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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

For Quarterly Period Ended March 31, 2003

For the transition period from          to          .

Commission File Number 000-29959

Pain Therapeutics, Inc.

416 Browning Way, South San Francisco, CA 94080
(Address of principal executive offices)     (Zip Code)

(650) 624-8200

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes (X)   No (  )

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Indicate the number of shares outstanding of each of issuer’s classes of common stock, as of the latest practicable date.

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PAIN THERAPEUTICS, INC.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PAIN THERAPEUTICS, INC.
(A Development Stage Enterprise)

Condensed Balance Sheets
(Unaudited)
(in thousands)

See accompanying notes to condensed financial statements.

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PAIN THERAPEUTICS, INC.
(A Development Stage Enterprise)

Condensed Statements of Operations
(Unaudited)
(in thousands except per share data)

Included in research and development and general and administrative expenses are stock based compensation expenses of $103 and $343 for the three months ended March 31, 2003 and 2002, respectively and $11,893 for the period from May 4, 1998 (inception) through March 31, 2003.

See accompanying notes to condensed financial statements.

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PAIN THERAPEUTICS, INC.
(A Development Stage Enterprise)

Condensed Statements of Cash Flows
(Unaudited)
(in thousands)

See accompanying notes to condensed financial statements.

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PAIN THERAPEUTICS, INC.
(A Development Stage Enterprise)

Notes to Condensed Financial Statements
(Unaudited)

Note 1. General

     Pain Therapeutics, Inc. is developing a new generation of opioid painkillers with improved clinical benefits. We believe our drugs will offer enhanced pain relief and reduced tolerance/physical dependence or addiction potential compared to existing opioid painkillers. If approved by the Food and Drug Administration, or FDA, we believe our proprietary drugs could replace many existing opioid painkillers commonly used to treat moderate to severe pain. The Company was incorporated in Delaware in May 1998.

     In the course of our development activities, we have sustained operating losses and expect such losses to continue through the next several years. We expect our current cash and cash equivalents will be sufficient to meet our planned working capital and capital expenditure requirements for at least the next twelve months. There are no assurances that additional financing will be available on favorable terms, or at all.

     Our development activities involve inherent risks. These risks include, among others, dependence on key personnel and determination of patentability and protection of our products and processes. In addition, we have product candidates that have not yet obtained Food and Drug Administration approval. Successful future operations depend on our ability to obtain approval for and commercialize these products.

     We have prepared the accompanying unaudited condensed financial statements of Pain Therapeutics, Inc. (“Pain Therapeutics”) in accordance with generally accepted accounting principles for interim financial information and pursuant to the instruction to form 10-Q and Article 10 of Regulation S-X. Accordingly, the financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In our opinion, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2003 are not necessarily indicative of the results that may be expected for any other interim period or for the year ended December 31, 2003. Certain prior year balances have been reclassified for comparative purposes.

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of expenses incurred during the reporting period. Actual results could differ from those estimates.

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Note 2. Loss per Share

     Basic loss per share is computed on the basis of the weighted-average number of shares outstanding for the reporting period. The Company has computed its weighted-average shares outstanding for all periods presented excluding those common shares issued and outstanding that remain subject to the Company’s repurchase rights. 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 common shares issued and outstanding subject to the Company’s repurchase rights, outstanding stock options and outstanding warrants.

     In all years presented we have reported a loss and therefore all common stock equivalents related to potentially dilutive securities have been excluded from the calculation of diluted loss per share because they are anti-dilutive.

Note 3. 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.

Note 4. Stock Based Compensation

     We use the intrinsic-value method of accounting for stock based awards granted to employees in accordance with Accounting Principles Board Opinion No. 25 and its related interpretations. Accordingly, we would recognize compensation expense in our financial statements in connection with stock options granted to employees with exercise prices less than fair value at the time the stock option is granted. We record stock based compensation expense for non-employees at the fair value of the options granted in accordance with Statement of Financial Accounting Standards No. 123 (“SFAS 123”) and Emerging Issues Task Force No. 96-18 (“EITF 96-18”). The fair value of options granted to non-employees is estimated using a Black-Scholes option valuation model. The model considers a number of factors, including the market price and volatility of our common stock at the date of measurement. We periodically re-measure the compensation expense for options granted to non-employees as the underlying options vest. The compensation expense related to all grants is being amortized using the graded vesting method, in accordance with SFAS 123, EITF 96-18 and FASB Interpretation No. 28, over the vesting period of each respective stock option, generally four years. The graded vesting method results in expensing approximately 57% of the total award in year one, 26% in year two, 13% in year three and 4% in year four.

