Entropin (ETOP) 10QSB 2006 Q3 Quarterly report (small business)

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________

FORM 10-QSB

________________

xQUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

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

For the transition period from to

Commission file number 000-29807

________________

ENTROPIN, INC.

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

________________

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

13314 Lost Key Place, Bradenton, FL. 34202

(Address of principal executive offices)

(941) 388-9512

(Issuer’s telephone number)

Former Address

45926 Oasis Street, Indio, CA 92201

Former Telephone Number

(760) 775-8333

________________

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 xNo ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):     Yes x No ¨

As of November 3, 2006, 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

INDEX

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Balance Sheets - December 31, 2005 and September 30, 2006 (unaudited)	2
	Condensed Statements of Operations - For the Three Months Ended September 30, 2005 and 2006 (unaudited)	3
	Condensed Statements of Operations - For the Nine Months Ended September 30, 2005 and 2006 and for the Period from August 27, 1984 (Inception) through September 30, 2006 (unaudited)	4
	Condensed Statement of Changes in Stockholders’ Deficit - For the Nine Months Ended September 30, 2006 (unaudited)	5
	Condensed Statements of Cash Flows - For the Nine Months Ended September 30, 2005 and 2006 and for the Period from August 27, 1984 (Inception) through September 30, 2006 (unaudited)	6
	Notes to Condensed Financial Statements (unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.	Controls and Procedures	15
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	16
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	16
Item 3.	Defaults upon Senior Securities	16
Item 4.	Submission of Matters to a Vote of Security Holders	16
Item 5.	Other Information	17
Item 6.	Exhibits	17
	Signatures	18

1

ENTROPIN, INC.

(A DEVELOPMENT STAGE COMPANY)

CONDENSED BALANCE SHEETS

December 31, 2005 and September 30, 2006

	December 31, 2005			September 30, 2006
				(unaudited)
Current assets:
Cash and cash equivalents	$	112,841		$	42,724
Prepaid expenses		—			—
Total current assets	$	112,841		$	42,724
Total assets	$	112,841		$	42,724
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	589,114		$	571,102
Commitments & contingencies
Stockholders’ deficit:
Series A’ redeemable preferred stock, $.0001 par value; 3,210,487 shares authorized, and 3,210,487 shares issued and outstanding, $1.00 per share redemption value		3,210,487			3,210,487
Common stock, $.0001 par value; 200,000,000 shares authorized; 30,645,341 shares issued and outstanding		3,065			3,065
Additional paid-in capital		34,819,422			34,819,422
Deficit accumulated during the development stage		(38,509,247	)		(38,561,352	)
Total stockholders’ deficit		(476,273	)		(528,378	)
Total liabilities and stockholders’ deficit	$	112,841		$	42,724

See accompanying notes to condensed financial statements.

2

ENTROPIN, INC.

(A DEVELOPMENT STAGE COMPANY)

CONDENSED STATEMENTS OF OPERATIONS

For the Three Months Ended September 30, 2005 and 2006

(Unaudited)

	2005			2006
Costs and expenses:
General and administrative		34,302			22,215
Impairment of patent costs	$	695,572		$	-
Operating loss		(729,874	)		(22,215	)
Other income:
Interest income		-			-
Interest expense		-			-
Other Expense		-			-
Total other income, net		-			-
Net loss		(729,874	)		(22,215	)
Dividends applicable to Series B
preferred stockholders		-			-
Net loss applicable to common stockholders	$	(729,874	)	$	(22,215	)
Basic and diluted net loss per common share	$	(.02	)	$	(.00	)
Weighted average common shares outstanding		30,645,000			30,645,000

See accompanying notes to condensed financial statements.

3

ENTROPIN, INC.

