---

---

U.S. SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-QSB

|ý                                           | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|------------------------------------------- | ---------------------------------------------------------------------------------
|For the quarterly period endedJune 30, 2002
|o                                           | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT                  

For the transition period from  to

Commission
file number 33-23693

ENTROPIN, INC.(Exact name of small business issuer as specified in its charter)

|DELAWARE                                                       |  | 68-0150827                       
|-------------------------------------------------------------- |  | ---------------------------------
|(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)

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
ý        No o

As
of August 2, 2002, 9,863,920 shares of the issuer's Common Stock, $.0001 par value per share were outstanding.

Transitional
Small Business Disclosure Format        Yes o        No ý

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---

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INDEX

|PART I.  | FINANCIAL INFORMATION                                                                                                                                                           |  |   
|-------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --
|Item 1.  | Financial Statements                                                                                                                                                            |  |   
|         | Balance SheetsDecember 31, 2001 and June 30, 2002 (unaudited)                                                                                                                  |  | 2 
|         | Statements of OperationsFor the Three Months and Six Months Ended June 30, 2001 and 2002 and for the Period from August 27, 1984 (Inception) through June 30, 2002 (unaudited) |  | 3 
|         | Statement of Changes in Stockholders' EquityFor the Six Months Ended June 30, 2002 (unaudited)                                                                                 |  | 5 
|         | Statements of Cash FlowsFor the Six Months Ended June 30, 2001 and 2002 and for the Period from August 27, 1984 (Inception) through June 30, 2002 (unaudited)                  |  | 6 
|         | Notes to Financial Statements (unaudited)                                                                                                                                       |  | 8 
|Item 2.  | Management's Discussion and Analysis of Financial Condition and Results of Operations                                                                                           |  | 10
|PART II. | OTHER INFORMATION                                                                                                                                                               |  |   
|Item 1.  | Legal Proceedings                                                                                                                                                               |  | 14
|Item 2.  | Changes in Securities and Use of Proceeds                                                                                                                                       |  | 14
|Item 3.  | Defaults upon Senior Securities                                                                                                                                                 |  | * 
|Item 4.  | Submission of Matters to a Vote of Security Holders                                                                                                                             |  | 14
|Item 5.  | Other Information                                                                                                                                                               |  | 15
|Item 6.  | Exhibits and Reports on Form 8-K                                                                                                                                                |  | 19
|         | Signatures                                                                                                                                                                      |  | 20

---

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PART I.Item 1.

ENTROPIN, INC.  (A DEVELOPMENT STAGE COMPANY)  BALANCE SHEETS  December 31, 2001 and June 30, 2002