     If we had recorded compensation cost of our stock based plans in a manner consistent with the fair value approach of SFAS No. 123, our loss and adjusted loss per share would have been increased as follows (in thousands, except per share data):

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The weighted average fair value of options granted was $1.52 and $6.86 in the three months ended March 31, 2003 and 2002, respectively.

For both employee and non-employee stock options, the weighted average fair value of each option granted was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:

For the 2000 Employee Stock Purchase Plan, no purchase rights have been granted in 2003 and the weighted average fair value of purchase rights granted in the three months ended March 31, 2002, was $3.79 per share, calculated using the Black-Scholes option pricing model with the following assumptions: volatility equal to 89%, risk free interest rate of 2.0% and an expected life of 2 years.

Note 5. 1998 Stock Plan

     In accordance with the provisions of the 1998 Stock Plan, effective January 1, 2003 the number of shares of common stock authorized for issuance under the 1998 Stock Plan was increased from 7,000,000 to 8,350,000 shares.

Note 6. Recent Accounting Pronouncements

     In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). We adopted FIN 46 in January 2003, which did not have a significant impact on our financial position and results of operations.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     This discussion and analysis should be read in conjunction with our financial statements and accompanying notes included elsewhere in this report. Operating results are not necessarily indicative of results that may occur in future periods.

     This document contains forward-looking statements that are based upon current expectations that are within the meaning of the Private Securities Reform Act of 1995. It is the Company’s intent that such statements be protected by the safe harbor created thereby. Forward-looking statements involve risks and uncertainties and our actual results and the timing of events may differ significantly from the results discussed in the forward-looking statements. Examples of such forward-looking statements include, but are not limited to: statements about future operating losses and anticipated operating and capital expenditures; statements about the potential benefits of our drug candidates; statements relating to the timing or anticipated results of our clinical development of its drug candidates; the size of the potential market for our products, upcoming announcements by the Company; statements relating to the utility of our intellectual property; statements about expected future sources of revenue and capital; statements about potential competitors or products; statements about future market acceptance of our drug candidates; statements about expenses increasing substantially or fluctuating; statements about future expectations regarding trade secrets, technological innovations, licensing agreements and outsourcing of certain business functions; statements about future non-cash charges related to option grants; statements about anticipated hiring; statements about the sufficiency of our current resources to fund our operations over the next twelve months; statements about increasing cash requirements; statements about future negative operating cash flows; statements about fluctuations in our operating results; statements about potential additional applications of our technology; and statements about development of our internal systems and infrastructure.

     Such forward-looking statements involve risks and uncertainties, including, but not limited to, those risks and uncertainties relating to difficulties or delays in development, testing, regulatory approval, production and marketing of the Company’s drug candidates, unexpected adverse side effects or inadequate therapeutic efficacy of the Company’s drug candidates that could slow or prevent product approval (including the risk that current and past results of clinical trials are not indicative of future results of clinical trials), the uncertainty of patent protection for the Company’s intellectual property or trade secrets, potential infringement of the intellectual property rights or trade secrets of third parties and the Company’s ability to obtain additional financing if necessary. In addition such statements are subject to the risks and uncertainties discussed in the “Risk Factors” section and elsewhere in this document.

Overview

     Pain Therapeutics, Inc. is developing a new generation of opioid painkillers with improved clinical benefits. We believe our drugs will offer enhanced pain relief or reduced tolerance/physical dependence or addiction potential compared to existing opioid painkillers. We conduct our research and development programs through a combination of internal and

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collaborative programs. We rely on arrangements with universities, our collaborators, contract research organizations and clinical research sites for a significant portion of our product development efforts.

