<PAGE>   1
 
   
     AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 11, 2000
    
                                                      REGISTRATION NO. 333-32370
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 
                                    FORM S-1
   
                                AMENDMENT NO. 3
    
                                       TO
                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933
                            ------------------------
 
                            PAIN THERAPEUTICS, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 

<TABLE>
<S>                                  <C>                                  <C>
              DELAWARE                               7841                              91-1911336
  (STATE OR OTHER JURISDICTION OF        (PRIMARY STANDARD INDUSTRIAL               (I.R.S. EMPLOYER
   INCORPORATION OR ORGANIZATION)        CLASSIFICATION CODE NUMBER)             IDENTIFICATION NUMBER)
</TABLE>

 
                        250 EAST GRAND AVENUE, SUITE 70
                     SOUTH SAN FRANCISCO, CALIFORNIA 94080
                                 (650) 624-8200
  (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
                   REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
 
                            ------------------------
 
                                  REMI BARBIER
                     PRESIDENT AND CHIEF EXECUTIVE OFFICER
                        250 EAST GRAND AVENUE, SUITE 70
                     SOUTH SAN FRANCISCO, CALIFORNIA 94080
                                 (650) 624-8200
 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
                             OF AGENT FOR SERVICE)
 
                            ------------------------
 
                                   COPIES TO:
 

<TABLE>
<S>                                              <C>
           MICHAEL J. O'DONNELL, ESQ.                          PETER T. HEALY, ESQ.
           MARTIN J. WATERS III, ESQ.                         O'MELVENY & MYERS LLP
        WILSON SONSINI GOODRICH & ROSATI                     EMBARCADERO CENTER WEST
            PROFESSIONAL CORPORATION                      275 BATTERY STREET, SUITE 2600
               650 PAGE MILL ROAD                          SAN FRANCISCO, CA 94111-3305
            PALO ALTO, CA 94304-1050                              (415) 984-8833
                 (650) 493-9300
</TABLE>

 
        APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
 
    If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box.  [ ]
 
    If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering.  [ ] __________
 
    If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.  [ ] __________
 
    If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.  [ ] __________
 
                            ------------------------
 
    THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL HEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(A),
MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

<PAGE>   2
 
       THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
       MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
       THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
       NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER
       TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
       PERMITTED.
 
   
                   SUBJECT TO COMPLETION, DATED JULY 11, 2000
    
 
PROSPECTUS
 
                                      LOGO
 
                                5,000,000 Shares
                                  Common Stock
 
--------------------------------------------------------------------------------
   
This is an initial public offering of 5,000,000 shares of common stock of Pain
Therapeutics, Inc. No public market currently exists for our common stock. We
anticipate that the initial public offering price will be between $11 and $13
per share.
    
 
We have applied to have our common stock approved for quotation on the Nasdaq
National Market under the symbol "PTIE."
--------------------------------------------------------------------------------
 
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 6.
--------------------------------------------------------------------------------
 

<TABLE>
<CAPTION>
                                                       PER SHARE           TOTAL
<S>                                                    <C>              <C>
Public offering price                                   $               $
Underwriting discounts and commissions                  $               $
Proceeds, before expenses, to us                        $               $
</TABLE>

 
   
The underwriters have an option to purchase 750,000 additional shares of common
stock to cover any over-allotments of shares.
    
 
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
--------------------------------------------------------------------------------
 
THOMAS WEISEL PARTNERS LLC
                           CIBC WORLD MARKETS
                                                      TUCKER ANTHONY CLEARY GULL
 
The date of this prospectus is                 , 2000

<PAGE>   3
 
                               TABLE OF CONTENTS
 
   

<TABLE>
<CAPTION>
                                PAGE
                                ----
<S>                             <C>
Prospectus Summary............    1
Risk Factors..................    6
Cautionary Note On Statements
  of Our Expectations About
  Our Future Performance......   13
Use of Proceeds...............   14
Dividend Policy...............   14
Capitalization................   15
Dilution......................   16
Selected Financial Data.......   17
Management's Discussion and
  Analysis of Financial
  Condition and Results of
  Operations..................   18
Business......................   24
</TABLE>

    
 
   

<TABLE>
<CAPTION>
                                PAGE
                                ----
<S>                             <C>
Management....................   37
Certain Relationships and
  Related Transactions........   46
Principal Stockholders........   47
Description of Capital
  Stock.......................   49
Shares Eligible for Future
  Sale........................   53
U.S. Tax Consequences to Non-
  U.S. Holders................   55
Underwriting..................   58
Legal Matters.................   61
Experts.......................   61
Where You Can Find More
  Information.................   61
Index to Financial
  Statements..................  F-1
</TABLE>

    
 
                                        i

<PAGE>   4
 

                               PROSPECTUS SUMMARY
 
     This summary highlights information found in greater detail elsewhere in
this prospectus. In addition to this summary, we urge you to read the entire
prospectus carefully, especially the risks of investing in our common stock
discussed under "Risk Factors" and the consolidated financial statements, before
you decide to buy our common stock.
 
                            PAIN THERAPEUTICS, INC.
 
   
     Pain Therapeutics is developing a new generation of opioid painkillers.
Opioids are drugs derived from the poppy plant. We use our technology to
reformulate opioid drugs, such as morphine, into new painkillers with improved
clinical benefits. We currently have four opioid painkillers in Phase II
clinical trials. We believe our drugs offer enhanced pain relief, fewer adverse
side effects and reduced tolerance and addiction compared to existing opioid
painkillers. If approved by the Food and Drug Administration, or FDA, we believe
our proprietary drugs could replace many commonly used opioid painkillers. Our
product candidates are combinations of FDA-approved drugs. For this reason, we
believe we may encounter fewer clinical and regulatory hurdles than if we were
developing new chemical entities.
    
 
                               OPIOID PAINKILLERS
 
     The clinical use of opioid painkillers is widely accepted throughout the
world. Despite their widespread clinical use, opioid painkillers have
significant adverse side effects including respiratory depression, nausea,
vomiting, dizziness, sedation, mental clouding, constipation, urinary retention
and severe itching. Chronic use leads to tolerance and, potentially, addiction.
Adverse side effects limit the usefulness of opioid painkillers. In many cases,
patients voluntarily take less than the prescribed dosage to avoid adverse side
effects. Some patients even prefer to endure pain rather than to suffer from
adverse side effects. As a result, many patients are seriously under-treated and
may be suffering from pain unnecessarily.
 
     To date, innovations in the field of opioid painkillers have largely
focused on changing the convenience of opioid drugs. In contrast, we are
focusing on improving clinical benefits. Based on clinical and pre-clinical
data, we believe our painkillers address the shortcomings of existing opioids.
 
                                   OUR MARKET
 
     Medical economists estimate the direct and indirect costs associated with
pain to be $100 billion annually in the United States. Drugs are the key element
in the treatment of pain. In the United States and Western Europe, the market
for pain drugs totaled nearly $12 billion in 1997. This market has grown by
approximately 15% annually over the past five years. In 1999, U.S. opioid
painkiller sales were approximately $2.5 billion.
 
                                  OUR PRODUCTS
 
     Each of our product candidates consists of two components: an opioid
agonist, such as morphine, and a low-dose opioid antagonist, such as naltrexone
or naloxone. An opioid agonist is a drug that blocks pain, and an opioid
antagonist is a compound that blocks pain relief. Normally, combining an
antagonist with an agonist cancels out the effects of the agonist. Studies
indicate, however, that with opioids, combining a low-dose antagonist with an
agonist actually improves the performance of the agonist. By
                                        1

<PAGE>   5
 
combining low-dose opioid antagonists, such as naltrexone or naloxone, with
opioid agonists such as morphine, we believe our drugs will:
 
     - enhance pain relief;
 
     - minimize adverse side effects; and
 
     - reduce tolerance and addiction.
 
   
     Clinical results from four studies involving a total of over 750 patients
support our technology. For example, we recently completed a 200 patient Phase
II clinical trial of our oral morphine product candidate. Results of this trial
indicate that an optimal dose of our painkiller provided patients with 50% more
pain relief than morphine alone during the first four hours after
administration. This result is clinically meaningful with p=0.058, which means
the likelihood that this result occurred by chance is less than 1 in 17.
    
 
     We have worldwide exclusive rights to our technology. We have five issued
U.S. patents, one U.S. Notice of Allowance, two pending U.S. patent applications
and ten corresponding pending foreign patent applications or issued patents
relating to our technology.
 
                                  OUR STRATEGY
 
     Our goal is to build a speciality pharmaceutical company focused on pain
management. We plan to achieve this goal by:
 
     - Developing products with reduced clinical and regulatory risks compared
       to the development of new chemical entities. We believe this approach may
       enable us to commercialize our drugs rapidly and cost effectively.
 
     - Focusing on clinical development and late-stage products. We believe this
       focus will enable us to generate product revenues earlier than if we were
       discovering new chemical entities.
 
     - Retaining significant rights. In general, we intend to independently
       develop our product candidates through late-stage clinical trials. As a
       result, we expect to capture a greater percentage of the profits from
       drug sales than we would have if we had outlicensed our drugs earlier in
       the development process.
 
     - Using our technology to develop multiple drugs for both pain and non-pain
       indications. We are initially focusing our efforts on developing four
       opioid painkillers. However, we believe our technology can be broadly
       applied to other indications.
 
     - Outsourcing key functions. We intend to outsource preclinical studies,
       clinical trials, formulation and manufacturing. We believe outsourcing
       will produce significant time savings and allow for more efficient
       deployment of our resources.
 
                               OTHER INFORMATION
 
     We incorporated in Delaware in May 1998. Our principal executive office is
located at 250 East Grand Avenue, Suite 70, South San Francisco, California
94080. Our telephone number at this location is (650) 624-8200. Pain
Therapeutics and our logo are trademarks of Pain Therapeutics, Inc. This
prospectus also contains trademarks and tradenames of other parties.
                                        2

<PAGE>   6
 
                                  THE OFFERING
 
Common stock offered by
Pain Therapeutics, Inc. ...  5,000,000 shares
 
Common stock to be
  outstanding after this
  offering.................  25,827,142 shares
 
Use of proceeds............  Working capital and general corporate purposes,
                             including the continued development of existing
                             product candidates, clinical research and
                             development, formulation and manufacturing and
                             commercialization activities.
 
Proposed Nasdaq National
  Market symbol............  PTIE
 
     The number of shares to be outstanding after this offering is based on
20,827,142 shares outstanding as of March 31, 2000. This number excludes:
 
     - 1,757,970 shares of common stock issuable upon exercise of options then
       outstanding, at a weighted average exercise price of $0.50 per share;
 
     - 190,000 shares of common stock issuable upon exercise of warrants then
       outstanding at a weighted average exercise price of $3.53 per share;
 
     - 150,000 shares of series A convertible preferred stock issuable upon
       exercise of warrants then outstanding at an exercise price of $1.00 per
       share;
 
     - 223,800 shares of common stock then available for issuance, under our
       1998 Stock Plan, as amended; and
 
     - 500,000 additional shares of common stock which will be available for
       issuance under our 2000 Employee Stock Purchase Plan immediately
       following the offering.
 
     Except as otherwise indicated, all information in this prospectus assumes:
 
     - the automatic conversion of all shares of series A, B and C preferred
       stock into an aggregate 11,108,912 shares of common stock upon completion
       of this offering; and
 
     - no exercise of the underwriters' over-allotment option.
                                        3

<PAGE>   7
 
                         SUMMARY FINANCIAL INFORMATION
 
     You should read the following summary financial data together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the accompanying financial statements and related notes which
are included in this prospectus. The following table presents summary financial
information for Pain Therapeutics, Inc. The pro forma balance sheet data gives
effect to:
 
     - the conversion of all of our convertible preferred and redeemable
       convertible preferred stock outstanding as of March 31, 2000 into
       11,108,912 shares of common stock upon completion of the offering; and
 
     - the sale of 5,000,000 shares of common stock in the offering at an
       assumed initial offering price of $12 per share, after deducting
       estimated underwriting discounts, commissions and offering expenses.
 
     The summary statement of operations data for the period from May 4, 1998
(inception) through December 31, 1998, the year ended December 31, 1999 and the
period from May 4, 1998 (inception) through December 31, 1999 and the summary
balance sheet data as of December 31, 1999 are derived from our audited
financial statements. The summary statement of operations data for the three
months ended March 31, 1999 and 2000 and the period from May 4, 1998 (inception)
through March 31, 2000 and the summary balance sheet data as of March 31, 2000
are derived from our unaudited financial statements.
   

<TABLE>
<CAPTION>
                                   PERIOD FROM                               PERIOD FROM           THREE MONTHS ENDED
                                   MAY 4, 1998                               MAY 4, 1998               MARCH 31,
                               (INCEPTION) THROUGH      YEAR ENDED       (INCEPTION) THROUGH   --------------------------
                                DECEMBER 31, 1998    DECEMBER 31, 1999    DECEMBER 31, 1999       1999           2000
                               -------------------   -----------------   -------------------   -----------   ------------
<S>                            <C>                   <C>                 <C>                   <C>           <C>
STATEMENT OF OPERATIONS DATA:
Operating expenses
  Licensing fees.............       $ 100,000           $        --          $   100,000        $      --    $         --
  Research and development...         200,000             2,092,119            2,292,119               --       1,433,268
  General and
    administrative...........         122,168             2,567,355            2,689,523          118,257       4,619,719
                                    ---------           -----------          -----------        ---------    ------------
    Total operating
      expenses...............         422,168             4,659,474            5,081,642          118,257       6,052,987
                                    ---------           -----------          -----------        ---------    ------------
    Operating loss...........        (422,168)           (4,659,474)          (5,081,642)        (118,257)     (6,052,987)
Interest income..............          33,961               160,689              194,650           27,407         245,050
Income tax expense...........             800                   800                1,600              200             200
                                    ---------           -----------          -----------        ---------    ------------
    Net loss.................        (389,007)           (4,499,585)          (4,888,592)         (91,050)     (5,808,137)
Return to series C preferred
  shareholders for beneficial
  conversion feature.........              --                    --                   --               --     (14,231,595)
                                    ---------           -----------          -----------        ---------    ------------
Loss available to common
  shareholders...............       $(389,007)          $(4,499,585)         $(4,888,592)       $ (91,050)   $(20,039,732)
                                    =========           ===========          ===========        =========    ============
Basic and diluted loss per
  share......................       $   (0.06)          $     (0.48)                            $   (0.01)   $      (2.10)
                                    =========           ===========                             =========    ============
Weighted average shares used
  in computing basic and
  diluted loss per share.....       6,948,637             9,322,441                             9,000,000       9,528,957
                                    =========           ===========                             =========    ============
 
<CAPTION>
                                   PERIOD FROM
                                   MAY 4, 1998
                               (INCEPTION) THROUGH
                                 MARCH 31, 2000
                               -------------------
<S>                            <C>
STATEMENT OF OPERATIONS DATA:
Operating expenses
  Licensing fees.............     $    100,000
  Research and development...        3,725,387
  General and
    administrative...........        7,309,242
                                  ------------
    Total operating
      expenses...............       11,134,629
                                  ------------
    Operating loss...........      (11,134,629)
Interest income..............          439,700
Income tax expense...........            1,800
                                  ------------
    Net loss.................      (10,696,729)
Return to series C preferred
  shareholders for beneficial
  conversion feature.........      (14,231,595)
                                  ------------
Loss available to common
  shareholders...............     $(24,928,324)
                                  ============
Basic and diluted loss per
  share......................
Weighted average shares used
  in computing basic and
  diluted loss per share.....
</TABLE>

    
 
                                        4

<PAGE>   8
 

<TABLE>
<CAPTION>
                                                                               AT MARCH 31, 2000
                                                                          ----------------------------
                                                                                           PRO FORMA
                                                     DECEMBER 31, 1999       ACTUAL       AS ADJUSTED
                                                     -----------------    ------------    ------------
<S>                                                  <C>                  <C>             <C>
BALANCE SHEET DATA:
Cash and cash equivalents..........................     $ 9,339,669       $ 22,179,362    $ 76,879,362
Working capital....................................       9,095,831         21,795,444      76,495,444
Total assets.......................................       9,441,173         22,864,799      77,564,799
Series C redeemable convertible preferred
  stock(1).........................................              --         14,231,595              --
Series B redeemable convertible preferred stock....       9,703,903          9,703,903              --
Series A convertible preferred stock...............           2,660              2,660              --
Common stock.......................................           9,445              9,718          25,827
Additional paid-in capital.........................       9,367,750         17,697,759      96,319,808
Deferred compensation..............................      (4,980,180)        (8,448,370)     (8,448,370)
Deficit accumulated during the development stage...      (4,888,592)       (10,696,729)    (10,696,729)
Total stockholders' equity (deficit)...............        (563,317)        (1,558,362)     77,077,136
</TABLE>

 
-------------------------
(1) See Note 7 to the Financial Statements
                                        5

<PAGE>   9
 

                                  RISK FACTORS
 
     An investment in our common stock involves a high degree of risk. You
should carefully consider the following information about these risks, together
with the other information contained in this prospectus, before you decide
whether to buy our common stock. If any of the events described in the following
risks actually occurs, the market price of our common stock could decline, and
you may lose all or part of the money you paid to buy our common stock.
 
RISKS RELATED TO OUR BUSINESS
 
OUR BRIEF OPERATING HISTORY MAY MAKE IT DIFFICULT FOR YOU TO EVALUATE THE
SUCCESS OF OUR BUSINESS TO DATE AND TO ASSESS ITS FUTURE VIABILITY.
 
     We were founded in May 1998 and we are still in the development stage. Our
operations to date have been limited to organizing and staffing our company,
acquiring, developing and securing our technology and undertaking preclinical
studies and clinical trials. We have not yet demonstrated our ability to obtain
regulatory approval, formulate and manufacture product or conduct sales and
marketing activities. Consequently, any predictions you make about our future
success or viability may not be as accurate as they could be if we had a longer
operating history.
 
WE HAVE A HISTORY OF LOSSES AND EXPECT TO INCUR SUBSTANTIAL LOSSES AND NEGATIVE
OPERATING CASH FLOWS FOR THE FORESEEABLE FUTURE.
 
     Since our inception, we have incurred significant net losses, including net
losses of $389,000 in the period from May 4, 1998 (inception) through December
31, 1998, $4.5 million in the year ended December 31, 1999 and $5.8 million in
the three months ended March 31, 2000. As a result of ongoing operating losses,
we had an accumulated deficit of $10.7 million as of March 31, 2000. We are not
currently profitable. Even if we succeed in developing and commercializing one
or more of our drugs, we expect to incur substantial losses for the foreseeable
future and may never become profitable. We also expect to continue to incur
significant operating and capital expenditures and anticipate that our expenses
will increase substantially in the foreseeable future as we:
 
     - continue to undertake preclinical and clinical trials for our product
       candidates;
 
     - seek regulatory approvals for our product candidates;
 
     - develop, formulate, manufacture and commercialize our drugs;
 
     - implement additional internal systems and infrastructure; and
 
     - hire additional personnel.
 
     We also expect to experience negative cash flow for the foreseeable future
as we fund our operating losses and capital expenditures. As a result, we will
need to generate significant revenues to achieve and maintain profitability. If
we cannot successfully develop and commercialize our products, we will not be
able to generate such revenues or achieve profitability in the future. Our
failure to achieve or maintain profitability could negatively impact the market
price of our common stock.
 
IF WE CANNOT RAISE ADDITIONAL CAPITAL ON ACCEPTABLE TERMS, WE MAY BE UNABLE TO
COMPLETE PLANNED CLINICAL TRIALS OF ANY OF OUR PRODUCT CANDIDATES.
 
     Until we receive regulatory approval and commercialize one or more of our
products, we will have to fund all of our operations and capital expenditures
from the net proceeds of this offering and cash on hand. We expect that the
assumed net proceeds of 54.7 million from this offering and cash on hand will
 
                                        6

<PAGE>   10
 
be sufficient to meet our working capital and capital expenditure needs for at
least the next twelve months. However, if we experience unanticipated cash
requirements, we may need to raise additional funds much sooner and additional
financing may not be available on favorable terms, if at all. Even if we succeed
in selling additional equity securities to raise funds, our existing
stockholders' ownership percentage would be reduced and new investors may demand
rights, preferences or privileges senior to those of existing stockholders. If
we do not succeed in raising additional funds, we may be unable to complete
planned clinical trials or obtain FDA approval of our product candidates, and we
could be forced to discontinue product development, reduce sales and marketing
efforts and forego attractive business opportunities.
 
IF WE ARE UNABLE TO DESIGN, CONDUCT AND COMPLETE CLINICAL TRIALS SUCCESSFULLY,
WE WILL NOT BE ABLE TO SUBMIT A NEW DRUG APPLICATION TO THE FDA.
 
   
     In order to obtain FDA approval of any of our product candidates, we must
submit to the FDA a New Drug Application, or NDA, which demonstrates that the
product candidate is safe for humans and effective for its intended use. This
demonstration requires significant research and animal tests, which are referred
to as pre-clinical studies, as well as human tests, which are referred to as
clinical trials. Our four product candidates are still in the early stages of
clinical trials and we will have to commit substantial time and additional
resources to conducting further pre-clinical and clinical studies in several
types of pain before we can submit NDAs with respect to any of these product
candidates. Our first clinical trials for our PTI-555, PTI-501 and PTI-601
product candidates were completed only recently, in the past six months. We
intend to continue to conduct Phase II trials for these and our PTI-701 product
candidate. We will not be able to proceed to Phase III trials for any product
candidate until we determine appropriate dosages, submit such data to the FDA
and obtain FDA approval to begin phase III studies. Our other product candidates
are at a much earlier stage of development and will require extensive
pre-clinical testing before we can make any decision to proceed to clinical
trials. In addition, before we can commence human clinical trials of these
product candidates, we will have to submit an Investigational New Drug, or IND,
application to the FDA.
    
 
   
     Human clinical trials are very expensive and difficult to design and
implement, in part because they are subject to rigorous requirements. The
clinical trial process is also time consuming. We estimate that clinical trials
of our four leading product candidates will take a minimum of three years to
complete and may take longer. If we or the FDA believe the participating
patients are being exposed to unacceptable health risks, we would have to
suspend our clinical trials. Furthermore, failure can occur at any stage of the
trials, and we could encounter problems that cause us to abandon clinical trials
or to repeat clinical studies.
    
 
     Even if our clinical trials are completed as planned, their results may not
support our product claims. Success in pre-clinical testing and early clinical
trials does not ensure that later clinical trials will be successful, and the
results of later clinical trials may not replicate the results of prior clinical
trials and pre-clinical testing. The clinical trial process may fail to
demonstrate that our product candidates are safe for humans and effective for
indicated uses. Such failure would cause us to abandon a product candidate and
may delay development of other product candidates.
 
IF WE FAIL TO OBTAIN THE NECESSARY REGULATORY APPROVALS, WE WILL NOT BE ALLOWED
TO COMMERCIALIZE OUR DRUGS AND WILL NOT GENERATE PRODUCT REVENUES.
 
     Satisfaction of all regulatory requirements typically takes many years, is
dependent upon the type, complexity and novelty of the product candidate and
requires the expenditure of substantial resources for research and development
and testing. Our research and clinical approaches may not lead to drugs that the
FDA considers safe for humans and effective for indicated uses. The FDA may
require us to conduct
 
                                        7

<PAGE>   11
 
additional clinical testing or to commit to perform post-marketing studies, in
which cases we would have to expend additional unanticipated time and resources.
The approval process may also be delayed by changes in government regulation,
future legislation or administrative action or changes in FDA policy that occur
prior to or during our regulatory review.
 
   
     Even if we comply with all FDA requests, the FDA may ultimately deny one or
more of our NDAs, and we may never obtain regulatory approval for any of our
product candidates. If we fail to achieve regulatory approval of any of our
leading product candidates we will have fewer saleable products and
corresponding profit revenues. Even if we receive regulatory approval of our
products, such approval may involve limitations on the indicated uses for which
we may market our products. Further, later discovery of previously unknown
problems could result in additional regulatory restrictions, including
withdrawal of products.
    
 
     In foreign jurisdictions, we must receive marketing authorizations from the
appropriate regulatory authorities before we can commercialize our drugs.
Foreign regulatory approval processes generally include all of the risks
associated with the FDA approval procedures described above.
 
IF OUTSIDE RESEARCHERS FAIL TO DEVOTE SUFFICIENT TIME AND RESOURCES TO OUR DRUG
DEVELOPMENT PROGRAMS, OR IF THEIR PERFORMANCE IS SUBSTANDARD, THE SUBMISSION OF
OUR FDA APPLICATIONS AND OUR PRODUCT INTRODUCTIONS MAY BE DELAYED.
 
     We depend on independent investigators and collaborators, such as
universities and medical institutions, to conduct our clinical trials under
agreements with us. These collaborators are not our employees and we cannot
control the amount or timing of resources that they devote to our programs.
These investigators may not assign as great a priority to our programs or pursue
them as diligently as we would if we were undertaking such programs ourselves.
If outside collaborators fail to devote sufficient time and resources to our
drug development programs, or if their performance is substandard, the approval
of our FDA applications and our introductions of new drugs will be delayed.
These collaborators may also have relationships with other commercial entities,
some of whom may compete with us. If outside collaborators assist our
competitors at our expense, our competitive position could be harmed.
 
IF THIRD-PARTY MANUFACTURERS OF OUR PRODUCT CANDIDATES FAIL TO DEVOTE SUFFICIENT
TIME AND RESOURCES TO OUR CONCERNS, OR IF THEIR PERFORMANCE IS SUBSTANDARD, OUR
CLINICAL TRIALS AND PRODUCT INTRODUCTIONS MAY BE DELAYED AND OUR COSTS MAY RISE.
 
     We have no manufacturing facilities and no experience in drug formulation
or manufacturing. We lack the resources and expertise to formulate or
manufacture our own product candidates. We currently rely on a single contract
manufacturer to supply, store and distribute drug supplies for our clinical
trials. Our reliance on a single third-party manufacturer exposes us to the
following risks, any of which could delay our clinical trials, the approval of
our product candidates by the FDA, or the commercialization of our products,
result in higher costs or deprive us of potential product revenues:
 
     - Contract manufacturers often encounter difficulties in achieving volume
       production, quality control and quality assurance, as well as shortages
       of qualified personnel. Accordingly, our manufacturer might not be able
       to meet our clinical schedules.
 
     - Switching manufacturers may be difficult because the number of potential
       manufacturers is limited. It may be difficult or impossible for us to
       find a replacement manufacturer on acceptable terms quickly, or at all.
 
     - Our contract manufacturers may not perform as agreed or may not remain in
       the contract manufacturing business for the time required to successfully
       produce, store and distribute our products.
 
                                        8

<PAGE>   12
 
     - Drug manufacturers are subject to ongoing periodic unannounced inspection
       by the FDA, the U.S. Drug Enforcement Agency, or DEA, and corresponding
       state agencies to ensure strict compliance with good manufacturing
       practice and other government regulations and corresponding foreign
       standards. We do not have control over third-party manufacturers'
       compliance with these regulations and standards.
 
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY OUR COMPETITORS COULD
DEVELOP AND MARKET PRODUCTS WITH SIMILAR FEATURES THAT MAY REDUCE DEMAND FOR OUR
PRODUCTS.
 
     Our success, competitive position and potential future revenues will depend
in part on our ability to protect our intellectual property. If either we or
Albert Einstein College of Medicine fails to file, prosecute or maintain any of
our existing patents, our competitors could market products that contain
features and clinical benefits similar to those of our products, and demand for
our products could decline as a result. We intend to file additional patent
applications relating to our technology, products and processes. We may direct
Albert Einstein College of Medicine to file additional patent applications
relating to the licensed technology or we may do so ourselves. However, our
competitors may challenge, invalidate or circumvent any of these or future
patents. These patents may also fail to provide us with meaningful competitive
advantages.
 
   
     We expect that we will rely upon trade secrets, know-how, continuing
technological innovations and licensing opportunities to develop and maintain
our competitive position. Others may independently develop substantially
equivalent proprietary information or be issued patents that may prevent the
sale of our products or know-how or require us to license such information and
pay significant fees or royalties in order to produce our products. Moreover,
our technology could infringe upon claims of patents owned by others. If we were
found to be infringing on a patent held by another, we might have to seek a
license to use the patented technology. In that case, we might not be able to
obtain such a license on terms acceptable to us, or at all. If a legal action
were to be brought against us or our licensors, we could incur substantial
defense costs, and any such action might not be resolved in our favor. If such a
dispute were to be resolved against us, we could have to pay the other party
large sums of money and our use of our technology and the testing, manufacture,
marketing or sale of one or more of our proposed products could be restricted or
prohibited.
    
 
COMPETITION FOR QUALIFIED PERSONNEL IN THE PHARMACEUTICAL INDUSTRY IS INTENSE,
AND IF WE ARE NOT SUCCESSFUL IN ATTRACTING AND RETAINING QUALIFIED PERSONNEL, WE
COULD EXPERIENCE DELAYS IN COMPLETING NECESSARY CLINICAL TRIALS AND THE
REGULATORY APPROVAL PROCESS OR IN FORMULATING, MANUFACTURING, MARKETING AND
SELLING OUR POTENTIAL PRODUCTS.
 
   
     We will need to hire additional qualified personnel with expertise in
clinical research, preclinical testing, government regulation, formulation and
manufacturing and sales and marketing. We compete for qualified individuals with
numerous biopharmaceutical companies, universities and other research
institutions. Competition for such individuals, particularly in the San
Francisco Bay area, is intense, and our search for such personnel may not be
successful. Attracting and retaining qualified personnel will be critical to our
success.
    
 
THE DEA LIMITS THE AVAILABILITY OF THE ACTIVE INGREDIENTS IN OUR CURRENT PRODUCT
CANDIDATES AND, AS A RESULT, OUR QUOTA MAY NOT BE SUFFICIENT TO COMPLETE
CLINICAL TRIALS OR MEET COMMERCIAL DEMAND.
 
     The DEA regulates chemical compounds as Schedule I, II, III, IV or V
substances, with Schedule I substances considered to present the highest risk of
substance abuse and Schedule V substances the lowest risk. The active
ingredients in our current product candidates, including morphine and
hydrocodone, are listed by the DEA as Schedule II or III substances under the
Controlled Substances
 
                                        9

<PAGE>   13
 
   
Act of 1970. Consequently, their manufacture, shipment, storage, sale and use
are subject to a high degree of regulation. For example, all Schedule II drug
prescriptions must be signed by a physician, physically presented to a
pharmacist and may not be refilled without a new prescription. Furthermore, the
amount of Schedule II substances we can obtain for clinical trials and
commercial distribution is limited by the DEA and our quota may not be
sufficient to complete clinical trials or meet commercial demand. There is a
risk that DEA regulations may interfere with the supply of the drugs used in our
clinical trials, and in the future, our ability to produce and distribute our
products in the volume needed to meet commercial demand.
    
 
   
WE MAY INCUR SUBSTANTIAL LIABILITIES AND MAY BE REQUIRED TO LIMIT TESTING OF OUR
PRODUCTS IN RESPONSE TO PRODUCT LIABILITY LAWSUITS.
    
 
   
     The testing of medical products entail an inherent risk of product
liability. If we cannot successfully defend ourselves against product liability
claims, we may incur substantial liabilities or be required to limit testing of
our products. Our inability to obtain sufficient product liability insurance at
an acceptable cost to protect against potential product liability claims could
prevent or inhibit the commercialization of pharmaceutical products we develop,
alone or with corporate collaborators. We currently carry clinical trial
insurance but do not carry product liability insurance. We, or any corporate
collaborators, may not be able to obtain insurance at a reasonable cost, if at
all. Even if our agreements with any future corporate collaborators entitle us
to indemnification against losses, such indemnification may not be available or
adequate should any claim arise.
    
 
DEVELOPMENTS BY COMPETITORS MAY RENDER OUR PRODUCTS OR TECHNOLOGIES OBSOLETE OR
NON-COMPETITIVE.
 
     Alternative technologies and products are being developed to improve or
replace the use of opioids for pain management, several of which are in clinical
trials or are awaiting approval from the FDA. Such alternatives include Elan's
SNX-111, as well as combination products from Endo Pharmaceuticals. In addition,
companies that sell generic opioid drugs represent substantial competition. Many
of these organizations competing with us have substantially greater capital
resources, larger research and development staffs and facilities, greater
experience in drug development and in obtaining regulatory approvals and greater
manufacturing and marketing capabilities than we do. These organizations also
compete with us to attract qualified personnel, parties for acquisitions, joint
ventures or other collaborations.
 
RISKS RELATED TO THE OFFERING
 
OUR STOCK PRICE COULD BE VOLATILE WHICH MAY LEAD TO LOSSES BY INVESTORS.
 
   
     An active public market for our common stock may not develop or be
sustained after this offering. We will determine the initial public offering
price of our common stock based on negotiations between the representatives of
the underwriters and our management concerning the valuation of our common
stock, and such price may not be indicative of future market prices. The public
market may not agree with or accept this valuation. After this offering, you may
not be able to resell your shares at or above the initial public offering price.
The trading price of our common stock is likely to be volatile.
    
 
     The stock market in general, and the market prices for securities of
biotechnology companies in particular, has experienced extreme volatility and
may continue to be highly volatile in the future. The following factors, in
addition to other risk factors described in this section, may have a significant
impact on the market price of our common stock:
 
     - publicity regarding actual or potential clinical results relating to
       products under development by our competitors or us;
 
                                       10

<PAGE>   14
 
     - announcements of technological innovations or new commercial products by
       our competitors or us;
 
     - developments concerning proprietary rights, including patents;
 
     - developments concerning our collaborations;
 
     - regulatory developments in the United States and foreign countries;
 
     - litigation;
 
     - economic or other crises and other external factors; or
 
     - period to period fluctuations in our financial results.
 
WE ARE AT RISK OF SECURITIES CLASS ACTION LITIGATION DUE TO OUR EXPECTED STOCK
PRICE VOLATILITY.
 
     In the past, securities class action litigation has often been brought
against companies following periods of volatility in the market price of their
securities. Due to the expected volatility of our stock price, we may be the
target of securities litigation in the future. Securities litigation could
result in substantial costs and divert management's attention and resources from
our business.
 
OUR EXECUTIVE OFFICERS, DIRECTORS AND PERSONS AFFILIATED WITH OUR DIRECTORS WILL
RETAIN SIGNIFICANT CONTROL OVER US AFTER THIS OFFERING, WHICH MAY LEAD TO
CONFLICTS WITH OTHER STOCKHOLDERS ON CORPORATE GOVERNANCE ISSUES.
 
     We anticipate that our executive officers, directors and individuals or
entities affiliated with our directors will beneficially own approximately 41%
of our outstanding common stock as a group after this offering closes. Acting
together, these stockholders would be able to exercise significant influence
over all matters that our stockholders vote upon, including the election of
directors and the approval of significant corporate transactions. This
concentration of ownership may also delay, deter or prevent a change in our
control and may make some transactions more difficult or impossible to complete
without the support of the stockholders.
 
   
THE PROVISIONS OF OUR CHARTER DOCUMENTS AND DELAWARE LAW WILL INHIBIT POTENTIAL
ACQUISITION BIDS THAT A STOCKHOLDER MAY BELIEVE ARE DESIRABLE, AND THE MARKET
PRICE OF OUR COMMON STOCK MAY BE LOWER AS A RESULT.
    
 
     Upon completion of this offering, our board of directors will have the
authority to issue up to 10,000,000 shares of preferred stock. The board of
directors can fix the price, rights, preferences, privileges and restrictions of
the preferred stock without any further vote or action by our stockholders. The
issuance of shares of preferred stock may delay or prevent a change in control
transaction. As a result, the market price of our common stock and the voting
and other rights of our stockholders may be adversely affected. The issuance of
preferred stock may result in the loss of voting control to other stockholders.
We have no current plans to issue any shares of preferred stock.
 
   
     Our charter documents contain the following anti-takeover devices:
    
 
     - only one of the three classes of directors is elected each year;
 
     - the ability of our stockholders to remove directors without cause is
       limited;
 
     - the right of stockholders to act by written consent has been eliminated;
 
     - the right of stockholders to call a special meeting of stockholders has
       been eliminated; and
 
                                       11

<PAGE>   15
 
     - a requirement of advance notice to nominate directors or submit proposals
       for consideration at stockholder meetings.
 
   
     We will be subject to the anti-takeover provisions of the Delaware General
Corporation Law, which regulate corporate acquisitions. Delaware law will
prevent us from engaging, without the approval of our board of directors or a
large majority of our stockholders, in transactions with any stockholder who
controls, alone or together with affiliates, 15% or more of our outstanding
common stock for three years following the date on which the stockholder first
acquired 15% or more of our outstanding common stock. Although we may opt out of
these anti-takeover provisions, we do not intend to do so.
    
