##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




---

Form 10-K

FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTIONS 13 OR 15(d) OF
THE


SECURITIES EXCHANGE ACT OF 1934


|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the fiscal year ended December 31,
    2003                                             
|  
|or
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|  
|   |  | For the transition period
    from           to                                             

Commission file number 0-19222



---

Genelabs Technologies, Inc.

(Exact name of Registrant as Specified in Its
Charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|California                                                         |  | 94-3010150                              
|(State or Other Jurisdiction of
    Incorporation or Organization) |  | (IRS Employer
    Identification Number)

505 Penobscot Drive

Redwood City, California 94063


(Address of Principal Executive Offices,
Including Zip Code)


(650) 369-9500

(Registrants Telephone Number, Including
Area Code)


Securities registered pursuant to
Section 12(b) of the Act:

None


Securities registered pursuant to
Section 12(g) of the Act:

Common Stock


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 þ          No o

Indicate by check
mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of Registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K.     þ

Indicate by check
mark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the
Act).     Yes þ          No o

Aggregate market
value of Common Stock held by non-affiliates of the Registrant,
as of June 30, 2003: $83,148,000, based on the last
reported sales price on the Nasdaq Stock Market.

Number of shares of
Registrants Common Stock outstanding on March 1,
2004: 87,999,655

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the
Registrants definitive Proxy Statement for its 2004 Annual
Meeting of Shareholders to be held on June 10, 2004 are
incorporated by reference into Part III (Items 10, 11,
12 and 13) hereof.



---






---

TABLE OF CONTENTS



|                                                                 |                                                                                                |  |  |  |  |  |  | 
|---------------------------------------------------------------- | ---------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|FORWARD-LOOKING STATEMENTS                                      
|PART I                                                          
|                                                                 | Item 1. Business.                                                                             
|RISK FACTORS                                                    
|                                                                 | Item 2. Properties.                                                                           
|                                                                 | Item 3. Legal Proceedings.                                                                    
|                                                                 | Item 4. Submission of Matters to a Vote of Security Holders.                                  
|PART II                                                         
|                                                                 | Item 5. Market for Registrants Common Equity and Related Shareholder Matters.                
|                                                                 | Item 6. Selected Financial Data.                                                              
|                                                                 | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
|                                                                 | Item 7A. Quantitative and Qualitative Disclosures About Market Risk.                          
|                                                                 | Item 8. Consolidated Financial Statements and Supplementary Data.                             
|                                                                 | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 
|                                                                 | Item 9A. Controls and Procedures.                                                             
|PART III                                                        
|                                                                 | Item 10. Directors and Executive Officers of Registrant.                                      
|                                                                 | Item 11. Executive Compensation.                                                              
|                                                                 | Item 12. Security Ownership of Certain Beneficial Owners and Management.                      
|                                                                 | Item 13. Certain Relationships and Related Transactions.                                      
|                                                                 | Item 14. Principal Accounting Fees and Services.                                              
|PART IV                                                         
|                                                                 | Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.                    
|SIGNATURES                                                      
|CONSOLIDATED FINANCIAL STATEMENTS AND ANNUAL REPORT ON FORM 10-K
|REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS               
|CONSOLIDATED BALANCE SHEETS                                     
|CONSOLIDATED STATEMENTS OF OPERATIONS                           
|CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY                  
|CONSOLIDATED STATEMENTS OF CASH FLOWS                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                      
|Statements of Operations                                        
|Balance Sheets                                                  
|EXHIBIT 21.01                                                   
|EXHIBIT 23.01                                                   
|EXHIBIT 31.1                                                    
|EXHIBIT 31.2                                                    
|EXHIBIT 32.1                                                    



---



##### Table of Contents








FORWARD-LOOKING STATEMENTS


This Annual Report on Form 10-K contains or
incorporates by reference certain forward-looking statements
within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended, referred to as the Exchange
Act, which are subject to the safe harbor created
therein including those identified by the words may,
will, anticipates, intends,
believes, expects, plans,
potential and similar expressions. These
forward-looking statements include, among others, statements
regarding:



| |   |                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | estimates relating to the timing and completion
    of our pending clinical trials;                                                                                                            
|
| |  | the results of our confirmatory clinical trial of
    PrestaraTM;                                                                                                                              
|
| |  | potential FDA actions with respect to our NDA for
    Prestara, including whether or not the Prestara NDA ultimately
    will receive marketing approval;                                      
|
| |  | if the NDA for Prestara is ultimately approved,
    our plans and ability to successfully commercialize Prestara for
    systemic lupus erythematosus;                                         
|
| |  | our ability to secure a European partner for
    Prestara;                                                                                                                                     
|
| |  | our strategy for pursuing approval of Prestara in
    Europe, our ability to obtain approval of Prestara in Europe,
    and the timing of any such approval;                                   
|
| |  | estimates relating to our cash resources and our
    ability to obtain additional funding for our business plans;                                                                              
|
| |  | our ability to complete the divestment of our
    diagnostics business on a timely basis, if at all;                                                                                           
|
| |  | our ability to secure and defend intellectual
    property rights important to our business; and                                                                                               
|
| |  | the potential success of our research efforts,
    including our ability to identify compounds for preclinical
    development and the success of any such preclinical development
    efforts.

