##### Table of Contents

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U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-QSB



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|x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------



For the quarterly period ended September 30, 2004



| ̈ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
|- | ---------------------------------------------------------------



For the transition period from  to



Commission file number 000-29807



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ENTROPIN, INC.

(Exact name of small business issuer as specified in its charter)



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|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|DELAWARE                                                       |  | 68-0510827                       
|(State or other jurisdiction of incorporation or organization) |  | (IRS employer Identification No.)



45926 Oasis Street,
Indio, CA 92201

(Address of principal executive offices)



(760) 775-8333

(Issuers telephone number)



N/A

(Former name, former address and former fiscal year, if changed since last report)



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Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈



As of
November 12, 2004, 30,645,341 shares of the issuers Common Stock, $.0001 par value per share, were outstanding.



Transitional Small Business Disclosure Format    Yes ̈No  x



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##### Table of Contents

|         |  |                                                                                                                                                                             |  |   
|-------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --
|         |  | INDEX                                                                                                                                                                       |  |   
|         |  |                                                                                                                                                                            
|PART I.  |  | FINANCIAL INFORMATION                                                                                                                                                       |  |   
|         |  |                                                                                                                                                                            
|Item 1.  |  | Financial Statements                                                                                                                                                        |  |   
|         |  |                                                                                                                                                                            
|         |  | Balance Sheets  December 31, 2003 and September 30, 2004 (unaudited)                                                                                                       |  | 2 
|         |  |                                                                                                                                                                            
|         |  | Statements of Operations  For the Three Months Ended September 30, 2003 and 2004 (unaudited)                                                                               |  | 3 
|         |  |                                                                                                                                                                            
|         |  | Statements of Operations  For the Nine Months Ended September 30, 2003 and 2004 and for the Period from August 27, 1984 (Inception) through September 30, 2004 (unaudited) |  | 4 
|         |  |                                                                                                                                                                            
|         |  | Statement of Changes in Stockholders Equity  For the Nine Months Ended September 30, 2004 (unaudited)                                                                     |  | 5 
|         |  |                                                                                                                                                                            
|         |  | Statements of Cash Flows  For the Nine Months Ended September 30, 2003 and 2004 and for the Period from August 27, 1984 (Inception) through September 30, 2004 (unaudited) |  | 6 
|         |  |                                                                                                                                                                            
|         |  | Notes to Financial Statements (unaudited)                                                                                                                                   |  | 8 
|         |  |                                                                                                                                                                            
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                                       |  | 13
|         |  |                                                                                                                                                                            
|Item 3.  |  | Controls and Procedures                                                                                                                                                     |  | 20
|         |  |                                                                                                                                                                            
|PART II. |  | OTHER INFORMATION                                                                                                                                                           |  |   
|         |  |                                                                                                                                                                            
|Item 1.  |  | Legal Proceedings                                                                                                                                                           |  | 21
|         |  |                                                                                                                                                                            
|Item 2.  |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                                                                 |  | 21
|         |  |                                                                                                                                                                            
|Item 3.  |  | Defaults upon Senior Securities                                                                                                                                             |  | 21
|         |  |                                                                                                                                                                            
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                                                                                         |  | 21
|         |  |                                                                                                                                                                            
|Item 5.  |  | Other Information                                                                                                                                                           |  | 21
|         |  |                                                                                                                                                                            
|Item 6.  |  | Exhibits                                                                                                                                                                    |  | 22
|         |  |                                                                                                                                                                            
|         |  | Signatures                                                                                                                                                                  |  | 23



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##### Table of Contents

ENTROPIN, INC.

(A DEVELOPMENT STAGE COMPANY)

BALANCE SHEETS

December 31, 2003 and September 30, 2004



|                                                                                                                                                  |  |                  |             |   |                   |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ----------- | - | ----------------- | - | ----------- | -
|                                                                                                                                                  |  | December 31,2003 |             |   | September 30,2004 |  
|                                                                                                                                                  |  |                  |             |   | (Unaudited)       |  
|ASSETS                                                                                                                                            |  |                  |             |   |                   |   |             |  
|Current assets:                                                                                                                                   |  |                  |             |   |                   |   |             |  
|Cash and cash equivalents                                                                                                                         |  | $                | 1,032,343   |   |                   | $ | 536,470     |  
|Short-term investments                                                                                                                            |  |                  |            |   |                   |   | 1,665,094   |  
|                                                                                                                                                  |  |                  |             |   |                   |   |             |  
|Total current assets                                                                                                                              |  |                  | 1,032,343   |   |                   |   | 2,201,564   |  
|Patent costs, less accumulated amortization of $200,944 (2003) and $238,521 (2004)                                                                |  |                  | 493,995     |   |                   |   | 654,011     |  
|Property and equipment, net                                                                                                                       |  |                  | 6,226       |   |                   |   | 3,023       |  
|Deferred offering costs                                                                                                                           |  |                  | 63,697      |   |                   |   |            |  
|                                                                                                                                                  |  |                  |             |   |                   |   |             |  
|Total assets                                                                                                                                      |  | $                | 1,596,261   |   |                   | $ | 2,858,598   |  
|                                                                                                                                                  |  |                  |             |   |                   |   |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                              |  |                  |             |   |                   |   |             |  
|Current liabilities:                                                                                                                              |  |                  |             |   |                   |   |             |  
|Accounts payable                                                                                                                                  |  | $                | 208,456     |   |                   | $ | 101,917     |  
|Contingencies (Note 2)                                                                                                                            |  |                  |             |   |                   |   |             |  
|Stockholders equity:                                                                                                                             |  |                  |             |   |                   |   |             |  
|Series A redeemable preferred stock, $.0001 par value; 3,210,487 shares authorized, issued and outstanding; liquidation preference of
$3,210,487 |  |                  | 3,210,487   |   |                   |   | 3,210,487   |  
|Common stock, $.0001 par value; 50,000,000 shares authorized, 11,545,341 (2003) and 30,645,341 (2004) shares issued and
outstanding               |  |                  | 1,154       |   |                   |   | 3,065       |  
|Additional paid-in capital                                                                                                                        |  |                  | 30,871,699  |   |                   |   | 34,809,094  |  
|Unearned stock compensation                                                                                                                       |  |                  |            |   |                   |   | (7,039      | )
|Deficit accumulated during the development stage                                                                                                  |  |                  | (32,695,535 | ) |                   |   | (35,258,926 | )
|                                                                                                                                                  |  |                  |             |   |                   |   |             |  
|Total stockholders equity                                                                                                                        |  |                  | 1,387,805   |   |                   |   | 2,756,681   |  
|                                                                                                                                                  |  |                  |             |   |                   |   |             |  
|Total liabilities and stockholders equity                                                                                                        |  | $                | 1,596,261   |   |                   | $ | 2,858,598   |  
|                                                                                                                                                  |  |                  |             |   |                   |   |             |  



See accompanying notes
to financial statements.