 
   
     The anti-takeover provisions of our charter documents and of the Delaware
General Corporation Law are likely to discourage potential acquisition proposals
and delay or prevent a change in control transaction. In addition, they are
likely to discourage others from making tender offers for our common stock. As a
result, these provisions could prevent the market price of our common stock from
increasing substantially in response to actual or rumored takeover attempts.
These provisions could also prevent changes in our management.
    
 
FUTURE SALES OF COMMON STOCK BY OUR EXISTING STOCKHOLDERS COULD CAUSE OUR STOCK
PRICE TO DECLINE.
 
     Sales of a substantial number of shares of our common stock after this
offering, or the perception that these sales could occur, could adversely affect
the market price of our common stock and impair our ability to raise capital
through the sale of additional equity securities. After this offering, based
upon the number of shares outstanding at March 31, 2000, we will have 25,827,142
shares of our common stock outstanding. All of the shares sold in the offering
will be freely transferable without restriction or further registration, except
for any shares purchased by our "affiliates," as defined in Rule 144. 20,969,091
shares of common stock outstanding after this offering will be subject to lock
up agreements between our shareholders and Thomas Weisel Partners LLC
restricting the sale of these shares for 180 days after the date of this
prospectus. In addition, these shares are "restricted securities" as defined in
Rule 144 and may be sold in absence of registration in accordance with Rule 144
or Rule 701 under the Securities Act or another exemption from registration.
 
YOU WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION BECAUSE THE NET TANGIBLE BOOK
VALUE OF SHARES PURCHASED IN THIS OFFERING WILL BE SUBSTANTIALLY LOWER THAN THE
INITIAL PUBLIC OFFERING PRICE.
 
     The initial public offering price of the shares of common stock in this
offering will significantly exceed the net tangible book value per share of our
common stock. Any shares of common stock that investors purchase in this
offering will have a post-closing net tangible book value per share of $9.02 per
share less than the initial public offering price paid, assuming an initial
public offering price per share of $12 and based on our pro forma net tangible
book value as of March 31, 2000. If outstanding options or warrants are
exercised, you will incur additional dilution.
 
                                       12

<PAGE>   16
 
   
               CAUTIONARY NOTE ON STATEMENTS OF OUR EXPECTATIONS
    
   
                          ABOUT OUR FUTURE PERFORMANCE
    
 
   
     This prospectus contains statements of our expectations about our future
performance under the captions "Summary," "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business," and elsewhere. These statements include statements about the
following:
    
 
     - anticipated operating losses and capital expenditures;
 
     - our clinical development efforts;
 
     - the success of our technology;
 
     - the timing of regulatory processes for our product candidates;
 
     - the future growth of markets for our products;
 
     - our intention to rely on third parties for key functions such as
       formulation and manufacturing and sales and marketing;
 
     - anticipated increases in our expenses;
 
     - the sufficiency of the net proceeds of this offering, together with our
       cash on hand, to fund our operations for the next 12 months; and
 
     - the lack of a material impact of the adoption of Statement of Financial
       Accounting Standards No. 133 and Financial Accounting Standards Board
       Interpretation No. 44, which is discussed in detail under the caption
       "Management's Discussion and Analysis of Financial Condition and Results
       of Operations -- Recent Accounting Pronouncements."
 
   
     The words believe, anticipate, estimate, expect, seek, intend, may, will,
plan and similar expressions are generally intended to identify statements of
our expectations about our future performance. The matters discussed in these
statements are subject to known and unknown risks and other factors which may
cause our actual results, performance or achievements, or industry results, to
be materially different from the results, performance or achievements expressed
or implied by the statements. These factors are discussed in more detail
elsewhere in this prospectus, including under the captions "Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and "Business." You should not place undue reliance on
statements of our expectations about our future performance.
    
 
     Market data and forecasts used in this prospectus, including, for example,
estimates of the size and growth rates of the pain management market, have been
obtained from independent industry sources, and we have not independently
verified such data.
 
                                       13

<PAGE>   17
 

                                USE OF PROCEEDS
 
     Our net proceeds from the sale of the shares of common stock we are
offering are estimated to be $54.7 million ($63.1 million if the underwriters
exercise their over-allotment option in full) assuming a public offering price
of $12 per share and after deducting the underwriting discounts and commissions
and our estimated offering expenses.
 
     We will retain broad discretion in the allocation of the net proceeds of
this offering. We currently anticipate using the net proceeds from this offering
for working capital and general corporate purposes, including the continued
development of existing product candidates, clinical research and development,
formulation and manufacturing and commercialization activities. We may also, as
opportunities arise, use a portion of the net proceeds to acquire or invest in
businesses, products or technologies that are complementary to our own. While we
periodically engage in preliminary discussions with respect to acquisitions, we
are not currently a party to any agreements or commitments, and we have no
understandings with respect to any acquisitions.
 
     The amounts and timing of our actual expenditures for each purpose may vary
significantly depending upon numerous factors, including:
 
     - the size, scope and progress of our product candidate development
       efforts;
 
     - regulatory approvals;
 
     - competition;
 
     - market acceptance of any of our drugs;
 
     - marketing and sales activities;
 
     - future revenue growth, if any; and
 
     - the amount of cash, if any, we generate from operations.
 
   
     The precise uses to which we will apply the net proceeds of this offering
will be selected by management, under the supervision of our board of directors,
in light of future circumstances and our business prospects. Pending the use of
the net proceeds, we intend to invest the net proceeds primarily in short-term,
investment grade, interest bearing U.S. government securities.
    
 

                                DIVIDEND POLICY
 
     We have never declared or paid cash dividends on our capital stock. We
expect to retain our future earnings, if any, for use in the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future. Any future declaration and payment of dividends will be
subject to the discretion of our board of directors, will be subject to
applicable law and will depend on our results of operations, earnings, financial
condition, contractual limitations, cash requirements, future prospects and
other factors deemed relevant by our board of directors.
 
                                       14

<PAGE>   18
 

                                 CAPITALIZATION
 
     The following table sets forth our capitalization as of March 31, 2000.
This table should be read in conjunction with the "Selected Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and the related notes appearing
elsewhere in this prospectus. This information is presented:
 
     - on an actual basis derived from our financial statements;
 
     - on a pro forma basis to give effect to the conversion of all of our
       convertible preferred and redeemable convertible preferred stock
       outstanding as of March 31, 2000 into 11,108,912 shares of common stock
       upon completion of the offering;
 
     - on a pro forma as adjusted basis to give effect to the sale of 5,000,000
       shares of common stock in the offering at an assumed initial offering
       price of $12 per share, after deducting estimated underwriting discounts,
       commissions and offering expenses, and our amended and restated
       certificate of incorporation to be filed upon closing of this offering.
 

<TABLE>
<CAPTION>
                                                                          AS OF MARCH 31, 2000
                                                              --------------------------------------------
                                                                                               PRO FORMA
                                                                 ACTUAL        PRO FORMA      AS ADJUSTED
                                                              ------------   -------------   -------------
<S>                                                           <C>            <C>             <C>
Redeemable convertible preferred stock, $0.001 par value:
Series C, 3,200,000 shares authorized and 3,044,018 issued
  and outstanding actual; none issued and outstanding, pro
  forma and pro forma as adjusted (See Note 7 to the
  Financial Statements).....................................    14,231,595             --              --
Series B, 5,405,405 shares authorized, issued and
  outstanding actual; none issued and outstanding pro forma
  and pro forma as adjusted.................................  $  9,703,903   $         --    $         --
                                                              ------------   ------------    ------------
         Total redeemable convertible preferred stock.......    23,935,498             --              --
                                                              ------------   ------------    ------------
Stockholders' equity:
Convertible preferred stock: series A, $0.001 par value;
  3,500,000 shares authorized and 2,659,489 issued and
  outstanding actual; none issued and outstanding pro forma
  and pro forma as adjusted.................................         2,660             --              --
Preferred stock 10,000,000 shares authorized, none issued
  and outstanding pro forma as adjusted.....................            --             --              --
Common stock, $0.001 par value; 22,000,000 shares
  authorized, 9,718,230 shares issued and outstanding
  actual; 20,827,142 shares issued and outstanding pro
  forma; 120,000,000 shares authorized, 25,827,142 issued
  and outstanding pro forma as adjusted.....................         9,718         20,827          25,827
Additional paid-in-capital..................................    17,697,759     41,624,808      96,319,808
Deferred compensation.......................................    (8,448,370)    (8,448,370)     (8,448,370)
Notes receivable............................................      (123,400)      (123,400)       (123,400)
Deficit accumulated during the development stage............   (10,696,729)   (10,696,729)    (10,696,729)
                                                              ------------   ------------    ------------
         Total stockholders' equity (deficit)...............    (1,558,362)    22,377,136      77,077,136
                                                              ------------   ------------    ------------
         Total capitalization...............................  $ 22,377,136   $ 22,377,136    $ 77,077,136
                                                              ============   ============    ============
</TABLE>

 
-------------------------
     The data in the table above excludes:
 
     - 1,757,970 shares of common stock issuable upon exercise of options
       outstanding as of March 31, 2000, at a weighted average exercise price of
       $0.50 per share;
 
     - 223,800 shares of common stock available for issuance at March 31, 2000,
       under our 1998 Stock Plan, as amended;
 
     - 70,000 shares of common stock issuable upon exercise of warrants
       outstanding as of March 31, 2000 at an exercise price of $1.00 per share;
 
     - 150,000 shares of series A convertible preferred stock issuable upon
       exercise of warrants outstanding at March 31, 2000 at an exercise price
       of $1 per share; and
 
     - 120,000 shares of common stock issuable upon exercise of warrants issued
       in conjunction with the February 2000 sale of series C redeemable
       convertible preferred stock at an exercise price of $5 per share.
 
     See Notes 3 and 7 to the Financial Statements.
 
                                       15

<PAGE>   19
 
                                    DILUTION
 
     If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the pro forma as adjusted net tangible book value per share of
our common stock after this offering. Our pro forma net tangible book value as
of March 31, 2000 was $22,377,136, or $1.07 per share of common stock. Pro forma
net tangible book value per share represents the amount of our total tangible
assets less total liabilities, divided by the pro forma number of shares of
common stock outstanding at March 31, 2000 and assumes the conversion of all
outstanding shares of preferred stock into an aggregate 11,108,912 shares of
common stock automatically upon completion of this offering.
 
     Dilution in net tangible book value per share represents the difference
between the amount per share paid by purchasers of shares of common stock in
this offering and the net tangible book value per share of our common stock
immediately after the completion of this offering. After giving effect to the
sale of the shares of our common stock in this offering at an assumed public
offering price of $12 per share, after deducting underwriting discounts and
commissions and estimated offering expenses, our pro forma as adjusted net
tangible book value as of March 31, 2000 would have been $77,077,136, or $2.98
per share. This represents an immediate increase in pro forma net tangible book
value of $1.91 per share to existing stockholders and an immediate dilution of
$9.02 per share to new investors, or approximately 75% of the assumed offering
price of $12 per share. The following table illustrates this per share dilution:
 

<TABLE>
<S>                                                           <C>     <C>
Assumed offering price per share............................          $12.00
  Pro forma net tangible book value per share at March 31,
     2000...................................................  $1.07
  Increase per share attributable to new investors..........   1.91
                                                              -----
Pro forma as adjusted net tangible book value per share
  after this offering.......................................            2.98
                                                                      ------
Dilution per share to new investors.........................          $ 9.02
                                                                      ======
</TABLE>

 
     If the underwriters exercise their over-allotment option in full, the pro
forma and as adjusted net tangible book value per share to existing stockholders
will be $3.22 per share, the increase in the net tangible book value per share
to existing stockholders will be $2.15 per share and the dilution in net
tangible book value to new investors will be $8.78 per share.
 
     The following table summarizes, on a pro forma basis as of March 31, 2000
after giving effect to the automatic conversion of all outstanding shares of
preferred stock into common stock upon the closing of this offering, the total
number of shares of common stock purchased from us, the total consideration paid
to us and the average price per share paid to us by existing stockholders and by
new investors before deducting the underwriting discounts and commissions and
estimated offering expenses, at an assumed initial public offering price of $12
per share:
 
   

<TABLE>
<CAPTION>
                                            SHARES PURCHASED      TOTAL CONSIDERATION     AVERAGE
                                          --------------------   ---------------------     PRICE
                                            NUMBER     PERCENT     AMOUNT      PERCENT   PER SHARE
                                          ----------   -------   -----------   -------   ---------
<S>                                       <C>          <C>       <C>           <C>       <C>
Existing stockholders...................  20,827,142       81%   $26,730,539       31%    $ 1.28
New investors...........................   5,000,000       19     60,000,000       69%    $12.00
                                          ----------    -----    -----------   ------
  Total.................................  25,827,142    100.0%   $86,730,539    100.0%
                                          ==========    =====    ===========   ======
</TABLE>

    
 
     The foregoing discussion assumes no exercise of any stock options or
warrants to purchase common stock outstanding as of March 31, 2000. As of March
31, 2000, there were options and warrants outstanding to purchase 2,097,970
shares of common stock at a weighted average exercise price of $0.81 per share.
To the extent any of these options are exercised, there will be further dilution
to investors. In addition, there were 223,800 shares available for issuance upon
the exercise of options which may be granted under our 1998 stock plan, as
amended after March 31, 2000.
 
                                       16

<PAGE>   20
 
                            SELECTED FINANCIAL DATA
 
   
     The selected statement of operations data for the period from May 4, 1998
(inception) through December 31, 1998, for the year ended December 31, 1999 and
the period from May 4, 1998 (inception) through December 31, 1999 and the
selected balance sheet data as of December 31, 1998 and 1999 are derived from
our audited financial statements and notes appearing elsewhere in this
prospectus. The selected statements of operations data for the three months
ended March 31, 1999 and 2000 and for the period from May 4, 1998 (inception)
through March 31, 2000, and the selected balance sheet data as of March 31, 2000
are derived from our unaudited financial statements appearing elsewhere in this
prospectus which reflect, in the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results for these periods and the financial condition as of
that date. Historical results are not necessarily indicative of results that may
be expected for any future period. You should read the following selected
financial data in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on page 19 and the financial
statements and related notes beginning on page F-1.
    

<TABLE>
<CAPTION>
                                   PERIOD FROM                               PERIOD FROM           THREE MONTHS ENDED
                                   MAY 4, 1998                               MAY 4, 1998               MARCH 31,
                               (INCEPTION) THROUGH      YEAR ENDED       (INCEPTION) THROUGH   --------------------------
                                DECEMBER 31, 1998    DECEMBER 31, 1999    DECEMBER 31, 1999       1999           2000
                               -------------------   -----------------   -------------------   -----------   ------------
<S>                            <C>                   <C>                 <C>                   <C>           <C>
STATEMENT OF OPERATIONS DATA:
Operating expenses:
  Licensing fees.............       $ 100,000           $        --          $   100,000        $      --    $         --
  Research and development...         200,000             2,092,119            2,292,119               --       1,433,268
  General and
    administrative...........         122,168             2,567,355            2,689,523          118,257       4,619,719
                                    ---------           -----------          -----------        ---------    ------------
    Total operating
      expenses...............         422,168             4,659,474            5,081,642          118,257       6,052,987
                                    ---------           -----------          -----------        ---------    ------------
    Operating loss...........        (422,168)           (4,659,474)          (5,081,642)        (118,257)     (6,052,987)
Interest income..............          33,961               160,689              194,650           27,407         245,050
Income tax expense...........             800                   800                1,600              200             200
                                    ---------           -----------          -----------        ---------    ------------
    Net loss.................        (389,007)           (4,499,585)          (4,888,592)         (91,050)     (5,808,137)
Return to series C preferred
  shareholders for beneficial
  conversion feature.........              --                    --                   --               --     (14,231,595)
                                    ---------           -----------          -----------        ---------    ------------
Loss available to common
  shareholders...............       $(389,007)          $(4,499,585)         $(4,888,592)       $ (91,050)   $(20,039,732)
                                    =========           ===========          ===========        =========    ============
Basic and diluted loss per
  share......................       $   (0.06)          $     (0.48)                            $   (0.01)   $      (2.10)
                                    =========           ===========                             =========    ============
Weighted average shares used
  in computing basic and
  diluted loss per share.....       6,948,637             9,322,441                             9,000,000       9,528,957
                                    =========           ===========                             =========    ============
 
<CAPTION>
                                   PERIOD FROM
                                   MAY 4, 1998
                               (INCEPTION) THROUGH
                                 MARCH 31, 2000
                               -------------------
<S>                            <C>
STATEMENT OF OPERATIONS DATA:
Operating expenses:
  Licensing fees.............     $    100,000
  Research and development...        3,725,387
  General and
    administrative...........        7,309,242
                                  ------------
    Total operating
      expenses...............       11,134,629
                                  ------------
    Operating loss...........      (11,134,629)
Interest income..............          439,700
Income tax expense...........            1,800
                                  ------------
    Net loss.................      (10,696,729)
Return to series C preferred
  shareholders for beneficial
  conversion feature.........      (14,231,595)
                                  ------------
Loss available to common
  shareholders...............     $(24,928,324)
                                  ============
Basic and diluted loss per
  share......................
Weighted average shares used
  in computing basic and
  diluted loss per share.....
</TABLE>

 
     See Note 1 of Notes to Financial Statements for an explanation of the
determination of the weighted-average common shares used to compute basic and
diluted loss per share.
 

<TABLE>
<CAPTION>
                                                                     DECEMBER 31,
                                                              --------------------------     MARCH 31,
                                                                 1998           1999           2000
                                                              -----------    -----------    -----------
<S>                                                           <C>            <C>            <C>
SELECTED BALANCE SHEET DATA:
Cash and cash equivalents...................................  $ 2,333,512    $ 9,339,669    $22,179,362
Working capital.............................................    2,264,038      9,095,831     21,795,444
Total assets................................................    2,382,600      9,441,173     22,864,799
Series C redeemable convertible preferred stock(1)..........           --             --     14,231,595
Series B redeemable convertible preferred stock.............           --      9,703,903      9,703,903
Series A convertible preferred stock........................        2,660          2,660          2,660
Common stock................................................        9,000          9,445          9,718
Additional paid-in-capital..................................    2,686,839      9,367,750     17,697,759
Deferred compensation.......................................           --     (4,980,180)    (8,448,370)
Deficit accumulated during the development stage............     (389,007)    (4,888,592)   (10,696,729)
Total stockholders' equity (deficit)........................    2,274,492       (563,317)    (1,558,362)
</TABLE>

 
(1) See Note 7 to the Financial Statements
 
                                       17

<PAGE>   21
 

                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
     You should read the following discussion and analysis in conjunction with
"Selected Financial Data" and the financial statements and related notes
included elsewhere in this prospectus. This discussion contains forward-looking
statements. Please see "Risk Factors" and "Cautionary Note on Forward-Looking
Statements."
 
OVERVIEW
 
   
     Pain Therapeutics is engaged in the development of a new generation of
opioid painkillers. We use our technology to reformulate opioid drugs, such as
morphine, into new painkillers with improved clinical benefits. We currently
have four opioid painkillers in Phase II clinical trials. We believe our drugs
offer enhanced pain relief, fewer adverse side effects and reduced tolerance and
addiction compared to existing opioid painkillers.
    
 
     We have yet to generate any revenues from product sales. We have not been
profitable and, since our inception, we have incurred a cumulative deficit of
approximately $10.7 million through March 31, 2000. These losses have resulted
principally from costs incurred in connection with research and development
activities, including costs of clinical trials associated with our four product
candidates and general and administrative expenses.
 
     Product revenue will depend on our ability to receive regulatory approvals
for, and successfully market, our product candidates. In the event that our
development efforts result in regulatory approval and successful
commercialization of our product candidates, we will generate revenue from
direct sales of our products and/or, if we license our products to future
collaborators, from the receipt of license fees and royalties from licensed
products.
 
     Sources of revenue for the foreseeable future may also include payments
from potential collaborative arrangements, including license fees, funded
research payments and milestone payments and royalties based on revenues
received from products commercialized under such arrangements.
 
     We expect to incur additional operating losses for the next several years.
We also expect to continue to incur significant operating and capital
expenditures and anticipate that our expenses will increase substantially in the
foreseeable future as we:
 
     - continue to undertake preclinical and clinical trials for our product
       candidates;
 
     - seek to obtain regulatory approvals for our product candidates;
 
     - develop, manufacture and market our product candidates and products;
 
     - implement additional internal systems and infrastructure; and
 
     - hire additional personnel.
 
Deferred Non-Cash Compensation
 
     During the three month period ended March 31, 2000 and the year ended
December 31, 1999 we granted stock options to employees and non-employee
consultants for which we recorded deferred compensation of approximately $4.7
million and $6.5 million, respectively. No options were granted in 1998.
 
                                       18

<PAGE>   22
 
     For employees, deferred compensation represents the difference between the
exercise price of the option and the fair value of our common stock on the date
of grant in accordance with Accounting Principles Board Opinion No. 25 and its
related interpretations. For non-employees, deferred compensation is recorded at
the fair value of the options granted in accordance with Statement of Financial
Accounting Standards No. 123 and Emerging Issues Task Force No. 96-18.
 
     Compensation expense is being recognized over the vesting period for
employees and the service period for non-employees in accordance with Financial
Accounting Standards Board Interpretation No. 28 as that methodology most
closely approximates the way in which our options are earned by the option
holder. For the three month period ended March 31, 2000 and the year ended
December 31, 1999, amounts amortized to the statement of operations as
compensation expense for both employees and non-employees totalled $1.2 million
and $1.5 million, respectively.
 
RESULTS OF OPERATIONS
 
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
 
Licensing Fees
 
   
     In May 1998, we entered into an exclusive, worldwide license agreement with
Albert Einstein College of Medicine for all patents and pending patent
applications relating to low-dose opioid antagonist technology. Pursuant to the
terms of the license agreement, in 1998 we paid Albert Einstein College of
Medicine a one-time licensing fee of $100,000. In addition, we have paid Albert
Einstein College of Medicine three of four research payments which in the
aggregate total $600,000, including $200,000 paid in each of the years ended
December 31, 1999 and 1998. We are also required to make milestone payments to
Albert Einstein College of Medicine upon the achievement of certain regulatory
and clinical events. In the aggregate these success based milestone payments may
total up to $5,000,000, including amounts due upon receipt of our first drug
approval in the U.S. and in specified foreign countries. Finally, we must pay
Albert Einstein College of Medicine royalties based on a percentage of net sales
of our products. If a product is combined with a drug or other substance for
which we are paying an additional royalty, the royalty rate we pay to Albert
Einstein College of Medicine is generally reduced by one-half of the amount of
such additional royalty. We have charged the licensing fee payment to licensing
fees in accordance with Statement of Financial Accounting Standards No. 2,
Accounting for Research and Development Costs, as this technology has no
alternative future use. No such payments were made during the three month
periods ended March 31, 2000 and 1999.
    
 
Research and Development
 
   
     Research and development expense consists of drug development work
associated with product candidates, including costs of clinical trials and
clinical supplies, and research payments to the Albert Einstein College of
Medicine. Research and development expenses were $1.4 million for the three
months ended March 31, 2000. For the three months ended March 31, 1999 no
research and development expenses were incurred as clinical trial activity was
initiated during the second quarter of 1999.
    
 
General and Administrative
 
     General and administrative expense consists primarily of amortization of
deferred compensation for options granted to employees and consultants, charges
resulting from stock issuances pursuant to restricted stock purchase agreements,
salaries and related benefit costs, facilities expenses, consulting and
professional services expenses, travel and other general corporate expenses.
General and administrative expenses increased to $4.6 million for the three
months ended March 31, 2000 from $118,000 for the three months ended March 31,
1999. This increase was primarily attributable to the hiring of additional
 
                                       19

<PAGE>   23
 
personnel and related expenses, the amortization of deferred compensation,
charges resulting from stock issuances pursuant to restricted stock purchase
agreements and increased consulting and professional services expenses. There
will be future non-cash charges for options granted to employees and
consultants.
 
Interest Income
 
     Interest income increased to approximately $245,000 for the three months
ended March 31, 2000 from $27,000 for the period ended March 31, 1999. This
increase resulted from higher average balances of cash and cash equivalents
following the sale of our series B and series C redeemable convertible preferred
stock.
 
Return to Series C Preferred Stockholders for Beneficial Conversion Feature
 
     We determined that our series C preferred stock was issued with a
beneficial conversion feature. The beneficial conversion feature has been
recognized by allocating a portion of the preferred stock proceeds equal to the
intrinsic value of that feature, limited to the net proceeds received
(approximately $14.2 million), to additional paid-in capital. The intrinsic
value is calculated at the date of issue as the difference between the
conversion price of the preferred stock and the fair value of our common stock,
into which the preferred stock is convertible, multiplied by the number of
common shares into which the preferred stock is convertible, limited to the net
proceeds received. As our series C preferred stock is convertible into common
stock at the option of the holder, at the issuance date of the preferred stock
the entire $14.2 million discount resulting from the allocation of proceeds to
the beneficial conversion feature has been treated as a dividend and recognized
as a return to the preferred stockholders for purposes of computing basic and
diluted loss per share in the three months ended March 31, 2000.
 
YEAR ENDED DECEMBER 31, 1999 AND PERIOD FROM MAY 4, 1998 (INCEPTION) THROUGH
DECEMBER 31, 1998
 
Licensing Fees
 
     The licensing fee payments made pursuant to the terms of the license
agreement with the Albert Einstein College of Medicine have been charged to
licensing fees in accordance with Statement of Financial Accounting Standards
No. 2, Accounting for Research and Development Costs, as this technology has no
alternative future use.
 
Research and Development
 
     Research and development expenses increased to $2.1 million for the year
ended December 31, 1999 from $200,000 for the period ended December 31, 1998.
This increase was attributable to the initiation of clinical trials during 1999.
 
General and Administrative
 
     General and administrative expenses increased to $2.6 million for the year
ended December 31, 1999 from $122,000 for the period ended December 31, 1998.
This increase was primarily attributable to the hiring of additional personnel,
the amortization of deferred compensation, increased professional services
expenses and the longer period over which general corporate expenses were
incurred in 1999. There will be future non-cash charges for options granted to
employees and consultants.
 
                                       20

<PAGE>   24
 
Interest Income
 
     Interest income increased to approximately $161,000 for the year ended
December 31, 1999 from $34,000 for the period ended December 31, 1998. This
increase resulted from higher average balances of cash and cash equivalents
following the sale of our series B redeemable convertible preferred stock.
 
Income Taxes
 
     We have incurred net operating losses since inception and, consequently,
have not recorded any federal or state income taxes other than the minimum
California state franchise tax. Our deferred tax assets primarily consist of net
operating loss carryforwards and research and development tax credits. We have
recorded a valuation allowance for the full amount of our deferred tax asset as
the future realization of the tax benefit is not assured.
 
     As of December 31, 1999, we had net operating loss carryforwards of
approximately $3.3 million for federal and state income tax purposes. These
federal and state tax loss carryforwards are available to reduce future taxable
income. If not utilized, the net operating loss carryforwards expire at various
dates through 2019 for federal purposes and 2006 for state purposes. Annual
limitations may result in the expiration of net operating loss and credit carry
forwards before they are used. Under the provisions of the Internal Revenue
Code, substantial changes in our ownership may limit the amount of net operating
loss carryforwards that could be utilized annually in the future to offset
taxable income.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     We have financed our operations primarily from the net proceeds generated
from sales of our preferred stock. Through the date of this filing we have
received total net proceeds of approximately $27.5 million from the sales of:
 
     - an aggregate 2,659,489 shares of our series A convertible preferred stock
       in August and October 1998 raising total net proceeds of approximately
       $2.6 million;
 
     - an aggregate 5,405,405 shares of our series B redeemable convertible
       preferred stock in October and November 1999 raising total net proceeds
       of approximately $9.7 million; and
 
     - an aggregate 3,044,018 shares of our series C redeemable convertible
       preferred stock in February 2000 raising total net proceeds of
       approximately $15.2 million. We have allocated approximately $14.2
       million of these proceeds to a beneficial conversion feature which we
       have treated as a dividend to the preferred shareholders.
 
     All of these shares of preferred stock will convert 1-for-1 into common
stock upon completion of this offering. As of the date of this offering, there
are warrants outstanding to purchase a total of 190,000 shares of our common
stock at a weighted average exercise price of $3.53 per share and 150,000 shares
of our series A convertible preferred stock at an exercise price of $1.
 
     As of March 31, 2000, cash and cash equivalents were $22.2 million, up from
$9.3 million at the end of 1999 and $2.3 million at the end of 1998.
 
     For the three months ended March 31, 2000 we used approximately $1.8
million of cash for operations principally as a result of the net loss of $5.8
million offset by non-cash compensation of approximately $1.2 million, non-cash
charges resulting from stock issuances pursuant to restricted stock purchase
agreements of $2.6 million and the increase in accounts payable of $187,000. In
the year ended December 31, 1999 we used approximately $2.7 million of cash for
operations principally as a result of the net loss of $4.5 million offset by
non-cash compensation of approximately $1.5 million and the increase in accounts
payable of $162,000. We used approximately $300,000 of cash for operations in
the 1998 period.
 
     Our investing activities used cash of approximately $83,000 in the three
months ended March 31, 2000. For the year ended December 31, 1999 our investing
activities used cash of approximately $39,000
 
                                       21

<PAGE>   25
 
compared to approximately $11,000 in the 1998 period. These activities consisted
of purchases of property and equipment. We expect to continue to make
investments in our infrastructure, including the purchase of property and
equipment to support our operations.
 
     Financing activities provided cash of $14.7 million in the three months
ended March 31, 2000. Our financing activities in the year ended December 31,
1999 and for the period ended December 31, 1998 generated approximately $9.7
million and $2.7 million, respectively. These amounts are primarily from the
private sales of preferred stock. The 2000 period also includes approximately
$460,000 of deferred charges related to our initial public offering. Our series
B and C redeemable convertible preferred stock have redemption features that may
require us to make cash payments in the absence of certain events at set future
dates in amounts equal to their purchase price plus unpaid, declared dividends.
 
   
     We currently occupy approximately 3,250 square feet of leased space, for
which the operating lease expires in September 2000. We are in negotiations to
lease approximately 10,000 square feet of new office space in South San
Francisco, California, as well as separate negotiations to extend the expiration
date of our current lease through December 2000. The combination of our need for
additional square footage and increased rents in the San Francisco Bay Area will
likely result in a significantly higher occupancy expense going forward.
    
 
     We expect our cash requirements to increase significantly in 2000, as we
continue our research and development efforts, hire and expand our product
development personnel, grow our administrative support activities and expand our
leased facilities. Additionally, as our clinical development efforts grow we
anticipate a significant cash requirement for working capital growth, capital
expenditures and investment in infrastructure. The amount and timing of cash
requirements will depend on regulatory and market acceptance of our products, if
any, and the resources we devote to researching and developing, formulating,
manufacturing, commercializing and supporting our products. We believe that the
net proceeds from this offering together with our current cash and cash
equivalents should be sufficient to fund our operations for at least the next 12
months. However, we may require additional financing within this timeframe and
such additional funding, if needed, will may not be available on terms
acceptable to us or at all. Further, any additional equity financing may be
dilutive to current stockholders.
 
RECENT ACCOUNTING PRONOUNCEMENTS
 
     In June 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative instrument be
recorded in the balance sheet as either an asset or liability measured at its
fair value. SFAS No. 133, as recently amended by SFAS No. 137, is effective for
fiscal years beginning after June 15, 2000. Management believes the adoption of
SFAS No. 133 will not have a material effect on our financial position, results
of operations or cash flows.
 
     In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, or FIN No. 44, Accounting for Certain Transactions
Involving Stock Compensation. This Interpretation clarifies the application of
APB Opinion No. 25, Accounting for Stock Issued to Employees and is generally
effective July 1, 2000, with certain conclusions in this Interpretation covering
specific events that occur after either December 15, 1998, or January 12, 2000.
To the extent that this Interpretation covers events occurring during the period
after December 15, 1998, or January 12, 2000, but before the effective date of
July 1, 2000, the effects of applying this Interpretation are recognized on a
prospective basis from July 1, 2000. Management believes the adoption of FIN No.
44 will not have a material impact on our financial position, results of
operations or cash flows.
 
                                       22

<PAGE>   26
 
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
     The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from investments without
significantly increasing risk. Some of the securities that we may invest in may
be subject to market risk. This means that a change in prevailing interest rates
may cause the value of the investment to fluctuate. For example, if we purchase
a security that was issued with a fixed interest rate and the prevailing
interest rate later rises, the value of our investment will probably decline. To
minimize this risk in the future, we intend to maintain our portfolio of cash
equivalents and short-term investments in a variety of securities including
commercial paper, money market funds and government and non-government debt
securities. In general, money market funds are not subject to market risk
because the interest paid on such funds fluctuates with the prevailing interest
rate. As of March 31, 2000, we neither had any holdings of derivative financial
or commodity instruments, nor any foreign currency denominated transactions, and
all of our cash and cash equivalents were in money market and checking funds.
 
     Our series B and C redeemable convertible preferred stock is carried at its
redemption value which approximates fair value and it is not subject to interest
rate risk.
 
                                       23

<PAGE>   27
 

 
                                   BUSINESS
 
   
     Pain Therapeutics, Inc. is developing a new generation of opioid
painkillers with improved clinical benefits. We use our technology to
reformulate existing opioid painkillers into new drugs, which we believe offer
enhanced pain relief, fewer adverse side effects and reduced tolerance and
addiction compared to existing opioid painkillers. If approved by the FDA, we
believe our proprietary drugs could replace many existing opioid painkillers
commonly used to treat moderate to severe pain. We believe our products may
encounter fewer clinical and regulatory hurdles than new chemical entities,
because they consist of drugs that, individually, are already FDA approved.
    
 
BACKGROUND
 
Clinical Pain
 
     Clinical pain is any unpleasant sensation that occurs as a result of injury
or disease. Pain can have a protective role by warning of imminent or actual
tissue damage, which can help prevent additional injury. Pain can also trigger a
biological response that helps to preserve or regenerate damaged tissue. In this
respect, pain is usually a normal, predictable response to events such as
surgery, trauma and illness.
 
Types of Pain and Pain Relief
 
     Drugs are often used to reduce or eliminate pain, especially when the pain
is severe. The type of drug used to relieve pain depends on both the severity
and the duration of the pain. Pain can be classified into three categories of
severity:
 
     - Mild Pain. Almost everyone experiences mild pain, such as headaches or
       joint pain, at one time or another. People typically treat mild pain with
       over-the-counter drugs such as aspirin and acetaminophen.
 
     - Moderate Pain. Pain resulting from minor surgery or arthritis are
       examples of moderate pain. Physicians typically prescribe opioid
       painkillers to treat moderate pain. Opioid painkillers come in three
       varieties: weak opioids, strong opioids and synthetic opioids. Weak
       opioids such as hydrocodone or codeine are generally used to treat
       patients with moderate pain.
 
     - Severe Pain. Patients experiencing severe pain often suffer from a
       serious underlying illness, such as AIDS or cancer. Severe pain can also
       result from major surgery, nerve damage or undetermined causes. Patients
       experiencing severe pain often require a strong opioid, such as morphine
       or fentanyl, to achieve adequate pain relief.
 
     Pain can also be classified in terms of its duration as either acute or
chronic. Acute pain, such as pain resulting from knee surgery, is brief and
rarely results in long-term consequences. Most acute pain subsides within hours,
days or weeks. Chronic pain persists long after an injury has healed, and
typically results from a chronic illness or appears spontaneously and persists
for undefined reasons. Examples of chronic pain include chronic lower back pain,
and pain resulting from bone cancer or advanced arthritis. The effect of chronic
pain tends to be more pervasive than that of acute pain. Chronic pain often
affects a patient's mood, personality and social relationships. As a result, a
patient with chronic pain commonly suffers from both their state of physical
pain as well as a general decline in their quality of life.
 
                                       24

<PAGE>   28
 
     In general, the more severe or chronic the pain, the more likely an opioid
painkiller will be prescribed to treat the pain. The following diagram
illustrates the types of pain which physicians typically treat with opioid
painkillers:
 
                                   [GRAPHIC]
 
Pain Management Market
 
     The medical effort to treat pain, known as pain management, addresses a
large market. Clinical pain is a worldwide problem with serious health and
economic consequences. For example, in the United States:
 
     - medical economists estimate that the effects of pain result in
       approximately $100 billion of costs annually, including costs associated
       with an estimated 515 million lost work days;
 
     - according to the National Institutes of Health, approximately 40 million
       Americans are unable to find relief from their pain;
 
     - more than 30 million Americans suffer chronic pain for which they visit a
       doctor;
 
     - approximately one million cancer patients suffer from severe pain at any
       given time; and
 
     - an estimated 10% of the more than 200,000 AIDS patients suffer severe
       pain.
 