(A DEVELOPMENT STAGE COMPANY)

CONDENSED STATEMENTS OF OPERATIONS

For the Nine Months Ended September 30, 2005 and 2006

and for the Period from August 27, 1984 (Inception) Through September 30, 2006

(Unaudited)

	2005			2006			Inception through September 30, 2006
Costs and expenses:
Research and development	$	131,006		$	—		$	16,043,819
General and administrative		1,398,647			52,105			21,893,168
Impairment of patent costs		695,572			—			695,572
Operating loss		(2,225,224	)		(52,105	)		(38,632,559	)
Other income (expense):
Interest income		20,762			—			1,529,259
Interest expense		—			—			(242,811	)
Other Expense		(931	)		—			(127,241	)
Total other income (expense), net		19,831			—			1,159,207
Net loss		(2,205,393	)		(52,105	)		(37,473,352	)
Dividends applicable to Series B preferred stockholders		—			—			(1,103,184	)
Net loss applicable to common stockholders	$	(2,205,393	)	$	(52,105	)	$	(38,576,536	)
Basic and diluted net loss per common share	$	(0.07	)	$	(0.00	)	$	(4.20	)
Weighted average common shares outstanding		30,645,000			30,645,000			9,187,000

See accompanying notes to condensed financial statements.

4

ENTROPIN, INC.

(A DEVELOPMENT STAGE COMPANY)

CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT

For the Nine Months Ended September 30, 2006

(Unaudited)

	Series A Redeemble Preferred Stock			Common Stock
	Shares		Amount	Shares		Amount		Additional paid-in capital		Deficit accumulated during development stage			Total stockholders’ equity
Balance, January 1, 2006	3,210,487	$	3,210,487	30,645,341	$	3,065	$	34,819,422	$	(38,509,247	)	$	(476,273	)
Net loss for the period	—		—	—		—		—		(52,105	)		(52,105	)
Balance, September 30, 2006	3,210,487	$	3,210,487	30,645,341	$	3,065	$	34,819,422	$	(38,561,352	)	$	(528,378	)

See accompanying notes to condensed financial statements.

5

ENTROPIN, INC.

(A DEVELOPMENT STAGE COMPANY)

CONDENSED STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30, 2005 and 2006

and for the Period from August 27, 1984 (Inception) Through September 30, 2006

(Unaudited)

	2005			2006			Inception through Sept. 30, 2006
Cash flows from operating activities:
Net loss	$	(2,205,393	)	$	(52,105	)	$	(37,473,352	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		30,624			—			352,584
Impairment of patent costs		695,572			—			695,572
Series B preferred stock redemption conversion incentive		—			—			126,309
Loss on disposal of assets		—			—			1,837
Services received in exchange for stock, stock options and warrants		—			—			10,642,845
Services received in exchange for compensation agreements		—			—			2,231,678
Increase (decrease) in accounts payable		(41,823	)		(18,012	)		778,799
Other		—			—			58,610
Net cash used in operating activities		(1,521,020	)		(70,117	)		(22,585,118	)
Cash flows from investing activities:
Maturities (purchase) of short-term investments, net		1,273,000			—			—
Patent costs		(50,188	)		—			(976,433	)
Purchase of property and equipment		—			—			(130,515	)
Net cash provided by (used in) investing activities		1,288,812			—			(1,106,948	)
Cash flows from financing activities:
Proceeds from issuance of common stock and warrants		—			—			21,732,261
Proceeds from issuance of preferred stock		—			—			1,142,750
Proceeds from stockholder loans		—			—			809,679
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	)
Payment for cancellation of common stock warrant		—			—			(330,000	)
Proceeds from convertible notes payable		—			—			200,000
Net cash provided by financing activities		—			—			23,734,790
Net (decrease) increase in cash and cash equivalents		(298,208	)		(70,117	)		42,724
Cash and cash equivalents at beginning of period		444,611			112,841			—
Cash and cash equivalents at end of period	$	146,403		$	42,724		$	42,724

(Continued on following page)

See accompanying notes to condensed financial statements

6

ENTROPIN, INC.

(A DEVELOPMENT STAGE COMPANY)

CONDENSED STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30, 2005 and 2006

and for the Period from August 27, 1984 (Inception) Through September 30, 2006

(Unaudited)

(Continued from preceding page)

Supplemental disclosure of cash flow information:

	2005		2006		Inception through Sept. 30, 2006
Cash paid for income taxes during period	$	—	$	—	$	—
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, 2006, 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, 2006, the Company converted promissory notes payable with outstanding principal and interest balances totaling $201,660 into 100,831 shares of common stock.