|                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                         | December 31,
2001                          |           | June 30,
2002 |          
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | --------- | ------------- | ---------
|
|ASSETS                                                                                                                                                                                                                               |                                                                                                                                                                                                                                         |                                            |           |               |          
|Current assets:                                                                                                                                                                                                                      |                                                                                                                                                                                                                                         |                                            |           |               |          
|                                                                                                                                                                                                                                     | Cash and cash equivalents                                                                                                                                                                                                               |                                            | $         | 4,609,562     |          
|                                                                                                                                                                                                                                     | Short-term investments                                                                                                                                                                                                                  |                                            |           | 4,098,692     |          
|                                                                                                                                                                                                                                     | Accrued interest receivable                                                                                                                                                                                                             |                                            |           | 33,327        |          
|                                                                                                                                                                                                                                     | Prepaid insurance                                                                                                                                                                                                                       |                                            |           |              |          
|                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                         |                                            |           |               |          
|                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                         | Total current assets                       |           |               | 8,741,581
|Patent costs, less accumulated amortization of $132,997 (2001) and $147,398 (2002)                                                                                                                                                   |                                                                                                                                                                                                                                         |                                            | 329,035   |               |          
|Other assets                                                                                                                                                                                                                         |                                                                                                                                                                                                                                         |                                            | 52,151    |               |          
|                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                         |                                            |           |               |          
|                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                         | Total assets                               |           | $             | 9,122,767
|                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                         |                                            |           |               |          
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                                                                                                 |                                                                                                                                                                                                                                         |                                            |           |               |          
|Current liabilities:                                                                                                                                                                                                                 |                                                                                                                                                                                                                                         |                                            |           |               |          
|                                                                                                                                                                                                                                     | Accounts payable                                                                                                                                                                                                                        |                                            | $         | 142,986       |          
|Series A redeemable preferred stock, $.001 and $.0001 par value at December 31, 2001 and June 30, 2002, respectively; 3,210,487 shares authorized, issued and outstanding, $1.00 per share redemption value                          |                                                                                                                                                                                                                                         |                                            | 3,210,487 |               |          
|Series B redeemable convertible preferred stock, $.001 and $.0001 par value at December 31, 2001 and June 30, 2002, respectively; 400,000 shares authorized, 168,500 shares issued and outstanding, $5.00 per share
redemption value |                                                                                                                                                                                                                                         |                                            | 825,049   |               |          
|Stockholders' equity:                                                                                                                                                                                                                |                                                                                                                                                                                                                                         |                                            |           |               |          
|                                                                                                                                                                                                                                     | Common stock, $.001 and $.0001 par value at December 31, 2001 and June 30, 2002, respectively; 50,000,000 shares authorized, 9,798,480 and 9,863,920 shares issued and outstanding at December 31, 2001 and June 30, 2002,
respectively |                                            |           | 9,798         |          
|                                                                                                                                                                                                                                     | Additional paid-in capital                                                                                                                                                                                                              |                                            |           | 29,037,558    |          
|                                                                                                                                                                                                                                     | Unearned stock compensation                                                                                                                                                                                                             |                                            |           | (62,780       | )        
|                                                                                                                                                                                                                                     | Deficit accumulated during the development stage                                                                                                                                                                                        |                                            |           | (24,040,331   | )        
|                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                         |                                            |           |               |          
|                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                         | Total stockholders' equity                 |           |               | 4,944,245
|                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                         |                                            |           |               |          
|                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                         | Total liabilities and stockholders' equity |           | $             | 9,122,767
|                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                         |                                            |           |               |          

See
accompanying notes to financial statements.

2

---



ENTROPIN, INC.  (A DEVELOPMENT STAGE COMPANY)  STATEMENTS OF OPERATIONS  For the Three Months Ended June 30, 2001 and 2002  (Unaudited)

|                                                        |                            | 2001           |            | 2002    |           
|------------------------------------------------------- | -------------------------- | -------------- | ---------- | ------- | ----------
|Operating costs and expenses:                           |                            |                |            |         |           
|                                                        | Research and development   |                | $          | 813,152 |           
|                                                        | General and administrative |                |            | 565,231 |           
|                                                        |                            |                |            |         |           
|                                                        |                            | Operating loss |            |         | (1,378,383
|Interest income                                         |                            |                | 138,535    |         |           
|                                                        |                            |                |            |         |           
|Net loss                                                |                            |                | (1,239,848 | )       |           
|Dividends applicable to Series B preferred stockholders |                            |                | (22,563    | )       |           
|                                                        |                            |                |            |         |           
|Net loss applicable to common stockholders              |                            | $              | (1,262,411 | )       | $         
|                                                        |                            |                |            |         |           
|Basic and diluted net loss per common share             |                            | $              | (.13       | )       | $         
|                                                        |                            |                |            |         |           
|Weighted average common shares outstanding              |                            |                | 9,707,000  |         |           
|                                                        |                            |                |            |         |           

See
accompanying notes to financial statements.

3

---

ENTROPIN, INC.  (A DEVELOPMENT STAGE COMPANY)  STATEMENTS OF OPERATIONS  For the Six Months Ended June 30, 2001 and 2002  and for the Period From August 27, 1984 (Inception) Through June 30, 2002
(Unaudited)