     Drugs are the key element in the treatment of pain. The worldwide market
for pain drugs totaled over $16 billion in 1997. In the United States and
Western Europe the corresponding market for pain drugs totaled nearly $12
billion. The pain management market has grown significantly in recent years and
is expected to continue to grow significantly. The pain market has grown by
approximately 15% per year during the past five years due to a number of
factors, including:
 
     - a rapidly aging population;
 
     - patients' demand for effective pain relief;
 
     - increasing recognition of the therapeutic and economic benefits of
       effective pain management by physicians and healthcare providers and
       payers; and
 
     - longer survival times for patients with painful chronic conditions, such
       as cancer and AIDS.
 
                                       25

<PAGE>   29
 
     This accelerating growth rate appears to be attributable in part to recent
innovations in the treatment of mild pain. For example, in 1999, Monsanto, which
is now part of Pharmacia, and Merck, all of which are large pharmaceutical
companies, launched non-opioid prescription pain relievers called COX-2
inhibitors. These drugs achieved first-year sales exceeding $1.0 billion in the
United States. COX-2 inhibitors have fewer side effects than aspirin, and sell
for more than twenty times the price of aspirin. The success of COX-2 inhibitors
demonstrates the potential for rapid market acceptance and premium pricing of
pain products that offer reduced side effects.
 
     There has been little innovation in the area of opioid painkillers. Sales
of opioid painkillers in the United States are primarily of older off-patent
pain drugs, such as morphine and oxycodone. Notwithstanding the lack of novel
drugs, U.S. opioid painkiller sales were approximately $2.5 billion in 1999.
 
     Approximately 90% of U.S. patients who receive opioids are treated on an
outpatient basis. A portion of these patients receive care at one of the 3,400
specialty pain programs. The relatively low number of pain treatment centers
allows for focused distribution channels for pain management products. This
market structure permits midsize pharmaceutical companies to market and sell
pain products cost-effectively.
 
OPIOID DRUGS
 
     The history of opium use dates back more than 3,000 years. Today, the use
of opioid drugs to treat patients with moderate to severe pain is widely
accepted throughout the world. Opioids are the drugs of preference for many
caregivers because they have an extensive clinical history, are easy to use and
are available in a variety of doses and formulations. In the United States,
Europe and Japan, physicians use a variety of strong, weak and synthetic opioids
to manage patients' pain.
                              OPIOID DRUG SEGMENTS
 

<TABLE>
<CAPTION>
   MARKET SEGMENT      TYPICAL USE     EXAMPLES      REPRESENTATIVE BRAND  1999 U.S. SALES
   --------------      -----------  ---------------  --------------------  ---------------
                                                                            (IN MILLIONS)
<S>                    <C>          <C>              <C>                   <C>
 Strong Opioids        Cancer pain  Morphine         MS Contin and others      $  700
 Weak Opioids          Outpatient   Hydrocodone and  Vicodin and others
                       surgery      oxycodone                                  $1,300
 Synthetic Opioids     Back pain    Tramadol         Ultram                    $  450
                                                                           ---------------
                                                     Total                     $2,450
                                                                           ===============
</TABLE>

 
Source: IMS HEALTH, Retail & Provider Perspectives 1999
 
     Patients experiencing acute pain require fast acting, short-lived opioids
and rapid delivery. The most common acute use of opioids is post-surgical pain.
Opioid drugs used to treat acute pain include intravenous morphine, hydrocodone
and oxycodone, which provide rapid pain relief.
 
     In contrast, patients experiencing chronic severe pain often require
long-term, regular use of opioid drugs. Because rapid dose adjustments are not
necessary, patients experiencing chronic pain typically use opioid drugs in
sustained release formulations. Such formulations include fentanyl patches and
sustained release morphine. Although curing chronic pain is possible, it is
infrequent. The aim of using opioid drugs for patients with chronic pain is to
decrease pain and suffering while improving overall physical and mental
functions.
 
                                       26

<PAGE>   30
 
SHORTCOMINGS OF CURRENT PAIN MANAGEMENT
 
     Despite widespread clinical use of opioids, pain management remains less
than optimal. At all doses, opioid painkillers have significant adverse side
effects that limit their usefulness. Adverse side effects include: respiratory
depression, nausea, vomiting, dizziness, sedation, mental clouding,
constipation, urinary retention and severe itching. In addition, chronic use of
opioid painkillers can lead to the need for increasing dosage, and potentially,
addiction. Concerns about addiction often influence clinicians to prescribe less
than adequate doses of opioids. Many patients dislike the adverse side effects
of opioid treatment and voluntarily take less than the prescribed dosage. In all
cases, however, patients and clinicians must reach an appropriate balance
between pain relief and adverse side effects. In addition, patients often use a
process of trial and error with different opioids to identify an opioid that
yields the optimal balance between pain relief and adverse side effects. Some
patients may even prefer to endure pain rather than to withstand the side
effects of opioid therapy. As a result, many patients are seriously
under-treated and may be suffering from pain unnecessarily. In particular,
infants and children receive disproportionately fewer and lower doses of opioid
painkillers than adults.
 
     Historically, there has been little innovation in the opioid painkillers
used to treat moderate to severe pain. To date, product innovations have focused
on increasing convenience, rather than improving clinical benefits. For example,
novel dosing or delivery systems make it more convenient for patients to use
opioid drugs, but neither enhance pain relief or reduce adverse side effects.
 
OUR SOLUTION
 
     We are developing a new generation of drugs that address the shortcomings
of existing opioid painkillers. We believe our drugs will:
 
     - enhance pain relief;
 
     - minimize adverse side effects; and
 
     - reduce tolerance and addiction.
 
     If approved by the FDA, we believe our drugs could replace many commonly
used opioid painkillers. We also believe our drugs could be used in chronic pain
cases where physicians have been reluctant to prescribe opioid painkillers due
to concerns about adverse side effects or addiction.
 
     We have clinical results from four completed Phase II trials involving 750
patients, including two company-sponsored trials and two independent clinical
trials. We believe the results of these clinical trials demonstrate that our
product candidates offer superior pain relief as compared to equivalent dose
levels of an opioid painkiller alone.
 
     Our product candidates use a novel technology developed at Albert Einstein
College of Medicine. Our technology combines very low doses of opioid inhibitors
with standard opioid painkillers. We believe that the addition of a low dose of
an opioid antagonist to opioid painkillers has an unexpected and beneficial
effect. We believe that this effect includes enhancing potency, minimizing
adverse side effects and attenuating tolerance and addiction.
 
     Our technology has the added advantage of combining components which the
FDA has individually approved for human use. We believe that we may encounter
fewer clinical and regulatory hurdles than if we were developing new chemical
entities because the safety and therapeutic profiles of these individual
components are well-established.
 
                                       27

<PAGE>   31
 
STRATEGY
 
     Our goal is to build a leading specialty pharmaceutical company in pain
management. We intend to achieve this goal by:
 
     Developing Products with Reduced Clinical and Regulatory Hurdles. We intend
to develop drugs that we believe may have lower clinical and regulatory risks
compared to the development of new chemical entities. Our technology combines
separate drugs, each independently approved by the FDA, whose safety and
pharmacology are well established. We believe this approach will enable us to
commercialize our drugs rapidly and cost effectively.
 
     Focusing on Clinical Development and Late Stage Products. We continue to
focus on managing clinical trials. All four of our current product candidates
are in Phase II clinical trials. The conduct of human trials is a complex,
highly regulated and highly specialized effort. We believe that our clinical
development focus will enable us to generate product revenues earlier than if we
were discovering new chemical entities.
 
     Retaining Significant Rights. We currently retain worldwide
commercialization rights to all of our technology and pain management product
candidates in all markets and indications. In general, we intend to
independently develop our product candidates through late-stage clinical trials.
As a result, we expect to capture a greater percentage of the profits from drug
sales than we would if we outlicensed our drugs earlier in the development
process. In market segments that require large or specialized sales forces, such
as the market for morphine products, we may seek sales and marketing alliances
with third parties. We believe that such alliances will enable us to
commercialize our drugs rapidly and cost-effectively.
 
     Using Our Technology to Develop Multiple Drugs for Both Pain and Non-Pain
Indications. We are initially focusing our efforts on developing four opioid
painkillers. However, we believe our technology can be broadly applied to
additional segments of the pain market, as well as non-pain indications.
 
     Outsourcing Key Functions. We intend to continue to outsource preclinical
studies, clinical trials, formulation and manufacturing. We believe outsourcing
will produce significant time savings and allow for more efficient deployment of
our resources.
 
PRODUCTS IN DEVELOPMENT
 
     We have four painkillers in Phase II clinical trials. Each painkiller is a
proprietary combination of opioids. The first component is an opioid agonist,
such as morphine. The second component is an opioid antagonist, such as
naltrexone or naloxone. Normally, adding an antagonist to an agonist blocks the
action of the agonist. This effect is clinically useful, for example, to reverse
heroin overdose. At a very low-dose, however, studies indicate that this effect
is reversed: a very low-dose of an opioid antagonist can enhance pain relief,
reduce adverse side-effects and attenuate the development of tolerance and
addiction. Our technology takes advantage of this effect by combining opioid
agonists with low doses of opioid antagonists. The two individual components of
our combination drugs have the advantage of having been previously approved by
the FDA for human use at high dose. However, the use of both components in
combination, or the use of low-dose opioid antagonist alone, has not been
approved by the FDA.
 
     Our trials are designed to produce clinical information about how our
painkillers perform compared to placebo and existing opioid painkillers. We plan
to test each of our painkillers in several clinical models of pain in order to
support a broad approval by the FDA for use of the drug for the relief of
moderate to severe acute and chronic pain. FDA guidelines recommend that we
demonstrate efficacy of our new painkillers in more than one clinical model of
pain, typically including dental pain. Other
 
                                       28

<PAGE>   32
 
acceptable clinical models of pain include post-operative pain, cancer pain and
various types of trauma and arthritis pain. Because clinical models differ in
their sensitivity to detect pain, we expect to complete Phase II studies in
multiple clinical models of pain. We have designed all of our clinical trials to
date as randomized, double-blind, placebo-controlled, dose-ranging studies. A
randomized study is one in which patients are randomly assigned to the various
study arms. A double-blind study is one in which the patient, the physician and
the company's monitor are unaware if the patient is receiving placebo or study
drug in order to preserve the integrity of the trial. A placebo-controlled study
is one in which a subset of patients is purposefully not given study drug. Our
initial clinical goals are to obtain regulatory approval of the following four
combination opioid painkillers:
 

<TABLE>
<CAPTION>
PRODUCT    STAGE OF DEVELOPMENT                         FORMULATION
-------    --------------------                         -----------
<S>        <C>                     <C>
PTI-555          Phase II                    Oral morphine/low-dose naltrexone
PTI-501          Phase II                  Injectable morphine/low-dose naloxone
PTI-601          Phase II                       Tramadol/low-dose naltrexone
PTI-701          Phase II              Hydrocodone-acetaminophen/low-dose naltrexone
</TABLE>

 
PTI-555: oral morphine
 
     PTI-555 is our proprietary substitute for oral morphine. We are developing
this combination drug to treat moderate to severe pain in an acute or chronic
setting. PTI-555 is a combination of oral morphine and low-dose naltrexone. If
the FDA approves PTI-555, we believe it could be an effective substitute for
oral morphine. The principal use of oral morphine is the treatment of patients
suffering from chronic moderate to severe pain, such as cancer pain.
 
  Clinical Results
 
     In August 1999, we initiated a 200 patient Phase II clinical trial of
PTI-555. This trial compared three different doses of PTI-555 with placebo and
with oral morphine. Each dose of PTI-555 consisted of a fixed dose of morphine
with a different low dose of naltrexone. The trial enrolled patients
experiencing moderate to severe pain following dental surgery, in which two or
more teeth were extracted. We completed patient enrollment on schedule in
November 1999.
 
     In December 1999 we completed the analysis of this Phase II clinical study.
In this trial we demonstrated the following results:
 
   
     - PTI-555 is well-tolerated in humans;
    
 
     - three different doses of PTI-555 clearly provide patients with three
       different levels of pain relief;
 
     - an optimal dose of PTI-555 provides patients with meaningful pain relief
       compared to placebo; this result is statistically significant at the
       level of pl0.001, which means the likelihood that this result could have
       occurred by chance is less than 1 in 1,000; and
 
   
     - an optimal dose of PTI-555 provides patients with 50% more pain relief
       than morphine alone in the first four hours of the study period; this
       result is clinically meaningful with p=0.058, which means the likelihood
       that this result could have occurred by chance is less than 1 in 17.
    
 
     Based on these encouraging results, in January 2000 we initiated a new
Phase II clinical trial with PTI-555. This trial is designed to confirm the
safety, the efficacy and the optimal dose of PTI-555 in 300 patients suffering
from moderate to severe pain following dental surgery. We expect to complete
patient enrollment for this Phase II clinical trial by the third quarter of
2000.
 
                                       29

<PAGE>   33
 
PTI-501: injectable morphine
 
     PTI-501 is our proprietary substitute for injectable morphine. We are
developing this combination drug to treat moderate to severe pain in an acute or
chronic setting. PTI-501 consists of a pre-mixed combination of injectable
morphine and low-dose naloxone. If the FDA approves PTI-501, we believe it could
be an effective substitute for injectable morphine. The principal use of
injectable morphine is the treatment of patients with acute severe pain, such as
trauma pain.
 
  Clinical Results
 
     Our clinical data on PTI-501 includes a company-sponsored Phase II clinical
trial, as well as an independent clinical trial. The company-sponsored Phase II
clinical trial enrolled 120 patients suffering from moderate to severe
post-surgical pain. We completed patient enrollment for this clinical trial in
December 1999, and we expect to receive final clinical results by the third
quarter of 2000.
 
     In 1997, independent researchers at Duke University Medical Center
conducted a physician-sponsored, randomized, double-blind, placebo-controlled,
dose-ranging clinical trial of 60 patients suffering from post-surgical pain.
Published results of this trial indicated an approximate 50% reduction in
certain morphine-related adverse side effects in patients who received an
optimal dose of study drug compared to patients who received morphine without
low-dose naloxone. This result is statistically significant at the level of
p<0.05, which means the likelihood that this result could have occurred by
chance is less than 1 in 20.
 
PTI-601: tramadol
 
     PTI-601 is our proprietary substitute for tramadol. In 1999, U.S. sales of
tramadol exceeded $450 million. We are developing this combination drug to treat
patients with moderate pain in an acute or chronic setting. PTI-601 is a
combination of tramadol and low-dose naltrexone. If the FDA approves PTI-601, we
believe it could be an effective substitute for tramadol. Tramadol is
principally used to treat patients with acute or chronic moderate pain, such as
arthritis pain. Ortho-McNeil Pharmaceutical currently markets proprietary
tramadol hydrochloride tablets under the brand name Ultram. The relevant patents
for Ultram expire in 2001.
 
  Clinical Results
 
     In August 1999, we initiated a 250 patient Phase II trial of PTI-601. This
trial compared three different doses of PTI-601 with placebo and with tramadol.
Each dose of PTI-601 consisted of a fixed dose of tramadol combined with a
different low dose of naltrexone. The trial enrolled patients suffering from
moderate to severe pain following dental surgery, in which three or more teeth
were extracted. We completed patient enrollment on schedule in December 1999.
 
     In January 2000 we completed the analysis of this Phase II clinical study.
In this trial we demonstrated the following results:
 
   
     - PTI-601 is well-tolerated in humans;
    
 
     - different doses of PTI-601 clearly provide patients with different levels
       of pain relief; and
 
     - an optimal dose of PTI-601 provides patients with meaningful pain relief
       compared to placebo; this result is statistically significant at the
       level of p<0.008, which means the likelihood that this result could have
       occurred by chance is less than 1 in 125. By contrast patients who
       received tramadol alone did not achieve statistically meaningful pain
       relief compared to placebo.
 
                                       30

<PAGE>   34
 
PTI-701: hydrocodone
 
     PTI-701 is our proprietary substitute for hydrocodone, oxycodone and
similar weak opioids. In 1999, U.S. sales of such drugs exceeded $1.3 billion.
We are developing PTI-701 to treat moderate to severe pain in an acute or
chronic setting. PTI-701 is a combination of hydrocodone, acetaminophen and low-
dose naltrexone. If the FDA approves PTI-701, we believe it could be an
effective substitute for hydrocodone/acetaminophen. In the United States, all
hydrocodone is sold in combination with acetaminophen. The principal use of
hydrocodone is the treatment of patients with chronic moderate to severe pain,
such as cancer pain. Hydrocodone combination products are currently sold under
various trade names, including Knoll Laboratories' Vicodin, Forest
Pharmaceuticals' Lorcet and Watson Laboratories' Norco.
 
     In January 2000, we initiated a Phase II clinical trial with PTI-701. This
trial is designed to demonstrate the safety, the efficacy and the optimal dose
of PTI-701 in 300 patients suffering from moderate to severe pain following
dental surgery. We expect to complete patient enrollment for this trial by the
third quarter of 2000.
 
Other Product Candidates
 
     We believe the use of low-dose opioid antagonists, either alone or in
combination with existing opioid drugs, may have commercial applications beyond
our four current product candidates. We believe that our technology can be
broadly applied to additional segments of the pain market, as well as non-pain
indications. Examples include certain drugs used in anesthesiology and those
used to treat opioid and alcohol addiction. Until we undertake preclinical
studies and clinical trials, we cannot be certain that our technology will have
such additional applications.
 
     We anticipate initiating several Phase I/II pilot studies in an effort to
assess the clinical utility of our proprietary low-dose antagonist technology
within and outside the field of pain management. In particular, we may explore
the use of our technology in patients undergoing methadone maintenance treatment
and in patients suffering from irritable bowel syndrome.
 
MANUFACTURING
 
   
     We have no manufacturing facilities. We have entered into an agreement with
a qualified third party for the formulation and manufacture of our clinical
supplies. These supplies and the manufacturing facilities must comply with DEA
regulations and current good manufacturing practices, or GMPs, enforced by the
FDA. We plan to continue to outsource formulation and manufacturing.
    
 
TECHNOLOGY OVERVIEW
 
     According to the current understanding of pain mediation, opioid
painkillers produce their pain relieving effect by activating an inhibitory
pathway in the nervous system. Inhibitory pathways inhibit the transmission of
pain signals into the brain. Scientists at Albert Einstein College of Medicine
have published results suggesting that opioids also stimulate an excitatory
pathway in the nervous system. The excitatory pathway partially counteracts pain
inhibition and is believed to be a major cause of adverse side effects
associated with opioid use, including the development of tolerance and
addiction. In vitro studies on isolated nerve cells have helped researchers
detect and analyze the unique properties of the inhibitory and excitatory
pathways. At the normal clinical doses, the activation of the excitatory pathway
was previously undetected probably due to masking by the inhibitory pathway.
 
     Published results suggest that the selective blockade of the excitatory
pathway promotes the pain relieving potency of morphine in mice by blocking the
excitatory pain-enhancing effect. In addition,
 
                                       31

<PAGE>   35
 
preclinical studies have demonstrated that co-treatment with a very low dose of
an opioid antagonist, such as naloxone or naltrexone, preferentially blocks the
excitatory pathway over the inhibitory pathway, thereby enhancing morphine's
ability to inhibit pain.
 
     We believe that the excitatory pathway plays an important role in
modulating the adverse side effects of opioid use. After repeated administration
of morphine or other opioid painkillers, increasing doses of opioids are
required in order to obtain the same level of pain relief, a process known as
tolerance. If chronic opioid treatment is terminated abruptly, withdrawal
symptoms rapidly appear. Continued administration of opioids prevents the
appearance of withdrawal symptoms, at which point a patient is considered
dependent, and, potentially addicted. Published results also show that tolerance
and dependence in mice are due to sustained activation of the excitatory
pathway, and that tolerance and dependence can be prevented by co-administration
of low-dose naltrexone, a pure opioid antagonist. At very low concentrations, we
believe such opioid antagonists preferentially block excitatory pathways. These
results provided the rationale for our human clinical trials.
 
     The low-dose effect is the most important component of our technology
wherein a very low dose of an opioid antagonist is combined with an opioid
painkiller. Optimal dose ratios of low-dose opioid antagonist to opioid
painkiller depend on their specific pharmacology and the mode of administration.
Published preclinical and clinical dose response studies provide guidance in
formulating optimal ratios of low-dose opioid antagonist to opioid painkiller
for clinical development.
 
   
     Upon our formation in May 1998, we licensed our technology from Albert
Einstein College of Medicine. We have a worldwide exclusive license to the
technology. Our license rights terminate, upon the expiration of the patents
used to protect the technology, which are scheduled to expire no earlier than
September 2012. Pursuant to the terms of the license, we paid Albert Einstein
College of Medicine a one time licensing fee and are required to pay clinical
milestone payments and royalties based on a percentage of net drug sales. If a
product is combined with a drug or other substance for which we are paying an
additional royalty, the royalty that we pay to Albert Einstein College of
Medicine will be reduced by one-half of the amount of such additional royalty.
    
 
     Albert Einstein College of Medicine originally received grants from the
U.S. federal government to research some of the technology that we license. The
terms of these grants provide the U.S. federal government with a non-exclusive,
non-transferable paid-up license to practice inventions made with federal funds.
Thus, our licenses are non-exclusive to the extent of the U.S. government's
license. If the U.S. government exercises its rights under this license, it
could make use of the same technology that we license and the size of our
potential market could thereby be reduced.
 
   
     We seek to protect our technology by, among other methods, filing and
prosecuting U.S. and foreign patents and patent applications with respect to our
technology and products and their uses. The issued patents are scheduled to
expire no earlier than September 2012. We plan to prosecute and defend our
patent applications, issued patents and proprietary information. We have an
exclusive, worldwide license for five issued U.S. patents, one U.S. Notice of
Allowance and two pending U.S. patent applications relating to the low-dose
opioid antagonist technology under our license agreement with Albert Einstein
College of Medicine, and ten corresponding pending foreign patent applications
or issued patents. Our competitive position and potential future revenues will
depend in large part upon our ability to protect our intellectual property from
challenges and to enforce our patent rights against potential infringers. If our
competitors are able to successfully challenge the validity of our patent
rights, based on the existence of prior art or otherwise, they would be able to
market products that contain features and clinical benefits similar to those of
our products, and demand for our products could decline as a result.
    
 
                                       32

<PAGE>   36
 
     The focus of our patent strategy is to secure and maintain intellectual
property rights to technology for the following categories of our business:
 
     - the clinical use of a low-dose opioid antagonist, either alone or in
       combination with an opioid painkiller, for pain management and opioid and
       other addiction;
 
     - the use of a low-dose opioid antagonist to render opioid-based anesthesia
       products, such as fentanyl or fentanyl analogs, more effective; and
 
     - the clinical use of a low-dose opioid antagonist, either alone or in
       combination with any opioid painkiller, for the treatment of other
       conditions.
 
GOVERNMENT REGULATION
 
   
     Regulation by governmental authorities in the United States and other
countries is a significant factor in the manufacture and marketing of
pharmaceuticals and in our ongoing research and development activities. All of
our products will require regulatory approval by governmental agencies prior to
commercialization. In particular, human therapeutic products are subject to
rigorous preclinical testing and clinical trials and other pre-marketing
approval requirements by the FDA and regulatory authorities in other countries.
In the United States, various federal, and in some cases state statutes and
regulations also govern or impact upon the manufacturing, safety, labeling,
storage, record-keeping and marketing of our products. The lengthy process of
seeking required approvals and the continuing need for compliance with
applicable statutes and regulations, require us to spend substantial resources.
Regulatory approval, when and if obtained, may be limited in scope which may
significantly limit the indicated uses for which our products may be marketed.
Further, approved drugs, as well as their manufacturers, are subject to ongoing
review and discovery of previously unknown problems with such products which may
result in restrictions on their manufacture, sale or use or in their withdrawal
from the market.
    
 
   
     Applicable FDA regulations treat our combination of opioid painkillers,
such as morphine, and low-dose opioid antagonists, such as naloxone, as new
drugs and require the filing of a NDA and approval by the FDA prior to
commercialization in the United States. Our clinical trials seek to demonstrate
that an opioid painkiller/low-dose opioid antagonist combination produces
greater beneficial effects than either drug alone. Because each drug has been
separately approved for human use by the FDA, we believe that we may encounter
fewer regulatory hurdles than if we were developing new chemical entities.
    
 
The Drug Approval Process
 
     We will be required to take several steps before we can market any of our
drugs for human use in the United States, including:
 
     - preclinical studies;
 
     - submission to the FDA of an IND which must become effective before human
       clinical trials commence;
 
     - adequate and well-controlled human clinical trials to establish the
       safety and efficacy of the product candidate;
 
     - submission to the FDA of a NDA; and
 
     - FDA approval of the NDA prior to any commercial sale or shipment of the
       drug.
 
   
     Preclinical tests include laboratory evaluation of product chemistry and
formulation, as well as animal studies to assess the potential safety of the
product. Preclinical safety tests must be conducted by laboratories that comply
with FDA regulations regarding Good Laboratory Practice, or GLP regulations. We
submitted the results of preclinical tests to the FDA as part of our INDs prior
to commencing clinical trials. We may conduct additional toxicology studies
concurrently with the clinical trials.
    
 
                                       33

<PAGE>   37
 
   
     Based on preclinical testing, an IND is filed with the FDA to begin human
testing of the drug. The IND becomes effective if not rejected by the FDA within
30 days. The IND must indicate the results of previous experiments, how, where
and by whom the new studies will be conducted, the chemical structure of the
compound, the method by which it is believed to work in the human body, any
toxic effects of the compound found in the animal studies and how the compound
is manufactured. All clinical trials must be conducted in accordance with Good
Clinical Practice, or GCP, regulations. In addition, an Institutional Review
Board, or IRB, comprised of physicians at the hospital or clinic where the
proposed studies will be conducted, must review and approve the IND. The IRB
also continues to monitor the study. We must submit progress reports detailing
the results of the clinical trials to the FDA at least annually. In addition,
the FDA may, at any time during the 30-day period or at any time thereafter,
impose a clinical hold on proposed or ongoing clinical trials. If the FDA
imposes a clinical hold, clinical trials cannot commence or recommence without
FDA authorization and then only under terms authorized by the FDA. In some
instances, the IND application process can result in substantial delay and
expense.
    
 
   
     Clinical trials are typically conducted in three sequential phases which
may overlap. After an IND becomes effective, human clinical trials can begin.
Phase I tests typically take approximately one year to complete. The tests study
a drug's safety profile, and may include the safe dosage range. The Phase I
clinical studies also determine how a drug is absorbed, distributed, metabolized
and excreted by the body, and the duration of its action. In addition, we may,
to the extent feasible, assess pain relief in our Phase I trials. Based on
discussions with FDA, our current opioid development programs were allowed to
proceed into Phase II studies. In Phase II clinical trials, controlled studies
are conducted on volunteer patients with the targeted disease or condition. The
primary purpose of these tests is to evaluate the effectiveness of the drug on
the volunteer patients as well as to determine if there are any side effects.
These studies may be conducted concurrently with Phase I clinical trials. In
addition, Phase I/II clinical trials may be conducted to evaluate not only the
efficacy of the drug on the patient population, but also its safety. We
currently have four opioid painkillers in Phase II clinical trials. During the
Phase III clinical trials, the drug is studied in an expanded patient population
and in multiple sites, physicians monitor the patients to determine efficacy and
to observe and report any reactions that may result from long-term or expanded
use of the drug.
    
 
     The FDA publishes industry guidelines specifically for the clinical
evaluation of painkillers. We rely in part on these guidelines to design a
clinical strategy for the approval of each of our product candidates. In
particular, FDA guidelines recommend that we demonstrate efficacy of our new
painkillers in more than one clinical model of pain, typically including dental
pain. Other acceptable clinical models of pain include post-operative pain,
cancer pain and various types of trauma and arthritis pain. Since models differ
in their pain intensity and their sensitivity to detect pain, we expect to
complete several Phase II studies in multiple clinical models of pain. Upon a
clear demonstration of the safety and efficacy of painkillers in multiple
clinical models of pain, the FDA has historically approved pain killers with
broad indications. Such general purpose labeling often takes the form of "for
the management of moderate to severe pain."
 
   
     We may not successfully complete Phase I, Phase II or Phase III testing
within any specified time period, or at all, with respect to any of our product
candidates. Furthermore, the FDA may suspend clinical trials at any time in
response to concerns that we are exposing participants to an unacceptable health
risk.
    
 
   
     After the completion of clinical trials, if there is substantial evidence
that the drug is safe and effective, a NDA is filed with the FDA. The NDA must
contain all of the information on the drug gathered to that date, including data
from the clinical trials. NDAs are often over 100,000 pages in length.
    
 
   
     The FDA reviews all NDAs submitted before it accepts them for filing and
may request additional information rather than accepting a NDA for filing. In
such an event, the NDA must be resubmitted with the additional information and,
again, is subject to review before filing. Once the submission is accepted for
filing, the FDA begins an in-depth review of the NDA. Under the Federal Food,
Drug and
    
 
                                       34

<PAGE>   38
 
   
Cosmetic Act, the FDA has 180 days in which to review the NDA and respond to the
applicant. The review process is often significantly extended by FDA requests
for additional information or clarification regarding information already
provided in the submission. The FDA may refer the application to an appropriate
advisory committee, typically a panel of clinicians, for review, evaluation and
a recommendation as to whether the application should be approved. The FDA is
not bound by the recommendation of an advisory committee. If FDA evaluations of
the NDA and the manufacturing facilities are favorable, the FDA may issue either
an approval letter or an approvable letter, which usually contains a number of
conditions that must be met in order to secure final approval of the NDA. When
and if those conditions have been met to the FDA's satisfaction, the FDA will
issue an approval letter, authorizing commercial marketing of the drug for
certain indications. If the FDA's evaluation of the NDA submission or
manufacturing facilities is not favorable, the FDA may refuse to approve the NDA
or issue a not approvable letter.
    
 
   
     If the FDA approves the NDA, the drug becomes available for physicians to
prescribe. Periodic reports must be submitted to the FDA, including descriptions
of any adverse reactions reported. The FDA may request additional studies, Phase
IV, to evaluate long-term effects.
    
 
   
Other Regulatory Requirements
    
 
   
     The FDA mandates that drugs be manufactured in conformity with good
manufacturing practices regulations. If the FDA approves any of our product
candidates we will be subject to requirements for labeling, advertising, record
keeping and adverse experience reporting. Failure to comply with these
requirements could result, among other things, in suspension of regulatory
approval, recalls, injunctions or civil or criminal sanctions. We may also be
subject to regulations under other federal, state, and local laws, including the
Occupational Safety and Health Act, the Environmental Protection Act, the Clean
Air Act, national restrictions on technology transfer, and import, export, and
customs regulations. In addition, any of our products that contain narcotics
will be subject to DEA regulations relating to manufacturing, storage,
distribution and physician prescribing procedures. It is possible that any
portion of the regulatory framework under which we operate may change and that
such change could have a negative impact on our current and anticipated
operations.
    
 
   
     The Controlled Substances Act imposes various registration, record-keeping
and reporting requirements, procurement and manufacturing quotas, labeling and
packaging requirements, security controls and a restriction on prescription
refills on certain pharmaceutical products. A principal factor in determining
the particular requirements, if any, applicable to a product is its actual or
potential abuse profile. The DEA regulates chemical compounds as Schedule I, II,
III, IV or V substances, with Schedule I substances considered to present the
highest risk of substance abuse and Schedule V substances the lowest risk. Any
of our product candidates that contains a scheduled substance will be subject to
regulation as a drug of that class.
    
 
COMPETITION
 
     Our success will depend, in part, upon our ability to achieve market share
at the expense of existing and established and future products in the relevant
target markets. Existing and future products, therapies, technological
approaches or delivery systems will compete directly with our products.
Competing products may provide greater therapeutic benefits for a specific
indication, or may offer comparable performance at a lower cost. Companies that
currently sell generic or proprietary opioid formulations include Roxane
Laboratories, Purdue Pharma, Janssen Pharmaceutica, Knoll Laboratories, Abbott
Laboratories, Anesta, Endo Pharmaceuticals, Elkins-Sinn, Watson Laboratories,
Alza Pharmaceuticals, Ortho-McNeil Pharmaceutical, Forest Pharmaceuticals and
Astra Pharmaceutical. Alternative technologies are being developed to increase
opioid potency, as well as alternatives to opioid therapy for pain management,
several of which are in clinical trials or are awaiting approval from the FDA.
Such alternatives include Elan's SNX-111 and Endo Pharmaceuticals' Morphidex.
 
                                       35

<PAGE>   39
 
     We compete with fully integrated pharmaceutical companies, smaller
companies that are collaborating with larger pharmaceutical companies, academic
institutions, government agencies and other public and private research
organizations. Many of these competitors have opioid painkiller products already
approved by the FDA or in development and operate larger research and
development programs in these fields than we do. In addition, many of these
competitors, either alone or together with their collaborative partners, have
substantially greater financial resources than we do, as well as significantly
greater experience in:
 
     - developing drugs;
 
     - undertaking preclinical testing and human clinical trials;
 
     - obtaining FDA and other regulatory approvals of drugs;
 
     - formulating and manufacturing drugs; and
 
     - launching, marketing, distributing and selling drugs.
 
     Developments by competitors may render our product candidates or
technologies obsolete or non-competitive.
 
EMPLOYEES
 
     As of March 31, 2000, we had approximately 18 employees and seven executive
consultants, including five M.D./Ph.D.s, one M.D./D.D.S. and one Ph.D. We engage
additional consultants from time to time to perform services on a per diem or
hourly basis.
 
FACILITIES
 
   
     Our executive office is located at 250 East Grand Avenue, Suite 70, South
San Francisco, California 94080. Our leased property consists of approximately
3,250 square feet of office space. We believe that our facilities are sufficient
to meet anticipated staffing up to the expiration of our lease in September
2000. We are in negotiations to lease approximately 10,000 square feet of new
office space in South San Francisco, California, as well as separate
negotiations to extend the expiration date of our current lease through December
2000.
    
 
LEGAL PROCEEDINGS
 
     We are not a party to any legal proceedings.
 
                                       36

<PAGE>   40
 

                                   MANAGEMENT
 
EXECUTIVE OFFICERS AND DIRECTORS
 
     The following table presents information about our executive officers, key
employees and directors. Upon completion of this offering our board of directors
will be divided into three classes serving staggered three-year terms.
 

<TABLE>
<CAPTION>
                NAME                   AGE                       POSITION
                ----                   ---                       --------
<S>                                    <C>   <C>
Remi Barbier.........................  40    President, Chief Executive Officer and Chairman
                                             of the Board
Barry M. Sherman, M.D. ..............  59    Executive Vice President and Chief Medical
                                             Officer
Edmon R. Jennings....................  54    Chief Commercialization Officer
David L. Johnson.....................  46    Chief Financial Officer
Gert Caspritz, Ph.D.(1)..............  50    Director
Nadav Friedmann, M.D., Ph.D.(2)......  57    Director
Wilfred R. Konneker, Ph.D.(1)........  78    Director
Michael J. O'Donnell, Esq............  42    Director and Secretary
Sanford R. Robertson(1)(2)...........  68    Director
</TABLE>

 
-------------------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
 
     Remi Barbier, our founder, has served as our President, Chief Executive
Officer and Chairman since our inception in May 1998. Prior to that time, Mr.
Barbier helped in the growth or founding of: Exelixis Inc., a functional
genomics company, ArQule, a chemistry company, and EnzyMed (now owned by Albany
Molecular Research), a chemistry company. Mr. Barbier served as Chief Operating
Officer of Exelixis from January 1996 to May 1998. Prior to that, he was Vice
President of Corporate Development and Clinical Project Manager of Xoma
Corporation, a biotechnology company, from October 1993 to December 1995. Mr.
Barbier received his B.A. from Oberlin College and his M.B.A. from the
University of Chicago. He is a Director of Mendel Biotechnology, Inc.
 
     Barry M. Sherman, M.D. has served as our Executive Vice President and Chief
Medical Officer since April 1999. From April 1996 to February 1999, Dr. Sherman
was President and Chief Executive Officer of Anergen Inc., an immunology
biotechnology company. From 1985 until 1996, Dr. Sherman held various positions
at Genentech Inc., a biotechnology company, most recently serving as Senior Vice
President and Chief Medical Officer with responsibility for Genentech's overall
clinical development activities. Since 1986, Dr. Sherman has also been a
Clinical Professor of Internal Medicine at Stanford University. From 1971 to
1985, Dr. Sherman was a Professor of Internal Medicine and Director of the
Clinical Research Center at the University of Iowa College of Medicine. Dr.
Sherman received his M.D., with honors, from the University of Michigan.
 
     Edmon R. Jennings joined Pain Therapeutics, Inc. in February 2000. Prior to
that time, Mr. Jennings held senior management positions at Genentech, including
Vice President of Corporate Development from December 1995 to January 2000, Vice
President of Sales and Marketing from January 1994 to December 1995 and Vice
President of Sales from December 1990 to December 1993. Prior to Genentech, Mr.
Jennings held positions with Bristol-Myers Oncology and Bristol Laboratories,
both of which were divisions of Bristol-Myers (now Bristol-Myers Squibb), a
pharmaceutical company, for approximately twelve years. Mr. Jennings received
his B.A. from the University of Michigan.
 