2



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##### Table of Contents

ENTROPIN, INC.

(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF OPERATIONS

For the Three Months Ended September 30, 2003 and
2004

(Unaudited)



|                                                         |  |      |            |   |      |   |            |  
|-------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                         |  | 2003 |            |   | 2004 |  
|Costs and expenses:                                      |  |      |            |   |      |   |            |  
|Research and development                                 |  | $    | 43,599     |   |      | $ | 62,128     |  
|General and administrative                               |  |      | 632,350    |   |      |   | 449,919    |  
|                                                         |  |      |            |   |      |   |            |  
|Operating loss                                           |  |      | (675,949   | ) |      |   | (512,047   | )
|                                                         |  |      |            |   |      |   |            |  
|Other income (expense):                                  |  |      |            |   |      |   |            |  
|Interest income                                          |  |      | 3,719      |   |      |   | 7,774      |  
|Series B preferred stock redemption conversion incentive |  |      | (126,310   | ) |      |   |           |  
|                                                         |  |      |            |   |      |   |            |  
|Total other income (expense), net                        |  |      | (122,591   | ) |      |   | 7,774      |  
|                                                         |  |      |            |   |      |   |            |  
|Net loss                                                 |  |      | (798,540   | ) |      |   | (504,273   | )
|Dividends applicable to Series B preferred stockholders  |  |      | (2,289     | ) |      |   |           |  
|                                                         |  |      |            |   |      |   |            |  
|Net loss applicable to common stockholders               |  | $    | (800,829   | ) |      | $ | (504,273   | )
|                                                         |  |      |            |   |      |   |            |  
|Basic and diluted net loss per common share              |  | $    | (.07       | ) |      | $ | (.02       | )
|                                                         |  |      |            |   |      |   |            |  
|Weighted average common shares outstanding               |  |      | 10,928,000 |   |      |   | 30,595,000 |  
|                                                         |  |      |            |   |      |   |            |  



See accompanying notes
to financial statements.



3



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##### Table of Contents

ENTROPIN, INC.

(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF OPERATIONS

For the Nine Months Ended September 30, 2003 and
2004

and for the Period from August 27, 1984 (Inception) Through September 30, 2004

(Unaudited)



|                                                         |  |      |            |   |      |   |            |                                     |  |   |             |  
|-------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | ----------------------------------- |  | - | ----------- | -
|                                                         |  | 2003 |            |   | 2004 |   |            | Inception throughSeptember 30, 2004 | 
|Costs and expenses:                                      |  |      |            |   |      |   |            |                                     |  |   |             |  
|Research and development                                 |  | $    | 548,066    |   |      | $ | 414,580    |                                     |  | $ | 15,831,376  |  
|General and administrative                               |  |      | 2,033,255  |   |      |   | 2,161,973  |                                     |  |   | 19,472,625  |  
|                                                         |  |      |            |   |      |   |            |                                     |  |   |             |  
|Operating loss                                           |  |      | (2,581,321 | ) |      |   | (2,576,553 | )                                   |  |   | (35,304,001 | )
|                                                         |  |      |            |   |      |   |            |                                     |  |   |             |  
|Other income (expense):                                  |  |      |            |   |      |   |            |                                     |  |   |             |  
|Interest income                                          |  |      | 20,542     |   |      |   | 13,162     |                                     |  |   | 1,502,196   |  
|Interest expense                                         |  |      |           |   |      |   |           |                                     |  |   | (242,811    | )
|Series B preferred stock redemption conversion incentive |  |      | (126,310   | ) |      |   |           |                                     |  |   | (126,310    | )
|                                                         |  |      |            |   |      |   |            |                                     |  |   |             |  
|Total other income (expense), net                        |  |      | (105,768   | ) |      |   | 13,162     |                                     |  |   | 1,133,075   |  
|                                                         |  |      |            |   |      |   |            |                                     |  |   |             |  
|Net loss                                                 |  |      | (2,687,089 | ) |      |   | (2,563,391 | )                                   |  |   | (34,170,926 | )
|Dividends applicable to Series B preferred stockholders  |  |      | (35,039    | ) |      |   |           |                                     |  |   | (1,103,184  | )
|                                                         |  |      |            |   |      |   |            |                                     |  |   |             |  
|Net loss applicable to common stockholders               |  | $    | (2,722,128 | ) |      | $ | (2,563,391 | )                                   |  | $ | (35,274,110 | )
|                                                         |  |      |            |   |      |   |            |                                     |  |   |             |  
|Basic and diluted net loss per common share              |  | $    | (.26       | ) |      | $ | (.10       | )                                   |  | $ | (5.00       | )
|                                                         |  |      |            |   |      |   |            |                                     |  |   |             |  
|Weighted average common shares outstanding               |  |      | 10,410,000 |   |      |   | 26,538,000 |                                     |  |   | 7,052,000   |  
|                                                         |  |      |            |   |      |   |            |                                     |  |   |             |  



See accompanying notes
to financial statements.



4



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##### Table of Contents

ENTROPIN, INC.

(A DEVELOPMENT STAGE COMPANY)

STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY

For the Nine Months Ended
September 30, 2004

(Unaudited)