|                                                        |                            | 2001                    |            | 2002      |            | Inception through
June 30, 2002 |          
|------------------------------------------------------- | -------------------------- | ----------------------- | ---------- | --------- | ---------- | ------------------------------- | ---------
|Operating costs and expenses:                           |                            |                         |            |           |            |                                 |          
|                                                        | Research and development   |                         | $          | 1,122,175 |            | $                               | 1,894,096
|                                                        | General and administrative |                         |            | 956,087   |            |                                 | 1,317,275
|                                                        |                            |                         |            |           |            |                                 |          
|                                                        |                            | Operating loss          |            |           | (2,078,262 | )                               |          
|                                                        |                            |                         |            |           |            |                                 |          
|Other income (expense):                                 |                            |                         |            |           |            |                                 |          
|                                                        | Interest income            |                         |            | 318,602   |            |                                 | 108,186  
|                                                        | Interest expense           |                         |            |          |            |                                 |         
|                                                        |                            |                         |            |           |            |                                 |          
|                                                        |                            | Total other income, net |            |           | 318,602    |                                 |          
|                                                        |                            |                         |            |           |            |                                 |          
|Net loss                                                |                            |                         | (1,759,660 | )         |            | (3,103,185                      | )        
|Dividends applicable to Series B preferred stockholders |                            |                         | (45,750    | )         |            | (42,125                         | )        
|                                                        |                            |                         |            |           |            |                                 |          
|Net loss applicable to common stockholders              |                            | $                       | (1,805,410 | )         | $          | (3,145,310                      | )        
|                                                        |                            |                         |            |           |            |                                 |          
|Basic and diluted net loss per common share             |                            | $                       | (.19       | )         | $          | (.32                            | )        
|                                                        |                            |                         |            |           |            |                                 |          
|Weighted average common shares outstanding              |                            |                         | 9,696,000  |           |            | 9,850,000                       |          
|                                                        |                            |                         |            |           |            |                                 |          

See
accompanying notes to financial statements.

4

---



ENTROPIN, INC.  (A DEVELOPMENT STAGE COMPANY)  STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY  For the Six Months Ended June 30, 2002  (Unaudited)

|                         |                                                                                                   |           |        |   |       |        |   |            |         | Deficit
accumulated
during the
development
stage |          |          |  
|------------------------ | ------------------------------------------------------------------------------------------------- | --------- | ------ | - | ----- | ------ | - | ---------- | ------- | ------------------------------------------------ | -------- | -------- | -
|
|
|
|Balance, January 1, 2002 |                                                                                                   | 9,798,480 |        | $ | 9,798 |        | $ | 29,037,558 |         | $                                                | (62,780  | )        | $
|                         | Adjustment for change in par value of common stock in connection with reincorporation in Delaware |           |       |   |       | (8,878 | ) |            | 8,878   |                                                  |          |         |  
|                         | Unearned stock compensation pursuant to issuance of common stock options                          |           |       |   |       |       |   |            | 497,636 |                                                  |          | (497,636 | )
|                         | Amortization and valuation adjustment of unearned stock compensation                              |           |       |   |       |       |   |            |        |                                                  |          | 294,292  |  
|                         | Shares issued from exercise of stock options                                                      |           | 59,604 |   |       | 60     |   |            | (60     | )                                                |          |         |  
|                         | Shares issued for services                                                                        |           | 5,836  |   |       | 6      |   |            | 12,010  |                                                  |          |         |  
|                         | Net loss for the period                                                                           |           |       |   |       |       |   |            |        |                                                  |          |         |  
|                         |                                                                                                   |           |        |   |       |        |   |            |         |                                                  |          |          |  
|Balance, June 30, 2002   |                                                                                                   | 9,863,920 |        | $ | 986   |        | $ | 29,556,012 |         | $                                                | (266,114 | )        | $
|                         |                                                                                                   |           |        |   |       |        |   |            |         |                                                  |          |          |  

See
accompanying notes to financial statements.

5

---



ENTROPIN, INC.  (A DEVELOPMENT STAGE COMPANY)  STATEMENTS OF CASH FLOWS  For the Six Months Ended June 30, 2001 and 2002  and for the Period from August 27, 1984 (Inception) Through June 30, 2002
(Unaudited)