     David L. Johnson, CPA joined Pain Therapeutics, Inc. in January 2000. From
November 1998 to December 1999, Mr. Johnson was an independent financial
consultant, and acted as Chief Financial Officer at Aradigm, a drug delivery
technology company. From October 1997 to November 1998, Mr. Johnson held
 
                                       37

<PAGE>   41
 
positions as Vice President of Finance and Administration of Elan
Pharmaceuticals North America and Vice President of Finance and Chief Financial
Officer of Athena Neurosciences, both of which were divisions of Elan
Pharmaceuticals, a pharmaceutical company. From September 1996 to October 1997,
Mr. Johnson was Director of Finance at Gilead Sciences, a biopharmaceutical
company. From January 1995 to September 1996, Mr. Johnson was an independent
financial consultant and provided accounting services to Chiron, a biotechnology
company. From June 1993 to December 1994, Mr. Johnson was Director of Financial
Planning and Operational Analysis at Chiron. Mr. Johnson is a former member of
the audit staff of KPMG LLP, our auditors. Mr. Johnson received his B.S. in
Accounting from Oklahoma State University.
 
     Gert Caspritz, Ph.D. has served as a director since November 1999. Dr.
Caspritz has been the Investment Manager of TVM-Techno Venture Management, an
international venture capital firm based in Germany, since June 1999. Prior to
joining TVM he was employed by Hoechst Marion Roussel, a pharmaceutical company,
for over 15 years, most recently as Vice President of New Technologies
Licensing. During his tenure at Hoechst Marion Roussel he was a member of
various strategy task forces, including the group that negotiated many of
Hoechst Marion Roussel's biotechnology collaborations. Dr. Caspritz serves on
the board of Coley Pharmaceutical Group, PhytoMedica and Epicept. Dr. Caspritz
received his undergraduate degree and his Ph.D. in Biology from the University
of Mainz, Germany.
 
     Nadav Friedmann, M.D., Ph.D. has served as a director since September 1998.
Dr. Friedmann was President and Chief Executive Officer of Daiichi
Pharmaceutical Corporation, a pharmaceutical company, from 1997 to April 2000
and before that was a Consultant to the Board of Daiichi Pharmaceutical Co.,
Ltd. in Tokyo from 1995 to 1997. From 1992 to 1995, Dr. Friedmann served as Vice
President, Clinical Research at Xoma Corporation. From 1980 to 1991, Dr.
Friedmann held various leadership positions, with Johnson & Johnson, a
healthcare company, including Vice President and Head of Research of J&J
Biotechnology Center. Prior to that, Dr. Friedmann was Medical Director of
Abbott Laboratories. Dr. Friedmann is a graduate of Albert Einstein College of
Medicine, where he received an M.D., and of the University of California, San
Diego, where he received a Ph.D. degree in Biochemistry.
 
     Wilfred Konneker, Ph.D. has served as a director since November 1999. Dr.
Konneker has been a private investor since retiring as Vice President of the
radio pharmaceuticals division of Mallinckrodt, Inc., a healthcare company, in
1973. He served as a director of Mallinckrodt from 1966 to 1975. Dr. Konneker
founded Nuclear Consultants, Inc., the first supplier of radio-isotopes to the
pharmaceutical industry, in 1950, and served as its President and Chief
Executive Officer until its merger with Mallinckrodt, Inc. in 1966. Dr. Konneker
sits on the Board of Trustees for Washington University and the Board of
Directors for Ohio University Foundation, the St. Louis Symphony, the Opera
Theatre of St. Louis and the Chautauqua Foundation. Dr. Konneker received his
Ph.D. in Nuclear Physics from Washington University and an undergraduate degree
from Ohio University.
 
     Michael J. O'Donnell, Esq. has served as a director since June 1998. Mr.
O'Donnell has been a member of the law firm of Wilson Sonsini Goodrich & Rosati,
Professional Corporation, our corporate counsel, since 1993. Mr. O'Donnell
serves as corporate counsel to numerous public and private biopharmaceutical and
life science companies. Mr. O'Donnell received a J.D. degree, cum laude, from
Harvard University and a B.A. degree from Bucknell University, summa cum laude.
 
     Sanford R. Robertson has served as a director since September 1998. Mr.
Robertson has been a general partner of Francisco Partners, a technology
investment fund since January 2000. From October 1998 to December 1999 he was
President of Robertson and Co. Mr. Robertson is the founder and former chairman
of Robertson, Stephens & Company, an investment banking firm founded in October
1978, with which Mr. Robertson was associated through September 1998. Mr.
Robertson is also the founder of Robertson, Colman, Siebel & Weisel, later
renamed Montgomery Securities. He is also a former director of AIM Management
Group Inc. (now AMVESCAP) and BankAmerica Corporation. Mr. Robertson
 
                                       38

<PAGE>   42
 
received his B.B.A. and M.B.A. degrees with distinction from the University of
Michigan. He is also a director of Big Vine.com, Inc.
 
BOARD OF DIRECTORS
 
     Our board of directors currently consists of six members. Each director
holds office until his or her term expires or until his or her successor is duly
elected and qualified. Upon completion of this offering, our amended and
restated certificate of incorporation and bylaws will provide for a classified
board of directors. In accordance with the terms of our certificate, our board
of directors will be divided into three classes whose terms will expire at
different times. The three classes will be comprised of the following directors:
 
     - Class I consists of directors O'Donnell and Konneker, who will serve
       until the annual meeting of stockholders to be held in 2001;
 
     - Class II consists of directors Caspritz and Friedmann, who will serve
       until the annual meeting of stockholders to be held in 2002; and
 
     - Class III consists of directors Barbier and Robertson, who will serve
       until the annual meeting of stockholders to be held in 2003.
 
     At each annual meeting of stockholders beginning with the 2001 annual
meeting, the successors to directors whose terms will then expire will be
elected to serve from the time of election and qualification until the third
annual meeting following election and until their successors have been duly
elected and qualified. Any additional directorships resulting from an increase
in the number of directors will be distributed among the three classes so that,
as nearly as possible, each class will consist of an equal number of directors.
 
Committees
 
     Our board of directors has an executive committee, an audit committee and a
compensation committee. The executive committee consists of directors Remi
Barbier, Sanford Robertson and Nadav Friedmann. The audit committee consists of
directors Gert Caspritz, Wilfred Konneker and Sanford Robertson. The audit
committee reviews our internal accounting procedures, consults with and reviews
the services provided by our independent accountants and makes recommendations
to the board of directors regarding the selection of independent accountants.
The compensation committee consists of directors Sanford Robertson and Nadav
Friedmann. The compensation committee reviews and recommends to the board of
directors the salaries, incentive compensation and benefits of our executive
officers and administers our stock plans and employee benefit plans.
 
Compensation Committee Interlocks and Insider Participation
 
     Our board of directors established the compensation committee in September
1999. Prior to establishing the compensation committee, our board of directors
as a whole performed the functions delegated to the compensation committee. No
member of our compensation committee has served as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of our board of directors or compensation
committee. Since the formation of the compensation committee, none of its
members has been an officer or employee.
 
                                       39

<PAGE>   43
 
Director Compensation
 
     In March 2000, our board of directors approved guidelines for the grant of
stock options under our 1998 Stock Plan, as amended, to directors who are not
our officers or employees. These guidelines provide that such directors will
receive 20,000 shares vesting annually over four years which are to be granted
on the date of each annual stockholder meeting following the closing of this
offering at the fair market value of our common stock on the date of grant.
 
SCIENTIFIC AND MEDICAL ADVISORS
 
     We have established a scientific and medical advisory board to provide
specific expertise in areas of research and development relevant to our
business. Our scientific and medical advisory board meets periodically with our
scientific and development personnel and management to discuss current and long-
term research and development activities and initiatives. Our scientific and
medical advisory board is comprised of:
 

<TABLE>
<S>                                         <C>
Leslie Z. Benet, Ph.D. ...................  Professor of Biopharmaceutical Sciences,
                                            University of California, San Francisco
Stanley Crain, Ph.D. .....................  Professor of Neurosciences, Emeritus, Albert
                                            Einstein College of Medicine
Nadav Friedmann, M.D., Ph.D. .............  Independent Consultant, former President &
                                            Chief Executive Officer, Daiichi
                                            Pharmaceuticals Corp.
Scott R. Hamann, M.D., Ph.D. .............  Department of Anesthesiology, University of
                                            Kentucky College of Medicine
Don R. Mehlisch, M.D., D.D.S. ............  Independent Consultant, Co-founder, Scirex
                                            Corporation
Fredrick L. Minn, M.D., Ph.D. ............  Independent Consultant, formerly at Johnson &
                                            Johnson/Ortho-McNeil Pharmaceutical
Robert B. Raffa, Ph.D. ...................  Associate Professor of Pharmacology, Temple
                                            University
Patrick Scannon, M.D., Ph.D. .............  Chief Medical and Scientific Officer, Xoma
                                            Corporation
Ke-Fei Shen, M.D., Ph.D. .................  Principal Associate, Albert Einstein College
                                            of Medicine
Barry M. Sherman, M.D. ...................  Executive Vice President & Chief Medical
                                            Officer, Pain Therapeutics, Inc.
Eric J. Simon, Ph.D. .....................  Professor of Psychiatry and Pharmacology, New
                                            York University School of Medicine
Frank Porreca, Ph.D. .....................  Professor of Pharmacology and Anesthesiology,
                                            University of Arizona College of Medicine
</TABLE>

 
EXECUTIVE OFFICERS
 
     Our executive officers are appointed by our board of directors and serve
until their successors are elected or appointed.
 
                                       40

<PAGE>   44
 
Compensation
 
     The following table sets forth all compensation accrued during the year
ended December 31, 1999 to our President and Chief Executive Officer, and our
only other executive officer who was employed during the period. In accordance
with the rules of the SEC, the compensation described in this table does not
include perquisites and other personal benefits received by the executive
officers named in the table below which do not exceed the lesser of $50,000 or
10% of the total salary and bonus reported for these officers.
 
                           SUMMARY COMPENSATION TABLE
 

<TABLE>
<CAPTION>
                                                                      LONG-TERM
                                                                     COMPENSATION
                                                                     ------------
                                          ANNUAL COMPENSATION ($)     SECURITIES
                                          ------------------------    UNDERLYING     ALL OTHER
      NAME AND PRINCIPAL POSITIONS         SALARY    BONUS   OTHER   OPTIONS (#)    COMPENSATION
      ----------------------------        --------   -----   -----   ------------   ------------
<S>                                       <C>        <C>     <C>     <C>            <C>
Remi Barbier............................  $176,042    --      --            --          --
  President, Chief Executive
  Officer and Chairman
Barry M. Sherman, M.D. .................  $132,275    --      --       600,000          --
  Executive Vice President
  and Chief Medical Officer
</TABLE>

 
Option Grants in 1999
 
     The following table sets forth information concerning grants of stock
options to each of the executive officers named in the table above during 1999.
All options granted to these executive officers in 1999 were granted under the
1998 Stock Plan, as amended. Except as otherwise noted, one forty-eighth of the
shares subject to each option vests and becomes exercisable on the first month
after the vesting commencement date, and an additional one-forty-eighth of the
shares subject to each option vests each month thereafter. The percent of the
total options set forth below is based on an aggregate of 965,000 options
granted to employees during 1999. All options were granted at fair market value
as determined by our Board of Directors on the date of grant.
 
   
     Potential realizable value represents hypothetical gains that could be
achieved for the options if exercised at the end of the option term assuming an
initial public offering price of our common stock of $12.00 per share
appreciates at 5% and 10% over the option term. The assumed 5% and 10% rates of
stock price appreciation are provided in accordance with rules of the Securities
and Exchange Commission and do not represent our estimate or projection of our
future common stock price.
    
 

<TABLE>
<CAPTION>
                                               INDIVIDUAL GRANTS
                              ---------------------------------------------------     POTENTIAL REALIZABLE
                                           PERCENT OF                                   VALUE AT ASSUMED
                                             TOTAL                                      ANNUAL RATES OF
                              NUMBER OF     OPTIONS                                    STOCK APPRECIATION
                              SECURITIES   GRANTED TO                                  FOR OPTION TERM($)
                              UNDERLYING   EMPLOYEES      EXERCISE                  ------------------------
                               OPTIONS       DURING        PRICE       EXPIRATION
            NAME               GRANTED     PERIOD(%)    PER SHARE($)      DATE         5%             10%
            ----              ----------   ----------   ------------   ----------   ---------      ---------
<S>                           <C>          <C>          <C>            <C>          <C>            <C>
Remi Barbier................        --          --            --              --           --             --
Barry M. Sherman, M.D.......   250,000        25.9          0.10          5/7/09    4,861,683      7,756,227
                               250,000        25.9          0.10         9/10/09    4,861,683      7,756,227
                               100,000        10.4          0.20        12/10/09    1,934,673      3,092,490
</TABLE>

 
                                       41

<PAGE>   45
 
Aggregate Option Exercises in 1999 and Values at December 31, 1999
 
     The following table sets forth information concerning exercisable and
unexercisable stock options held by the executive officers named in the summary
compensation table at December 31, 1999. The value of unexercised in-the-money
options is based on an assumed initial offering price of $12 per share minus the
actual exercise prices. All options were granted under our 1998 Stock Plan, as
amended. Except as otherwise noted, these options vest over four years and
otherwise generally conform to the terms of our 1998 Stock Plan, as amended.
 

<TABLE>
<CAPTION>
                                                                     NUMBER OF SECURITIES          VALUE OF UNEXERCISED
                                                                    UNDERLYING UNEXERCISED         IN-THE-MONEY OPTIONS
                                                                            OPTIONS                   AT DECEMBER 31,
                                        SHARES                      AT DECEMBER 31, 1999(#)             1999($)(1)
                                       ACQUIRED        VALUE      ---------------------------   ---------------------------
                NAME                  ON EXERCISE   REALIZED($)   EXERCISABLE   UNEXERCISABLE   EXERCISABLE   UNEXERCISABLE
                ----                  -----------   -----------   -----------   -------------   -----------   -------------
<S>                                   <C>           <C>           <C>           <C>             <C>           <C>
Remi Barbier........................      --             --             --              --             --              --
Barry M. Sherman, M.D. .............      --             --         52,083         547,917        619,787       6,510,212
</TABLE>

 
-------------------------
(1) Value is determined by subtracting the exercise price of an option from an
    assumed $12 per share fair market value of our common stock.
 
EMPLOYMENT AGREEMENTS
 
     In July 1998, we entered into an employment agreement with Mr. Barbier.
Under the terms of the agreement as amended by our board, Mr. Barbier receives
an annual salary of $275,000, and is eligible to receive an annual bonus in an
amount to be determined by the board of directors. The term of the agreement is
three years, and it automatically renews for consecutive one-year terms unless
we or Mr. Barbier terminate the agreement earlier on sixty days' notice. The
agreement entitles Mr. Barbier to serve on the board of directors for as long as
he is our President and Chief Executive Officer. Thereafter, he will remain a
member of our board of directors only if we terminate his employment without
cause. The agreement also provides that if we terminate Mr. Barbier without
cause, we must pay him his salary for twelve months following the date of his
termination and relinquish our right to repurchase any of his shares of our
common stock.
 
     In March 1999, we executed an employment offer letter for Dr. Sherman.
Under the terms of the offer as amended by our Board, Dr. Sherman receives an
annual salary of $250,000. The offer letter provides that Dr. Sherman's
employment may be terminated at any time by either Dr. Sherman or us upon thirty
days' notice.
 
LIMITATIONS ON DIRECTORS' AND OFFICERS' LIABILITY AND INDEMNIFICATION
 
     Our amended and restated certificate of incorporation to be filed upon
completion of this offering limits the liability of our directors to the maximum
extent permitted by Delaware law. Delaware law provides that directors of a
corporation will not be personally liable for monetary damages for breach of
their fiduciary duties as directors, except liability associated with any of the
following:
 
     - any breach of their duty of loyalty to the corporation or its
       stockholders;
 
     - acts or omissions not in good faith or which involve intentional
       misconduct or a knowing violation of law;
 
     - unlawful payments of dividends or unlawful stock repurchases or
       redemption; or
 
     - any transaction from which the director derived an improper personal
       benefit.
 
                                       42

<PAGE>   46
 
     The limitation of our directors' liability does not apply to liabilities
arising under the federal securities laws and does not affect the availability
of equitable remedies such as injunctive relief or rescission.
 
     Our amended and restated certificate of incorporation and bylaws also
provide that we shall indemnify our directors and executive officers and may
indemnify our other officers and employees and other agents to the fullest
extent permitted by law. We believe that indemnification under our bylaws covers
at least negligence and gross negligence on the part of indemnified parties. Our
bylaws also permit us to secure insurance on behalf of any officer, director,
employee or other agent for any liability arising out of his or her actions in
such capacity, regardless of whether our bylaws would permit indemnification.
 
     We have entered into indemnification agreements with each of our officers
and directors containing provisions that require us to, among other things,
indemnify such officers and directors against liabilities that may arise by
reason of their status or service as directors or officers (other than
liabilities arising from willful misconduct of a culpable nature), to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified, and to cover our directors and officers under any of
our liability insurance policies applicable to our directors and officers. We
believe that these provisions and agreements are necessary to attract and retain
qualified persons as directors and executive officers.
 
STOCK PLANS
 
1998 Stock Plan
 
     Our 1998 Stock Plan, as amended, was approved by our board of directors in
September 1998, and subsequently amended in May and September 1999 and February
2000. As of March 31, 2000, 223,800 shares were available for issuance under the
1998 Stock Plan.
 
     The purpose of the 1998 Stock Plan is to provide us with an opportunity to
retain and attract employees, directors and consultants who are essential to our
future growth and success by providing such individuals with an opportunity to
acquire shares of our common stock. Our 1998 Stock Plan provides for the grant
of nonstatutory stock options to our (and our parent and subsidiary
corporations) employees, directors and consultants, and for the grant of
incentive stock options, within the meaning of Section 422 of the Internal
Revenue Code, to our employees and employees of our parent and subsidiary
corporations.
 
     A total of 3,200,000 shares of our common stock are authorized for issuance
under the 1998 Stock Plan. On the effective date of our initial public offering
a total of 1,500,000 shares will be added to reserve of shares available for
issuance under the 1998 Stock Plan. In addition, on the first day of each fiscal
year during the term of the 1998 Stock Plan, beginning with our fiscal year
2001, the number of shares available for issuance under our 1998 Stock Plan will
increase by an amount of shares equal to the lesser of 5% of the outstanding
shares of our common stock on the last day of our immediately preceding fiscal
year, 2,000,000 shares or a lesser amount as our board may determine.
 
     Our board of directors or a committee of our board administers the 1998
Stock Plan. In the case of options intended to qualify as performance-based
compensation within the meaning of Section 162(m) of the Internal Revenue Code,
the committee will consist of two or more outside directors within the meaning
of Section 162(m) of the Internal Revenue Code. The administrator has the power
to determine the terms of the options granted, including the exercise price, the
number of shares subject to each option, the exercisability of the options and
the form of consideration payable upon exercise.
 
     The administrator determines the exercise price of options granted under
the 1998 Stock Plan, but with respect to nonstatutory stock options intended to
qualify as performance-based compensation within
 
                                       43

<PAGE>   47
 
the meaning of Section 162(m) of the Internal Revenue Code and all incentive
stock options, the exercise price must at least be equal to the fair market
value of our common stock on the date of grant. The term of an incentive stock
option may not exceed 10 years, except that with respect to any participant who
owns 10% of the voting power of all classes of our outstanding capital stock,
the term must not exceed five years and the exercise price must equal at least
110% of the fair market value on the grant date. The administrator determines
the term of all other options.
 
     No optionee may be granted an option to purchase more than 1,000,000 shares
in any fiscal year. In connection with his or her initial service, an optionee
may be granted options to purchase up to an additional 1,000,000 shares.
 
     After termination of one of our employees, directors or consultants, he or
she may exercise his or her option for the period of time stated in the option
agreement. Generally, if termination is due to death or disability, the option
will remain exercisable for 12 months. In all other cases, the option will
generally remain exercisable for three months. However, an option may never be
exercised later than the expiration of its term.
 
     Our 1998 Stock Plan provides for the periodic automatic grant of options to
our nonemployee directors. Each option granted under this automatic grant
provision will have an exercise price per share equal to 100% of the fair market
value per share of our common stock on the date of grant, and will have a term
of 10 years, unless terminated earlier upon the optionee's termination of
service as a director.
 
     Our 1998 Stock Plan generally does not allow for the transfer of options
and only the optionee may exercise an option during his or her lifetime. The
administrator may, however, allow options to be transferable.
 
     Our 1998 Stock Plan provides that in the event of our merger with or into
another corporation or a sale of substantially all of our assets, the successor
corporation will assume or substitute each option. If the outstanding options
are not assumed or substituted, the administrator will provide notice to the
optionee that he or she has the right to exercise the options as to all of the
shares subject to the option, including shares which would not otherwise be
exercisable, for a period of 15 days from the date of the notice. The option
will terminate upon the expiration of the 15-day period.
 
     Our 1998 Stock Plan will automatically terminate in 2008, unless we
terminate it sooner. In addition, our board of directors has the authority to
amend, suspend or terminate the 1998 Stock Plan provided it does not adversely
affect any option previously granted under our 1998 Stock Plan.
 
2000 Employee Stock Purchase Plan.
 
     Our board of directors adopted the 2000 Employee Stock Purchase Plan in
April 2000 and our stockholders subsequently approved it. Our 2000 Employee
Stock Purchase Plan provides eligible employees the opportunity to purchase
shares of our common stock at a discount through payroll deductions.
 
     A total of 500,000 shares of our common stock are authorized for issuance
under the 2000 Employee Stock Purchase Plan. In addition, the number of shares
authorized for issuance under the 2000 Employee Stock Purchase Plan will
increase annually on the first day of each fiscal year, beginning with our
fiscal year 2001, equal to the lesser of 1% of the outstanding shares of our
common stock on the last day of the immediately preceding fiscal year, 500,000
shares, or such other amount as may be determined by our board of directors.
 
                                       44

<PAGE>   48
 
     Our board of directors or a committee of our board administers the 2000
Employee Stock Purchase Plan. Our board of directors or its committee has full
and exclusive authority to interpret the terms of the 2000 Employee Stock
Purchase Plan.
 
     All of our employees are eligible to participate if they are customarily
employed by us or any participating subsidiary for at least 20 hours per week
and more than five months in any calendar year. However, an employee may not be
granted an option to purchase stock under the 2000 Employee Stock Purchase Plan
if such employee:
 
     - immediately after grant owns stock possessing 5% or more of the total
       combined voting power or value of all classes of our capital stock, or
 
     - whose rights to purchase stock under all of our employee stock purchase
       plans accrue at a rate that exceeds $25,000 worth of stock for each
       calendar year.
 
     Our 2000 Employee Stock Purchase Plan is intended to qualify under Section
423 of the Internal Revenue Code and contains consecutive, overlapping 24-month
offering periods. Each offering period includes four 6-month purchase periods.
The offering periods generally start on the first trading day on or after May
1st and November 1st of each year, except for the first such offering period
which will commence on the first trading day on or after the effective date of
this offering and will end on the last trading day on or after May 1, 2002.
 
     Our 2000 Employee Stock Purchase Plan permits participants to purchase
common stock through payroll deductions of up to 15% of their eligible
compensation which includes a participant's base straight time gross earnings. A
participant may purchase a maximum of 7,500 shares during a 6-month purchase
period.
 
     Amounts deducted from a participant's eligible compensation and accumulated
during a six month purchase period are used to purchase shares of our common
stock at the end of the six-month purchase period. The price is 85% of the lower
of the fair market value of our common stock at the beginning of an offering
period or at the end of a purchase period. If the fair market value at the end
of a purchase period is less than the fair market value at the beginning of the
offering period, participants will be withdrawn from the current offering period
following their purchase of shares on the purchase date and will be
automatically re-enrolled in a new offering period. Participants may end their
participation at any time during an offering period, and will be paid their
payroll deductions to date. Participation ends automatically upon termination of
employment with us.
 
     A participant may not transfer rights granted under the 2000 Employee Stock
Purchase Plan other than by will, the laws of descent and distribution or as
otherwise provided under the 2000 Employee Stock Purchase Plan.
 
     In the event of our merger with or into another corporation or a sale of
all or substantially all of our assets, a successor corporation may assume or
substitute each outstanding option. If the successor corporation refuses to
assume or substitute for the outstanding options, the offering period then in
progress will be shortened, and a new exercise date will be set.
 
     Our 2000 Employee Stock Purchase Plan will terminate in 2010. However, our
board of directors has the authority to amend or terminate our 2000 Employee
Stock Purchase Plan, except that, subject to certain exceptions described in the
2000 Employee Stock Purchase Plan, no such action may adversely affect any
outstanding rights to purchase stock under our 2000 Employee Stock Purchase
Plan.
 
                                       45

<PAGE>   49
 

                 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
PREFERRED STOCK
 
     In August and October 1998, we sold a total of 2,659,489 shares of our
series A convertible preferred stock at a price of $1.00 per share. In October
and November 1999, we sold a total of 5,405,405 shares of our series B
redeemable convertible preferred stock at a price of $1.85 per share. In
February 2000, we sold a total of 3,044,018 shares of our series C redeemable
convertible preferred stock at a price of $5.00 per share. The following
officers, directors and 5% stockholders purchased shares of our preferred stock
in these financings:
 

<TABLE>
<CAPTION>
                      PURCHASER                        SERIES A     SERIES B     SERIES C
                      ---------                        ---------    ---------    ---------
<S>                                                    <C>          <C>          <C>
John Griffin and entities and persons affiliated with
  Blue Ridge Limited Partnership.....................  1,000,000      270,270      440,000
Cascade Investment, LLC..............................         --           --    2,000,000
GMS Capital Partners, L.P............................         --    1,000,000      146,070
TVM-Techno Venture Management III GmbH...............         --    1,459,449      184,655
Nadav Friedmann, M.D., Ph.D..........................     20,000           --           --
Sanford R. Robertson.................................    200,000           --           --
Entities affiliated with Michael J. O'Donnell........         --       12,838        1,876
</TABLE>

 
INVESTOR RIGHTS AGREEMENT
 
     We have entered into an agreement pursuant to which these and other
preferred stockholders will have registration rights with respect to their
shares of common stock following this offering. For a description of these
registration rights, see "Description of Capital Stock." Concurrently with the
completion of this offering, all shares of our outstanding preferred stock will
be automatically converted into an equal number of shares of common stock.
 
INDEMNIFICATION
 
     We have entered into indemnification agreements with each of our directors
and executive officers. Such indemnification agreements require us to indemnify
our directors and officers to the fullest extent permitted by Delaware law. See
"Limitation on Directors' Liability and Indemnification."
 
SEVERANCE ARRANGEMENTS
 
     We executed employment offer letters for Mr. Johnson and Mr. Jennings in
November and December 1999, respectively. Pursuant to these offer letters, Mr.
Johnson and Mr. Jennings receive annual base salaries of $155,000 and $195,000,
respectively. In addition, Mr. Johnson was permitted to purchase 190,000 shares
of our common stock at a per share exercise price of $0.20 subject to our
repurchase right, and Mr. Jennings received an option to purchase 225,000 shares
of our common stock at a per share exercise price of $1.00. We may terminate
either officer's employment at any time and for any reason or no reason.
However, if we terminate Mr. Johnson's employment without cause after November
23, 2000, or Mr. Jennings' employment without cause after December 3, 2000, we
must pay severance equal to the officer's base salary until the sooner of the
date that he secures new employment, or the date that is three months after the
date of his termination. Neither officer will receive any severance if we
terminate his employment within the first year, if he voluntarily terminates his
employment any time, or if we terminate him for cause at any time.
 
                                       46

<PAGE>   50
 
                             PRINCIPAL STOCKHOLDERS
 
     The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of March 31, 2000 and as adjusted to
reflect the sale of common stock offered hereby by the following:
 
     - each stockholder known by us to own beneficially more than 5% of our
       common stock;
 
     - each of our executive officers named in the compensation table above;
 
     - each of our directors; and
 
     - all directors and executive officers as a group.
 
     As of March 31, 2000, there would have been 20,827,142 shares of our common
stock outstanding, assuming that all outstanding preferred stock has been
converted into common stock. Except as otherwise indicated, we believe that the
beneficial owners of the common stock listed below, on the information furnished
by such owners, have sole voting power and investment power with respect to such
shares. Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percent ownership of that person, shares
of common stock subject to options or warrants held by that person that are
currently exercisable or that will become exercisable within 60 days after March
31, 2000 are deemed outstanding, while such shares are not deemed outstanding
for purposes of computing percent ownership of any other person. Unless
otherwise indicated in the footnotes below, the persons and entities named in
the table have sole voting and investment power with respect to all shares
beneficially owned, subject to community property laws where applicable. The
address for those individuals for which an address is not otherwise indicated is
250 Grand Avenue, Suite 70, South San Francisco, California 94080.
 

<TABLE>
<CAPTION>
                                                                              PERCENT OF SHARES
                                                             SHARES            OUTSTANDING(2)
                                                          BENEFICIALLY    -------------------------
                                                          OWNED PRIOR     PRIOR TO
          NAME OR GROUP OF BENEFICIAL OWNERS             TO OFFERING(1)   OFFERING   AFTER OFFERING
          ----------------------------------             --------------   --------   --------------
<S>                                                      <C>              <C>        <C>
William H. Gates, III(3)...............................     2,000,000        9.6%          7.7%
  2365 Carillon Point
  Kirkland, WA 98033
TVM-Techno Venture Management III GmbH(4)..............     1,644,104        7.9           6.4
  101 Arch Street, Suite 1950
  Boston, MA 02110
John Griffin(5)........................................     1,710,270        8.2           6.6
  Blue Ridge Limited Partnership
  660 Madison Avenue
  New York, NY 10021
GMS Capital Partners, L.P.(6)..........................     1,146,070        5.5           4.4
  405 Park Avenue, 16th Floor
  New York, NY 10022
Remi Barbier(7)........................................     8,180,000       39.3          31.7
Gert Caspritz, Ph.D.(8)................................     1,644,104        7.9           6.4
  101 Arch Street, Suite 1950
  Boston, MA 02110
Sanford R. Robertson(9)................................       258,333        1.2           1.0
  One Maritime Plaza, Suite 2500
  San Francisco, CA 94111
David L. Johnson(10)...................................       190,000          *             *
Barry M. Sherman, M.D.(11).............................       114,584          *             *
</TABLE>

 
                                       47

<PAGE>   51
 

<TABLE>
<CAPTION>
                                                                              PERCENT OF SHARES
                                                             SHARES            OUTSTANDING(2)
                                                          BENEFICIALLY    -------------------------
                                                          OWNED PRIOR     PRIOR TO
          NAME OR GROUP OF BENEFICIAL OWNERS             TO OFFERING(1)   OFFERING   AFTER OFFERING
          ----------------------------------             --------------   --------   --------------
<S>                                                      <C>              <C>        <C>
Nadav Friedmann, M.D., Ph.D.(12).......................       128,333          *             *
  91 Bacon Court
  Lafayette, CA 94549
Michael J. O'Donnell(13)...............................        65,756          *             *
  Wilson Sonsini Goodrich & Rosati
  650 Page Mill Road
  Palo Alto, CA 94304-1050
Edmon R. Jennings(14)..................................        14,063          *             *
Wilfred R. Konneker, Ph.D..............................            --         --            --
  Konneker Development Corporation
  142 Enchanted Parkway, Suite 200
  Manchester, MO 63021
All directors and executive officers as a group
  (9 persons)(15)......................................    10,595,173       50.9%         41.0%
</TABLE>

 
-------------------------
  *  Represents beneficial ownership of less than one percent (1%) of the
     outstanding shares of the Company's Common Stock.
 
 (1) Beneficial ownership is determined with the rules of the Securities and
     Exchange Commission and generally includes voting or investment power with
     respect to securities. Shares of Common Stock subject to stock options and
     warrants currently exercisable or exercisable within 60 days are deemed to
     be outstanding for computing the percentage ownership of the person holding
     such options and the percentage ownership of any group of which the holder
     is a member, but are not deemed outstanding for computing the percentage of
     any other person. Except as indicated by footnote, and subject to community
     property laws where applicable, the persons named in the table have sole
     voting and investment power with respect to all shares of Common Stock
     shown beneficially owned by them.
 
 (2) Applicable percentage of ownership is based on 20,827,142 shares of Common
     Stock outstanding prior to this offering.
 
 (3) Includes 2,000,000 shares held by Cascade Investment, LLC, which is
     controlled by William H. Gates, III.
 
 (4) TVM Techno Venture Management III GmbH is controlled by its two Managing
     Directors, Helmut Schuhsler and Friedrich Bornikee.
 
 (5) Includes 1,090,270 shares held by Blue Ridge Limited Partnership, 40,000
     shares held by Blue Ridge Private Equity Fund, and 580,000 shares held by
     John Griffin. All of the shares held by Blue Ridge Limited Partnership and
     Blue Ridge Private Equity Fund are beneficially owned by John Griffin.
 
 (6) GMS Capital Investments, L.L.C. is the general partner of GMS Capital
     Partners, L.P. Joachim Gfeeller, David Meek and Andrew Stallman are the
     managing members of GMS Capital Investments, L.L.C.
 
 (7) All of these shares are subject to our right of repurchase which lapses
     over time.
 
 (8) Includes 1,644,104 shares held by TVM-Techno Venture Management III GmbH.
     Dr. Caspritz, a Director of the Company, is the Investment Manager of
     TVM-Techno Venture Management.
 
                                       48

<PAGE>   52
 
     Dr. Caspritz disclaims beneficial ownership of the shares held by
     TVM-Techno Venture Management III GmbH, except to the extent of his
     partnership interest in such shares.
 
 (9) Includes 8,333 shares issuable pursuant to options exercisable within 60
     days of March 31, 2000.
 
(10) All of these shares are subject to our right of repurchase which lapses
     over time.
 
(11) Includes 114,584 shares issuable pursuant to options exercisable within 60
     days of March 31, 2000.
 
(12) Includes 8,333 shares issuable pursuant to options exercisable within 60
     days of March 31, 2000.
 
(13) Includes 45,000 shares held by WS Investment Company 98B, 12,162 shares
     held by WS Investment Company 99B, 1,777 shares held by WS Investment
     Company 2000A, 5,775 shares held by Michael J. O'Donnell and 1,042 shares
     issuable to Mr. O'Donnell pursuant to options exercisable within 60 days of
     March 31, 2000. Mr. O'Donnell, a Director of the Company, is a General
     Partner of WS Investment Company. Mr. O'Donnell disclaims beneficial
     ownership of the shares held by WS Investment Company, except to the extent
     of his partnership interest in such shares. Mr. O'Donnell is also a partner
     in Wilson Sonsini Goodrich & Rosati, our corporate counsel.
 
(14) Includes 14,063 shares issuable pursuant to options exercisable within 60
     days of March 31, 2000.
 
(15) Includes 146,355 shares issuable pursuant to options exercisable within 60
     days of March 31, 2000.
 

                          DESCRIPTION OF CAPITAL STOCK
 
     Upon the completion of this offering, we will be authorized to issue
shares, $0.001 par value per share, to be divided into two classes to be
designated common stock and preferred stock. Of the shares authorized,
120,000,000 shares shall be designated as common stock and 10,000,000 shares
shall be designated as preferred stock. The following description of our capital
stock is only a summary. For a complete description of our capital stock, you
should refer to our certificate of incorporation and bylaws as in effect upon
the completion of this offering, which are included as exhibits to the
registration statement of which this prospectus forms a part, and to the
provisions of applicable Delaware law.
 
COMMON STOCK
 
     As of March 31, 2000, assuming the conversion of all outstanding shares of
preferred stock into common stock, there were 20,827,142 shares of common stock
outstanding which were held by approximately 85 stockholders. There will be
25,827,142 shares of common stock outstanding (assuming no exercise of the
underwriters' over-allotment option and no exercise of outstanding options after
March 31, 2000) after giving effect to the sale of our common stock in this
offering. In addition to 1,757,970 shares issuable upon exercise of outstanding
options, and 223,800 shares available for issuance under our 1998 Stock Plan, as
amended there are an aggregate of 500,000 shares reserved for issuance under our
2000 Employee Stock Purchase Plan. See "Management -- Stock Plans" for a
description of our stock plans.
 