|                                                                                       |  |                                     |  |              |           |        |                           |   |        |                           |       |   |                                              |   |            |                          |  |   |          |   |  |   |             |   |  |   |            |  
|-------------------------------------------------------------------------------------- |  | ----------------------------------- |  | ------------ | --------- | ------ | ------------------------- | - | ------ | ------------------------- | ----- | - | -------------------------------------------- | - | ---------- | ------------------------ |  | - | -------- | - |  | - | ----------- | - |  | - | ---------- | -
|                                                                                       |  | Series A redeemablepreferred stock |  | Common stock |           |        | Additionalpaid-in capital |   |        | Unearnedstockcompensation |       |   | Deficitaccumulatedduring thedevelopmentstage |   |            | Totalstockholdersequity | 
|                                                                                       |  | Shares                              |  | Amount       |           | Shares |                           |   | Amount |                           |       |   |                                              |  
|Balance, January 1, 2004                                                               |  | 3,210,487                           |  | $            | 3,210,487 |        | 11,545,341                |   |        | $                         | 1,154 |   |                                              | $ | 30,871,699 |                          |  | $ |         |   |  | $ | (32,695,535 | ) |  | $ | 1,387,805  |  
|Shares and warrants issued pursuant to secondary stock offering, net of offering costs |  |                                    |  |              |          |        | 19,250,000                |   |        |                           | 1,926 |   |                                              |   | 3,429,270  |                          |  |   |         |   |  |   |            |   |  |   | 3,431,196  |  
|Shares issued for services                                                             |  |                                    |  |              |          |        | 50,000                    |   |        |                           | 5     |   |                                              |   | 5,495      |                          |  |   |         |   |  |   |            |   |  |   | 5,500      |  
|Repurchase of shares from secondary stock offering                                     |  |                                    |  |              |          |        | (200,000                  | ) |        |                           | (20   | ) |                                              |   | (39,980    | )                        |  |   |         |   |  |   |            |   |  |   | (40,000    | )
|Stock compensation pursuant to the issuance of warrants                                |  |                                    |  |              |          |        |                          |   |        |                           |      |   |                                              |   | 152,562    |                          |  |   |         |   |  |   |            |   |  |   | 152,562    |  
|Unearned stock compensation pursuant to the issuance of options                        |  |                                    |  |              |          |        |                          |   |        |                           |      |   |                                              |   | 390,048    |                          |  |   | (390,048 | ) |  |   |            |   |  |   |           |  
|Amortization of unearned stock compensation                                            |  |                                    |  |              |          |        |                          |   |        |                           |      |   |                                              |   |           |                          |  |   | 383,009  |   |  |   |            |   |  |   | 383,009    |  
|Net loss for the period                                                                |  |                                    |  |              |          |        |                          |   |        |                           |      |   |                                              |   |           |                          |  |   |         |   |  |   | (2,563,391  | ) |  |   | (2,563,391 | )
|                                                                                       |  |                                     |  |              |           |        |                           |   |        |                           |       |   |                                              |   |            |                          |  |   |          |   |  |   |             |   |  |   |            |  
|Balance, September 30, 2004                                                            |  | 3,210,487                           |  | $            | 3,210,487 |        | 30,645,341                |   |        | $                         | 3,065 |   |                                              | $ | 34,809,094 |                          |  | $ | (7,039   | ) |  | $ | (35,258,926 | ) |  | $ | 2,756,681  |  
|                                                                                       |  |                                     |  |              |           |        |                           |   |        |                           |       |   |                                              |   |            |                          |  |   |          |   |  |   |             |   |  |   |            |  



See accompanying notes
to financial statements.



5



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##### Table of Contents

ENTROPIN, INC.

(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30, 2003 and
2004

and for the Period from August 27, 1984 (Inception) Through September 30, 2004

(Unaudited)



|                                                                            |  |      |            |   |      |   |            |                                     |  |   |             |  
|--------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | ----------------------------------- |  | - | ----------- | -
|                                                                            |  | 2003 |            |   | 2004 |   |            | Inception throughSeptember 30, 2004 | 
|Cash flows from operating activities:                                       |  |      |            |   |      |   |            |                                     |  |   |             |  
|Net loss                                                                    |  | $    | (2,687,089 | ) |      | $ | (2,563,391 | )                                   |  | $ | (34,170,926 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |      |            |   |      |   |            |                                     |  |   |             |  
|Depreciation and amortization                                               |  |      | 31,515     |   |      |   | 40,780     |                                     |  |   | 307,221     |  
|Series B preferred stock redemption conversion incentive                    |  |      | 126,310    |   |      |   |           |                                     |  |   | 126,310     |  
|Loss on disposal of assets                                                  |  |      |           |   |      |   |           |                                     |  |   | 1,837       |  
|Services received in exchange for stock, stock options and warrants         |  |      | 239,954    |   |      |   | 541,071    |                                     |  |   | 10,625,478  |  
|Services received in exchange for compensation agreements                   |  |      |           |   |      |   |           |                                     |  |   | 2,231,678   |  
|Decrease in accrued interest receivable                                     |  |      | 5,954      |   |      |   |           |                                     |  |   |            |  
|(Decrease) increase in accounts payable                                     |  |      | (8,619     | ) |      |   | (106,539   | )                                   |  |   | 309,614     |  
|Other                                                                       |  |      | 3,126      |   |      |   |           |                                     |  |   | 58,610      |  
|                                                                            |  |      |            |   |      |   |            |                                     |  |   |             |  
|Net cash used in operating activities                                       |  |      | (2,288,849 | ) |      |   | (2,088,079 | )                                   |  |   | (20,510,178 | )
|                                                                            |  |      |            |   |      |   |            |                                     |  |   |             |  
|Cash flows from investing activities:                                       |  |      |            |   |      |   |            |                                     |  |   |             |  
|Maturities (purchase) of short-term investments, net                        |  |      | 990,000    |   |      |   | (1,665,094 | )                                   |  |   | (1,665,094  | )
|Patent costs                                                                |  |      | (60,953    | ) |      |   | (197,593   | )                                   |  |   | (892,532    | )
|Purchase of property and equipment                                          |  |      |           |   |      |   |           |                                     |  |   | (130,515    | )
|                                                                            |  |      |            |   |      |   |            |                                     |  |   |             |  
|Net cash provided by (used in) investing activities                         |  |      | 929,047    |   |      |   | (1,862,687 | )                                   |  |   | (2,688,141  | )
|                                                                            |  |      |            |   |      |   |            |                                     |  |   |             |  
|Cash flows from financing activities:                                       |  |      |            |   |      |   |            |                                     |  |   |             |  
|Proceeds from issuance of common stock and warrants                         |  |      |           |   |      |   | 3,494,893  |                                     |  |   | 21,732,261  |  
|Proceeds from issuance of preferred stock                                   |  |      |           |   |      |   |           |                                     |  |   | 1,142,750   |  
|Proceeds from stockholder loans                                             |  |      |           |   |      |   |           |                                     |  |   | 809,678     |  
|Proceeds from shares issued pursuant to recapitalization                    |  |      |           |   |      |   |           |                                     |  |   | 220,100     |  
|Proceeds from stockholder advances                                          |  |      |           |   |      |   |           |                                     |  |   | 98,873      |  
|Repayments of stockholder advances                                          |  |      |           |   |      |   |           |                                     |  |   | (98,873     | )
|Repurchase of common stock                                                  |  |      |           |   |      |   | (40,000    | )                                   |  |   | (40,000     | )
|Payment for cancellation of common stock warrant                            |  |      |           |   |      |   |           |                                     |  |   | (330,000    | )
|Proceeds from convertible notes payable                                     |  |      |           |   |      |   |           |                                     |  |   | 200,000     |  
|                                                                            |  |      |            |   |      |   |            |                                     |  |   |             |  
|Net cash provided by financing activities                                   |  |      |           |   |      |   | 3,454,893  |                                     |  |   | 23,734,789  |  
|                                                                            |  |      |            |   |      |   |            |                                     |  |   |             |  
|Net (decrease) increase in cash and cash equivalents                        |  |      | (1,359,802 | ) |      |   | (495,873   | )                                   |  |   | 536,470     |  
|Cash and cash equivalents at beginning of period                            |  |      | 2,906,853  |   |      |   | 1,032,343  |                                     |  |   |            |  
|                                                                            |  |      |            |   |      |   |            |                                     |  |   |             |  
|Cash and cash equivalents at end of period                                  |  | $    | 1,547,051  |   |      | $ | 536,470    |                                     |  | $ | 536,470     |  
|                                                                            |  |      |            |   |      |   |            |                                     |  |   |             |  



(Continued on following
page)

See accompanying notes to financial statements.