All statements in this Annual Report on
Form 10-K that are not historical are forward-looking
statements and are subject to risks and uncertainties, including
those set forth in the Risk Factors section at the end of
Item 1, and actual results could differ materially from
those expressed or implied in these statements. All
forward-looking statements included in this Annual Report on
Form 10-K are made as of the date hereof. We assume no
obligation to update any such forward-looking statement for
subsequent events or any reason why actual results might differ
except as required by the Exchange Act. The risks and
uncertainties under the captions Risk Factors and
Managements Discussion and Analysis of Financial
Condition and Results of Operations contained herein,
among other things, should be considered in evaluating our
prospects and future financial performance.

Corporate History, Headquarters and Website
Information

We were incorporated in California in 1985. Our
principal executive offices are located at 505 Penobscot Drive,
Redwood City, California 94063, and our main telephone number is
(650) 369-9500. Investors can obtain access to this annual
report on Form 10-K, our quarterly reports on
Form 10-Q, our current reports on Form 8-K and all
amendments to these reports, free of charge, on our website at
www.genelabs.com as soon as reasonably practicable after such
filings are electronically filed with the SEC.

We also make available on our website our Code of
Business Ethics and Conduct, the charters of the Audit
Committee, Compensation Committee and Nominating Committee of
our board of directors, our policy on Shareholder Communications
to the board of directors and our Whistleblower Procedures. The
information contained on our website, or on other websites
linked to our website, is not part of this report.

1



---



##### Table of Contents






PART I






|        |          
|------- | ---------
|Item 1. | Business.

General

Genelabs Technologies, Inc., referred to as
Genelabs or the Company, is a biopharmaceutical company
pioneering the discovery and development of novel pharmaceutical
products to improve human health. Genelabs is pursuing
regulatory approval of PrestaraTM, its
investigational drug for women with systemic lupus
erythematosus, a disease for which no new drug has been approved
in the past 40 years and for which current therapies are
not adequate. We are also pursuing the discovery of novel
antiviral compounds for treatment of hepatitis C virus
infections are initiating preclinical development work in this
area. In addition, the Company has established a portfolio of
patents and patent applications based on inventions arising from
its research and development activities. We have granted
licenses to third parties under our intellectual property
portfolio, including under patents covering the hepatitis E
virus, hepatitis G virus and a nucleic acid amplification
technology known as LADA, and may seek to grant additional
licenses under these or other patents we own. We believe that
these high-risk, potentially high reward programs focus our
research and development expertise in areas where we have the
opportunity to be scientific pioneers and, if successful, we
believe that these programs will yield products that will
address diseases for which current therapies are inadequate. At
the same time, our established capabilities can be utilized as
we diversify our research and development programs.

We have built drug discovery and clinical
development capabilities that can support various research and
development projects. We are concentrating our capabilities on:



| |   |                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------
| |  | developing our late-stage product for lupus,
    PrestaraTM;                                                       
|
| |  | discovering novel lead compounds that selectively
    inhibit replication of the hepatitis C virus, or
    HCV; and
|
| |  | advancing our HCV research program into
    preclinical development.                                               

Prestara.Our
clinical development efforts are concentrated on
PrestaraTM, an investigational drug for systemic
lupus erythematosus, referred to as lupus or SLE. Lupus is a
life-long autoimmune disease that causes the immune system to
attack the bodys own tissues and organs. In August 2002,
we received an approvable letter for Prestara from the Food and
Drug Administration, or FDA. Approval is contingent upon, among
other things, the successful completion of an additional
clinical trial providing sufficient evidence to confirm the
positive effect of Prestara on bone mineral density of women
with lupus on glucocorticoids and the emergence of no
significant and new safety issues. Patient enrollment into this
clinical study was completed in February 2004. As the treatment
duration in the study is six months with either 200 mg per
day of Prestara or placebo, the last patients enrolled are
scheduled to complete their treatment in August 2004.
Afterwards, we will unblind and analyze the data following a
standard review for completeness and accuracy. We currently
expect to be able to report the results in the fourth quarter of
2004.

Hepatitis C Virus.Our drug discovery research is focused on discovering orally
active compounds for the treatment of infections caused by the
hepatitis C virus, or HCV. The World Health Organization
has estimated that 170 million people worldwide are
chronically infected with HCV, including 4 million in the
United States, where HCV is the most common chronic blood-borne
virus. Patients with chronic HCV infection can be virtually
symptom-free for decades but can eventually develop serious
liver diseases. HCV infection is the leading cause of liver
transplants in the United States. Currently available treatments
are effective in only approximately 50% of the patients infected
with HCV genotype 1, the genotype most prevalent in the United
States.

Development of Prestara for Systemic Lupus
Erythematosus

In August 2002, we received an approvable letter
for Prestara from the FDA. FDA approval of Prestara is
contingent upon, among other things, the successful completion
of an additional clinical trial providing sufficient evidence to
confirm the positive effect of Prestara on the bone mineral
density of women with lupus

2



---



##### Table of Contents



on glucocorticoids that was observed in a nested
study within Genelabs Study GL95-02. Separately, the FDA
advised us that it considers Study GL95-02 to be a positive,
adequate and well-controlled study with respect to its overall
primary endpoint, which was a responder index comprised of
measures of SLE disease activity, damage, and health-related
quality of life.