During the period from August 27, 1984 (inception) through September 30, 2006, the Company issued 94,850 shares of common stock at $5.00 per share as payment of accrued dividends on Series B preferred stock.

During the period from August 27, 1984 (inception) through September 30, 2006, the Company issued 1,337,333 shares of common stock totaling $1,336,609, for conversion of shares of Series B preferred stock.

See accompanying notes to condensed financial statements.

7

ENTROPIN, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONDENSED 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, 2006 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, 2005 as filed with the Securities and Exchange Commission on April 11, 2006.

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 has been 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 (“FDA”) approval for its proprietary compounds, including its current drug candidate, ENT-103, as well as fund raising.

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

Going Concern:

As of September 30, 2006, the Company had total current assets of $42,724 and current liabilities of $571,102. 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, 2006 of $38,561,352. Management anticipates additional operating losses for the foreseeable future. These factors, among others, indicate that the Company will be unable to continue as a going concern unless it can immediately obtain significant additional funds to support its operations. The financial statements do not include any adjustments related to the recoverability of recorded asset amounts that may be necessary should the Company be unable to continue as a going concern. In the absence of positive cash flows from operations which the Company expects will not be possible for several years, if at all, the Company is and will remain highly dependent on its ability to secure additional funding through the issuance of debt or equity instruments, corporate partnering or merger/acquisition arrangements. As the Company was unable to raise sufficient additional funds on a timely basis, it was forced to cease its operations prior to the end of the second quarter of 2005.

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

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

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

8

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

Use of estimates:

The preparation of financial statements in conformity with 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 $28,718 and $0 for the nine months ended September 30, 2005 and 2006, respectively, and approximately $281,000 from inception through September 30, 2006. The Company decided to write off the balance of the patents totaling $695,572 as of September 30, 2005, due to a lack of capital to fund the approval process for the patents.

Impairment of long-lived assets:

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

9

Concentrations of credit risk:

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

Stock-based compensation:

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

Fair value of financial instruments:

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

Loss per share:

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

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.   Commitments and contingencies

The Company, along with two of its former officers and/or directors, is currently a defendant in a class action securities fraud lawsuit that is pending in the United States District Court for the Central District of California. The plaintiffs in this lawsuit are a class of shareholders who purchased Entropin securities in the Company’s March 15, 2000 public offering. In the lawsuit, Entropin is accused of violating Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by making false and misleading statements in the Company’s March 15, 2000 registration statement regarding the scientific and regulatory development of its developmental drug, Esterom. Specifically, the Company and the individual defendants are accused of making false and misleading statements regarding: (1) the results of its Phase II clinical study of Esterom; (2) the Phase III clinical study of Esterom; and (3) Entropin’s intention to file a new drug application for Esterom in early 2001. The Company is vigorously defending itself against these allegations, which it believes are without merit. A trial date has been set for January 9, 2007. However, there can be no assurance that the Company will succeed in defending or settling this action. Additionally, there can be no assurance that the action will not have a material adverse effect on the Company's business.

The Company, along with two of its former officers and directors, is also a defendant in a class action securities fraud lawsuit that is pending in California Superior Court. The allegations and parties in this lawsuit are largely identical to those in the federal litigation described above. In June 2004, this lawsuit was dismissed by the California Superior Court as having been filed after the statutes of limitations had expired. However, the California Court of Appeals has reversed the California Superior Court’s order of dismissal and has taken actions to remand the matter back to the California Superior Court for further deliberations. The Company will vigorously defend itself against these allegations, which it believes are without merit. There can be no assurance that the Company will succeed in defending or settling this action. Additionally, there can be no assurance that the action will not have a material adverse effect on the Company's business. As of the date of this report, the Company is not a party to any other material legal proceedings.

10

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, 2005.