     The holders of our common stock are entitled to one vote per share held of
record on all matters submitted to a vote of the stockholders. Our amended and
restated certificate of incorporation to be filed concurrently with completion
of this offering, does not provide for cumulative voting in the election of
directors. Subject to preferences that may be applicable to any outstanding
preferred stock, the holders of common stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by our board of
directors out of funds legally available for that purpose. In the event of our
liquidation, dissolution or winding up, holders of our common stock are entitled
to share ratably in all assets remaining after payment of liabilities, subject
to prior distribution rights of preferred stock, if any, then outstanding.
Holders of our common stock have no preemptive or other subscription or
conversion rights. There are no redemption or sinking fund provisions applicable
to our common stock. All outstanding
 
                                       49

<PAGE>   53
 
shares of common stock are fully paid and non-assessable, and the shares of
common stock to be issued upon the completion of this offering will be fully
paid and non-assessable.
 
PREFERRED STOCK
 
     Upon the completion of this offering and filing of our amended and restated
certificate of incorporation, we will not have any shares of preferred stock
outstanding, however, our board of directors will be authorized, without action
by the stockholders, to issue up to 10,000,000 shares of preferred stock in one
or more series and to fix the rights, preferences, privileges and restrictions
of each series. These rights, preferences and privileges may include dividend
rights, conversion rights, voting rights, terms of redemption, liquidation
preferences, sinking fund terms and the number of shares constituting any series
or the designation of any series, all or any of which may be greater than the
rights of the common stock.
 
     The issuance of preferred stock could adversely affect the voting power of
holders of common stock and the likelihood that the holders of common stock will
receive dividend payments and payments upon liquidation. In addition, the
issuance of preferred stock could have the effect of delaying or preventing a
change in our control without further action by the stockholders. We have no
present plans to issue any shares of preferred stock.
 
WARRANTS TO PURCHASE COMMON STOCK
 
     As of March 31, 2000, we had the following warrants outstanding to purchase
a total of 340,000 shares of our capital stock:
 
     - 70,000 shares of our common stock at an exercise price of $1.00 per
       share, terminating 2005;
 
     - 120,000 shares of our common stock at an exercise price of $5.00 per
       share terminating 2005; and
 
     - 150,000 shares of our series A convertible preferred stock which are
       convertible into 150,000 shares or our common stock at an exercise price
       of $1.00 per share, terminating June 5, 2010.
 
REGISTRATION RIGHTS
 
     Pursuant to a registration rights agreement we entered into with holders of
11,108,912 shares of our common stock (assuming conversion of all outstanding
shares of preferred stock), the holders of these shares are entitled to certain
registration rights regarding these shares. The registration rights provide that
if we propose to register any securities under the Securities Act, either for
our own account or for the account of other security holders exercising
registration rights, they are entitled to notice of the registration and are
entitled to include shares of their common stock in the registration. This right
is subject to conditions and limitations, including the right of the
underwriters in an offering to limit the number of shares included in the
registration. The holders of these shares may also require us to file up to two
registration statements under the Securities Act at our expense with respect to
their shares of common stock. We are required to use our best efforts to effect
this registration, subject to conditions and limitations. Furthermore, the
holders of these shares may require us to file additional registration
statements on Form S-3, subject to conditions and limitations. These rights
terminate on the earlier of five years after the effective date of this
offering, the date on which all securities subject to registration rights have
been sold, or when a holder is able to sell all its shares pursuant to Rule 144
under the Securities Action in any 90-day period.
 
                                       50

<PAGE>   54
 
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
 
     Certain provisions of Delaware law and our certificate of incorporation and
bylaws could make the following transactions more difficult:
 
     - the acquisition of us by means of a tender offer;
 
     - the acquisition of us by proxy contest or other means; and
 
     - the removal of our incumbent officers and directors.
 
     These provisions, summarized below, are expected to discourage certain
types of coercive takeover practices and inadequate takeover bids and to
encourage persons seeking to acquire control of us to first negotiate with us.
We believe that the benefits of increased protection of our potential ability to
negotiate with the proponent of an unfriendly or unsolicited proposal to acquire
or restructure our company outweighs the disadvantages of discouraging such
proposals because, among other things, negotiation of such proposals could
result in an improvement of their terms. The amendment of any of the following
provisions would require approval by holders of at least 66 2/3% of our
outstanding common stock.
 
     Election and Removal of Directors. Effective with the first annual meeting
of stockholders following completion of this offering, our amended and restated
bylaws provide for the division of our board of directors into three classes, as
nearly equal in number as possible, with the directors in each class serving for
a three-year term, and one class being elected each year by our stockholders.
This system of electing and removing directors may tend to discourage a third
party from making a tender offer or otherwise attempting to obtain control of us
and may maintain the incumbency of the board of directors, as it generally makes
it more difficult for stockholders to replace a majority of the directors.
Further, our amended and restated certificate of incorporation filed in
connection with this offering and restated bylaws do not provide for cumulative
voting in the election of directors.
 
     Stockholder Meetings. Under our amended and restated certificate of
incorporation and amended and restated bylaws, only our board of directors,
chairman of the board or chief executive officer may call special meetings of
stockholders. Our restated bylaws establish advance notice procedures with
respect to stockholder proposals and the nomination of candidates for election
as directors, other than nominations made by or at the direction of the board of
directors or a committee thereof. In addition, our amended and restated
certificate of incorporation eliminates the right of stockholders to act by
written consent without a meeting and eliminates cumulative voting.
 
     Undesignated Preferred Stock. The authorization of undesignated preferred
stock makes it possible for the board of directors to issue preferred stock with
voting or other rights or preferences that could impede the success of any
attempt to change control of us. These and other provisions may have the effect
of deterring or delaying hostile takeovers or delaying changes in control or
management.
 
     Section 203. We are subject to Section 203 of the Delaware General
Corporation Law. In general, the statute prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that the stockholder became an
interested stockholder unless:
 
     - prior to the date, the board of directors of the corporation approved
       either the business combination or the transaction that resulted in the
       stockholder becoming an interested stockholder;
 
     - upon consummation of the transaction that resulted in the stockholder's
       becoming an interested stockholder, the interested stockholder owned at
       least 85% of the voting stock of the corporation outstanding at the time
       the transaction commenced, excluding those shares owned by persons
 
                                       51

<PAGE>   55
 
       who are directors and also officers, and employee stock plans in which
       employee participants do not have the right to determine confidentially
       whether shares held subject to the plan will be tendered in a tender or
       exchange offer; or
 
     - on or subsequent to the date, the business combination is approved by the
       board of directors and authorized at an annual or special meeting of
       stockholders, and not by written consent, by the affirmative vote of at
       least two-thirds of the outstanding voting stock that is not owned by the
       interested stockholder.
 
     Section 203 defines "business combination" to include:
 
     - any merger or consolidation involving the corporation and the interested
       stockholder;
 
     - any sale, transfer, pledge or other disposition involving the interested
       stockholder of 10% or more of the assets of the corporation;
 
     - subject to exceptions, any transaction that results in the issuance or
       transfer by the corporation of any stock of the corporation to the
       interested stockholder; or
 
     - the receipt by the interested stockholder of the benefit of any loans,
       advances, guarantees, pledges or other financial benefits provided by or
       through the corporation.
 
     In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by the entity or person.
 
TRANSFER AGENT AND REGISTRAR
 
     The transfer agent and registrar for the common stock is ChaseMellon
Shareholder Services, LLC.
 
THE NASDAQ STOCK MARKET'S NATIONAL MARKET LISTING
 
     We have applied to list our common stock on The Nasdaq Stock Market's
National Market under the symbol "PTIE."
 
                                       52

<PAGE>   56
 
                        SHARES ELIGIBLE FOR FUTURE SALE
 
     Prior to this offering, there has been no public market for our stock.
After we complete this offering, based upon the number of shares outstanding at
March 31, 2000, there will be 25,827,142 shares of our common stock outstanding.
Of these outstanding shares, the 5,000,000 shares sold in this offering will be
freely tradable without restriction or further registration under the Securities
Act of 1933, except that any shares purchased by our "affiliates", as that term
is defined in Rule 144 under the Securities Act, may generally only be sold in
compliance with the limitations of Rule 144 described below.
 
LOCK-UP AGREEMENTS
 
     20,967,091 shares of our common stock outstanding after this offering will
be subject to lock-up agreements which expire 180 days after the date of this
prospectus. Upon expiration of the 180-day lock-up period, all of these shares
will be eligible for sale in the public market subject to the provisions of Rule
144 or Rule 701 under the Securities Act. In the lock-up agreements, our
stockholders agreed that, for a period of 180 days after the date of this
prospectus, they will not sell, contract to sell or otherwise dispose of any
shares of our common stock, or any shares convertible into or exchangeable for
shares of our common stock, owned directly by them or with respect to which they
have the power of disposition, without the prior written consent of Thomas
Weisel Partners LLC.
 
SALES OF RESTRICTED SHARES
 
     In addition to being subject to the lock-up agreements 20,967,091 shares
are deemed "restricted securities" under Rule 144. In general under Rule 144 a
stockholder, including one of our affiliates, who has beneficially owned his or
her restricted securities for at least one year is entitled to sell, within any
three-month period commencing 90 days after the date of this prospectus, a
number of shares that does not exceed the greater of 1% of the then outstanding
shares of common stock (approximately 258,000 shares immediately after this
offering) or the average weekly trading volume in our common stock during the
four calendar weeks preceding the date on which notice of the sale was filed
under Rule 144, provided requirements concerning availability of public
information, manner of sale and notice of sale are satisfied. In addition, a
stockholder that is not one of our affiliates at any time during the three
months preceding a sale and who has beneficially owned the shares proposed to be
sold for at least two years is entitled to sell the shares immediately under
Rule 144(k) without compliance with the above described requirements of Rule
144.
 
     In general, under Rule 701 of the Securities Act as currently in effect,
any of our employees, consultants or advisors who purchase shares from us under
a stock option plan or other written agreement can resell those shares 90 days
after the effective date of this offering in reliance on Rule 144, but without
complying with some of the restrictions, including the holding period, contained
in Rule 144.
 
STOCK OPTIONS
 
     We intend to file registration statements on Form S-8 under the Securities
Act to register an aggregate of 5,200,000 shares of common stock issuable under
our 1998 Stock Plan and the 2000 Employee Stock Purchase Plan. Shares issued
upon exercise of stock options after the effective date of the Form S-8
registration statements will be eligible for resale in the public market without
restriction, subject to Rule 144 limitations applicable to affiliates and the
lock-up agreements noted above, if applicable.
 
                                       53

<PAGE>   57
 
REGISTRATION RIGHTS
 
     Upon completion of this offering, the holders of 11,108,912 shares of our
common stock and of warrants to purchase 150,000 shares of our series A
convertible preferred stock and warrants to purchase 120,000 shares of our
common stock will be entitled to rights with respect to the registration of
their shares under the Securities Act even if the shares would have been subject
to Rule 144 restrictions. Please see "Description of Capital
Stock -- Registration Rights" for a more detailed description of these
registration rights. After registration, these shares will become freely
tradable without restriction under the Securities Act. Any sales of securities
by these shareholders could have a material adverse effect on the trading price
of our common stock.
 
                                       54

<PAGE>   58
 
               UNITED STATES TAX CONSEQUENCES TO NON-U.S. HOLDERS
 
     The following is a general discussion of the principal United States
federal income and estate tax consequences of the acquisition, ownership and
disposition of our common stock by a Non-U.S. Holder. As used in this
prospectus, the term "Non-U.S. Holder" is a person who holds our common stock
other than:
 
     - a citizen or resident of the United States,
 
     - a corporation or other entity taxable as a corporation created or
       organized in or under the laws of the United States or of any political
       subdivision of the United States,
 
     - an estate the income of which is includable in gross income for United
       States federal income tax purposes regardless of its source, or
 
     - a trust subject to the primary supervision of a United States court and
       the control of one or more United States persons, or a trust (other than
       a wholly-owned grantor trust) that was treated as a domestic trust
       despite not meeting the requirements described above.
 
     This discussion does not consider:
 
     - state, local or foreign tax consequences,
 
     - specific facts and circumstances that may be relevant to a particular
       Non-U.S. Holder's tax position in light of their particular
       circumstances,
 
     - the tax consequences for the stockholders or beneficiaries of a Non-U.S.
       holder,
 
     - special tax rules that may apply to certain Non-U.S. Holders, including
       without limitation, partnerships, banks, insurance companies, dealers in
       securities and traders in securities, or
 
     - special tax rules that may apply to a Non-U.S. Holder that holds our
       common stock as part of a "straddle," "hedge" or "conversion
       transaction."
 
     The following discussion is based on provisions of the United States
Internal Revenue Code of 1986, as amended, also known as the Code, applicable
Treasury regulations and administrative and judicial interpretations, all as of
the date of this prospectus, and all of which are subject to change,
retroactively or prospectively. The following discussion assumes that our common
stock is held as a capital asset. The following summary is for general
information. Accordingly, each Non-U.S. Holder should consult a tax advisor
regarding the United States federal, state, local and foreign income and other
tax consequences of acquiring, holding and disposing of shares of our common
stock.
 
DIVIDENDS
 
     We do not anticipate paying cash dividends on our common stock in the
foreseeable future. See "Dividend Policy." In the event, however, that dividends
are paid on shares of our common stock, dividends paid to a Non-U.S. Holder of
our common stock generally will be subject to withholding of United States
federal income tax at a 30% rate, or such lower rate as may be provided by an
applicable income tax treaty. Non-U.S. Holders should consult their tax advisors
regarding their entitlement to benefits under a relevant income tax treaty.
 
     Dividends that are effectively connected with a Non-U.S. Holder's conduct
of a trade or business in the United States or, if an income tax treaty applies,
attributable to a permanent establishment in the United States, known as United
States trade or business income, are generally subject to United States federal
income tax on a net income basis at regular graduated rates, but are not
generally subject to the
 
                                       55

<PAGE>   59
 
30% withholding tax if the Non-U.S. Holder files the appropriate United States
Internal Revenue Service form with the payor. Any United States trade or
business income received by a Non-U.S. Holder that is a corporation may also,
under certain circumstances, be subject to an additional "branch profits tax" at
a 30% rate or such lower rate as specified by an applicable income tax treaty.
 
     Dividends paid prior to 2001 to an address in a foreign country are
presumed, absent actual knowledge to the contrary, to be paid to a resident of
such country for purposes of the withholding discussed above and for purposes of
determining the applicability of a tax treat rate. For dividends paid after
2000, a Non-U.S. Holder of our common stock who clams the benefit of an
applicable income tax treaty rate generally will be required to satisfy
applicable certification and other requirements.
 
     A Non-U.S. Holder of our common stock that is eligible for a reduced rate
of United States withholding tax under an income tax treaty may obtain a refund
or credit of any excess amounts withheld by filing an appropriate claim for a
refund with the United States Internal Revenue Services.
 
GAIN ON DISPOSITION OF COMMON STOCK
 
     A Non-U.S. Holder generally will not be subject to United States federal
income tax in respect of gain recognized on a disposition of our common stock
unless:
 
     - the gain is United States trade or business income, in which case the
       branch profits tax described above may apply to a corporate Non-U.S.
       Holder,
 
     - the Non-U.S. Holder is an individual who holds our common stock as a
       capital asset within the meaning of Section 1221 of the Code, is present
       in the United States for more than 182 days in the taxable year of the
       disposition and meets certain other requirements,the Non-U.S. Holder is
       subject to tax pursuant to the provisions of the United States tax law
       applicable to certain United States expatriates, or
 
     - we are or have been a United States real property holding corporation for
       United States federal income tax purposes at any time during the shorter
       of the five-year period ending on the date of disposition of the period
       that the Non-U.S. Holder held our common stock.
 
     Generally, a corporation is a United States real property holding
corporation if the fair market value of its United States real property
interest, such as interest in real property located in the United States or the
Virgin islands, and certain interests in other United States real property
holding corporations, equals or exceeds 50% of the sum of the fair market value
of its worldwide real property interests plus its other assets used or held for
use in a trade or business. We believe we have never been, are not currently and
are not likely to become a United States real property holding corporation for
United States federal income tax purposes.
 
FEDERAL ESTATE TAX
 
     Common stock owned or treated as owned by an individual who is a Non-U.S.
Holder at the time of death will be included in the individual's gross estate
for United States federal estate tax purposes, unless an applicable estate tax
or other treaty provides otherwise.
 
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
 
     We must report annually to the United States Internal Revenue Service and
to each Non-U.S. Holder the amount of dividends paid to that holder and the tax
withheld with respect to those dividends. Copies of the information returns
reporting those dividends and withholding may also be made available
 
                                       56

<PAGE>   60
 
to the tax authorities in the country in which the Non-U.S. Holder is a resident
under the provisions of an applicable income tax treaty or agreement.
 
     Under certain circumstances, United States Treasury Regulations require
information reporting and backup withholding at a rate of 31% on certain
payments on our common stock. Under currently applicable law, Non-U.S. Holders
of our common stock, generally will be exempt from these information reporting
requirements and from backup withholding on dividends paid prior to 2001 to an
address outside the United States. For dividends paid after 2000, however, a
Non-U.S. Holder of our common stock that fails to certify its Non-U.S. holder
status in accordance with applicable United States Treasury Regulations may be
subject to backup withholding at a rate of 31% of dividends.
 
     The payment of the proceeds of the disposition of our common stock by a
holder to or through the United States office of a broker generally will be
subject to information reporting and backup withholding at a rate of 31% unless
the holder either certifies its status as a Non-U.S. Holder under penalties of
perjury or otherwise establishes an exemption. The payment of the proceeds of
the disposition by a Non-U.S. Holder of our common stock to or through a foreign
office of a foreign broker will not be subject to backup withholding or
information reporting unless the foreign broker will not be subject to backup
withholding or information reporting unless the foreign broker is a United
States related person. In the case of the payment of proceeds from the
disposition of our common stock by or through a foreign office of a broker that
is a United States person or a "United States related person," information
reporting, but currently not backup withholding, on the payment applies unless
the broker receives a statement from the owner, signed under penalty of perjury,
certifying its foreign status or the broker has documentary evidence in its
files that the holder is a Non-U.S. Holder and the broker has no actual
knowledge to the contrary. For this purpose, a United States related person is:
 
     - a "controlled foreign corporation" for United States federal income tax
       purposes,
 
     - a foreign person 50% or more of whose gross income from all sources for
       the three-year period ending with the close of its taxable year preceding
       the payment, or for such part of the period that the broker has been in
       existence, is derived from activities that are effectively connected with
       the conduct of a United State trade or business,
 
     - effective after 2000, a foreign partnership if, at any time during the
       taxable year, (A) at least 50% of the capital or profits interest in the
       partnership is owned by United States persons, or (B) the partnership is
       engaged in a United States trade or business, or
 
     - certain U.S. branches of foreign banks or insurance companies.
 
     Effective after 2000, backup withholding may apply to the payment of
disposition proceeds by or through a foreign office or a broker that is a United
States person or a United States related person unless certain certification
requirements are satisfied or an exemption is otherwise established and the
broker has no actual knowledge that the holder is a United States person.
Non-U.S. Holders should consult their own tax advisors regarding the application
of the information reporting and backup withholding rules to them, including
changes to these rules that will become effective after 2000.
 
     Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be refunded, or credited against the holder's United States
federal income tax liability, if any, provided that the required information is
furnished to the United States Internal Revenue Service.
 
                                       57

<PAGE>   61
 

                                  UNDERWRITING
 
GENERAL
 
     Subject to the terms and conditions set forth in an agreement among the
underwriters and us, each of the underwriters named below, through their
representatives, Thomas Weisel Partners LLC, CIBC World Markets Corp. and Tucker
Anthony Incorporated, has severally agreed to purchase from us the aggregate
number of shares of common stock set forth opposite its name below:
 

<TABLE>
<CAPTION>
                                                              NUMBER OF
                        UNDERWRITERS                           SHARES
                        ------------                          ---------
<S>                                                           <C>
Thomas Weisel Partners LLC..................................
CIBC World Markets Corp. ...................................
Tucker Anthony Incorporated.................................
                                                              ---------
  Total.....................................................  5,000,000
                                                              =========
</TABLE>

 
     The underwriting agreement provides that the obligations of the several
underwriters are subject to various conditions. The nature of the underwriters'
obligations commits them to purchase and pay for all of the shares of common
stock listed above if any are purchased.
 
     The underwriting agreement provides that we will indemnify the underwriters
against liabilities specified in the underwriting agreement under the Securities
Act or will contribute to payments that the underwriters may be required to make
relating to these liabilities.
 
     Thomas Weisel Partners LLC expects to deliver the shares of common stock to
purchasers on                      , 2000.
 
OVER-ALLOTMENT OPTION
 
     We have granted a 30-day over-allotment option to the underwriters to
purchase up to a total of 750,000 additional shares of our common stock from us
at the initial public offering price, less the underwriting discounts and
commissions, as set forth on the cover page of this prospectus. If the
underwriters exercise this option in whole or in part, then each of the
underwriters will be separately committed, subject to conditions described in
the underwriting agreement, to purchase the additional shares of our common
stock in proportion to their respective commitments set forth in the table
above.
 
STOCK MARKET LISTING
 
     We expect our common stock will be quoted on the Nasdaq National Market
under the symbol "PTIE."
 
DETERMINATION OF OFFERING PRICE
 
     Before this offering, there has been no public market for our common stock.
The initial public offering price will be determined through negotiations
between us and the representatives. In addition to prevailing market conditions,
the factors to be considered in determining the initial public offering price
will include:
 
     - the valuation multiples of publicly-traded companies that the
       representatives believe are comparable to us;
 
     - our financial information;
 
                                       58

<PAGE>   62
 
     - our history and prospects and the outlook for our industry;
 
     - an assessment of our management, our past and present operations, and the
       prospects for, and timing of, our future revenues;
 
     - the present state of our development and the progress of our business
       plan; and
 
     - the above factors in relation to market values and various valuation
       measures of other companies engaged in activities similar to ours.
 
     An active trading market for our shares may not develop. Even if an active
market does develop, the public price at which our shares trade in the future
may be below the offering price.
 
COMMISSIONS AND DISCOUNTS
 
     The underwriters propose to offer the shares of common stock directly to
the public at the public offering price set forth on the cover page of this
prospectus, and at this price less a concession not in excess of $     per share
of common stock to other dealers specified in a master agreement among
underwriters who are members of the National Association of Securities Dealers,
Inc. The underwriters may allow, and the other dealers specified may reallow,
concessions, not in excess of $0.10 per share of common stock to these other
dealers. After this offering, the offering price, concessions and other selling
terms may be changed by the underwriters. Our common stock is offered subject to
receipt and acceptance by the underwriters and to other conditions, including
the right to reject orders in whole or in part.
 
     The following table summarizes the compensation to be paid to the
underwriters by us and the expenses payable by us:
 

<TABLE>
<CAPTION>
                                                                            TOTAL
                                                               --------------------------------
                                                                  WITHOUT             WITH
                                                  PER SHARE    OVER-ALLOTMENT    OVER-ALLOTMENT
                                                  ---------    --------------    --------------
<S>                                               <C>          <C>               <C>
Underwriting discounts and commissions paid by
  us............................................    $            $                 $
Expenses payable by us..........................    $            $                 $
</TABLE>

 
INDEMNIFICATION OF THE UNDERWRITERS
 
     We will indemnify the underwriters against some civil liabilities,
including liabilities under the Securities Act and liabilities arising from
breaches of our representations and warranties contained in the underwriting
agreement. If we are unable to provide this indemnification, we will contribute
to payments the underwriters may be required to make in respect of those
liabilities.
 
RESERVED SHARES
 
     The underwriters, at our request, have reserved for sale at the initial
public offering price up to 250,000 shares of common stock to be sold in this
offering for sale to our employees and other persons designated by us. The
number of shares available for sale to the general public will be reduced to the
extent that any reserved shares are purchased. Any reserved shares not purchased
in this manner will be offered by the underwriters on the same basis as the
other shares offered in this offering.
 
NO SALES OF SIMILAR SECURITIES
 
     Our directors, officers and securityholders holding a total of 20,967,091
shares of common stock have agreed or have a contractual obligation to agree,
subject to specified exceptions, not to offer, sell,
 
                                       59

<PAGE>   63
 
agree to sell, directly or indirectly, or otherwise dispose of any shares of
common stock or any securities convertible into or exchangeable for shares of
common stock without the prior written consent of Thomas Weisel Partners LLC for
a period of 180 days after the date of this prospectus.
 
     We have agreed that for a period of 180 days after the date of this
prospectus we will not, without the prior written consent of Thomas Weisel
Partners LLC, offer, sell, or otherwise dispose of any shares of common stock,
except for the shares of common stock offered in the offering and the shares of
common stock issuable upon exercise of outstanding options and warrants on the
date of this prospectus.
 
INFORMATION REGARDING THOMAS WEISEL PARTNERS LLC
 
     Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Thomas Weisel
Partners LLC has been named as a lead or co-manager on 164 filed public
offerings of equity securities, of which 120 have been completed, and has acted
as a syndicate member in an additional 95 public offerings of equity securities.
Thomas Weisel Partners LLC does not have any material relationship with us or
any of our officers, directors or controlling persons, except with respect to
its contractual relationship with us under the underwriting agreement entered
into in connection with this offering.
 
NASDAQ NATIONAL MARKET LISTING
 
     Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for our common stock was
determined through negotiations between us and representatives of the
underwriters. Some of the factors considered in these negotiations included our
results of operations in recent periods, estimates of our prospects and the
industry in which we compete, an assessment of our management, the general state
of the securities markets at the time of this offering and the prices of similar
securities of generally comparable companies. We have applied to have our common
stock quoted on the Nasdaq National Market under the symbol "PTIE". We cannot
assure you that an active or orderly trading market will develop for our common
stock or that our common stock will trade in the public markets subsequent to
this offering at or above the initial offering price.
 
DISCRETIONARY ACCOUNTS
 
     The underwriters do not expect sales of shares of common stock offered by
this prospectus to any accounts over which they exercise discretionary authority
to exceed five percent of the shares offered.
 
MARKET STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
 
     In order to facilitate this offering, persons participating in this
offering may engage in transactions that stabilize, maintain or otherwise affect
the price of our common stock during and after this offering. Specifically, the
underwriters may over-allot or otherwise create a short position in our common
stock for their own account by selling more shares of common stock than we have
sold to them. The underwriters may elect to cover any short position by
purchasing shares of common stock in the open market or by exercising the
over-allotment option granted to the underwriters. In addition, the underwriters
may stabilize or maintain the price of the common stock by bidding for or
purchasing shares of common stock in the open market and may impose penalty
bids. Under these penalty bids, selling concessions that are allowed to
syndicate members or other broker-dealers participating in this offering are
reclaimed if shares of common stock previously distributed in this offering are
repurchased, usually in order to stabilize the market. The effect of these
transactions may be to stabilize or maintain the market price at a level above
that which might otherwise prevail in the open market. No representation is made
as to the magnitude or
 
                                       60

<PAGE>   64
 
effect of any stabilization or other transaction. These transactions may be
effected on the Nasdaq National Market or otherwise and may be discontinued at
any time after they are commenced.
 

                                 LEGAL MATTERS
 
     The validity of the common stock offered hereby will be passed upon for us
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Legal matters will be passed upon for the underwriters by O'Melveny
& Myers LLP, San Francisco, California. As of the date of this prospectus,
investment partnerships composed of certain members of and persons associated
with Wilson Sonsini Goodrich & Rosati, Professional Corporation, in addition to
individual members of and persons associated with Wilson Sonsini Goodrich &
Rosati, Professional Corporation, beneficially own an aggregate of 64,714 shares
of our preferred and common stock.
 

                                    EXPERTS
 
     The financial statements of Pain Therapeutics, Inc. (a development stage
enterprise) as of December 31, 1998 and 1999, and for the period from May 4,
1998 (inception) through December 31, 1998, the year ended December 31, 1999,
and the period from May 4, 1998 (inception) through December 31, 1999 have been
included herein and in the registration statement in reliance upon the report of
KPMG LLP, independent certified public accountants, appearing elsewhere herein,
and upon the authority of said firm as experts in accounting and auditing.
 
                      WHERE YOU CAN FIND MORE INFORMATION
 
     We have filed with the Securities and Exchange Commission, Washington,
D.C., a registration statement on Form S-1 under the Securities Act with respect
to the shares of common stock offered hereby. This prospectus does not contain
all the information set forth in the registration statement and the exhibits and
schedules thereto. For further information with respect to us and our common
stock, you should refer to the registration statement and to the exhibits and
schedules filed therewith. Statements contained in this prospectus that describe
the contents of any contract or other document are not necessarily complete, and
in each instance reference is made to the copy of the contract or other document
filed as an exhibit to the registration statement, each statement being
qualified in all respects by this reference. A copy of the registration
statement may be inspected by anyone without charge at the Public Reference
Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of all or any portion of the registration
statement may be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of prescribed fees.
The public may obtain information on the operation of the public reference room
by calling the SEC at 1-800-SEC-0330. The Commission maintains a Web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission.
 
                                       61

<PAGE>   65
 
                            PAIN THERAPEUTICS, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
 

                         INDEX TO FINANCIAL STATEMENTS
 

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Independent Auditors' Report................................  F-2
Balance Sheets..............................................  F-3
Statements of Operations....................................  F-4
Statements of Stockholders' Equity (Deficit)................  F-5
Statements of Cash Flows....................................  F-6
Notes to Financial Statements...............................  F-7
</TABLE>

 
                                       F-1

<PAGE>   66
 

                          INDEPENDENT AUDITORS' REPORT
 
The Board of Directors
Pain Therapeutics, Inc.:
 
     We have audited the accompanying balance sheets of Pain Therapeutics, Inc.
(a development stage enterprise) as of December 31, 1998 and 1999, and the
related statements of operations, stockholders' equity (deficit) and cash flows
for the period from May 4, 1998 (inception) through December 31, 1998, for the
year ended December 31, 1999 and for the period from May 4, 1998 (inception)
through December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pain Therapeutics, Inc. (a
development stage enterprise) as of December 31, 1998 and 1999 and the results
of its operations and its cash flows for the period from May 4, 1998 (inception)
through December 31, 1998, for the year ended December 31, 1999 and for the
period from May 4, 1998 (inception) through December 31, 1999, in conformity
with generally accepted accounting principles.
 
                                          /s/ KPMG LLP
 
San Francisco, California
February 26, 2000, except as to note 7

which is as of March 9, 2000
 
                                       F-2

<PAGE>   67
 
                            PAIN THERAPEUTICS, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
 
                                 BALANCE SHEETS
 

<TABLE>
<CAPTION>
                                                                                       MARCH 31, 2000
                                                                                ----------------------------
                                                                                                 PRO FORMA
                                                                                               STOCKHOLDERS'
                                                  DECEMBER 31,   DECEMBER 31,                     EQUITY
                                                      1998           1999          ACTUAL        (NOTE 1)
                                                  ------------   ------------   ------------   -------------
                                                                                (UNAUDITED)     (UNAUDITED)
<S>                                               <C>            <C>            <C>            <C>
ASSETS
Current assets:
  Cash and cash equivalents.....................   $2,333,512    $ 9,339,669    $ 22,179,362
  Interest receivable...........................        3,138         15,362          32,095
  Prepaid expenses..............................       35,496         41,387          71,650
                                                   ----------    -----------    ------------
    Total current assets........................    2,372,146      9,396,418      22,283,107
Property and equipment, net.....................       10,454         44,755         121,513
Deferred financing costs........................           --             --         460,179
                                                   ----------    -----------    ------------
    Total assets................................   $2,382,600    $ 9,441,173    $ 22,864,799
                                                   ==========    ===========    ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities:
  Accounts payable..............................   $  108,108    $   300,587    $    487,663
                                                   ----------    -----------    ------------
    Total liabilities...........................      108,108        300,587         487,663
                                                   ----------    -----------    ------------
Commitments and contingencies
Redeemable convertible preferred stock --
  Series C $.001 par value; 3,044,018 shares
    authorized; 3,200,000 shares designated,
    issued and outstanding at March 31, 2000;
    none pro forma; liquidation preference and
    redemption value of $5 per share............           --             --      14,231,595             --
  Series B $.001 par value; 5,405,405 shares
    authorized; 5,405,405 shares designated,
    issued and outstanding in 1999 and 2000;
    none pro forma; liquidation preference and
    redemption value of $1.85 per share.........           --      9,703,903       9,703,903             --
                                                   ----------    -----------    ------------    -----------
                                                           --      9,703,903      23,935,498             --
                                                   ----------    -----------    ------------    -----------
Stockholders' equity (deficit):
  Convertible preferred stock -- Series A $.001
    par value; 3,500,000 shares authorized;
    2,659,489 shares issued and outstanding in
    1998, 1999 and 2000; none pro forma;
    liquidation preference of $1.00 per share...        2,660          2,660           2,660             --
  Common stock, $.001 par value; 20,000,000
    shares authorized and 9,000,000 and
    9,445,000 issued and outstanding as of
    December 31, 1998 and 1999, respectively;
    22,000,000 shares authorized and 9,718,230
    shares issued and outstanding as of March
    31, 2000, 20,827,142 shares issued and
    outstanding pro forma.......................        9,000          9,445           9,718         20,827
  Additional paid-in-capital....................    2,686,839      9,367,750      17,697,759     41,624,808
  Deferred compensation.........................           --     (4,980,180)     (8,448,370)    (8,448,370)
  Notes receivable..............................      (35,000)       (74,400)       (123,400)      (123,400)
  Deficit accumulated during the development
    stage.......................................     (389,007)    (4,888,592)    (10,696,729)   (10,696,729)
                                                   ----------    -----------    ------------    -----------
    Total stockholders' equity (deficit)........    2,274,492       (563,317)     (1,558,362)    22,377,136
                                                   ----------    -----------    ------------    ===========
    Total liabilities and stockholders' equity
      (deficit).................................   $2,382,600    $ 9,441,173    $ 22,864,799
                                                   ==========    ===========    ============
</TABLE>

 
                See accompanying notes to financial statements.
 
                                       F-3

<PAGE>   68
 
                            PAIN THERAPEUTICS, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
 
                            STATEMENTS OF OPERATIONS
 

<TABLE>
<CAPTION>
                                PERIOD FROM
                                MAY 4, 1998                   MAY 4, 1998
                                (INCEPTION)                   (INCEPTION)        THREE MONTHS ENDED        MAY 4, 1998
                                  THROUGH       YEAR ENDED      THROUGH              MARCH 31,             (INCEPTION)
                                DECEMBER 31,   DECEMBER 31,   DECEMBER 31,   --------------------------      THROUGH
                                    1998           1999           1999          1999           2000       MARCH 31, 2000
                                ------------   ------------   ------------   -----------   ------------   --------------
                                                                             (UNAUDITED)   (UNAUDITED)     (UNAUDITED)
<S>                             <C>            <C>            <C>            <C>           <C>            <C>
Operating expenses:
  Licensing fees..............   $  100,000    $        --    $   100,000    $       --    $         --    $    100,000
  Research and development....      200,000      2,092,119      2,292,119            --       1,433,268       3,725,387
  General and
    administrative............      122,168      2,567,355      2,689,523       118,257       4,619,719       7,309,242
                                 ----------    -----------    -----------    ----------    ------------    ------------
    Total expenses............      422,168      4,659,474      5,081,642       118,257       6,052,987      11,134,629
                                 ----------    -----------    -----------    ----------    ------------    ------------
    Operating loss............     (422,168)    (4,659,474)    (5,081,642)     (118,257)     (6,052,987)    (11,134,629)
Other income:
  Interest income.............       33,961        160,689        194,650        27,407         245,050         439,700
                                 ----------    -----------    -----------    ----------    ------------    ------------
    Net loss before income
      taxes...................     (388,207)    (4,498,785)    (4,886,992)      (90,850)     (5,807,937)    (10,694,929)
Income tax expense............          800            800          1,600           200             200           1,800
                                 ----------    -----------    -----------    ----------    ------------    ------------
    Net loss..................     (389,007)    (4,499,585)    (4,888,592)      (91,050)     (5,808,137)    (10,696,729)
Return to series C preferred
  shareholders for beneficial
  conversion feature..........           --             --             --            --     (14,231,595)    (14,231,595)
                                 ----------    -----------    -----------    ----------    ------------    ------------
Loss available to common
  shareholders................   $ (389,007)   $(4,499,585)   $(4,888,592)   $  (91,050)   $(20,039,732)   $(24,928,324)
                                 ==========    ===========    ===========    ==========    ============    ============
Basic and diluted loss per
  share.......................   $    (0.06)   $     (0.48)                  $    (0.01)   $      (2.10)
                                 ==========    ===========                   ==========    ============
Weighted-average shares used
  in computing basic and
  diluted loss per share......    6,948,637      9,322,441                    9,000,000       9,528,957
                                 ==========    ===========                   ==========    ============
</TABLE>

 
                See accompanying notes to financial statements.
 