|                                                     |                                                                             | 2001                                                                |                                                     | 2002       |          | Inception through
June 30, 2002 |           
|---------------------------------------------------- | --------------------------------------------------------------------------- | ------------------------------------------------------------------- | --------------------------------------------------- | ---------- | -------- | ------------------------------- | ----------
|Cash flows from operating activities:                |                                                                             |                                                                     |                                                     |            |          |                                 |           
|                                                     | Net loss                                                                    |                                                                     | $                                                   | (1,759,660 | )        | $                               | (3,103,185
|                                                     | Adjustments to reconcile net loss to net cash used in operating activities: |                                                                     |                                                     |            |          |                                 |           
|                                                     |                                                                             | Depreciation and amortization                                       |                                                     |            | 14,698   |                                 |           
|                                                     |                                                                             | Services received in exchange for stock, stock options and warrants |                                                     |            | 307,193  |                                 |           
|                                                     |                                                                             | Services received in exchange for compensation agreements           |                                                     |            |         |                                 |           
|                                                     |                                                                             | Decrease (increase) in accrued interest receivable                  |                                                     |            | 110,139  |                                 |           
|                                                     |                                                                             | (Decrease) increase in accounts payable                             |                                                     |            | (414,530 | )                               |           
|                                                     |                                                                             | Other                                                               |                                                     |            | 151,280  |                                 |           
|                                                     |                                                                             |                                                                     |                                                     |            |          |                                 |           
|                                                     |                                                                             |                                                                     | Net cash used in operating activities               |            |          | (1,590,880                      | )         
|                                                     |                                                                             |                                                                     |                                                     |            |          |                                 |           
|Cash flows from investing activities:                |                                                                             |                                                                     |                                                     |            |          |                                 |           
|                                                     | (Purchase) maturities of short-term investments, net                        |                                                                     |                                                     | (159,934   | )        |                                 | 2,102,352 
|                                                     | Patent costs                                                                |                                                                     |                                                     | (7,792     | )        |                                 | (36,255   
|                                                     | Purchase of property and equipment                                          |                                                                     |                                                     |           |          |                                 | (4,568    
|                                                     |                                                                             |                                                                     |                                                     |            |          |                                 |           
|                                                     |                                                                             |                                                                     | Net cash (used in) provided by investing activities |            |          | (167,726                        | )         
|                                                     |                                                                             |                                                                     |                                                     |            |          |                                 |           
|Cash flows from financing activities:                |                                                                             |                                                                     |                                                     |            |          |                                 |           
|                                                     | Proceeds from shares issued pursuant to recapitalization                    |                                                                     |                                                     |           |          |                                 |          
|                                                     | Proceeds from issuance of common stock and warrants                         |                                                                     |                                                     | 306        |          |                                 |          
|                                                     | Proceeds from issuance of preferred stock                                   |                                                                     |                                                     |           |          |                                 |          
|                                                     | Proceeds from stockholder loans                                             |                                                                     |                                                     |           |          |                                 |          
|                                                     | Proceeds from stockholder advances                                          |                                                                     |                                                     |           |          |                                 |          
|                                                     | Repayments of stockholder advances                                          |                                                                     |                                                     |           |          |                                 |          
|                                                     | Payments for cancellation of common stock warrant                           |                                                                     |                                                     |           |          |                                 |          
|                                                     | Proceeds from convertible notes payable                                     |                                                                     |                                                     |           |          |                                 |          
|                                                     |                                                                             |                                                                     |                                                     |            |          |                                 |           
|                                                     |                                                                             |                                                                     | Net cash provided by financing activities           |            |          | 306                             |           
|                                                     |                                                                             |                                                                     |                                                     |            |          |                                 |           
|Net (decrease) increase in cash and cash equivalents |                                                                             |                                                                     | (1,758,300                                          | )          |          | (660,205                        | )         
|Cash and cash equivalents at beginning of period     |                                                                             |                                                                     | 6,018,187                                           |            |          | 4,609,562                       |           
|                                                     |                                                                             |                                                                     |                                                     |            |          |                                 |           
|Cash and cash equivalents at end of period           |                                                                             | $                                                                   | 4,259,887                                           |            | $        | 3,949,357                       |           
|                                                     |                                                                             |                                                                     |                                                     |            |          |                                 |           

(Continued
on following page)
See accompanying notes to financial statements.

6

---

(Continued from preceding page)

Supplemental
disclosure of cash flow information:

Six Months Ended June 30,Inception through
June 30, 20022001

2002Cash paid for interest during the period

$


$


$
242,811


Supplemental
disclosure of non-cash investing and financing activities:



See
accompanying notes to financial statements.

7

---



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

The accompanying financial statements of Entropin, Inc. (the "Company") have been prepared in accordance with accounting principles generally accepted in
the United States of America for interim financial information and with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Certain information and
footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted under such rules and regulations.
Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America 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 six months ended June 30, 2001 and 2002
are not necessarily indicative of the results to be expected for the full year. For further information, refer to the financial statements and footnotes thereto included in our annual report on
Form 10-KSB for the year ended December 31, 2001 as filed with the Securities and Exchange Commission on March 14, 2002.