     Our lead product candidate is Oxytrex™, a next generation version of immediate release oxycodone. In April 2003, we completed enrollment of patients in a 21-day Phase II multi-dose safety study of Oxytrex™ in patients with severe osteoarthritic pain. We expect to announce clinical data from this safety study in June 2003 and that these data will support further clinical studies of Oxytrex™. In June 2003, we expect to initiate a Phase III clinical trial to examine the safety and efficacy of Oxytrex™ in patients with severe, chronic low-back pain. We have several other opioid painkillers in various earlier stages of clinical testing.

     We have yet to generate any revenues from product sales. We have not been profitable and, since our inception through March 31, 2003, we have incurred a cumulative deficit of approximately $57.2 million. These losses have resulted principally from costs incurred in connection with research and development activities, including costs of preclinical and clinical trials as well as clinical supplies associated with our product candidates, salaries and other personnel related costs, including non-cash stock based compensation associated with options granted to employees and non-employees, and general corporate expenses. Our operating results may fluctuate substantially from period to period as a result of the timing and enrollment rates of clinical trials for our product candidates and our need for clinical supplies.

     We expect to incur significant additional operating losses for the next several years. Our cash requirements for operating activities and capital expenditures will increase substantially in the 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 develop new infrastructure;
	•		acquire or in-license additional products or technologies, or expand the use of our technology;
	•		maintain, defend and expand the scope of our intellectual property; and
	•		hire additional personnel.

     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.

Results of Operations

Three Months Ended March 31, 2003 and 2002

     Research and Development

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     Research and development expense consists primarily of drug development work associated with our product candidates, including costs of preclinical, clinical trials, clinical supplies and other formulation and design costs and salaries and other personnel related expenses, as well as non-cash stock based compensation. Research and development expense increased to $3.8 million for the three months ended March 31, 2003 from $2.8 million in the three months ended March 31, 2002 primarily due to expenses incurred in the ongoing clinical development of Oxytrex™.

     In April 2003, we announced completion of enrollment of patients in a 21-day Phase II multi-dose safety study of Oxytrex™ in patients with severe osteoarthritic pain. We expect to announce clinical data from this safety study in June 2003 and that these data will support further clinical studies of Oxytrex™. In June 2003, we expect to initiate a Phase III clinical trial to examine the safety and efficacy of Oxytrex™ in patients with severe, chronic low-back pain.

     We have several other opioid painkillers in various earlier stages of clinical testing. Research and development expenses in the three months ended March 31, 2003 also included formulation-related expenses for certain of our product candidates.

     We expect research and development expenses to increase significantly over the next several years as we expand our development efforts and as our product candidates progress through various stages of clinical trials, including the Phase III trial of Oxytrex™. This increase may fluctuate from quarter to quarter and year to year due to the timing and scope of these activities.

General and Administrative

     General and administrative expenses decreased to $1.0 million for the three months ended March 31, 2003 from $1.5 million for the three months ended March 31, 2002, primarily due to a decrease in non-cash equity related expenses as well as a decrease in certain common occupancy expenses. General and administrative expense consists primarily of compensation and other general corporate expenses as well as non-cash stock based compensation. We expect general and administrative expense to increase in future periods in support of increased research and development or general corporate activities.

Non-Cash Stock Based Compensation

     For both research and development and general and administrative expenses, non-cash stock based compensation expense for options granted decreased to $0.1 million for the three months ended March 31, 2003 from $0.3 million for the three months ended March 31, 2002. The decrease was primarily due to the lower market price of our common stock as well as the accelerated amortization methodology utilized in accordance with FIN 28. Non-cash stock based compensation expense may fluctuate from period to period due in part to fluctuations in the fair market value of our common stock as well as other factors used to calculate such expenses.

Interest Income

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     Interest income decreased to $0.1 million for the three months ended March 31, 2003 from $0.3 million for the three months ended March 31, 2002 as a result of lower returns on investment of our cash as well as the lower average balances of cash and cash equivalents.