                                       F-4

<PAGE>   69
 
                            PAIN THERAPEUTICS, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
 
                  STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                 FOR THE PERIOD MAY 4, 1998 (INCEPTION) THROUGH
              DECEMBER 31, 1998, THE YEAR ENDED DECEMBER 31, 1999,
                   AND THE THREE MONTHS ENDED MARCH 31, 2000

<TABLE>
<CAPTION>
 
                                     SERIES A CONVERTIBLE
                                        PREFERRED STOCK          COMMON STOCK        ADDITIONAL                      NOTE
                                     ---------------------   ---------------------     PAID-IN       DEFERRED     RECEIVABLE
                                      SHARES     PAR VALUE    SHARES     PAR VALUE     CAPITAL     COMPENSATION   FOR STOCK
                                     ---------   ---------   ---------   ---------   -----------   ------------   ----------
<S>                                  <C>         <C>         <C>         <C>         <C>           <C>            <C>
Balance -- May 4, 1998
  (inception)......................         --    $   --            --    $   --     $        --   $        --    $      --
Common stock issued on June 22,
  1998 at $.001 per share..........         --        --     8,500,000     8,500              --            --           --
Series A convertible preferred
  stock issued between August 14,
  1998 and October 28, 1998 at
  $1.00 per share
  (net of issuance costs of
  $19,490).........................  2,659,489     2,660            --        --       2,637,339            --           --
Common stock issued on September
  23, 1998 at $.10 per share for
  notes receivable.................         --        --       350,000       350          34,650            --      (35,000)
Common stock issued on September
  23, 1998 at $.10 per share for
  cash.............................         --        --       150,000       150          14,850            --           --
Net loss...........................         --        --            --        --              --            --           --
                                     ---------    ------     ---------    ------     -----------   -----------    ---------
Balance -- December 31, 1998.......  2,659,489     2,660     9,000,000     9,000       2,686,839            --      (35,000)
Payment on note receivable.........         --        --            --        --              --            --        5,000
Common stock issued between April 1
  and May 3, 1999 at $.10 per share
  for notes receivable.............         --        --       444,000       444          43,956            --      (44,400)
Issuance of common stock pursuant
  to exercise of stock options.....         --        --         1,000         1              99            --           --
Issuance of warrants in connection
  with lease in August 1999........         --        --            --        --          33,810            --           --
Deferred compensation with respect
  to options issuances during
  1999.............................         --        --            --        --       6,515,027    (6,515,027)          --
Amortization of deferred
  compensation.....................         --        --            --        --              --     1,534,847           --
Compensation expense with respect
  to non-employee option grants....         --        --            --        --          88,019            --           --
Net loss...........................         --        --            --        --              --            --           --
                                     ---------    ------     ---------    ------     -----------   -----------    ---------
Balance -- December 31, 1999.......  2,659,489     2,660     9,445,000     9,445       9,367,750    (4,980,180)     (74,400)
Common stock issued between January
  1 and March 31, 2000 at $0.20 per
  share for notes receivable
  (unaudited)......................         --        --       245,000       245          48,755            --      (49,000)
Issuance of common stock pursuant
  to exercise of stock options
  (unaudited)......................         --        --        28,230        28           3,014            --           --
Issuance of warrants in connection
  with the series C preferred stock
  offering (unaudited).............         --        --            --        --         963,240            --           --
Deferred compensation with respect
  to option issuances
  (unaudited)......................         --        --            --        --       4,669,000    (4,669,000)          --
Amortization of deferred
  compensation (unaudited).........         --        --            --        --              --     1,200,810           --
Charges related to stock purchase
  rights (unaudited)...............         --        --            --        --       2,646,000            --           --
Beneficial conversion feature of
  series C preferred stock
  (unaudited)......................         --        --            --        --      14,231,595            --           --
Return to series C preferred
  shareholders for beneficial
  conversion feature (unaudited)...         --        --            --        --     (14,231,595)           --           --
Net loss (unaudited)...............         --        --            --        --              --            --           --
                                     ---------    ------     ---------    ------     -----------   -----------    ---------
Balance -- March 31, 2000
  (unaudited)......................  2,659,489    $2,660     9,718,230    $9,718     $17,697,759   $(8,448,370)   $(123,400)
                                     =========    ======     =========    ======     ===========   ===========    =========
 
<CAPTION>
                                       DEFICIT
                                     ACCUMULATED
                                        DURING      STOCKHOLDERS'
                                     DEVELOPMENT       EQUITY
                                        STAGE         (DEFICIT)
                                     ------------   -------------
<S>                                  <C>            <C>
Balance -- May 4, 1998
  (inception)......................  $         --    $        --
Common stock issued on June 22,
  1998 at $.001 per share..........            --          8,500
Series A convertible preferred
  stock issued between August 14,
  1998 and October 28, 1998 at
  $1.00 per share
  (net of issuance costs of
  $19,490).........................            --      2,639,999
Common stock issued on September
  23, 1998 at $.10 per share for
  notes receivable.................            --             --

Common stock issued on September
  23, 1998 at $.10 per share for
  cash.............................            --         15,000
Net loss...........................      (389,007)      (389,007)
                                     ------------    -----------
Balance -- December 31, 1998.......      (389,007)     2,274,492
Payment on note receivable.........            --          5,000
Common stock issued between April 1
  and May 3, 1999 at $.10 per share
  for notes receivable.............            --             --
Issuance of common stock pursuant
  to exercise of stock options.....            --            100
Issuance of warrants in connection
  with lease in August 1999........            --         33,810
Deferred compensation with respect
  to options issuances during
  1999.............................            --             --
Amortization of deferred
  compensation.....................            --      1,534,847
Compensation expense with respect
  to non-employee option grants....            --         88,019
Net loss...........................    (4,499,585)    (4,499,585)
                                     ------------    -----------
Balance -- December 31, 1999.......    (4,888,592)      (563,317)
Common stock issued between January
  1 and March 31, 2000 at $0.20 per
  share for notes receivable
  (unaudited)......................            --             --
Issuance of common stock pursuant
  to exercise of stock options
  (unaudited)......................            --          3,042
Issuance of warrants in connection
  with the series C preferred stock
  offering (unaudited).............            --        963,240
Deferred compensation with respect
  to option issuances
  (unaudited)......................            --             --
Amortization of deferred
  compensation (unaudited).........            --      1,200,810
Charges related to stock purchase
  rights (unaudited)...............            --      2,646,000
Beneficial conversion feature of
  series C preferred stock
  (unaudited)......................            --     14,231,595
Return to series C preferred
  shareholders for beneficial
  conversion feature (unaudited)...            --    (14,231,595)
Net loss (unaudited)...............    (5,808,137)    (5,808,137)
                                     ------------    -----------
Balance -- March 31, 2000
  (unaudited)......................  $(10,696,729)   $(1,558,362)
                                     ============    ===========
</TABLE>

 
                See accompanying notes to financial statements.
 
                                       F-5

<PAGE>   70
 
                            PAIN THERAPEUTICS, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
 
                            STATEMENTS OF CASH FLOWS
 

<TABLE>
<CAPTION>
                                             PERIOD FROM
                                             MAY 4, 1998                   MAY 4, 1998          THREE MONTHS         MAY 4, 1997
                                             (INCEPTION)                   (INCEPTION)             ENDED             (INCEPTION)
                                               THROUGH       YEAR ENDED      THROUGH             MARCH 31,             THROUGH
                                             DECEMBER 31,   DECEMBER 31,   DECEMBER 31,   ------------------------    MARCH 31,
                                                 1998           1999           1999          1999         2000           2000
                                             ------------   ------------   ------------   ----------   -----------   ------------
                                                                                                (UNAUDITED)          (UNAUDITED)
<S>                                          <C>            <C>            <C>            <C>          <C>           <C>
Cash flows from operating activities:
  Net loss.................................   $ (389,007)   $(4,499,585)   $(4,888,592)   $  (91,050)  $(5,808,137)  $(10,696,729)
  Adjustments to reconcile net loss to net
    cash used in operating activities:
    Depreciation and amortization..........          518          4,244          4,762           549         6,454         11,216
    Amortization of deferred
      compensation.........................           --      1,534,847      1,534,847        17,083     1,200,810      2,735,657
    Noncash expense for options and
      warrants issued......................           --        121,829        121,829            --     2,646,000      2,767,829
    Changes in operating assets and
      liabilities:
      Interest receivable..................       (3,138)       (12,224)       (15,362)         (171)      (16,733)       (32,095)
      Prepaid expenses.....................      (35,496)        (5,891)       (41,387)      (27,951)      (30,263)       (71,650)
      Accounts payable.....................      108,108        162,479        270,587      (100,988)      187,076        457,663
                                              ----------    -----------    -----------    ----------   -----------   ------------
        Net cash used in operating
          activities.......................     (319,015)    (2,694,301)    (3,013,316)     (202,528)   (1,814,793)    (4,828,109)
                                              ----------    -----------    -----------    ----------   -----------   ------------
Cash flows used in investing
  activities -- purchase of property and
  equipment................................      (10,972)       (38,545)       (49,517)           --       (83,212)      (132,729)
                                              ----------    -----------    -----------    ----------   -----------   ------------
Cash flows from financing activities:
  Proceeds from issuance of series B
    redeemable convertible preferred stock
    (net of issuance costs of $296,096)....           --      9,733,903      9,733,903            --            --      9,733,903
  Proceeds from issuance of series C
    redeemable convertible preferred stock
    (net of cash issuance costs of
    $25,255)...............................           --             --             --            --    15,194,835     15,194,835
  Deferred financing costs.................           --             --             --            --      (460,179)      (460,179)
  Stock subscription received..............           --          5,000          5,000         5,000            --          5,000
  Proceeds from issuance of series A
    convertible preferred stock (net of
    issuance costs of $19,490).............    2,639,999             --      2,639,999            --            --      2,639,999
  Proceeds from issuance of common stock...       23,500            100         23,600        33,810         3,042         26,642
                                              ----------    -----------    -----------    ----------   -----------   ------------
        Net cash provided by financing
          activities.......................    2,663,499      9,739,003     12,402,502        38,810    14,737,698     27,140,200
                                              ----------    -----------    -----------    ----------   -----------   ------------
Net increase (decrease) in cash and cash
  equivalents..............................    2,333,512      7,006,157      9,339,669      (163,718)   12,839,693     22,179,362
Cash and cash equivalents at beginning of
  period...................................           --      2,333,512             --     2,333,512     9,339,669             --
                                              ----------    -----------    -----------    ----------   -----------   ------------
Cash and cash equivalents at end of
  period...................................   $2,333,512    $ 9,339,669    $ 9,339,669    $2,169,794   $22,179,362   $ 22,179,362
                                              ==========    ===========    ===========    ==========   ===========   ============
Supplemental cash flow information:
  Cash paid for income taxes...............   $       --    $     1,600    $     1,600
                                              ==========    ===========    ===========
</TABLE>

 
                See accompanying notes to financial statements.
 
                                       F-6

<PAGE>   71
 
                            PAIN THERAPEUTICS, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
 
                         NOTES TO FINANCIAL STATEMENTS
 
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 

The Company
 
     Pain Therapeutics, Inc. (a development stage enterprise) is a
clinical-stage specialty pharmaceutical company which was incorporated on May 4,
1998. Since our inception in May 1998, we have licensed proprietary technology
from Albert Einstein College of Medicine and have devoted substantially all of
our resources to the development of a new generation of opioid painkillers with
improved clinical benefits, which are based on the acquired technology.
 
     Our development activities involve inherent risks. These risks include,
among others, dependence on key personnel and determination of patentability of
our products and processes. In addition, we have product candidates which have
not yet obtained Food and Drug Administration approval. Successful future
operations depend on our ability to obtain approval for and commercialize these
products.
 
     On March 9, 2000, our Board of Directors authorized our management to file
a Registration Statement with the Securities and Exchange Commission to sell
shares of our common stock to the public.
 
Interim Financial Statements
 
     The financial information as of March 31, 2000 and for the three months
ended March 31, 1999 and 2000 and the period from May 4, 1998 (inception)
through March 31, 2000 is unaudited. This interim financial information has been
prepared on substantially the same basis as the audited financial statements and
in the opinion of management, contains all adjustments, consisting only of
normal recurring adjustments, necessary for the fair presentation of the
financial information set forth therein.
 
Cash and Cash Equivalents
 
     We consider all highly liquid financial instruments with original
maturities of three months or less to be cash equivalents. We maintain our cash
at one financial institution. Our balances are in excess of federal depository
insurance limitations.
 
Use of Estimates
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
 
Income Taxes
 
     Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Deferred tax assets are reduced by a valuation
 
                                       F-7

<PAGE>   72
                            PAIN THERAPEUTICS, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
allowance when, in the opinion of management, it is more likely than not that
some or all of the deferred tax assets may not be realized.
 
Property and Equipment
 
     Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation is calculated using the straight-line method over
the estimated useful lives of the assets, generally three to five years.
 
Fair Value of Financial Instruments
 
     Interest and stock subscriptions receivables are considered to have
carrying amounts that approximate fair value because of the short maturity of
these financial instruments. Notes receivable are considered to have carrying
amounts that approximate fair value as they bear a market rate of interest. The
series B and series C redeemable, convertible preferred stock has a carrying
amount that approximates fair value as the redemption amount equals the carrying
amount (see note 7 regarding series C redeemable convertible preferred stock).
 
Research and Development Costs
 
     Research and development costs and the costs of obtaining licenses used in
research and development are charged to expense as incurred.
 
Impairment of Long-Lived Assets
 
     We review, as circumstances dictate, the carrying amount of our long-lived
assets. The purpose of these reviews is to determine whether the carrying
amounts are recoverable. Recoverability is determined by comparing the projected
undiscounted net cash flows of the long-lived assets against their respective
carrying amounts. The amount of impairment, if any, is measured based on the
excess of the carrying value over the fair value. No such events have occurred
with respect to the Company's long-lived assets.
 
Stock-Based Compensation
 
     Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, establishes a fair-value method of accounting for
stock options and similar equity instruments. The fair-value method requires
compensation cost to be measured at the grant date based on the value of the
award, and is recognized over the service period. SFAS No. 123 allows companies
to either account for stock-based compensation to employees under the provisions
of SFAS No. 123 or under the provisions of Accounting Principles Board (APB)
Opinion No. 25 and its related interpretations. We have elected to account for
our stock-based compensation to employees in accordance with the provisions of
APB Opinion No. 25 and provide the pro forma disclosures required under SFAS No.
123.
 
     We have recorded deferred compensation for the difference between the
exercise price and the fair value of the common stock for financial reporting
purposes of stock options granted to employees.
 
     We account for equity instruments issued to nonemployees in accordance with
the provisions of SFAS No. 123 and Emerging Issues Task Force (EITF) Issue No.
96-18 Accounting for Equity
 
                                       F-8

<PAGE>   73
                            PAIN THERAPEUTICS, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
Instruments that Are Issued to Other than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services.
 
     The compensation expense related to all grants is amortized over the
vesting period of the related stock options in accordance with Financial
Accounting Standards Board Interpretation No. 28 (FIN 28), as that methodology
most closely approximates the way in which our options are earned by the option
holder.
 
Comprehensive Loss
 
     We have no components of other comprehensive loss other than our net loss
and, accordingly, our comprehensive loss is equivalent to our net loss for all
periods presented.
 
Business Segments
 
     SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, requires an enterprise to report segment information based on how
management internally evaluates the operating performance of its business units
(segments). Our operations are confined to one business segment: the discovery
and development of new opioid painkillers.
 
Loss per Share
 
     Basic loss per share is computed on the basis of the weighted-average
number of shares outstanding for the reporting period. Diluted loss per share is
computed on the basis of the weighted-average number of common shares plus
dilutive potential common shares outstanding using the treasury-stock method.
Potential dilutive common shares consist of convertible preferred stock, shares
issuable to holders of unexercised employee stock options and outstanding
warrants. Convertible preferred stock, options and warrants equivalent to, in
the aggregate, 2,809,489 and 9,580,094 shares of common stock as of December 31,
1998 and 1999 and 2,809,489 and 13,206,882 shares of common stock as of March
31, 1999 and 2000, respectively, were not included in the calculation of diluted
loss per share because the representative share increments would be
antidilutive.
 
Pro Forma Stockholders' Equity (Unaudited)
 
     The unaudited pro forma stockholders' equity gives effect to the conversion
of 11,108,912 shares of series A convertible preferred stock and B and C
redeemable convertible preferred stock outstanding as of March 31, 2000 into
shares of common stock, at a conversion rate of 1 common share for each
preferred share of series A convertible preferred stock and each share of series
B and C redeemable convertible preferred stock, upon the closing of our initial
public offering.
 
                                       F-9

<PAGE>   74
                            PAIN THERAPEUTICS, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
(2) PROPERTY AND EQUIPMENT
 
     Property and equipment consisted of the following as of December 31:
 

<TABLE>
<CAPTION>
                                                               1998       1999
                                                              -------    -------
<S>                                                           <C>        <C>
Machinery and equipment.....................................  $ 7,195    $14,703
Fixtures....................................................    3,777     34,814
                                                              -------    -------
                                                               10,972     49,517
Less accumulated depreciation...............................     (518)    (4,762)
                                                              -------    -------
Property and equipment, net.................................  $10,454    $44,755
                                                              =======    =======
</TABLE>

 
(3) STOCKHOLDERS' EQUITY (DEFICIT)
 
Common Stock
 
     On June 22, 1998, we issued 8,500,000 shares of common stock at $0.001 per
share. Of these shares, 8,480,000 were issued subject to a repurchase option.
The shares are released from our repurchase option over a four-year vesting
period at the rate of 1/48 at the end of each month from the date of purchase
until all shares are released. Our repurchase option is exercisable only within
90 days following the termination of the purchaser's employment, at which time
we are able to repurchase the unvested shares at the original purchase price of
$0.001 per share. As of December 31, 1999 4,416,667 shares of common stock were
not vested and, therefore, were subject to repurchase by us in the event of
termination of the purchaser's employment.
 
     On September 23, 1998, under the terms of the 1998 Stock Plan (see below),
we granted stock purchase rights to and subsequently issued 500,000 shares of
common stock at $0.10 per share in exchange for $35,000 in promissory notes and
$15,000 in cash. Such shares were issued pursuant to a restricted stock purchase
agreement. The shares are released from our repurchase option over a four-year
vesting period at the rate of 1/48 at the end of each month from the date of
purchase until all shares are released. Our repurchase option is exercisable
only within 90 days following the termination of the purchaser's employment or
provision of services, at which time we are able to repurchase the unvested
shares at the original purchase price of $0.10 per share. As of December 31,
1999, 350,000 shares of common stock were not vested and, therefore, were
subject to repurchase by us in the event of termination of the purchaser's
employment or provision of services to us.
 
     On February 25, 1999, under the terms of the 1998 Stock Plan (see below),
we granted stock purchase rights to and subsequently issued 444,000 additional
shares of common stock at $0.10 per share in exchange for promissory notes. Such
shares were issued pursuant to a restricted stock purchase agreement. The shares
are released from our repurchase option over a two-year vesting period at the
rate of 1/24 at the end of each month from the date of purchase until all shares
are released. Our repurchase option is exercisable only within 90 days following
the termination of the purchaser's employment or provision of services, at which
time we are able to repurchase the unvested shares at the original repurchase
price per share. As of December 31, 1999, 190,500 shares of common stock were
not vested and, therefore, subject to repurchase by us in the event of
termination of the purchaser's employment or provision of services to us.
 
                                      F-10

<PAGE>   75
                            PAIN THERAPEUTICS, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
Preferred Stock
 
     We are authorized to issue 10,000,000 shares of preferred stock.
 
     We issued 2,659,489 shares of series A convertible preferred stock at $1.00
per share during August and October 1998.
 
     We issued 5,405,405 shares of series B redeemable convertible preferred
stock at $1.85 per share during October and November 1999.
 
     A summary of the rights, preferences, privileges and restrictions relative
to the series A convertible preferred stock and series B redeemable convertible
preferred stock (Preferred Stock) follows:
 
     Dividends. The holders of both the series A convertible preferred stock and
series B redeemable convertible preferred stock are entitled to receive
dividends, prior and in preference to holders of common stock and on a pari
passu basis, at the rate of $0.06 per annum, when and if declared by the Board
of Directors. Such dividends are not cumulative. No dividends have been declared
to date.
 
     Liquidation. In the event that we liquidate, dissolve or wind up, the
holders of preferred stock shall be entitled to receive, prior and in preference
to the holders of common stock, an amount per share equal to (i) $1.00 per share
for each share of series A convertible preferred stock, plus declared but unpaid
dividends; and (ii) $1.85 per share for each outstanding share of series B
redeemable convertible preferred stock, plus declared but unpaid dividends. If,
upon the occurrence of such event, the assets and funds thus distributed are
insufficient to pay the full preferential amounts to all the holders of the
preferred stock, then our entire assets legally available for distribution shall
be distributed ratably among the holders of the preferred stock in proportion to
the preferential amount each such holder is otherwise entitled to receive. After
the liquidation preference has been paid to the holders of the preferred stock,
all remaining assets and funds shall be distributed ratably among the holders of
common stock. A merger, consolidation or sale of all or substantially all of our
assets, which will result in our stockholders immediately prior to such
transaction not holding at least 50% of the voting power of the surviving
corporation, shall be treated as a liquidation.
 
     Conversion. Each share of preferred stock shall be convertible, at the
option of the holder thereof, at any time after the date of issuance of such
share into common stock. Each share of preferred stock shall be convertible into
the number of shares of common stock as is determined by dividing (i) $1.00 in
the case of series A convertible preferred stock; or (ii) $1.85 in the case of
series B redeemable convertible preferred stock by the conversion price
applicable to such shares. The initial conversion price is $1.00 per share of
series A convertible preferred stock and $1.85 per share of series B redeemable
convertible preferred stock. The preferred stock shall be automatically
converted into shares of common stock at the then applicable conversion rate
upon the Company's sale of its common stock in a firm commitment underwritten
public offering with a sales price per share (as adjusted) of at least $5.00 per
share and with aggregate gross proceeds to the Company of at least $15,000,000.
 
     Antidilution Adjustments. The conversion price of each series of preferred
stock is subject to adjustment upon the occurrence of certain events described
in our Certificate of Incorporation, including the issuance of common stock for
a consideration per share less than the conversion price in effect for each
respective series of preferred stock, common stock dividends, common stock
splits and recapitalizations.
 
                                      F-11

<PAGE>   76
                            PAIN THERAPEUTICS, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
     Redemption. The series A convertible preferred stock is not redeemable.
Each holder of series B redeemable convertible preferred stock has the right to
require us to redeem up to one-third of such series B redeemable convertible
preferred stock on each of October 1, 2005, October 1, 2006 and October 1, 2007,
with the right to carryforward such redemption onto subsequent anniversaries to
the extent it is not exercised in full on the applicable redemption date. The
redemption price per share shall be equal to the original series B redeemable
convertible preferred stock purchase price (subject to adjustment) plus all
declared but unpaid dividends.
 
     Voting. Except as otherwise provided or required by law, the holders of
both series of preferred stock shall be entitled to vote on an as-converted
basis on all matters with the holders of common stock. Consent of more than 50%
of the holders of preferred stock, voting together as a class, shall be required
in order to (i) amend the Certificate of Incorporation or Bylaws; (ii)
liquidate, dissolve or wind up the Company; or (iii) sell or otherwise dispose
of all or substantially all of the Company's assets or merge into or consolidate
with another entity, as a result of which the holders of the outstanding shares
of the Company prior to the transaction hold less than 50% of the voting power
of the surviving corporation and which generates gross proceeds to the Company
and its stockholders of $50,000,000 or more. Consent of two-thirds of the
holders of series B redeemable convertible preferred stock, voting as a class,
is required to consummate a change of control involving gross proceeds to us and
our stockholders of less than $50,000,000.
 
     Registration Rights. The holders of both series of preferred stock have
certain registration rights with respect to the preferred stock and the common
stock into which the preferred stock is convertible.
 
     Piggyback Registration Rights. The holders of both series of preferred
stock have the right to request that shares of common stock issued or issuable
upon conversion of said preferred stock be included in any registration of
common stock that we perform. In any such registration, the underwriters may,
for marketing reasons, exclude all or part of the shares requested to be
registered on behalf of the holder. Notwithstanding the foregoing, we have the
right to terminate any such registration prior to its effectiveness regardless
of any request for inclusion by a holder.
 
Warrants
 
     In June 1998, we issued a warrant to purchase 150,000 shares of series A
convertible preferred stock at an exercise price of $1.00 per share to one of
the holders of the series A convertible preferred stock, in consideration of
such holder's advance of funds to us prior to the closing of the series A
convertible preferred stock financing. The warrant expires on June 5, 2010. The
shares of Series A convertible preferred stock underlying this warrant are
entitled to the benefits of the registration rights granted by us to the holders
of series A convertible preferred stock.
 
     In August 1999, we issued a warrant to purchase 70,000 shares of common
stock at an exercise price of $1.00 per share to the Company's landlord in
connection with the commercial lease of the Company's facilities. The warrant
will expire on the fifth anniversary of the Company's initial public offering
(or sooner under certain circumstances). The shares of common stock underlying
this warrant are not entitled to any registration rights. The fair value of
these warrants of $33,810 was estimated using a Black-Scholes model and the
following assumptions: estimated volatility of 60%, a risk-free interest rate of
5.27%, no dividend yield, and an expected life of 5 years. This fair value is
being amortized to rent expense over the lease term.
 
                                      F-12

<PAGE>   77
                            PAIN THERAPEUTICS, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
1998 Stock Plan
 
     Pursuant to approval by the board of directors, effective September 23,
1998 we adopted the 1998 Stock Plan, allowing issuance of up to 1,500,000 shares
of common stock. The board of directors subsequently amended the 1998 Stock Plan
to increase the number of shares of common stock reserved for issuance under the
1998 Stock Plan to 2,500,000. The 1998 Stock Plan will terminate on September
23, 2008 or an earlier date as determined by the board of directors.
 
     Under the 1998 Stock Plan, employees, directors and consultants (Service
Providers) may be granted options that allow for the purchase of shares of our
common stock. Nonstatutory stock options and stock purchase rights (see above)
may be granted to all Service Providers. Incentive stock options may only be
granted to employees.
 
     Nonstatutory stock options may be granted under the 1998 Stock Plan at a
price not less than 110% and 85% of the fair value of the stock on the date the
option is granted where (a) the options are granted to Service Providers who, at
the time of grant, own stock representing more than 10% of the voting power of
all classes of stock, and (b) the options are granted to any other Service
Provider, respectively. Incentive stock options may be granted under the 1998
Stock Plan at a price not less than 110% and 100% of the fair market value of
the stock on the date the option is granted where (a) the options are granted to
employees who, at the time of the grant, own stock representing more than 10% of
the voting power of all classes of stock, and (b) the options are granted to any
other employee, respectively. The term of the nonstatutory and incentive stock
options granted is ten years or less from the date of the grant, as provided for
in the individual option agreement.
 
     Vesting provisions of individual options may vary, except in the case of
options granted to officers, directors and consultants where vesting is at a
rate of no less than 20% per year over five years from the date of grant.
Forfeited options become available for reissuance under the 1998 Stock Plan.
 
     There were no options granted during the period from May 4, 1998
(inception) through December 31, 1998.
 
     The following table summarizes option activity under the 1998 Stock Plan:
 

<TABLE>
<CAPTION>
                                                                                  WEIGHTED-
                                                       RANGE OF       NUMBER       AVERAGE
                                                       EXERCISE         OF        EXERCISE
                                                        PRICES        OPTIONS       PRICE
                                                      -----------    ---------    ---------
<S>                                                   <C>            <C>          <C>
Options outstanding as of December 31, 1998.........  $        --           --      $  --
  Granted...........................................  0.10 - 0.20    1,361,200       0.12
  Exercised.........................................     0.10           (1,000)      0.10
  Forfeited.........................................     0.10          (65,000)      0.10
                                                      -----------    ---------      -----
Options outstanding as of December 31, 1999.........  $0.10 - 0.20   1,295,200      $0.12
                                                      -----------    ---------      -----
Total number of shares exercisable as of December
  31, 1999..........................................  $0.10 - 0.20     133,213      $0.11
                                                      ===========    =========      =====
</TABLE>

 
     As of December 31, 1999, 14,800 shares of common stock were available for
issuance under the 1998 Stock Plan either under stock options or stock purchase
rights.
 
                                      F-13

<PAGE>   78
                            PAIN THERAPEUTICS, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
     Pursuant to SFAS No. 123, Accounting for Stock-Based Compensation, we are
required to disclose the pro forma effects on net loss and net loss per share as
if we had elected to use the fair value approach to account for all of our
employee stock-based compensation plans. Had compensation cost of our plans been
determined in a manner consistent with the fair value approach of SFAS No. 123,
our pro forma net loss and pro forma net loss per share would have been reduced
to the pro forma amounts indicated below:
 
     Pro forma net loss:
 

<TABLE>
<CAPTION>
                                                         YEARS ENDED DECEMBER 31,
                                                         ------------------------
                                                           1998          1999
                                                         --------     -----------
<S>                                                      <C>          <C>
Net loss as reported...................................  $389,007     $ 4,499,585
Adjusted pro forma net loss............................   389,007       4,505,402
Net loss per share basic and diluted as reported.......      0.06            0.48
Adjusted pro forma.....................................      0.06            0.48
</TABLE>

 
     The per share weighted-average fair value of stock options granted during
1999 was $4.90 on the date of grant using the minimum value method with the
following weighted-average assumptions for grants during the period ended
December 31, 1999:
 

<TABLE>
<S>                                                           <C>
Expected dividend yield.....................................            0%
Risk-free interest rate range...............................  5.49 - 6.20%
Expected life...............................................      5 years
</TABLE>

 
     The following table summarizes information about stock options outstanding
as of December 31, 1999:
 

<TABLE>
<CAPTION>
                   OPTIONS OUTSTANDING            OPTIONS EXERCISABLE
           -----------------------------------   ---------------------
                        WEIGHTED-
                         AVERAGE
                        REMAINING    WEIGHTED-    NUMBER     WEIGHTED-
            NUMBER     CONTRACTUAL    AVERAGE       OF        AVERAGE
EXERCISE      OF          LIFE       EXERCISE     VESTED     EXERCISE
 PRICES     OPTIONS      (YEARS)       PRICE      OPTIONS      PRICE
--------   ---------   -----------   ---------   ---------   ---------
<S>        <C>         <C>           <C>         <C>         <C>
$0.10..      992,200      9.48         $0.10      124,588      $0.10
0.20..       303,000      9.94          0.20        8,625       0.20
           ---------      ----         -----      -------      -----
           1,295,200      9.59         $0.12      133,213      $0.11
           ---------      ----         -----      -------      -----
</TABLE>

 
     During the year ended December 31, 1999 we granted stock options under the
1998 Stock Plan to employees and non-employee consultants for which we recorded
deferred compensation of $2,283,565 and $4,231,462, respectively. No options
were granted in 1998.
 
     For employees, deferred compensation represents the difference between the
exercise price of the option and the fair value of our common stock on the date
of grant in accordance with APB No. 25 and its related interpretations. For
non-employees, deferred compensation is recorded at the fair value of the
options granted in accordance with SFAS No. 123 and EITF 96-18. The fair value
for non-employee options was determined using a Black-Scholes model and the
following assumptions: estimated volatility of 60%, a risk free interest rate
ranging from 5.54 - 6.28%, no dividend yield, and an expected life of the option
equal to the options contractual life of ten years from the date of grant.
 
                                      F-14

<PAGE>   79
                            PAIN THERAPEUTICS, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
     Compensation expense is being recognized over the vesting period for
employees and the service period for non-employees in accordance with FIN No.
28. For the year ended December 31, 1999, amounts amortized to the statement of
operations as compensation expense for employees and non-employees was $187,621
and $1,347,226, respectively.
 
(4) INCOME TAXES
 
     Income tax expense for the period from May 4, 1998 (inception) through
December 31, 1998 and for the year ended December 31, 1999 is comprised of the
following:
 

<TABLE>
<CAPTION>
                                                           CURRENT    DEFERRED    TOTAL
                                                           -------    --------    -----
<S>                                                        <C>        <C>         <C>
1998:
  Federal................................................   $ --          --      $ --
  State..................................................    800          --       800
                                                            ----        ----      ----
                                                            $800          --      $800
                                                            ====        ====      ====
1999:
  Federal................................................   $ --          --      $ --
  State..................................................    800          --       800
                                                            ----        ----      ----
     Total...............................................   $800          --      $800
                                                            ====        ====      ====
</TABLE>

 
     Tax expense differed from the amounts computed by applying the U.S. federal
income tax rate of 34% to pretax income for the period from May 4, 1998
(inception) through December 31, 1998 and for the year ended December 31, 1999
as a result of the following:
 

<TABLE>
<CAPTION>
                                                               1998          1999
                                                             ---------    -----------
<S>                                                          <C>          <C>
Computed "expected" tax expense (benefit)..................  $(131,990)   $(1,529,587)
Current NOLs for which no benefit was realized.............    130,098      1,528,441
Permanent differences......................................      1,892          1,146
State taxes................................................        800            800
                                                             ---------    -----------
                                                             $     800    $       800
                                                             =========    ===========
</TABLE>

 
     The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets as of December 31, 1998 and 1999 is as
follows:
 

<TABLE>
<CAPTION>
                                                           1998          1999
                                                         ---------    -----------
<S>                                                      <C>          <C>
Deferred tax assets:
  Intangible assets....................................  $  11,275    $     8,817
  Issuance of options and warrants.....................         --        634,542
  Net operating loss carryforward......................    141,451      1,323,944
  State taxes..........................................        272            571
  Research and development credit......................     13,000        120,247
                                                         ---------    -----------
     Gross deferred tax assets.........................    165,998      2,088,121
  Valuation allowance..................................   (165,998)    (2,088,121)
                                                         ---------    -----------
     Net deferred tax assets...........................  $      --    $        --
                                                         =========    ===========
</TABLE>

 
                                      F-15

<PAGE>   80
                            PAIN THERAPEUTICS, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
     We have recorded a valuation allowance of $165,998 and $2,088,121 against
the deferred tax assets related to temporary differences and credits for federal
and state income tax purposes as of December 31, 1998 and 1999, respectively. We
believe that realization of these deferred tax assets is not assured, and
therefore we have not recognized the related deferred tax benefits. The change
in the valuation allowance for the years ended December 31, 1998 and 1999 was
$165,998 and $1,922,123, respectively.
 
     As of December 31, 1999, we have operating loss carryforwards (expiring
through 2019 for federal purposes and 2006 for state purposes) of approximately
$3,324,000 and $3,323,000 for federal and state income tax purposes,
respectively. We have federal research credits (expiring through 2019) of
approximately $114,000. We have California research credits (carrying forward
indefinitely) of approximately $9,000.
 
     Under provisions of the Internal Revenue Code, should substantial changes
in our ownership occur, the utilization of net operating loss carryforwards may
be limited.
 
(5) AGREEMENT WITH ALBERT EINSTEIN COLLEGE OF MEDICINE
 
     On May 5, 1998, we entered into an exclusive, worldwide license agreement
(the Agreement) with Albert Einstein College of Medicine (AECOM) to gain
exclusive rights to certain intellectual property developed and patented by
AECOM. In consideration for the terms of the Agreement, we paid AECOM a one-time
licensing fee. In addition, we have paid the first three of four research
funding installments to be paid over the first two years of the Agreement. We
are not obligated to pay the remaining research funding payments in the event
that the Agreement is terminated. We are also required to make milestone
payments upon achievement of certain events with respect to licensed
intellectual property. Royalties for the life of the agreement equal 4% of net
product sales. If a product is combined with a drug or other substance for which
we are paying an additional royalty, the royalty rate we pay to AECOM is reduced
by one-half the amount of such additional royalty.
 
(6) LEASES
 
     We lease office space and equipment pursuant to noncancelable operating
leases that will expire at various dates through 2002.
 
     Minimum annual rentals are as follows:
 

<TABLE>
<S>                                                           <C>
Through December 31, 2000...................................  $25,325
Through December 31, 2001...................................    1,992
Through December 31, 2002...................................    1,328
Through December 31, 2003...................................       --
Through December 31, 2004 and thereafter....................       --
                                                              -------
  Total.....................................................  $28,645
                                                              =======
</TABLE>

 
     Rent expense under noncancelable operating leases was $9,428 and $36,992
for the period from May 4, 1998 through December 31, 1998 and for the year ended
December 31, 1999, respectively.
 
(7) FIRST QUARTER 2000 EVENTS
 
Series C Redeemable Convertible Preferred Stock
 
     On February 1, 2000, we issued 3,044,018 shares of series C redeemable
convertible preferred stock for approximately $14.2 million, net of issuance
costs. The series C redeemable convertible Preferred Stock has the same rights,
preferences and privileges as the series B redeemable convertible preferred
stock.
 