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

From our inception in August 1984, we have devoted our resources primarily to funding our research and development efforts and conducting clinical trials with our products. We have been unprofitable since inception and have had no revenue from the sale of products, and do not expect revenue for the foreseeable future until we have received u.s. Food and Drug Administration (“FDA”) approval for one of the proprietary compounds we were attempting to develop. As of September 30, 2006, our accumulated deficit was approximately $38.6 million.

As of September 30, 2006, we had total current assets of approximately $43,000. Our available funds are not sufficient to allow us to pursue any further development of our proprietary drug candidate, ENT-103, including the preclinical work necessary to prepare and file an Investigational New Drug application with the FDA or to commence human clinical trials for ENT-103. As we were unable to immediately obtain significant additional funds to support our operations, we were forced to cease our operations prior to the end of the second quarter of 2005.

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

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

11

Going Concern:

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

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

Plan of Operation

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

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

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

Results of Operations

Three months ended September 30, 2006, compared to three months ended September 30, 2005.

The net loss for the three months ended September 30, 2006 was approximately $22,000, as compared to approximately $730,000 for the same period in 2005, a decrease of approximately $708,000 or 97%. Approximately $696,000 of this decrease was due to the impairment of patent costs.

Total research and development expenses were $0 for the three months ended September 30, 2006 and 2005, due to the cessation of operations in May, 2005.

Total general and administrative expenses were approximately $22,000 for the three months ended September 30, 2006, as compared to approximately $34,000 for the same period in 2005, a decrease of $12,000 or 35% due to the cessation of operations in May, 2005.

There was no interest income during the three months ended September 30, 2006 and 2005.

12

Nine months ended September 30, 2006, compared to nine months ended September 30, 2005.

The net loss for the first nine months of 2006 was approximately $52,000, as compared to approximately $2.2 million for the same period in 2005, a decrease of approximately $2,148,000 or $97.6%. Approximately $696,000 of the total decrease was due to the impairment of patent costs and the balance was due to the cessation of operations in May, 2005.

Total research and development expenses was $0 during the first nine months of 2006, as compared to approximately $131,000 for the first nine months of 2005, a decrease of $131,000 or 100%. The decrease in research and development expenses was due to the cessation of Company’s operations since May, 2005.

Total general and administrative expenses were approximately $52,000 for the first nine months of 2006, as compared to approximately $1,399,000 for the first nine months of 2005, a decrease of $1,347,000 or 96%.

Interest income during the first nine months of 2006 was $0, as compared to approximately $21,000 during the first nine months of 2005, a decrease of approximately $21,000 or 100%.

Liquidity and Capital Resources

As of September 30, 2006, we had total current assets of approximately $43,000, current liabilities of approximately $571,000, and a negative working capital of approximately $528,000. Our financial statements have been presented on a going concern basis. We have an immediate need to raise additional funds to continue our operations. There can be no assurance that such additional capital will be available on a timely basis or on terms acceptable to us, if at all. As we were unable to obtain the significant additional funds to support our operations, we had to cease our operations prior to the end of the second quarter of 2005.

We are in the development stage and have been primarily involved in research and development activities. This has resulted in significant operating losses and an accumulated deficit at September 30, 2006 of approximately $38.6 million. Our management anticipates additional operating losses for the foreseeable future. These factors, among others, indicate that we will be unable to continue as a going concern unless it can immediately obtain significant additional funds to support its operations. We have financed our operations since inception primarily through the net proceeds generated from the sale of our common and preferred stock, and through loans and advances from stockholders that were subsequently converted into equity securities. From inception through September 30, 2006, we have received net cash proceeds from financing activities aggregating approximately $23.7 million. As of September 30, 2006, we had a negative working capital of approximately $528,000.

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

Net cash used in operating activities was approximately $70,000 during the first nine months of 2006, compared with approximately $1.6 million during the first nine months of 2005. No research was done during the first nine months of 2006. However, during the same period in 2005, the cash used in operations was primarily related to conducting preclinical research studies and maintaining our administrative infrastructure.