Liquidity and Capital Resources

     Since inception, we have financed our operations primarily through public and private stock offerings. We intend to continue to use these proceeds to fund research and development activities, capital expenditures, working capital requirements and other general corporate purposes. As of March 31, 2003, cash and cash equivalents were $45.7 million and were invested primarily in money market funds.

     Net cash used in operating activities was $4.4 million for the three months ended March 31, 2003 compared to $4.0 million for the comparable period in 2002. Cash used in operating activities related primarily to the funding of operating losses.

     We expect our cash used for capital equipment in 2003 to be approximately $0.1 million. Our requirements for capital equipment may increase in the future.

     Our financing activities from issuing equity from our stock plans provided cash of $0.1 million for the three months ended March 31, 2002.

     We lease approximately 10,500 square feet of general office space. We also lease equipment pursuant to operating leases. Our leases expire at various dates through 2010. Under the terms of all of our leases, future minimum lease payments are $0.2 million in each of the years 2003 through 2010.

     We have license agreements that require us to make milestone payments upon the successful achievement of milestones, including clinical milestones. These agreements also require us to pay certain royalties to our licensors if we succeed in fully commercializing products under these license agreements. These potential future payments are cancelable as of March 31, 2003.

     Since our inception we have incurred a cumulative deficit of approximately $57.2 million, including a net loss of $4.6 million at March 31, 2003, and we expect to incur significant additional operating losses for the next several years. Since inception we have used $42.7 million of cash in operating activities and $2.7 million of cash in investing activities. We expect our cash requirements to increase in the foreseeable future as we continue to undertake preclinical and clinical trials for our product candidates, including the planned initiation of a Phase III trial of Oxytrex™; seek regulatory approvals for our product candidates; develop, formulate, manufacture and commercialize our drugs; implement additional internal systems and develop new infrastructure; acquire or in-license additional products or technologies, or expand the use of our technology; maintain, defend and expand the scope of our intellectual property; and hire additional personnel. The amount and timing of cash requirements will depend on regulatory and market acceptance of our products candidates and the resources we devote to researching and developing, formulating, manufacturing, commercializing and supporting our products. We

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believe that our current resources should be sufficient to fund our operations for at least the next twelve months. We may seek additional future funding through public or private financing within this timeframe, if such funding is available and on terms acceptable to us.

Recent Accounting Pronouncements

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). We adopted FIN 46 in January 2003, which did not have a significant impact on our financial position and results of operations.

Risk Factors

     You should carefully consider the following risk factors and all other information contained in this Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2002 as filed with the Securities and Exchange Commission. Risk and uncertainties, in addition to those we describe below, that are not presently known to us, or that we currently believe are immaterial may also impair our business operations. If any of the following risks occur, our business, operating results and financial condition could be harmed. In addition, the trading price of our common stock could decline due to the occurrence of any of these risks.

Risks Relating to our Financial Position and Need for Financing

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 are 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.

     We have incurred net losses each year since our inception. As a result of ongoing operating losses, we had an accumulated deficit of $57.2 million as of March 31, 2003. Even if we succeed in developing and commercializing one or more of our drugs, we expect to continue to incur substantial losses for the foreseeable future, and we may never become profitable. We anticipate that our expenses will increase substantially in the foreseeable future as we:

	•		continue to undertake preclinical and clinical trials for our product candidates, including the planned initiation of a Phase III trial of Oxytrex™ ;
	•		seek regulatory approvals for our product candidates;

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	•		develop, formulate, manufacture and commercialize our drugs;
	•		implement additional internal systems and develop new infrastructure;
	•		acquire or in-license additional products or technologies, or expand the use of our technology;
	•		maintain, defend and expand the scope of our intellectual property; and
	•		hire additional personnel.

     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 additional clinical trials of any or some of our product candidates.

     We have funded all of our operations and capital expenditures with the proceeds from public and private stock offerings. We expect that our current cash and cash equivalents on hand will be sufficient to meet our working capital and capital expenditure needs for at least the next twelve months. However, we may need to raise additional funds sooner and additional financing may not be available on favorable terms, if at all. Even if we succeed in selling additional equity or convertible debt 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.

Risks Relating to our Business and Strategy

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 r