6



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##### Table of Contents

ENTROPIN, INC.

(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30, 2003 and 2004

and for the Period from August 27, 1984 (Inception) Through September 30, 2004

(Unaudited)



(Continued from preceding page)



Supplemental disclosure of cash flow information:



|                                         |  |      |   |      |   |                                      |  |   |        
|---------------------------------------- |  | ---- | - | ---- | - | ------------------------------------ |  | - | -------
|                                         |  | 2003 |   | 2004 |   | Inception through September 30, 2004
|Cash paid for interest during the period |  | $    |  |      | $ |                                     |  | $ | 242,811



Supplemental disclosure of non-cash
investing and financing activities:



During the period from
August 27, 1984 (inception) through September 30, 2004, the Company issued 3,210,487 shares of Series A preferred stock in exchange for an aggregate $1,710,487 of notes payable to stockholders plus accrued interest and a $1,500,000 compensation
agreement.



During the period from August 27, 1984 (inception)
through September 30, 2004, the Company converted promissory notes payable with outstanding principal and interest balances totaling $201,662 into 100,831 shares of common stock.



During the nine months ended September 30, 2003 and 2004, and the period from August 27, 1984 (inception) through September
30, 2004, the Company issued none, 12,850, and 94,850, respectively, shares of common stock at $5.00 per share as payment of accrued dividends on Series B preferred stock.



During the nine months ended September 30, 2003 and 2004, and the period from August 27, 1984 (inception) through September
30, 2004, the Company issued 1,235,333, none and 1,337,333 shares of common stock totaling $843,293, $0 and $1,336,610, respectively, for conversion of shares of Series B preferred stock.



See accompanying notes to financial statements.



7



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##### Table of Contents

ENTROPIN, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS

(Unaudited)



The accompanying financial statements of Entropin, Inc. have been prepared in accordance with
accounting principles generally accepted in the United States of America (GAAP) for interim financial information and with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Certain information and note disclosures
normally included in financial statements prepared in accordance with GAAP have been condensed or omitted under such rules and regulations. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, the financial statements reflect all adjustments considered necessary for a fair presentation. The results of operations for the nine months ended September 30, 2004 are not necessarily indicative of the
results to be expected for the full year. For further information, refer to the financial statements and notes thereto included in our annual report on Form 10-KSB for the year ended December 31, 2003 as filed with the Securities and Exchange
Commission on March 30, 2004.



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



Organization and basis of presentation:



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



The Companys financial statements have been presented on a going concern basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company is in the development stage and has been primarily involved in research and development activities. This has resulted in significant operating losses and an accumulated deficit at September
30, 2004 of $35,258,926. Management anticipates additional operating losses for the foreseeable future. These factors, among others, may indicate that the Company will be unable to continue as a going concern for a reasonable period of time. The
financial statements do not include any adjustments related to the recoverability of recorded asset amounts that may be necessary should the Company be unable to continue as a going concern. The Company will need to raise significant additional
funds to continue its planned development activities. In the absence of positive cash flows from operations which the Company expects will not be possible for several years, if at all, the Company is and will remain highly dependent on its ability
to secure additional funding through the issuance of debt or equity instruments or corporate partnering arrangements. If adequate funds are not available, the Company may be forced to significantly curtail or terminate its operations or to obtain
funds through entering into collaborative agreements or other arrangements that may be on unfavorable terms. The Companys failure to raise sufficient additional funds on favorable terms, or at all, would have a material adverse effect on its
business, results of operations and financial position. The Companys continued existence is currently dependent on its ability to successfully raise additional capital and complete development of, obtain approval for, and successfully market
its proprietary compound ENT-103.



On October 31, 2003, the
Company filed a registration statement with the Securities and Exchange Commission (the SEC) on Form SB-2 registering 20 million shares of common stock for sale in an offering. On January 20, 2004, the Company received approval from the
SEC to begin its best efforts offering to raise a minimum of $750,000 and a maximum of $3.5 million, plus a 10% over-allotment through the sale of shares of the Companys common stock at $0.20 per share. During the first quarter of 2004, the
Company completed the offering, raising net proceeds of approximately $3.4 million, net of offering costs of approximately $444,000 (including non-cash costs of approximately $19,500 related to a warrant issuance). The Company believes that the net
proceeds of this offering, along with its other available cash balances, will be sufficient to fund its operations through the first quarter of 2005. Although these estimates reflect the Companys current expectations, it is possible that the
Companys actual expenditures could exceed these estimates, which would shorten the time during which it could fund its operations.



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



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ENTROPIN, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS

(Unaudited)



Use of estimates:



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



Income taxes:



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



Property and equipment:



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



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



Research and
development costs:



Research and development costs are
expensed as incurred.



Patents:



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



Amortization expense related to amortizable patents was $26,855 and $37,577 for the nine months ended September 30, 2003 and 2004, respectively, and $238,521 from inception through September 30, 2004.



Impairment of long-lived assets:



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



Cash equivalents and short-term investments:



The Company considers cash equivalents to include only highly liquid securities with an original maturity of three months or less. Investments with an
original maturity of more than three months are considered short-term investments and have been classified by management as held-to-maturity. At December 31, 2003, the Company did not hold any funds in short-term investments. At September 30, 2004,
the Companys short-term investments consist entirely of certificates of deposit carried at amortized cost with an average remaining maturity period of 136 days.



Concentrations of credit risk:



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



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ENTROPIN, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS

(Unaudited)



Common Stock:



The Companys Board of Directors approved an amendment to the Companys Certificate of Incorporation on August 31, 2004, to increase the number
of authorized shares of common stock from 50,000,000 shares to 200,000,000 shares. On October 5, 2004, the Company mailed a proxy statement to its stockholders regarding a special meeting of stockholders to be held on November 19, 2004 to consider
and vote upon the proposal to increase the number of authorized shares of common stock.