                                      F-16

<PAGE>   81
                            PAIN THERAPEUTICS, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
     In connection with the issuance of the series C redeemable convertible
preferred stock, we issued warrants to purchase 120,000 shares of common stock
at $5 a share. The fair value of these warrants of $963,240 was estimated using
a Black-Scholes model and the following assumptions: estimated volatility of
60%, a risk-free interest rate of 4.59%, no dividend yield, and an expected life
equal to the contractual term of 5 years. This fair value was recognized as an
increase to additional paid-in capital in the three months ended March 31, 2000.
 
     We determined that our series C preferred stock was issued with a
beneficial conversion feature. The beneficial conversion feature has been
recognized by allocating a portion of the preferred stock proceeds equal to the
intrinsic value of that feature, limited to the net proceeds received
(approximately $14.2 million), to additional paid-in capital. The intrinsic
value is calculated at the date of issue as the difference between the
conversion price of the preferred stock and the fair value of our common stock,
into which the preferred stock is convertible, multiplied by the number of
common shares into which the preferred stock is convertible, limited to the net
proceeds received. As our series C preferred stock is convertible into common
stock at the option of the holder, at the issuance date of the preferred stock
the entire $14.2 million discount resulting from the allocation of proceeds to
the beneficial conversion feature has been treated as a dividend and recognized
as a return to the preferred stockholders for purposes of computing basic and
diluted loss per share in the three months ended March 31, 2000.
 
Board Resolutions
 
     In February 2000 our stockholders approved an amendment to our 1998 Stock
Plan increasing the number of shares of common stock available for issuance
under the plan by 700,000 to 3,200,000.
 
     On February 1, 2000, our Board of Directors approved an amendment to our
certificate of incorporation increasing the total number of shares authorized to
34,150,000 shares, 22,000,000 of which are common stock and 12,150,000 of which
are preferred stock.
 
     On March 9, 2000, our board of directors approved, subject to stockholder
approval, and effective upon the closing of our proposed initial public offering
the following resolutions:
 
     - an amendment to our Certificate of Incorporation to increase the number
       of authorized shares of common stock to 120,000,000, and
 
     - an amendment to our 1998 Stock Plan providing non-employee directors with
       an annual grant of options to purchase 20,000 shares of common stock.
 
2000 Employee Stock Purchase Plan
 
     Our 2000 Employee Stock Purchase Plan was adopted by our board of directors
in April 2000 and is subject to shareholder approval. A total of 500,000 shares
of common stock have been reserved for issuance under our 2000 Employee Stock
Purchase Plan, plus annual increases equal to the lesser of (i) 1,000,000
shares, (ii) 1% of the outstanding shares on such date, or (iii) a lesser amount
determined by our board of directors.
 
     Our 2000 Employee Stock Purchase Plan, which is intended to qualify under
Section 423 of the United States tax code, contains consecutive, overlapping
24-month offering periods. Each offering period includes four six month purchase
periods. The offering periods generally start on the first trading day on or
after May 1 and November 1 of each year, except for the first such offering
period which
 
                                      F-17

<PAGE>   82
                            PAIN THERAPEUTICS, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
commences on the first trading day on or after the effective date of this
offering and ends on the last trading day on or before May 1, 2002.
 
     Employees are eligible to participate if they are customarily employed by
us or any participating subsidiary for at least 20 hours per week and more than
five months in any calendar year. However, any employee who immediately after
grant owns stock possessing 5% or more of the total combined voting power or
value of all classes of our capital stock, or whose rights to purchase stock
under all of our employee stock purchase plans accrues at a rate which exceeds
$25,000 worth of stock for each calendar year may not be granted an option to
purchase stock under this plan. The 2000 Employee Stock Purchase Plan permits
participants to purchase common stock through payroll deductions of up to 15% of
the participant's "compensation." Compensation is defined as the participant's
base straight time gross earnings and commissions but is exclusive of payments
for overtime, shift premium payments, incentive compensation, incentive
payments, bonuses and other compensation. The maximum number of shares a
participant may purchase during a six month purchase period is 7,500 shares.
 
     Amounts deducted and accumulated by the participants are used to purchase
shares of common stock at the end of each purchase period. The price of stock
purchased under the 2000 Employee Stock Purchase Plan is generally 85% of the
lower of the fair market value of the common stock at the beginning of the
offering period or at the end of the purchase period. Participants may end their
participation at any time during an offering period, and they will be paid their
payroll deductions to date. Participation ends automatically upon termination of
employment with us.
 
     Rights granted under the 2000 Employee Stock Purchase Plan are not
transferable by a participant other than by will, the laws of descent and
distribution, or as otherwise provided under the plan. The 2000 Employee Stock
Purchase Plan provides that, in the event of our merger with or into another
corporation or a sale of substantially all our assets, each outstanding option
may be assumed or substituted for by the successor corporation. If the successor
corporation refuses to assume or substitute for the outstanding options, the
offering period then in progress will be shortened and a new exercise date will
be set. The 2000 Employee Stock Purchase Plan will terminate automatically in
2010, unless terminated earlier. The Board of Directors has the authority to
amend or terminate the purchase plan, except that no such action may adversely
affect any outstanding rights to purchase stock under the 2000 Employee Stock
Purchase Plan. Our Board of Directors has the exclusive authority to interpret
and apply the provisions of the purchase plan.
 
                                      F-18

<PAGE>   83
 
PROSPECTUS
 
                                 Edgar comment
 
                                5,000,000 Shares
                                  Common Stock
 
                           THOMAS WEISEL PARTNERS LLC
                               CIBC WORLD MARKETS
                           TUCKER ANTHONY CLEARY GULL
--------------------------------------------------------------------------------
 
Neither we nor any of the underwriters have authorized anyone to provide
information different from that contained in this prospectus. When you make a
decision about whether to invest in our common stock, you should not rely upon
any information other than the information in this prospectus. Neither the
delivery of this prospectus nor the sale of our common stock means that
information contained in this prospectus is correct after the date of this
prospectus. This prospectus is not an offer to sell or solicitation of an offer
to buy these shares of common stock in any circumstances under which the offer
or solicitation is unlawful.
 
Until              , 2000 (25 days after commencement of this offering), all
dealers that buy, sell or trade these shares of common stock, whether or not
participating in this offering, may be required to deliver a prospectus. This is
an addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.

<PAGE>   84
 

 
                                   PART II
 
                     INFORMATION NOT REQUIRED IN PROSPECTUS
 

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
 
     The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by Pain Therapeutics, Inc. in
connection with the sale of common stock being registered. All amounts are
estimates except the SEC registration fee, the NASD filing fee and the Nasdaq
National Market listing fee.
 

<TABLE>
<S>                                                           <C>
SEC registration fee........................................  $   19,800
NASD filing fee.............................................       8,000
Nasdaq National Market listing fee..........................      95,000
Printing and engraving costs................................     200,000
Legal fees and expenses.....................................     425,000
Accounting fees and expenses................................     300,000
Blue Sky fees and expenses..................................       1,500
Transfer Agent and Registrar fees...........................      10,000
Miscellaneous expenses......................................      40,700
                                                              ----------
  Total.....................................................  $1,100,000
                                                              ==========
</TABLE>

 

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
 
     Section 145 of the Delaware General Corporation Law permits a corporation
to include in its charter documents, and in agreements between the corporation
and its directors and officers, provisions expanding the scope of
indemnification beyond that specifically provided by the current law.
 
     Article VIII of the Registrant's Amended and Restated Certificate of
Incorporation provides for the indemnification of directors to the fullest
extent permissible under Delaware law.
 
     Article VI of the Registrant's Amended and Restated Bylaws provides for the
indemnification of officers, directors and third parties acting on behalf of the
Registrant if such person acted in good faith and in a manner reasonably
believed to be in and not opposed to the best interest of the Registrant, and,
with respect to any criminal action or proceeding, the indemnified party had no
reason to believe his or her conduct was unlawful.
 
     The Registrant has entered into indemnification agreements with its
directors and executive officers, in addition to indemnification provided for in
the Registrant's Amended and Restated Bylaws, and intends to enter into
indemnification agreements with any new directors and executive officers in the
future.
 

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
 
     Since inception, we have issued unregistered securities to a limited number
of persons as described below:
 
Common Stock:
 
     (1) In June 1998, we sold 8,480,000 shares of our common stock at a price
         of $0.001 per share to a founder for $8,480.
 
                                      II-1

<PAGE>   85
 
     (2) In June 1998, we sold an aggregate of 20,000 shares of our common stock
         at a price of $0.001 per share to investors for an aggregate purchase
         price of $20.
 
     (3) In September 1998, we sold 100,000 shares of our common stock at a
         price of $0.10 per share to an investor for a purchase price of
         $10,000.
 
     (4) In September 1998, we sold an aggregate of 400,000 shares of our common
         stock at a price of $0.10 per share to investors for an aggregate
         purchase price of $40,000.
 
     (5) In April 1999, we sold 300,000 shares of our common stock to an
         investor at a price of $0.10 per share for a purchase price of $30,000.
 
     (6) In May 1999, we sold an aggregate of 144,000 shares of our common stock
         to investors at a price of $0.10 per share for an aggregate purchase
         price of $14,400.
 
     (7) In June 1999, we sold 1,000 shares of our common stock to a consultant
         at a price of $0.10 per share for a total value of $100.
 
     (8) In February 2000, we sold an aggregate of 245,000 shares of our common
         stock at a price of $0.20 per share for an aggregate purchase price of
         $49,000.
 
     (9) In March 2000, we sold an aggregate of 26,042 shares of common stock at
         a price of $0.10 per share for an aggregate purchase price of
         $2,604.20.
 
     (10)In March 2000, we sold an aggregate of 2,188 shares of common stock at
         a price of $0.20 per share for an aggregate purchase price of $437.60.
 
Preferred Stock:
 
     (1) In August 1998, we sold an aggregate of 1,100,000 shares of our series
         A convertible preferred stock to investors at a price of $1.00 per
         share for an aggregate purchase price of $1,100,000.
 
     (2) In October 1998, we sold an aggregate of 1,559,489 shares of our series
         A convertible preferred stock to investors at a price of $1.00 per
         share for an aggregate purchase price of $1,559,489.
 
     (3) In October 1999, we sold an aggregate of 4,846,320 shares of our series
         B redeemable convertible preferred stock to investors at a price of
         $1.85 per share for an aggregate purchase price of $8,956,692.
 
     (4) In November 1999, we sold an aggregate of 559,085 shares of our series
         B redeemable convertible preferred stock to investors at a price of
         $1.85 per share for an aggregate purchase price of $1,034,307.
 
     (5) In February 2000, we sold an aggregate of 3,044,018 shares of our
         series C redeemable convertible preferred stock to investors at a price
         of $5.00 per share for an aggregate purchase price of $15,220,090.
 
Stock Options and Stock Purchase Rights:
 
     (1) From inception through March 2000, we granted stock options and stock
         purchase rights to acquire an aggregate of 3,041,200 shares of our
         common stock at prices ranging from $0.10 to $2.00 per share to
         employees, consultants and directors pursuant to our 1998 Stock Plan.
 
     (2) From inception through March 2000, we issued an aggregate of 1,218,230
         shares of our common stock to employees, consultants and directors
         pursuant to the exercise of stock options
 
                                      II-2

<PAGE>   86
 
         and stock purchase rights under our 1998 Stock Plan, for aggregate
         consideration of $146,541.80.
 
Warrants:
 
     (1) In June 1998, we issued a warrant to acquire 150,000 shares of our
         series A convertible preferred stock at an exercise price of $1.00 per
         share to an investor.
 
     (2) In August 1998, we issued a warrant to acquire 70,000 shares of our
         common stock at an exercise price of $1.00 per share to our landlord.
 
     (3) In February 2000, we issued a warrant to acquire 120,000 shares of our
         common stock at an exercise price of $5.00 per share to an investor.
 
     For additional information concerning these equity investment transactions,
reference is made to the information contained under the caption "Certain
Transactions" in the form of prospectus included herein. The sales of the above
securities were deemed to be exempt from registration in reliance on Rule 701
promulgated under Section 3(b) under the Securities Act as transactions pursuant
to a compensatory benefit plan or a written contract relating to compensation,
or in reliance on Section 4(2) of the Securities Act or Regulation D promulgated
thereunder as transactions by an issuer not involving any public offering. The
recipients of securities in each such transaction represented their intention to
acquire the securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed to
the share certificates and other instruments issued in such transactions. All
recipients either received adequate information about Pain Therapeutics, Inc. or
had access, through employment or other relationships, to such information.
 

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
     (a) EXHIBITS
 
                                 EXHIBIT INDEX
 
   

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C>       <S>
 1.1*     Form of Underwriting Agreement
 3.1*     Form of Amended and Restated Certificate of Incorporation of
          the Registrant to be in effect upon closing of this offering
 3.2*     Form of Bylaws of the Registrant to be in effect upon
          closing of this offering
 4.1*     Form of stock certificate
 5.1*     Opinion of Wilson Sonsini Goodrich & Rosati, Professional
          Corporation
10.1*     Form of Indemnification Agreement between the Registrant and
          each of its directors and officers
10.2+     License Agreement, dated May 5, 1998, between Registrant and
          Albert Einstein College of Medicine
10.3*     Research Agreement dated May 14, 1999 between the Registrant
          and KP Pharmaceutical Technology, Inc.
10.4*     Lease Agreement dated August 25, 1998 between the Registrant
          and Britannia Pointe Grand Limited Partnership
10.5*     1998 Stock Plan, as amended, and form of agreements
          thereunder between the Registrant and certain
          securityholders
10.6*     2000 Employee Stock Purchase Plan
</TABLE>

    
 
                                      II-3

<PAGE>   87
 
   

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C>       <S>
10.7*     Second Amended and Restated Investors' Rights Agreement
          dated as of February 1, 2000 between Registrant and the
          holders of its series B and series C redeemable convertible
          preferred stock
10.8*     Employment Agreement dated July 1, 1998 between the
          Registrant and Mr. Barbier
10.9*     Employment Offer Letter dated December 3, 1999 between the
          Registrant and Mr. Jennings
10.10*    Employment Offer Letter dated November 23, 1999 between the
          Registrant and Mr. Johnson
10.11*    Employment Offer Letter dated March 29, 1999 between the
          Registrant and Dr. Sherman
23.1      Consent of KPMG LLP, Independent Certified Public
          Accountants
23.2*     Consent of Counsel (see Exhibit 5.1)
24.1*     Power of Attorney (included on p. II-5 of the original
          filing)
27.1*     Financial Data Schedule
27.2*     Financial Data Schedule
27.3      Financial Data Schedule
</TABLE>

    
 
-------------------------
 + Confidential treatment has been requested for certain portions of this
   agreement. The omitted portions will be separately filed with the Securities
   and Exchange Commission.
 
 * Previously filed.
 
   
     Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
    
 

ITEM 17. UNDERTAKINGS
 
     The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
 
     Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by a director,
officer or controlling person in connection with the securities being registered
hereunder, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
 
     The undersigned Registrant hereby undertakes that:
 
          (1) For purposes of determining any liability under the Securities
     Act, the information omitted from the form of Prospectus filed as part of
     this Registration Statement in reliance upon Rule 430A and contained in a
     form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
     (4) or 497(h) under the Securities Act shall be deemed to be part of this
     Registration Statement as of the time it was declared effective.
 
          (2) For the purpose of determining any liability under the Securities
     Act, each post-effective amendment that contains a form of Prospectus shall
     be deemed to be a new registration statement relating to the securities
     offered therein, and the offering of such securities at that time shall be
     deemed to be the initial bona fide offering thereof.
 
                                      II-4

<PAGE>   88
 

                                   SIGNATURES
 
   
     Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Palo Alto,
State of California, on the 11th day of July, 2000.
    
 
                                      PAIN THERAPEUTICS, INC.
 
                                      By:          /s/ REMI BARBIER
                                         ---------------------------------------
                                                      Remi Barbier,
                                           President, Chief Executive Officer
                                         and Chairman of the Board of Directors
 
     Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated:
 
   

<TABLE>
<CAPTION>
                  SIGNATURE                                    TITLE                       DATE
                  ---------                                    -----                       ----
<S>                                            <C>                                     <C>
              /s/ REMI BARBIER                 President, Chief Executive Officer and  July 11, 2000
---------------------------------------------    Chairman of the Board of Directors
                Remi Barbier                       (Principal Executive Officer)
 
            /s/ DAVID L. JOHNSON*                Vice President, Finance and Chief     July 11, 2000
---------------------------------------------  Financial Officer (Principal Financial
              David L. Johnson                        and Accounting Officer)
 
          /s/ GERT CASPRITZ, PH.D.*                           Director                 July 11, 2000
---------------------------------------------
            Gert Caspritz, Ph.D.
 
      /s/ NADAV FRIEDMANN, M.D., PH.D.*                       Director                 July 11, 2000
---------------------------------------------
        Nadav Friedmann, M.D., Ph.D.
 
       /s/ WILFRED R. KONNEKER, PH.D.*                        Director                 July 11, 2000
---------------------------------------------
         Wilfred R. Konneker, Ph.D.
 
          /s/ MICHAEL J. O'DONNELL*                           Director                 July 11, 2000
---------------------------------------------
            Michael J. O'Donnell
 
          /s/ SANFORD R. ROBERTSON*                           Director                 July 11, 2000
---------------------------------------------
            Sanford R. Robertson
 
            *By: /s/ REMI BARBIER                         Attorney-In-Fact             July 11, 2000
  ----------------------------------------
                Remi Barbier
              Attorney-In-Fact
</TABLE>

    
 
                                      II-5

<PAGE>   89
 

                                 EXHIBIT INDEX
 
   

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C>       <S>
 1.1*     Form of Underwriting Agreement
 3.1*     Form of Amended and Restated Certificate of Incorporation of
          the Registrant to be in effect upon closing of this offering
 3.2*     Form of Bylaws of the Registrant to be in effect upon
          closing of this offering
 4.1*     Form of stock certificate
 5.1*     Opinion of Wilson Sonsini Goodrich & Rosati, Professional
          Corporation
10.1*     Form of Indemnification Agreement between the Registrant and
          each of its directors and officers
10.2+     License Agreement, dated May 5, 1998, between Registrant and
          Albert Einstein College of Medicine
10.3*     Research Agreement dated May 14, 1999 between the Registrant
          and KP Pharmaceutical Technology, Inc.
10.4*     Lease Agreement dated August 25, 1998 between the Registrant
          and Britannia Pointe Grand Limited Partnership
10.5*     1998 Stock Plan, as amended, and form of agreements
          thereunder between the Registrant and certain
          securityholders
10.6*     2000 Employee Stock Purchase Plan
10.7*     Second Amended and Restated Investors' Rights Agreement
          dated as of February 1, 2000 between Registrant and the
          holders of its series B and C redeemable convertible
          preferred stock
10.8*     Employment Agreement dated July 1, 1998 between the
          Registrant and Mr. Barbier
10.9*     Employment Offer Letter dated December 3, 1999 between the
          Registrant and Mr. Jennings
10.10*    Employment Offer Letter dated November 23, 1999 between the
          Registrant and Mr. Johnson
10.11*    Employment Offer Letter dated March 29, 1999 between the
          Registrant and Dr. Sherman
23.1      Consent of KPMG LLP, Independent Certified Public
          Accountants
23.2*     Consent of Counsel (see Exhibit 5.1)
24.1*     Power of Attorney (included on page II-5 of the original
          filing)
27.1*     Financial Data Schedule
27.2*     Financial Data Schedule
27.3      Financial Data Schedule
</TABLE>

    
 
-------------------------
 + Confidential treatment has been requested for certain portions of this
   agreement. The omitted portions will be separately filed with the Securities
   and Exchange Commission.
 
 * Previously filed.
   
    





<PAGE>   1

                                                                    EXHIBIT 10.2

                            LICENSE AGREEMENT BETWEEN
           ALBERT EINSTEIN COLLEGE OF MEDICINE OF YESHIVA UNIVERSITY
                                       AND
                             PAIN THERAPEUTICS, INC.

                                TABLE OF CONTENTS



<TABLE>
<S>                                                                      <C>
ARTICLE I

DEFINITIONS ............................................................... 2

    1.1     "AFFILIATE" ................................................... 2
    1.2     "AGENCY" ...................................................... 2
    1.3     "CALENDAR QUARTER" ............................................ 2
    1.4     "CALENDAR YEAR" ............................................... 3
    1.5     "CONFIDENTIAL INFORMATION" .................................... 3
    1.6     "DEVELOPMENT SCHEDULE" ........................................ 3
    1.7     "FIRST COMMERCIAL SALE" ....................................... 3
    1.8     "IND" ......................................................... 3
    1.9     "KNOW-HOW" .................................................... 3
    1.10    "LICENSED PRODUCT" ............................................ 4
    1.11    "MAJOR COUNTRIES" ............................................. 4
    1.12    "NDA" ......................................................... 4
    1.13    "NET SALES" ................................................... 4
    1.14    "NET PROCEEDS" ................................................ 5
    1.15    "PATENT RIGHTS" ............................................... 5
    1.16    "SUBLICENSEE" ................................................. 6
    1.17    "TERRITORY" ................................................... 6
    1.18    "VALID PATENT CLAIM" .......................................... 6

ARTICLE II

PATENT RIGHTS AND KNOW-HOW .................................................6

ARTICLE III

PAYMENTS ...................................................................8

Table I ...................................................................10
</TABLE>




<PAGE>   2



<TABLE>
<S>                                                                      <C>
ARTICLE IV

ROYALTIES AND REPORTS .................................................... 11

ARTICLE V

DEVELOPMENT AND COMMERCIALIZATION ........................................ 17

ARTICLE VI

CONFIDENTIALITY AND PUBLICATION .......................................... 18

ARTICLE VII

PATENTS .................................................................. 21

ARTICLE VIII

TERM AND TERMINATION ..................................................... 24

ARTICLE IX

INDEMNIFICATION .......................................................... 26

ARTICLE X

MISCELLANEOUS ............................................................ 28
</TABLE>




<PAGE>   3


                                LICENSE AGREEMENT

        THIS AGREEMENT, effective as of the date of last signature by a party
hereto (the "Effective Date"), is entered into by and between Albert Einstein
College of Medicine of Yeshiva University, a division of Yeshiva University, a
corporation existing under the laws of the State of New York, having an office
and place of business
 at 1300 Morris Park Avenue, Bronx, New York 10461
("UNIVERSITY") and Pain Therapeutics, Inc., a corporation organized and existing
under the laws of Delaware and having its principal office at 1345 Douglas
Street, San Francisco, CA 94131 ("LICENSEE").

                                   WITNESSETH

        WHEREAS, in the course of research conducted under UNIVERSITY auspices
by Dr. Stanley M. Crain and Dr. Ke-Fei Shen in the Department of Neuroscience of
UNIVERSITY certain Know-How and Patent Rights have been developed;

        WHEREAS, pursuant to assignments by Dr. Crain and Dr. Shen to
UNIVERSITY, which assignments have been recorded in the U.S. Patent and
Trademark Office, UNIVERSITY is the owner of the Know-How and Patent Rights, and
has the right to grant licenses under the Know-How and Patent Rights;

        WHEREAS, UNIVERSITY desires to have the Patent Rights utilized in the
public interest and is willing to grant a license to its interest thereunder,

        WHEREAS, LICENSEE desires to obtain a license under the Patent Rights
and Know-How in accordance with the terms and conditions set forth herein, to
commercially develop and exploit the Patent Rights and Know-How;



<PAGE>   4

        NOW, THEREFORE, in consideration of the mutual covenants and agreements
of the parties herein contained, the parties hereto, intending to be legally
bound, do hereby agree as follows.

                                    ARTICLE I
                                   DEFINITIONS

        The terms in this Agreement with initial letters capitalized, whether
used in the singular or plural, shall have the meaning designated below or, if
not designated below, the meaning as designated in places throughout this
Agreement.

1.1  "AFFILIATE" means any corporation or other entity which controls, is
     controlled by, or is under common control with a party to this Agreement. A
     corporation or other entity shall be regarded as in control of another
     corporation or entity if it owns or directly or indirectly controls more
     than fifty percent (50%) of the voting stock or other ownership interest of
     the other corporation or entity, or if it possesses, directly or
     indirectly, the power to direct or cause the direction of the management
     and policies of the corporation or other entity or the power to elect or
     appoint more than fifty percent (50%) of the members of the governing body
     of the corporation or other entity.

1.2  "AGENCY" means any governmental regulatory authority responsible for
     granting health or pricing approvals, registrations, import permits, and
     other approvals required before Licensed Product may be tested or marketed
     in any country.

1.3  "CALENDAR QUARTER" means the respective periods of three (3) consecutive
     calendar months ending on March 31, June 30, September 30 and December 31.


                                       2

<PAGE>   5

1.4  "CALENDAR YEAR" means each successive period of twelve (12) months
     commencing on January 1 and ending on December 31.

1.5  "CONFIDENTIAL INFORMATION" means and includes, without limitation,
     information and data of one party supplied to the other, know-how, and all
     other scientific, clinical, regulatory, marketing, financial and commercial
     information or data, whether communicated in writing or orally or by other
     means, which is provided by one party to the other party in connection with
     this Agreement, and which is designated confidential by the disclosing
     party.

1.6  "DEVELOPMENT SCHEDULE"' shall have the meaning set forth in Section 5.2
     hereof.

1.7  "FIRST COMMERCIAL SALE" means, with respect to a Licensed Product, the
     first sale for use or consumption by the public of such Licensed Product in
     a country after all required approvals, including marketing and pricing
     approvals, have been granted by the governing health authority of such
     country.

1.8  "IND" means Investigational New Drug application, or the like, as defined
     in the applicable laws and regulations of the governmental drug regulatory
     agencies in each country.

1.9  "KNOW-HOW" means all information and materials, including but not limited
     to, technology, experience, discoveries, improvements, processes, formulae,
     data (including but not limited to all preclinical, clinical,
     toxicological, and pharmacological data) and inventions, trade secrets,
     patentable or otherwise, developed by UNIVERSITY through Drs. Crain and
     Shen, which on the Effective Date of this Agreement are in UNIVERSITY's
     possession and control, are not generally known and are necessary or useful
     for LICENSEE in the research,


                                       3

<PAGE>   6

     development, manufacture, marketing, use or sale of compositions or methods
     for the attenuation of opioid tolerance and dependence and the enhancement
     of opioid analgesic potency. Know-How shall also include any Know-How and
     improvements or modifications to the Know-How which are developed by
     UNIVERSITY through Drs. Crain, Shen and their staff after the Effective
     Date of this Agreement as a result of any research funding provided by
     LICENSEE to UNIVERSITY pursuant to this Agreement.

1.10 "LICENSED PRODUCT" means any and all formulations for human pharmaceutical
     or animal health use, the manufacture, importation use or sale of which
     would (a) infringe a Valid Patent Claim but for the license provided under
     Article II hereof or (b) involve the use of Know-How.

1.11 "MAJOR COUNTRIES" means the following countries: United States, Canada,
     Japan and collectively the European Community.

1.12 "NDA" means a New Drug Application in the U.S. or the corresponding
     application for authorization for marketing of Licensed Product in any
     other country, as defined in the applicable laws and regulations and filed
     with the Agency of a given country.

1.13 "NET SALES" means the aggregate gross invoice price of Licensed Product
     sold by LICENSEE, its Affiliates and Sublicensees to an independent third
     party, including without limitation distributors, after deducting (to the
     extent not already deducted in the amount invoiced):

                (i)   trade and quantity discounts given;

                (ii)  returns and allowances;

                (iii) rebates, chargebacks and other amounts paid, credited or
                      accrued;

                (iv)  retroactive price reductions;


                                       4

<PAGE>   7

                (v)   sales commissions paid to distributors and/or selling
                      agents;

                (vi)  a fixed amount equal to five percent (5%) for U.S. sales
                      and ten percent (10%) for sales outside the U.S., of the
                      amount invoiced to cover bad debt, custom duties,
                      surcharges, sales or excise taxes, cash discounts,
                      transportation and insurance charges; and

                (vii) as agreed by the parties, any other specifically
                      identifiable amounts included in gross sales that were or
                      ultimately will be credited and that are substantially
                      similar to those listed above.

1.14 "NET PROCEEDS" shall mean the total consideration. in any form (including,
     but not limited to, license signing and maintenance fees, minimum payments,
     research and development funds, and payments for equity of Licensee in
     excess of fair market value. etc.), received by LICENSEE from any third
     party or parties in connection with the grant to said third party or
     parties of a sublicense to make and sell (or otherwise dispose of) Licensed
     Products. Net Proceeds do not include royalties based on Net Sales of a
     sublicensee, nor payments made to Licensee that are specifically earmarked
     for and actually used to conduct clinical trials for Licensed Products.

1.15 "PATENT RIGHTS" means the patents and patent applications listed on
     Attachment A and any and all divisions, continuations,
     continuations-in-part, reissues, renewals, extensions or the like of any
     such patents and patent applications and all foreign equivalents thereof
     and any and all patents and patent applications owned by UNIVERSITY which
     contain one or more claims directed to compositions or methods for the
     attenuation of opioid tolerance and dependence and the enhancement of
     opioid analgesic potency and which result from the research funding
     provided by LICENSEE to UNIVERSITY pursuant to this Agreement, and any and
     all divisions, continuations, continuations-in-part,


                                       5

<PAGE>   8

     reissues, renewals, extensions or the like of any such patents and patent
     applications and all foreign equivalents thereof.

1.16 "SUBLICENSEE" means a business entity which is sublicensed by LICENSEE
     under this Agreement.

1.17 "TERRITORY" means the entire world.

1.18 "VALID PATENT CLAIM"' means a claim of an issued and unexpired patent
     included within the Patent Rights which has not been revoked or held
     unenforceable or invalid by a decision of a court or other governmental
     agency of competent jurisdiction, unappealable or unappealed within the
     time allowed for appeal, or which has not been disclaimed, denied or
     admitted to be invalid or unenforceable through reissue or disclaimer or
     otherwise.

                                   ARTICLE 11

                           PATENT RIGHTS AND KNOW-HOW

2.1  Subject to paragraph 2.4, UNIVERSITY hereby grants to LICENSEE an exclusive
     license, with right to grant sublicenses, under the Patent Rights and
     Know-How to make, have made, use, sell, offer for sale and import Licensed
     Products in the Territory. LICENSEE shall require all of its sublicensees
     to expressly agree to indemnify UNIVERSITY in the same manner as LICENSEE
     is required to indemnify UNIVERSITY pursuant to this Agreement. For each
     sublicense agreement into which LICENSEE proposes to enter, LICENSEE shall
     notify UNIVERSITY of the name and address of the sublicensee and provide to
     UNIVERSITY a copy of the proposed agreement with such sublicensee. Within
     thirty days of receipt of the proposed agreement and name and address,


                                       6

<PAGE>   9

     UNIVERSITY shall have the right to reject a proposed Sublicensee if such
     sublicensee:

     1. Has, within the past 2 years, engaged in illegal activities;

     2. Has an unusually high debt burden or liability (as compared with similar
        businesses in the same country); and

     3. Has, within the past 2 years, been censured by the U.S. Securities and
        Exchange Commission or, if not a U.S. company, by the securities
        regulators of its country.

     4. Has, within the past 2 years, engaged in a boycott or Israel.

     A true and complete copy of all sublicense agreements shall be promptly
     provided to UNIVERSITY.

2.2  Within thirty (30) days following the Effective Date of this License
     Agreement, UNIVERSITY shall provide to LICENSEE Know-How not already
     provided to LICENSEE. Throughout the term of this Agreement, UNIVERSITY
     will provide additional Know-How to LICENSEE promptly as it is developed.

2.3  LICENSEE's Right of Negotiation. It is recognized that during the term of
     this Agreement discoveries and inventions may be made as a result of the
     research funding provided by LICENSEE to UNIVERSITY pursuant to this
     Agreement that have utility in the pharmaceutical or animal fields which
     are outside the scope of the license granted under Section 2.1 hereof. Such
     discoveries and inventions may be made solely by UNIVERSITY or jointly by
     UNIVERSITY and LICENSEE (said discoveries and inventions referred to herein
     collectively as "Subject Inventions"). In consideration of this Agreement,
     UNIVERSITY hereby grants to LICENSEE the fight to require, at LICENSEE's
     election, that UNIVERSITY negotiate in good faith with LICENSEE with
     respect to the grant to LICENSEE of an exclusive world-wide license, with
     right to grant sublicenses, to make, have


                                       7

<PAGE>   10

     made, use, sell, offer for sale and import under UNIVERSITY's rights in any
     and all Subject Inventions and any patent or patent application claiming
     such Subject Inventions. The terms and Conditions of such license will be
     determined giving consideration to product sales, the license scope and
     rates conventionally granted for inventions with reasonably similar
     commercial potential and the relative contributions of the parties to the
     invention, the relative contribution of such invention to the product
     commercialized, and the cost of subsequent research and development needed
     to bring the product into the marketplace.

2.4  UNIVERSITY has and will perform research sponsored in part by the United
     States Government and related to Licensed Products. As a result of this
     government sponsorship of the aforementioned research, the United States
     Government retains certain rights in such research as set forth in 35
     U.S.C. Section 200 et. seq. and applicable regulations. The continuation
     of such government sponsored research by UNIVERSITY during the term of this
     Agreement will not constitute a breach of this Agreement. All rights
     reserved to the U.S. Government under 35 U.S.C. Section 200 et. seq. and
     applicable regulations shall remain so reserved and shall in no way be
     affected by this Agreement. UNIVERSITY is not obligated under this
     Agreement to take any action which would conflict in any respect with their
     past, current or future obligations to the U.S. Government as to work
     already performed and to be performed in the future.

                                   ARTICLE III

                                    PAYMENTS

3.1  LICENSE FEE. In consideration for the rights and licenses granted
     hereunder, LICENSEE shall pay to UNIVERSITY a one time license fee payment
     of one hundred thousand dollars ($100,000) which shall be due within thirty
     (30) days of

                                       8

<PAGE>   11

     the Effective Date. This payment is non-returnable and not creditable
     against any other payment due under this Agreement.

3.2  RESEARCH FUNDING. In consideration of the license grant and with the
     understanding that the following payments will be used to fund research at
     UNIVERSITY in the laboratory of Drs. Crain and Shen, LICENSEE shall pay
     UNIVERSITY a total of six hundred thousand dollars ($600,000) as follows:

               (a) FIRST PAYMENT: one hundred thousand dollars ($100,000) paid 
                   in the first year of this Agreement, which shall be due
                   within thirty (30) days of the Effective Date;

               (b) SECOND PAYMENT: one hundred thousand dollars ($100,000) paid
                   in the first year of this Agreement, which shall be due
                   within thirty (30) days of the sixth (6) month anniversary of
                   the Effective Date;

               (c) THIRD PAYMENT: two hundred thousand dollars ($200,000), paid
                   in the second year of this Agreement, which shall be due
                   within thirty (30) days of the one year anniversary of the
                   Effective Date; and

               (d) FOURTH PAYMENT: two hundred thousand dollars ($200,000), paid
                   in the third year of this Agreement, which shall be due
                   within thirty (30) days of the two year anniversary of the
                   Effective Date.


                                       9

<PAGE>   12

     The parties acknowledge and agree that in the event LICENSEE terminates
     this Agreement as provided under Article VIII hereinbelow, then LICENSEE
     shall not be obligated to make any payment under this Section 3.2 that,
     becomes due after such termination. Thus, e.g., if LICENSEE terminates this
     Agreement on the six month anniversary of the Effective Date, then LICENSEE
     shall not be obligated to make the payments of Sections 3.2(a) and (b).

3.3  MILESTONES: MILESTONE PAYMENTS. In further consideration of the rights and
     licenses granted to LICENSEE hereunder, LICENSEE shall make lump sum
     milestone payments to UNIVERSITY upon the first achievement of the
     Milestone Events, as set forth in Table I hereinbelow, with respect to
     Licensed Product.

                                     TABLE 1


<TABLE>
<CAPTION>
      MILESTONE EVENT              MILESTONE PAYMENT           MILESTONE DATE
-----------------------------      -----------------      -----------------------
<S>                                   <C>                 <C>
Initiation of first Phase III           $200,000          4 years from  Effective
studies in the U.S.                                       Date

First NDA filing in the U.S.            $300,000          8 years from Effective
                                                          Date

First NDA approval in the U.S.        $3,000,000          1O Years from Effective
                                                          Date

First approval to market in             $500,000
each Major Country, other than
the U.S.
</TABLE>



                                       10

<PAGE>   13

        LICENSEE shall notify UNIVERSITY in writing within thirty (30) days upon
the achievement of each Milestone Event and such Milestone Payment shall be paid
no later than thirty (30) days following achievement of the Milestone Event. All
Milestone Payments under this Agreement shall be made in United States dollars.