Following receipt of the approvable letter, we
worked with the FDA and clinical experts to design the required
confirmatory clinical trial, submitted a study protocol to the
FDA for their review in November 2002 and initiated the study,
designated GL02-01, in December 2002. The primary endpoint of
this study is bone mineral density at the lumbar spine, and the
treatment duration will be six months with either 200 mg per day
Prestara or placebo. Patient enrollment in Study GL02-01 was
completed in February 2004. As the treatment duration in the
study is six months, the last patients entered into the study
should complete their treatment in August 2004. Afterwards, we
will unblind and analyze the data following a standard review
for completeness and accuracy. We currently expect to announce
the results in the fourth quarter of 2004. Study GL02-01 was
designed to generate data that, if positive, would satisfy the
FDAs requirement for confirmation of the Study GL95-02
bone mineral density results. If approved by the FDA, Prestara
will be the first new drug approved in the United States for
this debilitating disease in more than 40 years.

Background of Prestaras
Development.Genelabs licensed the
rights to Prestara from Stanford University in 1993. To develop
this drug candidate, we have built internal clinical development
capabilities including clinical trial design, monitoring,
analysis and reporting, regulatory affairs and quality control
and assurance, all of which may be used to support the
development of additional indications for Prestara and for other
investigational drugs. Genelabs acquired and developed this
late-stage investigational drug to provide opportunities to fund
and support our core business: the discovery and development of
novel drug candidates.

After licensing Prestara from Stanford, Genelabs
designed and completed two large, well-controlled Phase III
clinical trials of Prestara in women with SLE. A small
Phase III clinical trial in men with SLE, referred to as
Study 97-01, was begun in 1997 and was principally designed to
assess the safety of Prestara in this population. Genelabs
closed Study 97-01 due to enrollment difficulties because so few
men develop systemic lupus erythematosus, however the study did
not indicate any serious adverse events associated with Prestara
in this population. Upon completion of the second Phase III
trial in 1999, which is referred to as Study GL95-02, Genelabs
prepared an NDA for Prestara to treat women with lupus, which
was submitted to the FDA on a rolling basis under fast-track
designation in 2000. We subsequently received priority review
designation from the FDA.

The FDA Arthritis Advisory Committee reviewed the
NDA on April 19, 2001, and on June 26, 2001, the FDA
sent us a letter stating that the Prestara NDA was not
approvable, listing deficiencies that must be addressed before
the NDA can be approved. Because we believed that Prestara had
demonstrated usefulness in the management of lupus, Genelabs
worked within the FDAs regulatory framework, actively
continuing the NDA review process and seeking resolution of the
issues raised in the letter. Our goal was to reach agreement
with the FDA on the steps necessary for approval. As part of
this process, in December 2001 we had a meeting with the agency
which included presentations of the clinical data from our
Phase III clinical trials. As a follow-up to the meeting,
the FDA sent us a letter in January 2002 suggesting exploration
of additional data and analyses regarding Prestaras
positive effect on bone mineral density that was observed in
Study GL95-02. We submitted this information to the FDA in
February 2002. On August 28, 2002, we received the
above-noted approvable letter from the FDA and have subsequently
initiated a clinical trial which is designed to generate data
that, if positive, would serve to confirm the positive results
on bone mineral density observed in Study GL95-02.

Clinical Trial
Results.Genelabs has successfully
completed two Phase III double-blind randomized placebo
controlled clinical trials of Prestara in women with lupus. The
first of these Phase III trials, designated GL94-01, was
completed in 1997 and evaluated Prestaras ability to
reduce the glucocorticoid dose in steroid-dependent women with
mild to moderate lupus while maintaining stable or improved SLE
disease activity. All 191 women with SLE in this trial
previously required glucocorticoids at doses of 10 to 30 mg
per day in order to stabilize their disease. Patients in the
trial received daily doses of 200 mg of Prestara,
100 mg of Prestara or placebo for seven to nine months. The
primary endpoint of this study was a sustained reduction in

3



---



##### Table of Contents



glucocorticoid dose to 7.5 mg per day or
less, which are levels approximately equivalent to those
normally produced by the adrenal glands. Data presented to the
American College of Rheumatology on behalf of Genelabs showed
that patients who received the 200 mg daily doses of
Prestara had a higher response rate than patients who received
placebo. Among all patients enrolled in the study
(intent-to-treat analysis), a strong trend in favor of Prestara
was shown for the 200 mg dose over placebo (p=0.11). The
effect was most evident in the 137 lupus patients with active
disease, defined as those patients with a Systemic Lupus
Erythematosus Disease Activity Index (SLEDAI) score greater than
2 at study entry. Among these patients, 51% of those who
received daily doses of 200 mg of Prestara achieved the
primary endpoint compared to 29% of those who received placebo
(p=0.03). The results of this study were published in the July
2002 issue of Arthritis and Rheumatism.