1.Organization and selected accounting policies

Organization:



Stockholders'
Equity:



Use
of estimates:



8

---

Cash
equivalents and short-term investments:



Loss
per share:



Reclassifications:



Recent
accounting pronouncements:



9

---





PART I.Item 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS  OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report may contain predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties, some of which are discussed
in Part IIItem 5 of this report. This outlook represents our current judgment on the future direction of our business. Such risks and uncertainties could cause actual results to
differ materially from any future performance suggested below. We undertake no obligation to release publicly the results of any revisions to these forward-looking statements to reflect events or
circumstances arising after the date of this report.

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

From
our inception in August 1984, we have devoted our resources primarily to funding our research and development efforts. We have been unprofitable since inception and have had
no revenue from the sale of products or other resources, and will not be able to pursue generating revenue from sales of Esterom® unless it is approved by the FDA for marketing. We expect
to continue to incur losses for the foreseeable future through the completion of our Phase III clinical trials and the New Drug
Application, or NDA, process. As of June 30, 2002, our accumulated deficit was approximately $27.1 million.

Plan of Operation

We received approximately $12.5 million in March 2000 from the sales of our common stock and warrants to purchase shares of our common stock in a
secondary public offering. In May 2000, we received additional net proceeds of approximately $1.2 million from the managing underwriter of the secondary offering through the exercise of
its over-allotment option. To date these funds have been used as follows: approximately $1.7 million for general and administrative expenses and working capital; approximately
$5.7 million for clinical trials and associated research and development expenses; approximately $323,000 for research associated with additional uses of Esterom®; and approximately
$1.1 million for activities related to the preparation of our NDA. We have used a total of approximately $8.8 million of the secondary offering and over allotment proceeds. The remaining
proceeds, plus approximately $1.3 million in interest earned on these funds, total approximately $5.9 million and are invested in short-term certificates of deposit and money
market funds. We plan to continue using these funds to complete the clinical trial program associated with the FDA approval process for the treatment of acute painful shoulder, as well as ancillary
studies and the NDA process. We currently plan to seek FDA approval to market Esterom® for the treatment of soft tissue afflictions resulting in impaired function of the shoulder, and
identify and develop other medical

10

---

applications for Esterom® such as applications for lower back pain, arthritis and other joint disorders. We intend to continue to minimize our fixed costs by outsourcing clinical studies,
regulatory activities, manufacturing, sales and marketing.

Results of Operations

Our research and development expense for the six months ended June 30, 2002 was $1,894,096 as compared to $1,122,175 for the six months ended
June 30, 2001. Our general and administrative expense for the six months ended June 30, 2002 was $1,317,275 as compared to $956,087 for the six months ended June 30, 2001. These
expenses include non-cash compensation expense associated with stock issued and stock options granted in exchange for services as shown in the following table.

Six months ended June 30,2001

2002Research and development

$
1,122,175

$
1,894,096Less non-cash compensation


12,237


2,905$
1,109,938

$
1,891,191General and administrative

$
956,087

$
1,317,275Less non-cash compensation


294,956


303,403$
661,131

$
1,013,872


Research
and development expense, excluding non-cash compensation charges, during the six months ended June 30, 2002 was $1,891,191, as compared to $1,109,938 for the
same period in 2001. The increase in research and development expense incurred during the six months ended June 30, 2002 as compared to the same period in 2001 primarily reflects costs
associated with our Phase II/III clinical trial, research activities, and preparation for an NDA with the FDA.

General
and administrative expense, excluding non-cash compensation charges, during the six months ended June 30, 2002 was $1,013,872 compared to $661,131 for the same
period in 2001. The increase in general and administrative expense is primarily attributable to the increased cost of professional services, including accounting, legal, insurance and investor
relations.

Non-cash
compensation charged to research and development expense during the six months ended June 30, 2002 was $2,905, compared to $12,237 for the same period in
2001. Non-cash compensation charged to general and administrative expense was $303,403 during the six months ended June 30, 2002, as compared to $294,956 for the same period in
2001. The non-cash compensation charged to general and administrative expense primarily reflects stock options granted to management and directors in exchange for services.