Stock-based compensation:



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



In January 2004, the Company issued a warrant to acquire 1,000,000 shares of its common stock to Navidec, Inc., a consulting organization retained to
provide business and financial advisory services to the Company. The warrant became exercisable with respect to 500,000 of the underlying shares on January 31, 2004 and became exercisable with respect to the remaining 500,000 shares on March 31,
2004. The warrant is exercisable at a price of $0.25 per share until its expiration on January 28, 2009. The fair value of the warrant was estimated at $152,562 on the date of grant using the Black-Scholes option-pricing model with the following
assumptions: no dividend yield, 72% volatility rate, risk free interest rate of 2.99% and an expected life of five years. The fair value of the warrant was charged to general and administrative expense.



In January 2004, in connection with its secondary offering, the Company
issued a warrant to acquire 119,000 shares of its common stock to InvestLinc Securities, Inc., pursuant to the Amended and Restated Investment Banking Agreement, dated December 11, 2003 between the parties. The warrant is exercisable at a price of
$0.20 per share until its expiration on January 28, 2009. The fair value of the warrant was estimated at $19,500 on the date of grant using the Black-Scholes option-pricing model with the following assumptions: no dividend yield, 72% volatility
rate, risk free interest rate of 2.99% and an expected life of five years. The fair value of the warrant was included in offering costs.



In April 2004, the Company granted stock options to each of its non-salaried directors to purchase 1,666.67 shares of common stock for each month of
service as a director from January 1, 2000 through December 31, 2004. Option grants to acquire an aggregate of 381,667 shares of common stock for services prior to January 1, 2004 were fully vested at the grant date. Option grants to acquire an
aggregate of 105,000 shares of common stock for services during 2004, vest ratably on a monthly basis commencing January 1, 2004, through the earlier of December 31, 2004, or the termination of the recipients term as a director. All options,
once vested, are exercisable at $0.20 per share until May 1, 2014.



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



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



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



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



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ENTROPIN, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS

(Unaudited)



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



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



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



In July 2004, the Company issued a warrant to acquire 100,000 shares of its common stock to Barry Kaplan Associates, a consulting organization retained to
provide public relations services. The warrant is exercisable at a price of $0.22 per share until its expiration on June 18, 2009. The fair value of the warrant was estimated at $10,328 on the date of grant using the Black-Scholes option-pricing
model with the following assumptions: no dividend yield, 96.5% volatility rate, risk free interest rate of 3.38% and expected life of five years. The fair value of the warrant was charged to general and administrative expense.



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



Fair value of financial instruments:



The carrying amounts of cash, cash equivalents, short-term investments and accounts payable are considered to be
representative of their respective fair values because of their short-term nature.



Loss per share:



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



Segment reporting:



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



|2. | Litigation
|-- | ----------



On June 30, 2004, the Superior Court of the State of California for the County of Riverside granted the Companys motion for summary judgment in
connection with the securities class action lawsuit filed on January 28, 2003 (hereinafter, the State Action) against the Company and two of its directors. Based upon this ruling, the Superior Court formally dismissed the State Action
and entered judgment in favor of the Company and its two directors on August 13, 2004. Plaintiffs filed a notice of appeal with the Superior Court on August 24, 2004. To date, no briefing schedule has been established for the appeal. The Company
believes that the plaintiffs effort to appeal is meritless, and it intends to vigorously oppose such efforts.



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ENTROPIN, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS

(Unaudited)



In July 2004, a securities class action lawsuit (hereinafter, the Federal Action) was filed in the U.S. District Court for the Central
District of California against the Company and two of its directors. The complaint contends that federal securities laws have been violated and is based on the same facts alleged in the State Action referenced in the preceding paragraph. The Company
accepted service of the complaint on October 1, 2004, and on October 13, 2004, filed a motion to dismiss this lawsuit. The plaintiffs have opposed the Companys motion to dismiss. Regardless of the outcome of the pending motion, the Company
believes that it has strong defenses to plaintiffs claims and intends to vigorously defend against this lawsuit.



Although the Company believes this claims are without substance, there can be no assurance that it will succeed in defending or settling these actions.
Additionally, it is possible that these lawsuits will harm the Companys business and/or financial position. As of the date of this report, the Company is not party to any other material legal proceedings.



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Item 2.



MANAGEMENTS
DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



The following discussion and analysis should be read in conjunction with
the unaudited financial statements and notes thereto included in Part I  Item 1 of this report, and the audited financial statements and notes thereto contained in our Annual Report on Form 10-KSB for the fiscal year ended December 31,
2003.



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



We
were incorporated in California in 1984 as Entropin, Inc., or old Entropin, and in 1998 completed a merger with and into Vanden Capital Group, Inc. pursuant to which all of the issued and outstanding common shares of old Entropin were converted into
a majority of Vandens common stock. Vanden subsequently changed its name to Entropin, Inc. For accounting purposes, the acquisition was treated as a recapitalization of old Entropin based upon historical cost, with old Entropin as the
acquirer. In conjunction with the merger, Entropin, Inc. became a Colorado corporation. In June 2002, we changed our state of incorporation from Colorado to Delaware.



From our inception in August 1984, we have devoted our resources primarily to funding our research and development efforts
and conducting clinical trials with our products. We have been unprofitable since inception and have had no revenue from the sale of products, and do not expect revenue for the foreseeable future until we have received FDA approval for one of the
proprietary compounds we are attempting to develop. We expect to continue to incur losses for the foreseeable future through the completion of our preclinical and clinical trials and the FDA approval process. As of September 30, 2004, our
accumulated deficit was approximately $35.3 million.



Research and Development



Prior to our current
focus on ENT-103, we completed four preclinical animal studies, Phase I, Phase II and Phase II/III human clinical trials for our first product, known as Esterom solution. In January 2002, we reported that our researchers at Harvard Medical School
had identified the active ingredient in Esterom solution, which we named ENT-102. Results of our initial preclinical studies revealed that ENT-102 effectively blocks nerve impulse conduction and when injected into animals may have long-lasting
properties to reduce and manage pain.



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



Assuming that our clinical trials
are successful and we do not experience unexpected delays, we estimate that it will take at least an additional four to five years to complete the preclinical and clinical development and testing of ENT-103 so that it can be commercialized. Any
significant delays in our preclinical development, clinical trials or regulatory approval will affect our ability to generate revenue and may harm our ability to continue to raise the capital needed to complete the commercialization of ENT-103. We
believe the earliest time at which we could generate revenue from ENT-103 under a licensing or similar arrangement is following announcement of Phase I clinical trial results, which will be no earlier than late 2005, assuming the required
preclinical and clinical trial results are positive, we do not experience unexpected delays and that we are able to find a licensing partner at that time. Our current resources are not sufficient to complete required preclinical testing nor to begin
or complete a Phase I clinical trial for ENT-103.