The second Phase III study, designated
GL95-02, was completed in 1999 and evaluated Prestaras
ability to improve or stabilize clinical outcome and disease
symptoms in women with mild to moderate lupus. The 381 women
with SLE enrolled in this trial were randomized to receive
either an oral dose of 200 mg of Prestara or placebo once a
day for 12 months. In this trial, treatment with Prestara
demonstrated a consistent pattern of efficacy across a number of
primary and secondary variables. Prestara-treated patients with
active disease, defined as a baseline SLEDAI score greater than
2, who met the protocol requirements showed a 35% greater rate
of response than the placebo group: 66% of Prestara patients
responded to treatment compared to 49% of placebo patients. All
placebo and Prestara patients were allowed to continue taking
their existing medications for the full course of this trial.
This increased rate of response, defined as improvement or
stabilization in all four scoring instruments measured, with no
clinical deterioration, was statistically significant (p=0.005
for the defined per-protocol population). The scoring
instruments were SLEDAI, Systemic Lupus Activity Measure (SLAM),
Krupp Fatigue Severity Score (KFSS), and Patient Global
Assessment. Because of the inherent variability in these scoring
instruments, the classification of a patient as a responder
allowed for a slight deterioration in any of the four scores
from baseline. In an intent-to-treat analysis of these data,
presented at the April 19, 2001 FDA Arthritis Advisory
Committee meeting, Prestara-treated patients showed a 31%
greater rate of response than the placebo group: 59% of Prestara
patients responded to treatment compared to 45% of placebo
patients. This improvement in response was statistically
significant (p=0.017). In late 2002 the FDA advised Genelabs
that it considers this clinical trial to be a positive, adequate
and well-controlled study.

Because the most common organ damage in patients
with lupus is musculoskeletal, nested within Study GL95-02 was a
study conducted at eight of the investigator sites to assess
bone mineral density in patients who were required to have been
taking glucocorticoids for at least six months prior to entering
the trial. These patients had bone mineral density measurements
taken by Dual X-ray Absorptiometry at the beginning and end of
the trial. An analysis of the results including all patients who
had baseline and post-treatment bone mineral density
measurements showed that the group of patients receiving
Prestara had significantly increased bone mineral density,
compared to a decrease in bone density for the group of patients
on placebo. Between the Prestara and placebo treatment groups,
the differences were statistically significant (measured by mean
percentage change; 55 patients, p=0.003 at the lumbar spine
and 53 patients, p=0.013 at the hip). Lupus patients are at
risk for the long-term complication of osteoporosis both because
loss of bone density is a common manifestation of the disease
and because a significant side effect of one of the primary
therapies for the disease, glucocorticoids, is decreased bone
density.

In addition to showing effects on disease
activity and bone mineral density, the advantage of Prestara
over placebo was consistent among secondary efficacy variables
in Study GL95-02. Lupus flares occurred among 24% fewer patients
who received Prestara than those who received placebo. Certain
specific symptoms associated with SLE occurred less frequently
among Prestara recipients, including muscle pain, nasal and
mouth ulcers and hair loss. As expected, adverse events related
to taking this hormone were generally androgenic in nature, and
included reports of acne and facial hair growth. Other changes
identified in the clinical trial included hormonal changes and
reductions in HDL cholesterol and triglycerides. There were no
major safety concerns raised by the clinical trials.

The FDAs approvable letter issued in August
2002 indicated that approval of the NDA is contingent upon,
among other things, the successful completion of an additional
clinical trial providing sufficient evidence

4



---



##### Table of Contents



to confirm the positive effect on bone mineral
density that was observed in women with SLE while on
glucocorticoids in Genelabs Study GL95-02. To address this
requirement, Genelabs has designed and initiated a multicenter,
randomized, placebo-controlled, double-blind clinical trial that
is being conducted at leading U.S. medical centers,
designated Study GL02-01. The primary endpoint in this study is
bone mineral density at the lumbar spine and the protocol
provides for approximately 150 women with SLE receiving
glucocorticoids to be enrolled and treated for six months with
either 200 mg per day Prestara or placebo. Patient
enrollment in Study GL02-01 was completed in February 2004.
Because the treatment duration in this study is six months, the
last patients entered into the study should complete their
treatment in August 2004. Afterwards, we will unblind and
analyze the data following a standard review for completeness
and accuracy. We currently expect to be able to announce the
results in the fourth quarter of 2004. Genelabs is also
addressing other issues cited in the approvable letter,
including, among other things, compiling data for submission
regarding qualification of a manufacturing site. If the results
of Study GL02-01 are positive and no significant and new safety
issues emerge, we plan to submit the results and our response to
all other issues cited by the FDA as a complete response to the
approvable letter issued by the agency for our NDA.


Lupus and the Clinical Rationale Behind
PrestaraTM. According to
various published estimates, lupus affects approximately
200,000 patients in the United States, and Genelabs
believes that there are at least one million patients worldwide.
Lupus is a severe, chronic and frequently debilitating
autoimmune disease that can affect the musculoskeletal and
nervous systems as well as the lungs, heart, kidneys, skin and
joints. Scientific publications have reported that the most
common form of organ damage among lupus patients,
musculoskeletal damage, occurs in 22% of patients, followed by
neuropsychiatric disorders in 20% of lupus patients and renal
disease in 15%. In the United States, there have been no new
drugs approved by the FDA for the treatment of lupus in more
than 40 years. Existing treatments for lupus are often
inadequate, due to limited benefits and severe adverse side
effects.

Prestara is a pharmaceutical formulation for oral
administration that contains highly purified prasterone, the
synthetic equivalent of dehydroepiandrosterone, or DHEA, a
naturally occurring hormone and the most abundant adrenal
hormone in humans, as the active ingredient. Lupus patients
generally have abnormally low levels of DHEA, approximately 50%
of normal, and it is believed that hormonal influences may play
a role in the development and progression of the disease.