        Notwithstanding anything to the contrary, LICENSEE shall be deemed to
have met a Milestone obligation upon timely payment of the Milestone Payment,
regardless of whether the Milestone Event has actually been achieved. Moreover,
in the event LICENSEE meets a Milestone by timely payment of the Milestone
Payment, and then achieves the Milestone Event some time after the Milestone
Date, then the remaining Milestone Dates shall be adjusted into the future by
the same amount of time, up to one year, that it took to achieve the Milestone
Event. For example, if LICENSEE tendered the Milestone Payment associated with
the initiation of first Phase III Studies in the U.S. on the Milestone Date, and
achieved this Milestone Event 4.5 years from the Effective Date, then remaining
Milestone Dates would be adjusted forward as follows: First NDA filing in the
U.S., 8.5 years from Effective Date; First NDA approval in the U.S., 10.5
years. However, if LICENSEE tendered the Milestone Payment associated with the
initiation of first Phase III Studies in the U.S. on the Milestone Date, and
achieved this Milestone Event 5.5 years from the Effective Date, then remaining
Milestone Dates would be adjusted forward as follows: First NDA filing in the
U.S., 9 years from Effective Date; First NDA approval in the U.S., 11 years.

                                   ARTICLE IV

                              ROYALTIES AND REPORTS

4.1  In consideration of the license rights granted to LICENSEE by UNIVERSITY
     hereunder, LICENSEE shall pay to UNIVERSITY annual royalties for each
     Calendar Year on Net Sales of Licensed Product(s) by LICENSEE, its
     Affiliates and Sublicensees in the Territory. Such royalty shall be payable
     based upon the


                                       11

<PAGE>   14

     worldwide annual aggregate Net Sales in a Calendar Year of Licensed
     Product(s) at the rates and in the amounts set forth below:

               (a) four percent (4%) of the total aggregate Net Sales of
                   Licensed Product(s) in all countries in the Territory in
                   which the sale of the Licensed Product is covered in whole or
                   in part by a Valid Patent Claim;

               or, in the event that the Licensed Product is not covered by a
               Valid Patent Claim,

               (b) a royalty of two percent (2%) as a Know-How royalty, for each
                   country in the Territory in which the sale of the Licensed
                   product is not covered in whole or in part by a Valid Patent
                   Claim but involves the use of Know-How.

For each country, royalties on Licensed Product(s) at the rate set forth above
shall be payable to UNIVERSITY effective as of the date of First Commercial Sale
in the country. The royalty payable under Section 4.1(a) shall be payable until
the date of expiration of the last applicable Patent Right containing a Valid
Patent Claim in each such country. The royalty payable under Section 4.1(b)
shall be payable for a period of ten (10) years from the date of First
Commercial Sale.

         The royalties payable hereunder shall be subject to the following
         conditions:

                (i)   that only one royalty shall be due with respect to the
                      same unit of Licensed Product;


                                       12

<PAGE>   15

                (ii)  that  no royalties shall be due upon the sale or other
                      transfer between LICENSEE and its Affiliates;

                (iii) no royalties shall accrue on the disposition of Licensed
                      Product in reasonable quantities by LICENSEE, Affiliates
                      or its Sublicensees as bona fide samples or as donations
                      to nonprofit institutions or government agencies for
                      non-commercial purposes; and

                (iv)  notwithstanding the above royalty rates, upon LICENSEE's
                      request. the parties agree to discuss in good faith a
                      reduction of such royalty rate in any given country in the
                      event the level of development, patent protection or
                      general commercial environment affects the commercial
                      viability of the Licensed Product under such royalty rate.

4.2  If LICENSEE grants a sublicense under Patent Rights and/or Know-How prior
     to the completion of a Phase 11 clinical trial in support of approval to
     sell the first Licensed Product in the U.S.A., then LICENSEE shall pay to
     UNIVERSITY fifty percent (50%) of Net Proceeds in addition to payments due
     to UNIVERSITY pursuant to Paragraph 4.1 with respect to Net Sales of such
     Sublicensee. If LICENSEE grants a sublicense under Patent Rights and/or
     Know-How after the completion of a Phase II clinical trial in support of
     approval to sell the first Licensed Product in the U.S.A., then LICENSEE
     shall be obligated to make payments to UNIVERSITY pursuant to Paragraph 4.1
     with respect to Net Sales of such Sublicensee, but will not be obligated to
     make additional payments to UNIVERSITY based on Net Proceeds.

4.3  COMPULSORY LICENSES. If a compulsory license is granted with respect to
     Licensed Product in any country in the Territory with a royalty rate lower
     than the

                                       13

<PAGE>   16
     royalty rate provided by Section 4.1., then the royalty rate to be paid by
     LICENSEE on Net Sales in that country under Section 4.1 shall be reduced to
     be equal to the rate paid by the compulsory licensee.

4.4  THIRD PARTY PATENTS. If LICENSEE, in its reasonable judgment, is required
     to obtain a license from any third party under any patent in order to
     import, manufacture, use or sell the Licensed Product, and to pay a royalty
     under such license, and the infringement of such patent cannot reasonably
     be avoided by LICENSEE, LICENSEE's obligation to pay royalties under
     Section 4.1 hereof shall be reduced by one-half of the amount of the
     royalty paid to such third party, provided, however, that the royalties
     payable under Section 4.1 hereof shall not be reduced in any such event
     below one-half (1/2) of the amounts set forth in Sections 4.1(a)-(b) above.
     In addition, if LICENSEE is required to pay up-front payments or milestone
     payments to such third party in consideration for such license, then the
     milestone payments under Section 3.3 shall be reduced by one-half of the
     amount of such up-front payments or milestone payments paid to such third
     party, provided, however, that the milestone payments payable under Section
     3.3 hereof shall not be reduced in any such event below one-half (1/2) of
     the amounts set forth in Section 3.3.

4.5  ROYALTY DURING INFRINGEMENT. If there is substantial infringement of the
     Patent Rights by a third party or parties and LICENSEE has commenced
     litigation to abate such infringement, LICENSEE may discontinue payment of
     up to one half of the royalty with respect to sales in the country where
     the infringement occurs, until the infringement ends, after which the
     royalty rate will return to its previous level. Upon successful completion
     of the litigation and receipt by LICENSEE of a monetary award therefor,
     LICENSEE shall reimburse UNIVERSITY those royalties withheld under this
     paragraph 4.5. For the purpose of this paragraph 4.5 "substantial
     infringement" means unit sales which equal at least 10% of


                                       14

<PAGE>   17

     LICENSEE's unit sales in the country over any three (3) month period, as
     reported by IMS America Ltd. or another reputable, independent market
     research firm reasonably acceptable to both parties.

4.6  PAID-UP LICENSE. For each country, upon expiration of LICENSEE's obligation
     to pay royalties pursuant to Section 4.1, LICENSEE shall have a fully
     paid-up, non-exclusive license under any Know-How, to make, have made, use
     and sell Licensed Product in that country.

4.7  REPORTS: PAYMENT OF ROYALTY. During the term of the Agreement following the
     First Commercial Sale of a Licensed Product, LICENSEE shall furnish to
     UNIVERSITY a quarterly written report for the Calendar Quarter showing the
     sales of all Licensed Product(s) subject to royalty payments sold by
     LICENSEE, its Affiliates and its Sublicensees in the Territory during the
     reporting period and the royalties payable under this Agreement. Reports
     shall be due on the ninetieth (90) day following the close of each Calendar
     Quarter. Royalties shown to have accrued by each royalty report shall be
     due and payable on the date such royalty report is due. LICENSEE shall keep
     complete and accurate records in sufficient detail to enable the royalties
     payable hereunder to be determined.

4.8  AUDITS.

     (a)  Upon the written request of UNIVERSITY and not more than once in each
          Calendar Year, LICENSEE shall permit an independent certified public
          accounting firm of nationally recognized standing selected by
          UNIVERSITY and reasonably acceptable to LICENSEE, at UNIVERSITY's
          expense, to have access during normal business hours to such records
          of LICENSEE as may be reasonably necessary to verify the accuracy of
          the royalty reports hereunder for any Calendar Year ending not more
          than twenty-four (24) months prior to the date of such request.


                                       15

<PAGE>   18

          These rights with respect to any Calendar Year shall terminate two (2)
          years after the end of any such Calendar Year.

     (b)  If such accounting firm correctly concludes that additional royalties
          were owed during such period, LICENSEE shall pay the additional
          royalties within thirty (30) days of the date UNIVERSITY delivers to
          LICENSEE such accounting firm's written report so correctly
          concluding. The fees charged by such accounting firm shall be paid by
          UNIVERSITY unless the audit discloses that the payments payable by
          LICENSEE for the audited period are more than one hundred ten percent
          (110%) of the payments actually made for such period, in which case
          LICENSEE shall pay the reasonable fees and expenses charged by the
          accounting firm.

     (c)  LICENSEE shall include in each sublicense granted by it pursuant to
          this Agreement a provision requiring the Sublicensee to make reports
          to LICENSEE, to keep and maintain records of sales made pursuant to
          such sublicense and to grant access to such records by UNIVERSITY's
          independent accountant to the same extent required of LICENSEE under
          this Agreement.

     (d)  UNIVERSITY shall treat all financial information and other LICENSEE
          information subject to review under this Section 4.8 or under any
          sublicense agreement in accordance with the confidentiality provisions
          of this Agreement, and shall cause its accounting firm to enter into a
          confidentiality agreement with LICENSEE obligating it to retain all
          such financial information in confidence pursuant to such
          confidentiality agreement.


                                       16

<PAGE>   19

4.9  PAYMENT AND EXCHANGE RATE. All payments to be made by LICENSEE to
     UNIVERSITY under this Agreement shall be made in United States dollars and
     shall be paid by bank wire transfer in immediately available funds to such
     bank account in the United States designated in writing by UNIVERSITY from
     time to time. In the case of sales outside the United States by LICENSEE,
     the rate of exchange to be used in computing the amount of currency
     equivalent in United States dollars due UNIVERSITY shall be the month-end
     exchange rate applicable for the month in which the sales are recorded.
     Such month-end exchange rate is the exchange rate utilized by LICENSEE in
     its worldwide accounting system and reflects the average exchange rate for
     each month.

4.10 INTEREST ON LATE PAYMENTS. UNIVERSITY reserves the right to charge and
     LICENSEE hereby agrees to pay interest on any overdue amounts owing from
     LICENSEE which are overdue through the fault of LICENSEE, at the rate of
     one-half percent (0.5%) per month calculated from the date any payment was
     due and payable.

                                    ARTICLE V

                        DEVELOPMENT AND COMMERCIALIZATION

5.1  LICENSEE shall use its good faith efforts, to safely and appropriately
     manage at its own cost all scientific, medical and business activities that
     lead to regulatory approval, manufacturing, marketing and sale of Licensed
     Products worldwide.

5.2  Within ninety (90) days of the Effective Date of this Agreement, LICENSEE
     shall provide to UNIVERSITY a proposed schedule for the development of the
     Licensed Product (the "Development Schedule"). LICENSEE shall provide to
     UNIVERSITY an updated Development Schedule on an annual basis during the
     development of Licensed Product.


                                       17

<PAGE>   20

                                   ARTICLE VI

                         CONFIDENTIALITY AND PUBLICATION

6.1  The parties hereby agree to not disclose and to use all reasonable efforts
     to maintain the secrecy of any and all Confidential Information disclosed
     by one party to the other under the terms of this Agreement without the
     express, written consent of the disclosing party, with the exception of the
     following:

     (a)  information which, at the time of disclosure, is available to the
          public;

     (b)  information which, after disclosure, becomes available to the public
          by publication or otherwise, other than by breach of this Agreement by
          the receiving party;

     (c)  information that the receiving party can establish by prior record was
          already known to it or was in its possession or in the possession of
          an Affiliate (as such term is defined below) at the time of disclosure
          and was not acquired, directly or indirectly, from the disclosing
          party;

     (d)  information that the receiving party obtains from a third party;
          provided however, that such information was not obtained by said third
          party, directly or indirectly, from the disclosing party under an
          obligation of confidentiality toward the disclosing party;

     (e)  information that the receiving party can establish was independently
          developed by persons in its employ or otherwise who had no contact
          with and were not aware of the content of the Confidential
          Information; and

     (f)  information that the receiving party is compelled to disclose by a
          court or other tribunal of competent jurisdiction, provided however,
          that in such case the receiving party shall immediately give notice
          to the providing party so that the providing party may seek a
          protective order or other remedy from said court or tribunal. In any
          event, the receiving party shall


                                       18

<PAGE>   21

               disclose only that portion of the Confidential Information that,
               in the opinion of its legal counsel, is legally required to be
               disclosed and will exercise reasonable efforts to ensure that any
               such information so disclosed will be accorded confidential
               treatment by said court or tribunal.

6.2     The receiving party will not disclose any such Confidential Information
        to any person other than to Rs directors, officers or employees, or to,
        directors, officers or employees of an Affiliate and sublicensees, and
        only then if they have a clear need to know such Confidential
        Information in connection with the performance of their professional
        responsibilities.

6.3     The receiving party shall take all reasonable steps, including, but not
        limited to, those steps taken to protect its own information, data or
        other tangible or intangible property that it regards as proprietary or
        confidential, to insure that the Confidential Information is not
        disclosed or duplicated for the use of any third party, and shall take
        all reasonable steps to prevent its officers and employees, or any
        others having access to the Confidential Information, from disclosing or
        making unauthorized use of any Confidential Information, or from
        committing any acts or omissions that may result in a violation of this
        Agreement.

6.4     Title to, and all rights emanating from the ownership of, all
        Confidential Information disclosed under this Agreement shall remain
        vested in the disclosing party. Nothing herein shall be construed as
        granting any license or other right to use the Confidential Information
        other than as specifically agreed upon by the parties.

6.5     Upon written request of the disclosing party, the receiving party shall
        return promptly to the disclosing party all written materials and
        documents, as well as any computer software or other media, made
        available or supplied by the


                                       19

<PAGE>   22

        disclosing party to the receiving party that contains Confidential
        Information, together with any copies thereof, except that the receiving
        party may retain one copy of each such document or other media for
        archival purposes, subject to protection and non-disclosure in
        accordance with the terms of this Agreement

6.6     The receiving party agrees that the disclosure of Confidential
        Information without the express written consent of the disclosing party
        will cause irreparable harm to the disclosing party, and that any breach
        or threatened breach of this Agreement by the receiving party will
        entitle the disclosing party to injunctive relieve, in addition to any
        other legal remedies available to it, in any court of competent
        jurisdiction.

6.7     USE OF CONFIDENTIAL IN INFORMATION. Both parties agree that the
        Confidential Information shall only be used in connection with the
        parties' respective rights and obligations under this Agreement.

6.8     PUBLICATION. During the term of this Agreement, LICENSEE and UNIVERSITY
        each acknowledge the other party's interest in publishing its results to
        obtain recognition within the scientific community and to advance the
        state of scientific knowledge. Each party also recognizes the mutual
        interest in obtaining valid patent protection and in protecting business
        interests and trade secret information. Consequently, either party, its
        employees or consultants wishing to make a publication of the research
        funded by LICENSEE pursuant to this Agreement shall deliver to the other
        party a copy of the proposed written publication or an outline of an
        oral disclosure at least thirty (30) days prior to submission for
        publication or presentation. The reviewing party shall have the right
        (i) to propose modifications to the publication for patent reasons,
        trade secret reasons or business reasons or (ii) to request a reasonable
        delay in publication or presentation in order to protect patentable
        information. If the


                                       20

<PAGE>   23

        reviewing party requests a delay, the publishing party shall delay
        submission or presentation for a period of sixty (60) days to enable
        patent applications protecting each party's rights in such information
        to be filed. Upon expiration of such sixty (60) days, the publishing
        party shall be free to proceed with the publication or presentation. If
        the reviewing party requests modifications to the publication, the
        publishing party shall edit such publication to prevent disclosure or
        trade secret or proprietary business information prior to submission of
        the publication or presentation. In addition, the contributions of the
        parties to the research shall be expressly noted in such publications or
        other public disclosures by acknowledgment or co-authorship, whichever
        is appropriate.

                                   ARTICLE VII
                                     PATENTS


7.1     FILING, PROSECUTION AND MAINTENANCE OF PATENTS. The parties shall
        diligently take all commercially reasonable steps required to maintain
        the Patent Rights in full force and effect, UNIVERSITY shall be
        responsible for the day-to-day activities associated with filing,
        prosecuting and maintaining the Patent Rights. UNIVERSITY agrees to
        consult with and cooperate with LICENSEE to promptly file, prosecute and
        maintain the Patent Rights in the Territory. All filing, prosecution,
        and maintenance decisions with respect to the Patent Rights, including
        without limitation decisions about reexaminations and reissue
        proceedings, shall be made by LICENSEE with the approval of UNIVERSITY,
        such approval not to be unreasonably withheld. All such filing,
        prosecution, and maintenance of the Patent Rights shall be carried out
        by outside patent counsel selected by LICENSEE with the approval of
        UNIVERSITY, such approval not to be unreasonably withheld. Such outside
        patent counsel shall at all times during the term of this Agreement keep
        LICENSEE and UNIVERSITY advised of the status of patent filings and upon
        request of either party shall provide copies of


                                       21

<PAGE>   24

        any papers relating to the filing, prosecution or maintenance of such
        Patent Rights. During the term of this Agreement the parties shall
        cooperate in providing information to assist the outside counsel with
        the patent prosecution of the Patent Rights.

7.2     PATENT COSTS. In consideration of this Agreement, during the term of
        this Agreement LICENSEE shall reimburse UNIVERSITY for the documented
        filing, prosecution, and maintaining costs with respect to the Patent
        Rights which are invoiced by such outside patent counsel (the "Patent
        Costs"). Outside patent counsel shall provide LICENSEE with detailed
        invoices, reasonably satisfactory to LICENSEE, for the Patent Costs.
        LICENSEE shall pay outside patent counsel within thirty (30) days of
        receipt of such invoices. UNIVERSITY shall promptly give notice to
        LICENSEE of the grant, lapse, revocation, surrender, invalidation, or
        abandonment of any Patent Rights licensed to LICENSEE for which
        UNIVERSITY is responsible for the filing, prosecution and maintenance.
        In the event that UNIVERSITY desires to discontinue maintenance or
        prosecution of the Patent Rights, UNIVERSITY shall first agree to assign
        such Patent Rights to LICENSEE at no cost.

7.3     PATENT TERM RESTORATION. The parties hereto shall cooperate with each
        other in obtaining patent term restoration or supplemental protection
        certificates or their equivalents in any country in the Territory where
        applicable to Patent Rights. In the event that elections with respect to
        obtaining such patent term restoration, supplemental protection
        certificates or their equivalents are to be made, LICENSEE shall have
        the right to make the election and UNIVERSITY agrees to abide by such
        election.


                                       22

<PAGE>   25


7.4     INFRINGEMENT.

        (a)     UNIVERSITY and LICENSEE each shall immediately give notice to
                the other of any potential infringement or infringement by a
                third party of any Patent Rights of which they become aware or
                of any certification of which they become aware filed under the
                United States "Drug Price Competition and Patent Term
                Restoration Act of 1984" claiming that Patent Rights covering
                the Licensed Product are invalid or unenforceable or that
                infringement will not arise from the manufacture, use or sale of
                Licensed Product by a third party.

        (b)     LICENSEE as exclusive licensee will have the right to settle
                with the infringer or to bring suit or other proceeding at its
                expense against the infringer in its own name or in the name of
                UNIVERSITY where necessary, after consultation with UNIVERSITY.
                UNIVERSITY shall be kept advised at all times of such suit or
                proceedings brought by LICENSEE. UNIVERSITY may, in its
                discretion, join LICENSEE as party to the suit or other
                proceeding, provided that LICENSEE shall retain control of the
                prosecution of such suit or proceedings in such event.
                UNIVERSITY agrees to cooperate with LICENSEE in its efforts to
                protect Patent Rights, including joining as a party where
                necessary.

        (c)     If LICENSEE does not settle with the infringer or bring suit or
                other proceeding against the infringer, UNIVERSITY may in its
                discretion, bring suit or other proceeding at its expense
                against the infringer, provided however, that UNIVERSITY shall
                first consult with LICENSEE as to whether such act(s) by a third
                party reasonably constitute infringement and whether it is
                commercially advisable to bring such suit or proceeding, as
                reasonably determined by LICENSEE. LICENSEE shall be kept 


                                       23

<PAGE>   26

                advised at all times of such suit or proceedings brought by
                UNIVERSITY. LICENSEE may, in its discretion, join LICENSEE as
                party to the suit or other proceeding, provided that UNIVERSITY
                shall retain control of the prosecution of such suit or
                proceedings in such event. LICENSEE agrees to cooperate with
                UNIVERSITY in its efforts to protect Patent Rights, including
                joining as a party where necessary.

        (d)     Each party will bear its own expenses with respect to any suit
                or other proceeding against an infringer. Any recovery in
                connection with such suit or proceeding will first be applied to
                reimburse UNIVERSITY and LICENSEE for their out-of-pocket
                expenses, including attorney's fees. The party controlling the
                suit will retain the balance of any recovery. However, if the
                damages awarded LICENSEE include an amount based on lost sales
                or profit, then LICENSEE shall pay to UNIVERSITY four percent
                (4%) of the award after first subtracting from the award those
                amounts not based on lost sales or profit (such as punitive
                damages including treble damages, e.g.). If the damages awarded
                LICENSEE include an amount based on a reasonable royalty then,
                LICENSEE shall pay to UNIVERSITY twenty percent (20%) of the
                award after first subtracting from the award those amounts not
                based on a reasonable royalty (such as punitive damages
                including treble damages, e.g.).


                                  ARTICLE VIII

                              TERM AND TERMINATION

8.1     TERM AND EXPIRATION. This Agreement shall be effective as of the
        Effective Date and unless terminated earlier pursuant to Section 8.2,
        8.3 or 8.4 below, the terms of this Agreement shall continue in effect
        on a country-by-country basis until expiration date of the last
        obligation of LICENSEE to pay royalty to


                                       24

<PAGE>   27

        UNIVERSITY for the sale of a Licensed Product in that country. Upon
        expiration of this Agreement as to any country due to the expiration of
        the obligation of LICENSEE to pay royalty to UNIVERSITY for the sale of
        a Licensed Product in that country, the licenses hereunder with respect
        to Licensed Product shall become fully paid-up, perpetual licenses.

8.2     TERMINATION FOR CAUSE. This Agreement may be terminated by notice by
        either party at any time during the term of this Agreement:

        (a)     if it is shown by credible evidence that the other party is in
                breach of its material obligations hereunder (including all
                obligations of Licensee to make payments to UNIVERSITY
                hereunder) by causes and reasons within its control and has not
                cured such breach within ninety (90) days after written notice
                requesting cure of the breach; or

        (b)     upon the filing or institution of bankruptcy, liquidation or
                receivership proceedings, or upon an assignment of a substantial
                portion of the assets for the benefit of creditors by the other
                party; provided, however, in the case of any involuntary
                bankruptcy proceeding such right to terminate shall only become
                effective if the party consents to the involuntary bankruptcy or
                such proceeding is not dismissed within ninety (90) days after
                the filing thereof.

8.3     TERMINATION WITHOUT CAUSE. This Agreement may be terminated by LICENSEE
        at any time on fifteen (15) days written notice. Upon such termination
        all right, title and interest in the Patent Rights, Know-How and all
        preclinical and clinical data shall revert to UNIVERSITY and LICENSEE
        shall have no further obligations under this Agreement.


                                       25

<PAGE>   28

8.4     TERMINATION by UNIVERSITY. If LICENSEE has not initiated a Phase III
        clinical trial in the U.S.A. for a Licensed Product before the fourth
        anniversary of the Effective Date, then UNIVERSITY may terminate and the
        licenses granted hereunder by giving notice to LICENSEE FIFTEEN (15)
        days prior to such termination. Upon such termination all right, title
        and interest in the Patent Rights, Know-how and all preclinical data
        shall revert to UNIVERSITY and LICENSEE shall have no further
        obligations under this Agreement.

8.5     EFFECT OF TERMINATION. Expiration or termination of the Agreement shall
        not relieve the parties of any obligation accruing prior to such
        expiration or termination. Any expiration or early termination of this
        Agreement shall be without prejudice to the rights of either party
        against the other accrued or accruing under this Agreement prior to
        termination, including the obligation to pay royalties for Licensed
        Product sold prior to such termination.


                                   ARTICLE IX

                                 INDEMNIFICATION

9.1     INDEMNIFICATION BY LICENSEE. LICENSEE shall at all times during the term
        of this Agreement and thereafter, indemnify, defend and hold harmless
        UNIVERSITY, its trustees, officers, employees and affiliates, from and
        against any and all claim, loss, damage, liability, injury, cost or
        expense, including without limitation expenses of litigation and
        reasonable attorneys' fees, in connection with any claims made or suits
        brought against LICENSEE relating to this Agreement: (i) arising from
        the negligence, willful misconduct, or material breach of this Agreement
        by LICENSEE, its Affiliates, subcontractors, sublicensees, or agents or
        (ii)


                                       26

<PAGE>   29

        arising out of the death of or injury to any person or persons or out of
        any damage to property and resulting from the production, manufacture,
        sale, use, lease, consumption or advertisement of Licensed Product;
        provided however that LICENSEE shall not be obligated to provide
        indemnification hereunder to the extent that any such claim, loss,
        damage, liability, injury, cost or expense results form the gross
        negligence, willful misconduct, or material breach of this Agreement by
        UNIVERSITY.

9.2     INSURANCE. LICENSEE represents and warrants that prior to any clinical
        trials of Licensed Product, LICENSEE shall have liability protection,
        the nature and extent of which is commensurate with usual and customary
        industry practices.

9.3     PROCEDURE. Should UNIVERSITY or any of its officers, agents, parent
        companies, affiliates, or employees (the "Indemnitee") intend to claim
        indemnification under this Article 9, such Indemnitee shall promptly
        notify LICENSEE (the "Indemnitor") in writing of any loss, claim,
        damage, liability or action in respect of which the Indemnitee intends
        to claim such indemnification, and the Indemnitor shall be entitled to
        assume the defense thereof with counsel selected by the Indemnitor and
        approved by the Indemnitee, such approval not to be unreasonably
        withheld; provided, however, that if representation of Indemnitee by
        such counsel first selected by the Indemnitor would be inappropriate due
        to a conflict of interest between such Indemnitee and any other party
        represented by such counsel, then Indemnitor shall select other counsel
        for the defense of Indemnitee, with the fees and expenses to be paid by
        the Indemnitor, such other counsel to be approved by Indemnitee and such
        approval not to be


                                       27

<PAGE>   30

        unreasonably withheld. The indemnity agreement in this Article 9 shall
        not apply to amounts paid in settlement of any loss, claim, damage,
        liability or action if such settlement is effected without the consent
        of the Indemnitor, which consent shall not be withheld unreasonably. The
        failure to deliver notice to the Indemnitor within a reasonable time
        after the commencement of any such action, prejudicial to its ability to
        defend such action, shall relieve such Indemnitor of any liability to
        the Indemnitee under this Article 9, but the omission so to deliver
        notice to the Indemnitor will not relieve it of any liability that it
        may have to any Indemnitee otherwise than under this Article 9. The
        Indemnities under this Article 9, its employees and agents, shall
        cooperate fully with the Indemnitor and its legal representatives in the
        investigation of any action, claim or liability covered by this
        indemnification.

9.4     Except as otherwise expressly set forth in this Agreement, UNIVERSITY
        MAKES NO REPRESENTATIONS AND EXTENDS NO WARRANTIES OF ANY KIND, EITHER
        EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO WARRANTIES OF
        MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE NON-INFRINGEMENT OF
        THIRD PARTY RIGHTS, AND VALIDITY OF PATENT RIGHTS CLAIMS, ISSUED OR
        PENDING.


                                    ARTICLE X

                                  MISCELLANEOUS


10.1    FORCE MAJEURE. Neither party shall be held liable or responsible to the
        other party nor be deemed to have defaulted under or breached the
        Agreement for failure or delay in fulfilling or performing any term of
        the


                                       28

<PAGE>   31

        Agreement when such failure or delay is caused by or results from causes
        beyond the reasonable control of the affected party including, but not
        limited to, fire, floods, embargoes, war, acts of war (whether war be
        declared or not), insurrections, riots, civil commotions, strikes,
        lockouts of other labor disturbances, acts of God or acts, omissions or
        delays in acting by any governmental authority or the other party.

10.2    ASSIGNMENT. This Agreement may not be assigned or otherwise transferred
        by either party without the consent of the other party; provided,
        however, that LICENSEE may, without such consent, assign this Agreement
        and its rights and obligations hereunder to its Affiliates or in
        connection with the transfer or sale of all or substantially all of its
        business, or in the event of its merger or consolidation or change in
        control or similar transaction. Any purported assignment in violation of
        the preceding sentences shall be void. Any permitted assignee shall
        assume all obligations of its assignor under this Agreement.

10.3    SEVERABILITY. In the event any one or more of the provisions contained
        in this Agreement should be held invalid, illegal or unenforceable in
        any respect, the validity, legality and enforceability of the remaining
        provisions contained herein shall not in any way be affected or impaired
        thereby, unless the absence of the invalidated provision(s) adversely
        affect the substantive rights of the parties. The parties shall in such
        an instance use their best efforts to replace the invalid, illegal or
        unenforceable provision(s) with valid, legal and enforceable
        provision(s) which, insofar as practical, implement the purposes of this
        Agreement.


                                       29

<PAGE>   32

10.4    NOTICES. Any payment, notice or other communication pursuant to this
        Agreement shall be sufficiently made or given on the date of mailing if
        sent to such party by facsimile on such date, with paper copy being sent
        by certified first class mail, postage prepaid, or by next day express
        delivery service, addressed to it at is address below (or such address
        as it shall designate by written notice given to the other party). 

               In the case of LICENSEE:

               Pain Therapeutics, Inc.
               1345 Douglas Street
               San Francisco, CA 94131
               Attn: Mr. Remi Barbier

               In the case of UNIVERSITY:

               Office of Industrial Liaison
               Albert Einstein College of Medicine of Yeshiva University
               Jack and Pearl Resnick Campus
               1300 Morris Park Avenue
               Bronx, NY 10461
               Telephone No. (718) 430-3357
               Fax No. (718) 430-8822

               With copy to:

               Kenneth P. George, Esq.
               AMSTER, ROTHSTEIN & EBENSTEIN
               90 Park Avenue
               New York, NY 10016
               Telephone No. (212) 697-5995
               Fax No. (212) 286-0854

10.5    APPLICABLE LAW/JURISDICTION. This Agreement is acknowledged to have been
        made in and shall be construed, governed, interpreted and applied in
        accordance with the laws of the State of New York, without giving effect
        to


                                       30

<PAGE>   33

        its conflict of laws provisions. The parties shall attempt in good faith
        to amicably resolve any disputes under this Agreement. LICENSEE and
        UNIVERSITY agree to negotiate in good faith a resolution of any dispute
        between them regarding this Agreement. In this regard, the President and
        CEO of LICENSEE and the Director of the Office of Industrial Liaison of
        UNIVERSITY shall meet in person for at least two continuous hours to
        attempt in good faith to resolve the dispute. With respect to such
        disputes, any litigation instituted by LICENSEE shall be brought in a
        state or federal court located in New York, and any litigation
        instituted by UNIVERSITY shall be brought in a state or federal court
        located in New York. Each party hereby irrevocably consents to the
        personal and exclusive jurisdiction and venue of such courts.

10.6    ENTIRE AGREEMENT. This Agreement sets forth the entire agreement and
        understanding of the parties as to the subject matter hereof. This
        Agreement may be amended only by a written instrument duly executed by
        both parties hereto.

10.7    HEADINGS. The captions to the Articles and Sections hereof are not a
        part of the Agreement, but are merely guides or labels to assist in
        locating and reading the Articles and Sections hereof.

10.8    INDEPENDENT CONTRACTORS. It is expressly agreed that UNIVERSITY and
        LICENSEE shall be independent contractors with respect to this Agreement
        and that the relationship between the two parties created by this
        Agreement shall not constitute a partnership, joint venture or agency.
        Neither UNIVERSITY nor LICENSEE shall have the authority to make any


                                       31

<PAGE>   34

        statements, representations or commitments of any kind, or to take any
        action, which shall be binding on the other, without the prior consent
        of the party to do so.

10.9    WAIVER. The waiver by either party hereto of any right hereunder or the
        failure to perform or of a breach by the other party shall not be deemed
        a waiver of any other right hereunder or of any other breach or failure
        by said other party whether of a similar nature or otherwise.

10.10   COUNTERPARTS. The Agreement may be executed in two or more counterparts,
        each of which shall be deemed an original, but all of which together
        shall constitute one and the same instrument.

10.11   REPRESENTATIONS AND WARRANTIES. UNIVERSITY hereby represents and
        warrants that: (1) it has the right to enter into this Agreement and to
        grant the licenses contained herein and owns the Patent Rights and
        Know-How licensed hereunder by virtue of assignments from Drs. Crain and
        Shen and (2) no other person or organization presently has any effective
        option or license from UNIVERSITY to manufacture, use, sell or import
        Licensed Product or is presently authorized by UNIVERSITY to use the
        Know-How. Each party warrants and represents to the other that it has
        the full eight and authority to enter into this Agreement, and that it
        is not aware of any impediment, including any charge of infringement of
        patents, which would inhibit its ability to perform the terms and
        conditions imposed on it by such Agreement.


                                       32

<PAGE>   35

10.12   Nothing in this Agreement is or shall be construed as:

        (a)     A warranty or representation by UNIVERSITY that anything made or
                used by LICENSEE under any license granted in this Agreement is
                or will be free from infringement of patents, copyrights, and
                other rights of third parties; or

        (b)     Granting by implication, estoppel, or otherwise any license,
                right or interest other than as expressly set forth herein.

10.13   As of the Effective Date, to the best of UNIVERSITY's knowledge and
        belief, it has advised Licensee in writing of any conditions that may:

        (a)     materially affect pre-clinical/clinical development, regulatory
                approval or commercialization of Licensed Products, or

        (b)     raise reasonable doubts about the safety or utility of Licensed
                Products, including serious or unexpected side effects, toxicity
                or sensitivity reactions related to the clinical use or
                administration of the Licensed Products.

10.14   PUBLICITY. Each party agrees not to issue any press release or other
        public statement, whether oral or written, disclosing the existence of
        this Agreement or any information relating to this Agreement without the
        prior written consent of the other party, provided however, that neither
        party will be prevented from complying with any duty of disclosure it
        may have pursuant to law or government regulation.


                                       33

<PAGE>   36


10.15   USE OF NAMES. Neither party will, without prior written consent of the
        other party, use the name or any trademark or trade name owned by the
        other party, or, owned by an affiliate or parent corporation of the
        other party, in any publication, publicity, advertising, or otherwise.

10.16   NON-SOLICITATION. Except in the event of an initial public offering,
        LICENSEE will not directly or indirectly solicit the general public, or
        UNIVERSITY, its employees, directors, affiliates and all other parties
        related to UNIVERSITY, for any fund raising purposes whatsoever.


               IN WITNESS WHEREOF, the parties intending to be bound have caused
this Agreement to be executed by their duly authorized representatives,
Effective as of the Effective Date.

                                    ALBERT EINSTEIN COLLEGE OF MEDICINE
                                    OF YESHIVA UNIVERSITY



                                    BY: /s/ EMANUAL GENN
                                       -----------------------------------------
                                       EMANUEL GENN
                                       ASSOCIATE DEAN FOR BUSINESS AFFAIRS

                                    DATE:  5/5/98
                                         ---------------------------------------


                                       34

<PAGE>   37

                                     PAIN THERAPEUTICS, INC.



                                     BY: /s/ REMI BARBIER
                                        ----------------------------------------
                                     TITLE: President & CEO
                                           -------------------------------------
                                     DATE:
                                          --------------------------------------


                                       35

<PAGE>   38

                                   APPENDIX A


[*]

[*] Confidential Treatment Requested


                                       36



<PAGE>   1

                                                                    EXHIBIT 23.1


The Board of Directors
Pain Therapeutics, Inc.

We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the Prospectus.

                                        /s/ KPMG LLP

San Francisco, California
July 10, 2000





<TABLE> <S> <C>

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<MULTIPLIER> 1
       
<S>                             <C>
<PERIOD-TYPE>                   YEAR
<FISCAL-YEAR-END>                          DEC-31-1999
<PERIOD-START>                             JAN-01-1999
<PERIOD-END>                               DEC-31-1999
<CASH>                                       9,339,669
<SECURITIES>                                         0
<RECEIVABLES>                                        0
<ALLOWANCES>                                         0
<INVENTORY>                                          0
<CURRENT-ASSETS>                             9,396,418
<PP&E>                                          49,517
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<COMMON>                                         9,445
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<SALES>                                              0
<TOTAL-REVENUES>                                     0
<CGS>                                                0
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<INCOME-PRETAX>                            (4,498,785)
<INCOME-TAX>                                       800
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<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                               (4,499,585)
<EPS-BASIC>                                     (0.48)
<EPS-DILUTED>                                   (0.48)
        

</TABLE>