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We estimate that at least an additional $45 million will be required to complete development and FDA
approval of ENT-103. These expenditures primarily represent research, clinical trials and general and administrative costs. Through September 30, 2004, we have spent approximately $35.3 million to develop ENT-103 and its predecessor compounds.



Plan of Operation



We will need to raise significant additional funds to continue the
development of ENT-103 (topical and injectable formulations) and complete the FDA approval process, which we expect will cost at least $45 million beyond our total expenditures to date and will take at least an additional four to five years.



We intend to seek additional funding to support our future
operations through public or private sales of our equity or debt securities. We also intend to seek additional funding through potential corporate partnerships, licensing arrangements and/or merger/acquisition transactions. We cannot guarantee that
we will be able to secure additional funds in a timely manner or on reasonable terms, or at all. In addition, the costs of pursuing funding or other arrangements or transactions could shorten the time during which we can fund our operations, or
actively pursue the development of ENT-103.



Results of
Operations



Nine months ended September 30, 2004,
compared to nine months ended September 30, 2003.



The net
loss for the first nine months of 2004 was approximately $2.6 million, or $0.10 per share on approximately 26.5 million weighted average shares outstanding. In comparison, the net loss for the first nine months of 2003 was approximately $2.7
million, or $0.26 per share on approximately 10.4 million weighted average shares outstanding.



Total research and development expenses were approximately $415,000 during the first nine months of 2004, as compared to approximately $548,000 for the
first nine months of 2003. The decrease in research and development expenses during the first nine months of 2004 compared with the same period during 2003 reflects the fact that the preclinical research studies that we were engaged in during the
first nine months of 2003, including our mechanism of action studies, were more extensive and therefore more costly, than the preclinical research studies we were engaged in during the first nine months of 2004.



Total general and administrative expenses were approximately $2.2 million
for the first nine months of 2004, as compared to approximately $2.0 million for the first nine months of 2003. Approximately $541,000 and $218,000 of the general and administrative expense incurred during the first nine months of 2004 and 2003,
respectively, reflect charges to non-cash compensation for the fair value of stock options and warrants issued for services.



Interest income during the first nine months of 2004 was approximately $13,200 as compared to approximately $20,500 during the first nine months of 2003.
This decrease in interest income reflects lower balances and interest rates for cash, cash equivalents and short-term investments during the first nine months of 2004.



Liquidity and Capital Resources



We have financed our operations since inception primarily through the net proceeds generated from the sale of our common and
preferred stock, and through loans and advances from stockholders that were subsequently converted into equity securities. From inception through September 30, 2004, we have received net cash proceeds from financing activities aggregating
approximately $23.7 million. As of September 30, 2004, our working capital was approximately $2.1 million.



Our liquidity and capital needs relate primarily to working capital, research and development of ENT-103, and other general corporate requirements. We
have not received any cash from operations since inception.



During the first quarter of 2004, we completed a secondary stock offering from which we raised net proceeds of approximately $3.4 million. We estimate that the net proceeds from this offering, along with our other available cash balances,
will be sufficient to fund our operations through the first quarter of 2005. Although these estimates reflect our current expectations, it is possible that our actual expenditures could exceed these estimates or we may experience unexpected delays,
which would shorten the time during which we could fund our operations or limit our ability to complete significant milestones in the development of ENT-103 with our available resources. We will not generate revenue from sales of any products in the
foreseeable future.



Net cash used in operating activities was
approximately $2.1 million during the first nine months of 2004, compared with approximately $2.3 million during the first nine months of 2003. The cash used in operations during both periods was primarily



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related to funding research and development activities, legal expenses and maintaining our administrative
infrastructure. As of September 30, 2004, our principal source of liquidity was approximately $2.2 million in cash, cash equivalents and short-term investments.



The estimated period for which we expect available sources of cash to be sufficient fund our operations is a forward-looking
statement that involves risks and uncertainties. We will need to raise additional capital to fund future clinical trials and continue other research and development activities, including completing the preclinical studies necessary to prepare and
file an IND application for ENT-103. Our future liquidity and capital funding requirements will depend on numerous factors, including the success or failure of our preclinical research and studies on ENT-103, the timing of future clinical trials and
other activities related to the FDA approval process, the cost and timing of sales, marketing and manufacturing activities, the extent to which our products, if any, gain market acceptance, and the impact of competitors products. There can be
no assurance that such additional capital will be available in a timely manner or on terms acceptable to us, or at all. If adequate funds are not available, we may be forced to significantly curtail our operations or to obtain funds through entering
into collaborative agreements or other arrangements that may be on unfavorable terms. Our failure to raise sufficient additional funds on favorable terms, or at all, would harm our business, results of operations and financial position.



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



To meet future capital needs, we intend to pursue various financing options,
including stock or debt offerings; investment from, and/or partnership(s) with, established pharmaceutical companies; licensing arrangements and/or merger/acquisition transactions. To date, we have not entered into any such financing transactions or
arrangements. Additionally, there can be no assurance that we will be able to successfully negotiate and complete any financing transactions or arrangements or that we will be able to do so on terms we deem acceptable. In addition, the costs of
pursuing funding or other arrangements or transactions could shorten the time during which we can fund our operations.



Critical Accounting Policies



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



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



An investment in shares of our common stock involves a high degree of risk. You should consider carefully the following
information about these risks, together with other information contained in this report and our other filings with the Securities and Exchange Commission before you decide to buy our stock. If any of the following risks actually occur, our business,
financial condition and prospects would likely suffer. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our operations.



We need to raise additional funds to support our operations. If we are
unable to raise these funds, we will be unable to complete our product development and will need to reduce or cease our operations.



Our independent auditors opinion on our 2002 and 2003 financial statements includes an explanatory paragraph indicating substantial doubt about our
ability to continue as a going concern.



During the first
quarter of 2004, we completed a secondary offering of our common stock in which we raised net proceeds of approximately $3.4 million. We believe that the net proceeds of this offering, along with our other available cash balances, will be sufficient
to fund our operations through the first quarter of 2005. Although these estimates reflect our current expectations, it is possible that our actual expenditures could exceed these estimates, which would shorten the time during which we could fund
our operations. In addition, any delay in the completion of our preclinical studies could significantly harm our prospects given our limited remaining funds. For example, as we announced on May 28, 2004, we experienced an unexpected delay in the
preparation of radio labeled ENT-103. As many steps in the development process are sequentially time-dependent, this delay forced us to reschedule selected preclinical studies and our planned IND application for ENT-103, which in turn has postponed
our ability to commence human clinical trials. Although the exact rescheduling will depend on the time slots available to us



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from our third party providers, this delay in preparing radio labeled ENT-103 delayed our projected
timeline by four to six months. As a result, our current resources are not sufficient to allow us to complete the preclinical work necessary to prepare and file an IND, or to commence human clinical trials for ENT-103.