Early studies at Stanford indicated that oral use
of DHEA could be effective and safe for the treatment of SLE. A
Phase II clinical study, conducted at Stanford in 1993 and
published in Arthritis and Rheumatismin December 1995,
indicated that DHEA-treated patients showed improvement on the
basis of the patients own assessments, the
physicians clinical assessments and the SLEDAI score, a
measure of SLE disease activity, while placebo treated patients
did not. In addition, mean prednisone dose was decreased in
patients treated with DHEA. Prednisone, a commonly used
glucocorticoid drug treatment for lupus, has many serious side
effects including osteoporosis, atherosclerosis, diabetes and
infection, and is a leading cause of long-term morbidity and
mortality in lupus patients.

Market Position.Genelabs has exclusive rights under U.S. patents granted to
Stanford for the use of DHEA to treat SLE. In addition, two
U.S. patents issued to Genelabs during 2003, one of which
relates to the use of DHEA to treat SLE and the other to the use
of DHEA for treating subnormal bone mineral density. The FDA
granted orphan drug status to Prestara for women with SLE,
which, if Prestara is approved for marketing, provides for up to
seven years of U.S. marketing exclusivity. We are pursuing
additional patent applications relating to DHEA and its use in
treating SLE.

Currently products containing DHEA are available
as dietary supplements in the United States. Genelabs has
consistently maintained that a governmental entity should
regulate DHEA as a drug and submitted a petition and supporting
documentation to the FDA seeking DHEAs removal from the
market as a dietary supplement. In addition, we believe that
DHEA has the potential to be classified as anabolic steroid by
the U.S. Drug Enforcement Administration, or DEA, and
submitted a petition and supporting documentation to the DEA
supporting this classification. Neither the FDA nor the DEA has
taken any action to date to limit or regulate the manufacture or
sale of DHEA as a dietary supplement.

5



---



##### Table of Contents



International Regulatory
Applications.Independent of the
United States regulatory process, Genelabs is pursuing approval
of Prestara for the treatment of SLE in Europe. However, our
primary business focus in 2003 and 2004 with respect to Prestara
has been, and continues to be, meeting the requirements
established in the approvable letter from the FDA, and we
currently devote most of our drug development resources to
completion of the confirmatory clinical trial with the ultimate
goal of approval of Prestara in the United States. In Europe, we
applied for and received Part B status, which enabled us to
file a Marketing Authorization Application, or MAA, under the
centralized procedure of the European Agency for Evaluation of
Medicinal Products, or EMEA. Approval by the EMEA is required
prior to commercialization of Prestara in the European Union,
and the centralized procedure allows companies to file one MAA
for simultaneous consideration in 17 European countries, with a
single review and decision regarding the application. We
submitted our MAA for Prestara (under the trademark
AnastarTM) and it was validated in January 2003.
Though the application is currently pending and the EMEAs
review has not been completed, it may be necessary for Genelabs
to, among other things, clarify the Companys analysis of
data submitted and submit additional supportive data. In working
with the EMEA toward the ultimate goal of approval of the MAA,
we may continue to pursue approval of the pending application by
submitting additional responses and attending an oral hearing in
May 2004, or we may choose to withdraw the application and file
again at a later date. We are currently in active discussions
with companies that are interested in licensing the European
marketing rights. As part of our process for evaluating
potential European partners, we are evaluating their ability to
participate in the regulatory process in Europe because we lack
internal European regulatory expertise and resources. In Japan,
our licensee Tanabe is responsible for pursuing approval of
Prestara and for conducting and funding any associated studies
that may be required.

Drug Discovery Research

Genelabs drug discovery research
organization is focused on the discovery of antiviral agents
that inhibit replication of the hepatitis C virus (HCV).
Our core capabilities include medicinal chemistry, combinatorial
chemistry, computational modeling, molecular biology, assay
development and high-throughput screening, drug metabolism and
pharmacokinetics. These capabilities were initially built while
we were pursuing DNA as our primary target for drug
intervention. More recently we have expanded our emphasis to
HCV, which is now the primary focus of our drug discovery
efforts. In the future we may seek to expand our drug discovery
efforts to encompass additional targets in order to build a more
balanced product pipeline.

Background.Our drug
discovery efforts were initially founded to explore DNA as a
target for drug discovery. We began our efforts to discover new
antimicrobial agents by targeting small molecules to bind
reversibly to DNA. Our research team then was able to prove the
concept that compounds synthesized in our DNA-binding program
can selectively target infectious organisms. We conducted many
experiments to expand upon our specialized knowledge regarding
such compounds. These efforts resulted in the identification of
a number of small molecule lead compounds showing potent
activity against pathogenic fungi and bacteria and the decision
to promote one lead compound with potent activity against
Aspergillus fumigatusto preclinical status.

Drug Discovery
Process.Genelabs goal for our
drug discovery research is to move compounds quickly from
synthesis and discovery to preclinical development. We have
established all of the capabilities necessary to achieve this
goal and we continue to explore and utilize technologies to
enhance and streamline this process. The establishment of these
systems, combined with our clinical development capabilities,
enables our employees to discover and develop potential
pharmaceutical products. Our business objective for each of our
research programs is to advance one or more of our lead
compounds to pre-clinical development status, and we have
achieved this objective in our HCV and antifungal programs. We
also intend to collaborate with established pharmaceutical
companies for further development of our compounds and our drug
discovery programs.