Interest
income was $108,186 for the six months ended June 30, 2002, as compared to $318,602 for the same period in 2001. This decrease results from a combination of lower
interest rates and lower cash,
cash equivalent and short-term investment balances during the six months ended June 30, 2002 as compared to the same period in 2001.

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 June 30, 2002, we have received net cash proceeds from financing activities
aggregating approximately $20.3 million from these transactions. As of June 30, 2002, our working capital was approximately $5.8 million.

11

---

Our
liquidity and capital needs relate primarily to working capital, research and development of Esterom®, and other general corporate requirements. We have not received any
cash from operations since inception. Based on our current plans, we believe our available cash, cash equivalents and short-term investments will be sufficient to fund our basic operations
through at least the next 12 months.

We
currently anticipate the need to raise an additional $10 to $15 million to complete the required clinical studies and preparation of the New Drug Application for
Esterom® with the FDA with respect to impaired function of the shoulder. We have begun preliminary discussions with a number of investors and financial institutions that we believe may be
instrumental in our fund raising efforts, although the market for financing for companies of our size and stage of development remains difficult. Negative or inconclusive results generated by our
ongoing Phase II/III clinical study, the results of which are expected to be announced in September, will have a material adverse effect on our ability to raise funds. Expectations about our
long-term liquidity may prove inaccurate if approval for Esterom® is delayed or not obtained. We will not be able to pursue generating revenue from sales of
Esterom® unless it is approved by the FDA for marketing.

Net
cash used in operating activities was $2,721,644 during the six months ended June 30, 2002, compared with $1,590,880 for the same period in 2001. The cash used in operations
was primarily related to general operating expenses, clinical trial expenses and continuing research and development activities.

As
of June 30, 2002, our principal source of liquidity was approximately $6.0 million in cash, cash equivalents and short-term investments.

On
July 15, 2003, we must redeem all outstanding shares of our Series B Preferred Stock at the original purchase price of $5.00 per share, along with all accrued and unpaid
dividends. As of June 30, 2002, 168,500 shares of Series B Preferred Stock remained outstanding. If these shares have not been converted to shares of common stock prior to the mandatory
redemption date, we will be required to redeem them at a cost of approximately $825,000.

Our
operating expenses can be expected to increase as we proceed with the required clinical trials, the NDA and other related stages of the FDA approval process. Our future liquidity and
capital funding requirements will depend on numerous factors, including the results of our current Phase II/III clinical study, the timing of regulatory actions for Esterom®, the cost and
timing of sales, marketing and manufacturing activities, the extent to which Esterom® gains market acceptance, and the impact of competitors' products. There can be no assurance that such
additional funding will be available on terms acceptable to us, if at all. If adequate funds are not available, we may be forced to significantly curtail our operations or to obtain funds through
entering into collaborative agreements or other arrangements that may be on unfavorable terms. Our failure to raise funds on favorable terms could have a material adverse effect on our business,
financial condition or results of 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
the development of Esterom®. 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.

Deferred
charges for options granted to non-employees are determined in accordance with Statement of Financial Accounting Standards No. 123 and EITF 96-18
based on the fair value of the consideration or the fair value of the equity instruments issued, whichever is more reliably measured. Deferred charges for options granted to non-employees
are periodically remeasured as the underlying

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options vest and are included as unearned stock compensation in the stockholders' equity section of the balance sheet.

Recent Accounting Pronouncements

In June 2001, the FASB issued SFAS No. 141, "Business Combinations". SFAS No. 141 requires the use of the purchase method of accounting for
all business combinations initiated after September 30, 2001 and eliminates the pooling-of-interests method. The adoption of SFAS No. 141 had no effect on our
financial statements.

In
June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142 requires that goodwill and other intangible assets with indefinite
lives no longer be amortized, but instead tested for impairment at least annually. In addition, the standard addresses how intangible assets that are acquired individually or with a group of other
assets, other than as part of a business combination, should be accounted for upon their acquisition. The adoption of SFAS No. 142, effective January 1, 2002, had no effect on our
financial statements.

In
August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This statement supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of", and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of OperationsReporting the
Effects of a Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for the disposal of a segment of a business (as previously defined in
that opinion). The adoption of SFAS No. 144, effective January 1, 2002, had no effect on our financial statements.