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



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



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



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



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



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



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



We intend to seek additional funding to support our future operations through public or private sales of our equity or debt securities. Any negative
results or delay in our clinical and preclinical studies will adversely affect our ability to raise additional funds through the issuance of securities or consummation of corporate partnering relationships, including our inability to complete the
preclinical studies necessary to prepare and file an IND application for ENT-103 with our available resources. Any additional equity or debt financings that we may complete will be dilutive to our existing stockholders. We also intend to seek
additional funding through potential corporate partnerships, licensing arrangements and/or merger/acquisition transactions. Any such collaborative arrangements, if necessary to raise additional funds, may require us to relinquish rights to some of
our technologies or products, and may be dilutive to our existing stockholders. We cannot guarantee that we will be able to secure additional funds on reasonable terms, or at all. If we are unable to obtain the significant additional funds to
support our operations, we will be unable to complete our product development, we will need to reduce or cease our operations, and you may lose your entire investment in our company.



We have a history of losses and we may never achieve or maintain profitability.



To date we have experienced significant operating losses in funding the
research, development and testing of our previous drug candidate, Esterom solution, and our subsequent and current drug candidates, ENT-102 and ENT-103. We expect to continue to incur substantial operating losses during our research, development and
preclinical testing of ENT-103. From our inception through September 30, 2004, we have incurred cumulative net losses applicable to common stockholders of $35.3 million. We will not be able to pursue generating revenues from sales of ENT-103 unless
it is approved by the FDA for marketing. FDA approval will take several years, if ENT-103 is approved at all, and we may never achieve profitable operations.



If we fail to obtain regulatory approval to commercialize ENT-103, or if approval is delayed, it will increase the cost of development, and will likely
prevent or delay our ability to sell ENT-103 and generate revenue.



Our sole current drug candidate, ENT-103, has undergone only limited preclinical development and we do not anticipate beginning human clinical trials with ENT-103 until late in 2005. Furthermore, we can give no assurances as to the results
of or the time to complete the preclinical studies required to commence clinical studies. We have not yet filed an application to commence human clinical trials, known as an Investigational New Drug, or IND, application, nor have we requested or
received regulatory approval from the FDA for marketing products containing ENT-103. Neither ENT-103 nor any other products that may result from our research and development programs are expected to be commercially available for several years, if at
all. Any delay in the timing of the preclinical studies will adversely affect our ability to complete the necessary clinical trials, which could significantly harm our prospects given our limited remaining funds.



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



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results, as was the case with our Esterom clinical trials. Negative or inconclusive results generated
during preclinical or toxicology studies, or any future clinical studies, will have an immediate negative impact on our operations and future prospects.



There can be no assurance that development of ENT-103 will be completed successfully, that we will not encounter problems in preclinical studies or
clinical trials that will cause the delay or suspension of such trials, that current or future testing will show ENT-103 to be effective or that ENT-103 will receive regulatory approval. For example, as we announced on May 28, 2004, we experienced
an unexpected delay in the preparation of radio labeled ENT-103. As many steps in the development process are sequentially time-dependent, this delay forced us to reschedule selected preclinical studies and our planned IND application for ENT-103,
which in turn has postponed our ability to commence human clinical trials. Although the exact rescheduling will depend on the time slots available to us from our third party providers, this delay in preparing radio labeled ENT-103 delayed our
projected timeline by four to six months. As a result, our current resources are not sufficient to allow us to complete the preclinical work necessary to prepare and file an IND, or to commence human clinical trials for ENT-103.



Moreover, even if ENT-103 does receive regulatory approval, there can be no
assurance that ENT-103 will be commercially successful, or that we will be able to secure all of the patent and other regulatory protections necessary to prevent competitors from producing similar products. The failure of ENT-103 to receive timely
regulatory approval and achieve commercial success will negatively impact our business and results of operations.



In addition, as a controlled substance, ENT-103 will be subject to expensive and burdensome administrative requirements that will increase our costs.



We rely on third parties to test, research, develop and
manufacture ENT-103 and those third parties may not perform successfully, which could harm our business, financial condition and results of operations.



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



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



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



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



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



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



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



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



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



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



The Company is currently defending two securities class action lawsuits: one filed in the Superior Court of the State of California (hereinafter, the
State Action) and the other in the U.S. District Court for the Central District of California (hereinafter, the Federal Action). The Superior Court formally dismissed the State Action and entered judgment in favor of the
Company and its two directors on August 13, 2004. The plaintiffs, however, filed a notice of appeal with the Superior Court on August 24, 2004. Although no briefing schedule has been established for the appeal, the Company will need to continue to
monitor the status of any appeal and defend against any appeal pursued by the plaintiffs. In the Federal Action, the Company has filed a motion to dismiss the plaintiffs complaint, which the plaintiffs have opposed. There is no guarantee that
the Company will be successful in defeating the plaintiffs appeal in the State Action, or that the court will grant the Companys motion to dismiss the Federal Action. If the Company is unsuccessful in one or both of these actions, it
will need to continue to divert resources and attention away from the development of ENT-103 and the other operations of the Company. Moreover, the existence of the lawsuits, irrespective of the merits, makes it more difficult for the Company to
raise the additional funds needed to support its continued operations.



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



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



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



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



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



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



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



We may also need to initiate litigation, which could be time-consuming and expensive, to enforce our proprietary rights or to determine the scope and
validity of others rights. Any such litigation could result in substantial costs and diversion of resources, regardless of the outcome. In addition, a court may find our patents invalid or may find that we have infringed on a competitors
rights. If any claims or actions are asserted against us, we may be required to participate in expensive interference proceedings to determine who has the right to a patent for the technology.



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



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



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



The pharmaceutical industry is characterized by intense competition and is subject to rapid and significant technological change. There are currently many
successful products marketed for the treatment of pain and our competitors have new products and product candidates in all stages of development that will compete with ENT-103 if it is commercialized. Our competitors include major pharmaceutical
companies, biotechnology firms, universities and other research institutions, both in the United States and abroad. Most of our competitors have substantially greater financial, technical, manufacturing, marketing and human resource capabilities
than us. In addition, many of our competitors have significantly greater experience in testing new or improved therapeutic products and obtaining regulatory approval of products. Accordingly, our competitors may obtain regulatory approval for their
products more rapidly than we are able to. If we commence commercial sales of our products, we will also be competing with respect to manufacturing efficiencies and marketing capabilities, areas in which we have no prior experience.