6



---



##### Table of Contents



Genelabs drug discovery process includes:



| |   |                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | design and synthesis of novel compounds;                                                                                                                                                                          
|
| |  | screening for biological activity, including
    screens against viruses, replicating fragments of viruses and
    key viral enzymes;                                                                             
|
| |  | toxicity testing of compounds in cell culture and
    in animals;                                                                                                                                                 
|
| |  | analysis of pharmacokinetics and metabolism;                                                                                                                                                                      
|
| |  | analysis of structure-activity relationship and
    optimization of lead structures based on efficacy, safety and
    pharmacokinetic profiles;                                                                   
|
| |  | determination of efficacy in animal models of
    disease; and                                                                                                                                                    
|
| |  | selection of compounds for preclinical
    development, the successful completion of which enables the
    filing of Investigational New Drug applications (INDs) with the
    FDA prior to human clinical trials.

Genelabs creates a database of information
gathered during the drug discovery process and uses this
information to select lead compounds for further optimization.
Compounds are selected as leads if they demonstrate certain
drug-like properties desirable in early-stage pharmaceutical
research. The desired outcome of this process is to select the
compounds having the best pharmaceutical product profiles,
taking into consideration activity against disease, potency,
toxicity, and pharmacokinetics. Information obtained from
optimization is used to determine how changes in compound
structures affect their activity, known as the
structure-activity relationship, or SAR, allowing for further
refinement of the lead compounds. Our strategy is to pursue the
optimization and development of promising compounds that
demonstrate strong biological activity with acceptable toxicity
and pharmacokinetic profiles. We focus our research in areas
that address clinically unmet medical needs that are also
commercially attractive. Lead compounds can qualify for
advancement to preclinical candidate status if they meet or
exceed a predetermined set of advancement criteria we establish
for each therapeutic area. Once we identify a preclinical
candidate, IND-enabling work can be initiated, including
process chemistry, formulation, GLP animal studies, and
pharmacokinetic studies.

Currently our drug discovery research efforts are
focused on the discovery and advancement of novel compounds that
selectively inhibit replication of the hepatitis C virus.
Our core research strength is our expertise in designing,
synthesizing, screening and testing of novel small molecules. In
our HCV program we are actively synthesizing two distinct
classes of compounds, nucleoside analogues, which are
structurally similar to the building blocks of RNA, and
non-nucleosides. During 2003, our program advanced to
preclinical status, the stage at which the pharmaceutical
properties and potential toxicity of candidate compounds are
more thoroughly evaluated in advance of potential human testing.
Simultaneously, we continue to synthesize additional novel HCV
compounds to serve as potential follow-up candidates for
preclinical development. As we advance our existing research and
additional resources become available, we intend to explore
potential new targets that complement our current drug discovery
capabilities to build a more balanced pipeline of pharmaceutical
candidates. The ultimate objective of our drug discovery
research is to discover novel chemical compounds that can be
developed into drugs to treat human disease.

Antimicrobial Drug
Discovery.Through our previous drug
discovery efforts we have synthesized numerous DNA-binding
antibacterial and antifungal lead compounds. During 2002, we
made a decision to advance one of the antifungal lead compounds
synthesized by our scientists to preclinical development status,
having met our predefined criteria for such advancement,
although we currently do not plan to conduct the preclinical
development studies ourselves and are seeking a suitable
research partner for this work. This compound is active against
a variety of fungi in cell culture and has successfully
protected mice against lethal infection with Aspergillus. This
compound, GL48656, reproducibly showed significant improvement
in survival of mice infected with Aspergillus fumigatuscompared to untreated controls. The level of protection
achieved with GL48656 is comparable to that achieved with
Amphotericin B, the current standard of care for patients
with invasive Aspergillus infections. The same compound also
showed a significant reduction in Aspergillus colony forming
units recoverable from the brains and kidneys of animals treated
with effective doses of the compound. The acute toxicity of this
compound observed in mice was less than that of

7



---



##### Table of Contents



amphotericin B, and was comparable to that
observed with caspofungin, a novel antifungal recently
introduced to the market for treatment of invasive aspergillus
infections. On the basis of these and other experiments, we
determined that this lead compound met our pre-established
criteria for advancement to preclinical development.


The antibacterial activity of certain Genelabs
DNA-binding compounds has also been explored. A number of the
compounds tested demonstrated activity against a panel of gram
positive and gram negative bacterial species. Representative
compounds were tested in vivo and found to be dose-dependently
effective against both methicillin resistant and methicillin
sensitive strains of Staphylococcus aureus. These
compounds were bacteriocidal, meaning they kill the bacteria,
rather than simply inhibiting their growth. In a widely used
mouse model of infection, Genelabs compounds showed potency
greater than that of vancomycin (a current antibiotic of last
resort) at equivalent doses, in reducing bacterial colony
formation. While the compounds were efficacious, they did not
achieve an acceptable margin of safety.

We are currently focusing the resources that were
previously devoted to DNA-binding research towards our HCV drug
discovery efforts.

HCV Drug Discovery.Treatment for HCV infection is characterized by a dual
objective: preventing the progression of liver disease by
reducing the amount of virus in the body to low levels, and
modifying the process of liver inflammation. Currently approved
treatments for chronic HCV infections are interferon alpha and
the combination of interferon alpha with the nucleoside analogue
ribavirin. Unfortunately, these interferon alpha-based
treatments are only effective in achieving sustained reduction
in viral titers in approximately 50% of patients infected with
HCV genotype 1, the genotype most prevalent in the United
States. These treatments are also associated with significant
toxicities. HCV infection remains an important public health
problem throughout the world and there is a significant need for
improved treatments.