Critical Accounting Policies

We routinely granted stock options to compensate officers, directors and employees for their services. This practice allowed us to conserve our cash resources for our drug development program. We had 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 was 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 were 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 was 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.

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

Our independent auditors have added an explanatory paragraph in connection with the December 31, 2005 financial statements, which states that our Company is in the development stage and has incurred an accumulated deficit at December 31, 2005 of $38,509,247. At September 30, 2006, the Company had an accumulated deficit of approximately $38.6 million. These conditions give rise to substantial doubt about our Company’s ability to continue as a going concern. The Company is dependant on its ability to secure additional funding through the issuance of debt or equity instruments, corporate partnering or merger/acquisition arrangements. The Company ceased its business operations in the second quarter of 2005.

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

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

As of September 30, 2006, we had total current assets of approximately $43,000 and current liabilities of approximately $571,000. We ceased our operations in the second quarter of 2005. Our financial statements have been presented on a going concern basis. Our available funds are not sufficient to allow us to begin any further development of our proprietary drug candidate, ENT-103, including the preclinical work necessary to prepare and file an Investigational New Drug application with the FDA or to commence human clinical trials for ENT-103. We are actively seeking additional funding through potential merger/acquisition transactions coupled with private sales of our equity or debt securities. Any such transactions may require us to relinquish rights to some of our technologies or products, and will be dilutive to our existing stockholders. We cannot guarantee that we will be able to complete any such transaction or secure additional funds on a timely basis, or at all, and we cannot assure that such transaction will be on reasonable terms.

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

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

We have a history of losses and we may never resume operations.

To date we have experienced significant operating losses in funding the research, development and testing of our previous drug candidate, Esterom solution, and our subsequent and current drug candidates, ENT-102 and ENT-103. From our inception through September 30, 2006, we have incurred cumulative net losses applicable to common stockholders of $38.6 million. We ceased operations in the second quarter of 2005.

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

The Company, along with two of its former officers and directors, is currently a defendant in a class action securities fraud lawsuit that is pending in the United States District Court for the Central District of California. The plaintiffs in this lawsuit are a class of shareholders who purchased Entropin securities in the Company’s March 15, 2000 public offering. In the lawsuit, Entropin is accused of violating Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by making false and misleading statements in the Company’s March 15, 2000 registration statement regarding the scientific and regulatory development of its developmental drug Esterom. Specifically, the Company and the individual defendants are accused of making false and misleading statements regarding: (1) the results of its Phase II clinical study of Esterom; (2) the Phase III clinical study of Esterom; and (3) Entropin’s intention to file a new drug application for Esterom in early 2001. A trial date has been set for January 9, 2007. However, there can be no assurance that the Company will succeed in defending or settling this action. Additionally, there can be no assurance that the action will not have a material adverse effect on the Company's business.

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The Company, along with two of its former officers and directors, is also a defendant in a class action securities fraud lawsuit that is pending in California Superior Court. The allegations and parties in this lawsuit are largely identical to those in the federal litigation described above. In June 2004, this lawsuit was dismissed by the California Superior Court as having been filed after the statutes of limitations had expired. However, the California Court of Appeals has reversed the California Superior Court’s order of dismissal and has taken actions to remand the matter back to the California Superior Court for further deliberations. There can be no assurance that the Company will succeed in defending or settling this action. Additionally, there can be no assurance that the action will not have a material adverse effect on the Company's business.

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 stockholders approved the proposal to increase the number authorized shares of common stock at a special meeting held on November 19, 2004. The approval of this proposal by the Company’s stockholders provides the Board of Directors with a significant number of additional shares of common stock to issue in fund raising activities and for other corporate purposes. Our Certificate of Incorporation also provides for the issuance of up to 200 million shares of common stock and 10,000,000 shares of preferred stock. The issuance of these additional shares of common stock and/or preferred stock will have a dilutive effect on the equity and voting power of the existing holders of our common stock. It may also adversely affect the market price of our common stock. As of November 3, 2006, there were 30,645,341 shares of common stock issued and outstanding and 3,210,487 shares of Series A’ preferred stock issued and outstanding.