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PART II.

OTHER INFORMATION

Item 1. Legal Proceedings.

There is no material litigation currently pending against us.

Item 2. Changes in Securities and Use of Proceeds.

Recent Sales of Unregistered Securities

During the quarterly period ended June 30, 2002, we did not issue any unregistered securities.

Use of Proceeds

Pursuant to a registration statement on Form SB-2 (File No. 333-11308) which became effective on March 14, 2000, we sold for
an aggregate market price of $14,500,000 on March 20, 2000, 2,000,000
shares of common stock at $7.00 per share, and 2,000,000 warrants to purchase 2,000,000 shares of common stock at $0.25 per warrant. All offering expenses, including underwriting discounts and
commissions, finders' fees, and other underwriting expenses, totaled approximately $2,000,000. After deduction of offering expenses, we obtained net proceeds of approximately $12.5 million. On
May 1, 2000, the managing underwriter exercised its overallotment option, for an aggregate price of $1,335,000, to purchase an additional 180,000 shares of common stock at $7.00 per share, and
an additional 300,000 warrants to purchase 300,000 shares of common stock at $0.25 per warrant. After deduction of overallotment expenses of approximately $135,000, we obtained net proceeds of
approximately $1.2 million.

To
date the net proceeds we received from our secondary offering and over-allotment have been used as follows: approximately $1.7 million for general and
administrative expenses and working capital; approximately $5.7 million for clinical trials and associated research and development expenses; approximately $323,000 for research associated with
reformulation and understanding Esterom®'s mechanism of action; and approximately $1.1 million for activities related to the preparation of our NDA. We have used a total of
approximately $8.8 million of the secondary offering and over allotment proceeds. The remaining proceeds, plus interest earned on these funds, total approximately $5.9 million and are
invested in short-term certificates of deposit and money market funds. As part of general and administrative expenses, our directors have received approximately $206,000 for their
services; our officers have received approximately $473,000 for their services; and Thomas Anderson, who owns more than 10% of our common stock, indirectly received $21,600 in the form of rent for our
office space which was paid to the Law Offices of Thomas Anderson.

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

An annual meeting of the stockholders of the Company was held in Indian Wells, California on June 14, 2002. The stockholders approved each of the following
actions as set forth below together with the results of voting.

Three
directors were elected to three-year terms. Wilson S. Benjamin, Joseph R. Ianelli and Bruce R. Manning will serve until the date of the 2005 annual meeting of
stockholders. 5,354,060 shares were voted for the proposal, 9,235 against, and 171,303 abstained. Higgins D. Bailey, Dennis K. Metzler, and Thomas G. Tachovsky will continue to serve as directors
until the date of the 2003 annual meeting of stockholders. Paul V. Maier and Randall L. Carpenter will continue to serve as directors until the date of the 2004 annual meeting of stockholders.

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The
stockholders ratified the selection of Deloitte & Touche LLP as the independent auditors of the Company for the year ending December 31, 2002. 5,411,393 shares were
voted for the proposal, 103,350 against, and 19,855 abstained.

In
addition, the stockholders approved the agreement and plan of merger, dated as of May 2, 2002, between the Company and Entropin, Inc., a Delaware corporation, which
effected the Company's reincorporation in Delaware. 5,393,318 shares were voted for the proposal, 116,350 against, and 24,950 abstained.

Item 5. Other Information

Risks and Uncertainties

The following is a summary description of some of the many risk factors we face in our business. You should carefully review these risk factors in evaluating our
business. You should also consider the other information described in this report.

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 only current product, Esterom®, and
expect to continue to incur substantial operating losses through the completion of our Phase III clinical trials and the New Drug Application process. To June 30, 2002, we had incurred
cumulative net operating losses of $27.1 million. We will not even be able to pursue generating revenue from sales of Esterom® unless it is approved by the FDA for marketing. We may
never achieve a profitable level of operations or even if we achieve profitability, we may not be able to sustain it on an ongoing basis.

If we fail to obtain regulatory approval to commercially manufacture or sell Esterom®, or if approval is delayed, it will increase the cost of development, and will
likely prevent or delay our ability to sell Esterom® and generate revenue.