In 2002, we expanded on our drug discovery
research by initiating a program to discover orally active
compounds for the treatment of HCV infections by targeting a
viral-specific enzyme which is called the NS5b RNA-dependent RNA
polymerase. Since establishing this program, we have:



| |   |                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------
| |  | established a high-throughput cell-free enzyme
    assay for HCV RNA polymerase;                                   
|
| |  | established a cell-based assay which measures
    replication of an engineered HCV virus;                          
|
| |  | synthesized a large number of nucleoside and
    non-nucleoside compounds and tested them for activity;            
|
| |  | acquired a library of non-nucleoside compounds
    and initiated testing in our assay systems;                     
|
| |  | identified nucleoside and non-nucleoside lead
    compounds;                                                       
|
| |  | written and submitted multiple patent
    applications claiming novel compounds with activity against HCV;
    and,
|
| |  | initiated preclinical studies in the HCV research
    program.                                                     

Research Program Next
Steps.Genelabs strategy for
realizing value from our research programs is to aggressively
pursue optimization of our current lead compounds, with the goal
of identifying additional potential drug candidates and
ultimately filing INDs, either on our own or with a partner,
allowing the initiation of clinical development. We are
concentrating our activities in HCV, where we believe there is
the greatest opportunity for success of our program, due to the
research capabilities we have established and the clear market
need for improved therapeutic options.

During 2004, we intend to pursue further
optimization and generation of HCV lead compounds and to
initiate preclinical studies in our HCV research program. To
maximize the utilization of our expertise and resources, and our
opportunities for success, we will continue to evaluate
additional targets and explore the feasibility of initiating
drug discovery efforts against these targets as resource
availability and other factors permit. Our objectives for
research are to generate preclinical candidates and to continue
to build a pipeline of lead compounds and potential lead
compounds. Our business strategy is to establish collaborations
with

8



---



##### Table of Contents



pharmaceutical or larger biotechnology companies
to further advance the HCV program and the antifungal
preclinical development candidate.


Investments

Minority Investment in Taiwan-based
Biopharmaceutical Company.Genelabs
holds approximately 8% of the equity in a Taiwan-based company,
Genovate Biotechnology Co., Ltd., referred to as Genovate, which
was formerly called Genelabs Biotechnology Co., Ltd. Genovate
develops, manufactures and distributes pharmaceutical products
in Asia and holds the rights to market PrestaraTM in
Asia (except Japan), Australia and New Zealand. Genovate has
conducted a 119-patient Phase III clinical trial of
Prestara in Taiwan in accordance with U.S. Good Clinical
Practices and data from this trial were included in the NDA for
Prestara submitted by Genelabs as supportive data from a foreign
source. Since the founding of Genovate, we have periodically
sold portions of our equity in Genovate, and we may sell
additional portions of our equity in Genovate as regulations in
Taiwan and market conditions permit. The chairman of our board
of directors, Irene A. Chow, Ph.D., is also chairman
of the board of directors of Genovate. Another one of our
directors, Ms. Nina K. Wang, is a principal of several
investment entities, one of which owns approximately 6% of
Genelabs outstanding common stock, another of which owns
approximately 13% of Genovate common stock. Mrs. Wang also
owns approximately 35% of a publicly traded company that has a
subsidiary which owns approximately 14% of Genovate.

Genelabs Diagnostics Pte. Ltd.
(GLD).Through a series of
subsidiaries Genelabs owns 100% of GLD which is located in
Singapore. GLD develops, manufactures and markets diagnostic
products primarily in Europe and Asia. Based on our plan to
divest our interest in GLD, we account for our diagnostics
business as a discontinued operation in the consolidated
financial statements. In March 2004, Genelabs entered into an
agreement with a third party to sell GLD and its immediate
parent, Genelabs Asia Pte. Ltd., subject to certain closing
conditions.

Patents and Licenses

Genelabs seeks patent protection for its
proprietary technologies and potential products in the U.S. and
internationally. We own over 40 issued U.S. patents; these
patents cover our novel drug discovery technologies, Prestara,
our HEV and HGV discoveries, and other proprietary technologies.
We also own many corresponding international patents that cover
similar claims to our U.S. patents. Genelabs also has
exclusive and non-exclusive licenses under a number of patents
and patent applications owned by third parties. In addition, we
possess many pending patent applications covering our novel
chemistries and drug discovery technologies and other
proprietary technologies, but cannot estimate how many of these
pending patent applications, if any, will be granted as patents.

United States patents were issued to Genelabs in
2000 covering fundamental nucleic acid amplification techniques
first developed at the Company. One of these technologies is a
method of amplifying nucleic acids by attaching oligonucleotide
linkers to the ends of target DNA sequences (Linker-Aided DNA
Amplification, or LADA). In LADA, researchers add linkers of
known sequences to the ends of target DNA sequences, thereby
providing a known primer sequence that is complementary to the
attached linkers. The primers are then used to amplify the
target DNA, the precise sequence of which need not be known.
Another of these technologies is commonly known as RACE (Rapid
Amplification of cDNA Ends). In the RACE technique, a mixture of
different sequence DNA fragments is first treated with terminal
deoxynucleotide transferase to form a homopolymer tail on the
DNA fragments. Complementary homopolymer primers are then used
to amplify the DNA fragments. In 2002, we entered into our
initial non-exclusive license agreement for Genelabs LADA
technology with a leading genetic analysis tool company. In
addition to the license fees we have received, this agreement
provides us with annual fees and royalties. We are pursuing
additional, similar license agreements with others practicing
these technologies.