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

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

Item 3.CONTROLS AND PROCEDURES

(A)Evaluation of Disclosure Controls and Procedures

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

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(B)Changes in Internal Controls OverFinancial Reporting

In connection with the evaluation of the Company’s internal controls during the Company’s quarter ended September 30, 2006, the Company’s Principal Executive Officer/Principal Financial Officer has determined that there are no changes to the Company’s internal controls over financial reporting that has materially affected, or is reasonably likely to materially effect, the Company’s internal controls over financial reporting.

PART II.

OTHER INFORMATION

Item 1.Legal Proceedings

The Company, along with two of its former officers and directors, is currently a defendant in a class action securities fraud lawsuit that is pending in the United States District Court for the Central District of California. The plaintiffs in this lawsuit are a class of shareholders who purchased Entropin securities in the Company’s March 15, 2000 public offering. In the lawsuit, Entropin is accused of violating Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by making false and misleading statements in the Company’s March 15, 2000 registration statement regarding the scientific and regulatory development of its developmental drug Esterom. Specifically, the Company and the individual defendants are accused of making false and misleading statements regarding: (1) the results of its Phase II clinical study of Esterom; (2) the Phase III clinical study of Esterom; and (3) Entropin’s intention to file a new drug application for Esterom in early 2001. The Company is vigorously defending itself against these allegations, which it believes are without merit. A trial date has been set for January 9, 2007. However, there can be no assurance that the Company will succeed in defending or settling this action. Additionally, there can be no assurance that the action will not have a material adverse effect on the Company's business.

The Company, along with two of its former officers and directors, is also a defendant in a class action securities fraud lawsuit that is pending in California Superior Court. The allegations and parties in this lawsuit are largely identical to those in the federal litigation described above. In June 2004, this lawsuit was dismissed by the California Superior Court as having been filed after the statutes of limitations had expired. However, the California Court of Appeals has reversed the California Superior Court’s order of dismissal and has taken actions to remand the matter back to the California Superior Court for further deliberations. In this event, the Company will vigorously defend itself against these allegations, which it believes are without merit. There can be no assurance that the Company will succeed in defending or settling this action. Additionally, there can be no assurance that the action will not have a material adverse effect on the Company's business. As of the date of this report, the Company is not a party to any other material legal proceedings.

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

None.

Item 3.Defaults Upon Senior Securities

None.

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

None

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Item 5.Other Information

None.

Item 6.Exhibits

Exhibits

Exhibit Number	Description
2.1	Agreement of Plan of Merger, dated May 2, 2002, by and between Entropin, Inc., a Delaware Corporation and Entropin, Inc., a Colorado corporation (1)
3.1	Certificate of Incorporation of Entropin, Inc., a Delaware corporation (2)
3.2	Bylaws of Entropin, Inc., a Delaware corporation (2)
3.3	Certificate of Designations of Series A’ Preferred Stock of Entropin, Inc. (3)
3.4	Certificate of Amendment to Certificate of Incorporation (4)
4.1	Form of Common Stock Purchase Warrant (5)
4.2	Warrant for Common Stock issued to Navidec Financial Services, Inc. (6)
10.1	Agreement and Plan of Merger, dated December 9, 1997 between Vanden Capital Group, Inc. and Entropin, Inc. (7)
10.2	Lease Agreement, dated February 1, 1998, between the Registrant and Thomas T. Anderson (8)
10.3	1998 Compensatory Stock Plan (9)
10.4	Employment Agreement, dated December 1, 1999, between Entropin, Inc. and Thomas Tachovsky. (10)
10.5	Amended and Restated Investment Banking Agreement, dated December 11, 2003, between Entropin, Inc. and InvestLinc Securities, LLC. (10)
10.6	Form of Indemnification Agreement for the officers and directors (11)
31.1	Certification of Chief Executive Officer
31.2	Certification of Chief Financial Officer
32.1	Certification of President and Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.

___________

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

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

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

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

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

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

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

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

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

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

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

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 7, 2006	By: /s/ David L. Norris
	David L.Norris
	President, Chief Executive Officer Chief Financial Officer

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