Rapid technological change could make our products obsolete.



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



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



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



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



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



Our Certificate of Incorporation authorizes the issuance of up to 50,000,000 shares of common stock and up to 20,000,000 shares of preferred stock. In our secondary offering completed during the first quarter of 2004,
we issued a net total of 19,050,000 shares of common stock. As of September 30, 2004, there were 30,645,341 shares of common stock issued and outstanding and 3,210,487 shares of Series A preferred stock.



The Companys Board of Directors approved an amendment to the
Companys Certificate of Incorporation on August 31, 2004, to increase the number of authorized shares of common stock from 50,000,000 shares to 200,000,000 shares. On October 5, 2004, the Company mailed a proxy statement to its stockholders
regarding a special meeting of stockholders to be held on November 19, 2004 to consider and vote upon the proposal to increase the number of authorized shares of common stock. If this proposal is approved by the Companys stockholders, the
Companys Board of Directors will have a significant number of additional shares of common stock to issue in fund raising activities and for other corporate purposes. The issuance of these additional shares of common stock will have a dilutive
effect on the equity and voting power of the existing holders of the Companys common stock. It may also adversely affect the market price of the Companys common stock.



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



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



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##### Table of Contents

Item 3.



CONTROLS AND PROCEDURES



Disclosure Controls and Procedures



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



Internal Control over Financial Reporting



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



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##### Table of Contents

PART II.



OTHER
INFORMATION



Item 1. Legal Proceedings



On
June 30, 2004, the Superior Court of the State of California for the County of Riverside granted the Companys motion for summary judgment in connection with the securities class action lawsuit filed on January 28, 2003 (hereinafter, the
State Action) against the Company and two of its directors. Based upon this ruling, the Superior Court formally dismissed the State Action and entered judgment in favor of the Company and its two directors on August 13, 2004. Plaintiffs
filed a notice of appeal with the Superior Court on August 24, 2004. To date, no briefing schedule has been established for the appeal. The Company believes that the plaintiffs effort to appeal is meritless, and it intends to vigorously oppose
such efforts.



In July 2004, a securities class action lawsuit
(hereinafter, the Federal Action) was filed in the U.S. District Court for the Central District of California against the Company and two of its directors. The complaint contends that federal securities laws have been violated and is
based on the same facts alleged in the State Action referenced in the preceding paragraph. The Company accepted service of the complaint on October 1, 2004, and on October 13, 2004, filed a motion to dismiss this lawsuit. The plaintiffs have opposed
the Companys motion to dismiss. Regardless of the outcome of the pending motion, the Company believes that it has strong defenses to plaintiffs claims and intends to vigorously defend against this lawsuit.



Although we believe these claims are without substance, there can be no
assurance that we will succeed in defending or settling these actions. Additionally, it is possible that these lawsuits will harm our business and/or financial position. As of the date of this report, we are not party to any other material legal
proceedings.



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds



During the three month period ended September 30, 2004, we issued a warrant to acquire 100,000 shares of our common stock to Barry Kaplan Associates, a
consulting organization retained to provide public relations services. The warrant is exercisable at a price of $0.22 per share until its expiration on June 18, 2009.



During the three months ended September 30, 2004, we issued 50,000 shares of our common stock to Broadstreet Marketing,
Inc., a marketing organization retained to conduct a financial markets exposure program.



Item 3. Defaults Upon Senior Securities



None.



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



There have been no matters submitted to a vote of security holders during the quarterly period ended September 30, 2004 through the solicitation of proxies or otherwise.



Item 5. Other Information



None.



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Item 6. Exhibits



|              |  |                                                                                                                                                     
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                         
|2.1           |  | Agreement of Plan of Merger, dated May 2, 2002, by and between Entropin, Inc., a Delaware Corporation and Entropin, Inc., a Colorado corporation (1)
|              | 
|3.1           |  | Certificate of Incorporation of Entropin, Inc., a Delaware corporation (2)                                                                          
|              | 
|3.2           |  | Bylaws of Entropin, Inc., a Delaware corporation (2)                                                                                                
|              | 
|3.3           |  | Certificate of Designations of Series A Preferred Stock of Entropin, Inc. (3)                                                                      
|              | 
|4.1           |  | Form of Common Stock Purchase Warrant (4)                                                                                                           
|              | 
|4.2           |  | Warrant for Common Stock issued to Navidec Financial Services, Inc. (5)                                                                             
|              | 
|4.3           |  | Warrant for Common Stock issued to InvestLinc Securities, Inc. (5)                                                                                  
|              | 
|10.1          |  | Agreement and Plan of Merger, dated December 9, 1997 between Vanden Capital Group, Inc. and Entropin, Inc. (6)                                      
|              | 
|10.2          |  | Form of director and officer Indemnification Agreement. (7)                                                                                         
|              | 
|31.1          |  | Certification of President and Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.                                         
|              | 
|31.2          |  | Certification of Chief Financing Officer under Section 302 of the Sarbanes-Oxley Act of 2002.                                                       
|              | 
|32.1          |  | Certification of President and Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002.                                         
|              | 
|32.2          |  | Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.                                                       

---

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

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

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

|(4) | Incorporated by reference to the exhibit filed with the Registrants Registration Statement on Form SB-2/A, No. 333-11308, on March 15, 2000.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Incorporated by reference to the exhibits filed with the Registrants annual report on Form 10-KSB on March 30, 2004.
|--- | ---------------------------------------------------------------------------------------------------------------------

|(6) | Incorporated by reference from the exhibit filed with the Registrants Current Report on Form 8-K, as amended, on January 15, 1998.
|--- | -----------------------------------------------------------------------------------------------------------------------------------

|(7) | Incorporated by reference from the exhibit filed with the Registrants Current Report on Form 8-K on September 17, 2004.
|--- | ------------------------------------------------------------------------------------------------------------------------



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SIGNATURES



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



|                        |  |                                        |  |                                                                 
|----------------------- |  | -------------------------------------- |  | ----------------------------------------------------------------
|                        |  | ENTROPIN, INC., a Delaware corporation
|                        |  |                                       
|Date: November 12, 2004 |  | By:                                    |  | /s/ Thomas G. Tachovsky, Ph.D.                                  
|                        |  |                                        |  | Thomas G. Tachovsky, Ph.D. President and Chief
Executive Officer
|                        |  |                                       
|Date: November 12, 2004 |  | By:                                    |  | /s/ Patricia G. Kriss                                           
|                        |  |                                        |  | Patricia G. Kriss Chief Financial
Officer                       



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