Our only current product, Esterom®, is in late stage clinical trials for soft tissue afflictions resulting in impaired shoulder function. We have not
yet requested or received regulatory approval from the FDA for marketing Esterom®. Any other products that may result from our research and development programs are not expected to be
commercially available for the foreseeable future, if at all.

The
development of new pharmaceutical products is highly uncertain and subject to a number of risks. The FDA approval process generally takes years and consumes substantial capital
resources with no assurance of ultimate success. We cannot apply for FDA approval to market Esterom® until the product successfully completes the required Phase III clinical trials.
Several factors may prevent our successful completion of the Phase III clinical trials, including insufficient capital resources, inability to obtain the required number of patients to complete the
trials or insufficient proof that Esterom® is safe and effective.

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

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Negative or inconclusive results generated by our ongoing clinical trials will have a material adverse effect on our prospects.

We have completed patient enrollment in our Phase II/III clinical study of Esterom® for treatment of soft tissue afflictions resulting in impaired
function of the shoulder and anticipate announcing results in the near future. No assurances can be given as to the results of this study, and we have sponsored similar studies which have failed in
the past. Negative or inconclusive results generated by this clinical study or future clinical studies will have an immediate material adverse effect on our ability to raise additional funds through
the issuance of securities or consummation of corporate partnering relationships.

We will need additional funds to support our operations. If we are unable to obtain them, we will be unable to complete our product development and may have to reduce or cease
operations.

We believe that our existing capital resources will be sufficient to satisfy our current and projected funding requirements for at least the next twelve months.
Nonetheless, we will need additional funds to support our current operations as contemplated and future operations following such period. Our future capital requirements will depend on many factors,
including:



We
intend to seek additional funding to support our future operations through public or private sales of our equity securities. Any additional equity financings would be dilutive to our
stockholders. We may also seek additional funding through potential corporate partnerships, licensing arrangements and/or a merger/acquisition. Any such collaborative arrangements, if necessary to
raise additional funds, may require us to relinquish rights to some of our technologies or products. If we are unable to obtain additional funds to support our future operations, we will be unable to
complete our product development and may have to reduce or cease operations.

We rely on third parties to test, research, develop and manufacture our products 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:



If
these third parties fail to perform their contractual obligations, it could have a material adverse effect on our business and results of operations.

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We are dependent on contract manufacturers for the production of our products and our failure to obtain or retain these contract manufacturers would have a material adverse
affect on our business and results of operations.

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

Esterom®'s classification as a controlled substance may limit sales and increase costs which would harm our business and results of operations.

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

If we are unable to defend our patents and proprietary rights, or if others develop substantially equivalent products, our business would be impacted.

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

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

We may be exposed to product liability claims which could adversely affect our business and financial condition.

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

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We may face intense competition and may not be able to compete effectively.

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

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

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

Our stock price has been volatile and may continue to experience significant price fluctuations.

The market prices and trading volumes for our securities, and the securities of development stage companies in general, have historically been highly volatile and
have experienced significant price and volume fluctuations that are unrelated to operating performance. The following factors may have an adverse effect on the price of our securities:



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

Future sales of our securities in the publicor privatemarket could lower our stock price and impair our ability in new stock
offerings to raise funds to continue operations.

Future sales of our common stock, including shares issued upon the exercise of outstanding options and warrants or other derivative transactions with respect to
our stock, could have a significant

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negative effect on the market price of our common stock. These sales may also make it more difficult for us to sell equity securities or equity-related securities in the future at a time and price
that we would deem appropriate.

Item 6. Exhibits and Reports on Form 8-K.



2.1

Agreement and Plan of Merger, dated May 2, 2002, by and between Entropin, Inc., a Delaware corporation and Entropin, Inc., a Colorado corporation.3.1
(1)
Certificate of Incorporation of Entropin, Inc., a Delaware corporation.3.2
(1)
Bylaws of Entropin, Inc., a Delaware corporation.99.1

Certification under Section 906 of the Sarbanes-Oxley Act of 2002.


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During
the current quarter and prior to filing this Report, we filed the following Current Reports on Form 8-K:



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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.
|--------------------- |  | --------------
|                      |  |               
|Date: August 14, 2002 |  | By:           
|                      |  |               
|Date: August 14, 2002 |  | By:           

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