Licensing of
PrestaraTM.Genelabs
currently intends to commercialize Prestara (which may be known
by different tradenames in different territories) through
licensing agreements with established pharmaceutical companies
and to receive revenue in the form of license fees, milestone
payments upon achievement of certain

9



---



##### Table of Contents



development and regulatory goals, and royalties
on net sales generated by its licensees. Exclusive rights to
Prestara for North America have been licensed to Watson
Pharmaceuticals, Inc. The collaboration and license
agreement with Watson provides Genelabs with milestone payments
of up to $45 million and significant royalties on product
sales if the FDA approves the Prestara NDA for SLE. Through the
collaboration, Genelabs and Watson have agreed to make certain
decisions about the product, including decisions regarding the
future development of Prestara for the pursuit of new
formulations and new indications and the conduct of marketing
studies.


In January 2004 Genelabs licensed exclusive
rights to Prestara for Japan to Tanabe Seiyaku Co., Ltd. Under
the terms of the collaboration and license agreement, Tanabe
paid an up-front license fee of $2 million to Genelabs and
purchased 818,897 shares of Genelabs common stock for
$2.6 million. Genelabs has the right to receive up to
$10 million in additional milestone payments upon the
achievement of certain pre-determined development and regulatory
goals. In addition, Genelabs is entitled to receive royalties on
net sales of Prestara in Japan. Tanabe is responsible for
obtaining regulatory approval of Prestara in Japan, including
conducting and funding any development work that may be required.

Genelabs previously licensed marketing rights for
Asia (excluding Japan), Australia and New Zealand to Genovate in
exchange for an equity position in Genovate. Genelabs also has
licensed rights to Teva Pharmaceutical Industries Ltd. to market
Prestara in Israel, Gaza and the West Bank and, if Prestara is
approved in the U.S. and Israel, Genelabs will receive milestone
payments and royalties from Teva.

Genelabs is actively seeking a collaborator or
collaborators to license European rights to Prestara.



| |                                                       
| | ------------------------------------------------------
| | Licensing of Novel Viruses Discovered by
    Genelabs.

Hepatitis G Virus.On February 13, 2003, at the 10th Conference on
Retroviruses and Opportunistic Infections, data were presented
confirming two earlier New England Journal of Medicinearticles showing that patients infected with both the human
immunodeficiency virus, HIV, and GB virus C, also known as
hepatitis G virus, or HGV, had a reduced mortality rate compared
to those only infected with HIV. Genelabs scientists first
discovered HGV, which is transmitted by blood and other bodily
fluids, while seeking to identify what was then an unknown
hepatitis virus. Patents covering the HGV genome, peptides and
their uses have issued to Genelabs. During 2002, we granted
non-exclusive research licenses to academic institutions to
facilitate their continuing research on the interaction between
HGV and HIV. We have previously granted Boehringer Mannheim (now
Roche Diagnostics), Chiron Corporation and Ortho Diagnostic
Systems royalty-bearing license agreements for diagnostic
applications of HGV and Genelabs retains all other commercial
rights to its discovery of HGV, such as vaccine or therapeutic
applications of the virus. To date, royalties received under
these HGV agreements have not been significant, and we do not
foresee receiving significant royalties in the near future.
Although the presence of HGV has been detected in blood samples
contained in the U.S., Europe, Japan and elsewhere, to date
there are no known diseases specifically caused by HGV and no
assays developed for screening the blood bank supply.

Hepatitis E Virus.In connection with its discovery of the hepatitis E virus,
or HEV, Genelabs granted GlaxoSmithKline an exclusive worldwide
royalty-bearing license to make, use and sell HEV vaccines.
GlaxoSmithKline is developing an HEV vaccine candidate and has
successfully completed two Phase I clinical trials, showing
the vaccine to be safe and immunogenic. In 2001, the Walter Reed
Army Institute of Research initiated a Phase II clinical
trial of this vaccine candidate in collaboration with the
Medical Department of the Royal Nepal Army, the
U.S. National Institutes of Health and GlaxoSmithKline. The
trial has enrolled approximately 2,000 adult volunteers in Nepal
who have received three doses of either HEV vaccine or placebo
over a six month period. The follow-up period was 18 months
after the last dose. The clinical phase of the trial has been
completed but results are not yet available. In addition to
Glaxo-SmithKlines vaccine license, Genelabs has granted
Abbott Laboratories a royalty-bearing, non-exclusive worldwide
license to develop and commercialize diagnostic products for
HEV. To date, royalties received under these HEV agreements have
not been significant, and we do not foresee receiving
significant royalties in the near future.

10



---



##### Table of Contents



Hepatitis C Virus.After its discovery of certain polypeptide regions of the
hepatitis C virus, or HCV, Genelabs entered into a
royalty-bearing license agreement with Pasteur Sanofi
Diagnostics, which was acquired by Bio-Rad
Laboratories, Inc. in 1999. We have also granted certain
rights to our HCV patents to Chiron Corporation and Ortho
Diagnostic Systems. The agreements with Chiron and Ortho do not
provide for royalties and we receive royalties from Bio-Rad
pursuant to the terms of the Pasteur Sanofi license.

Genelabs® and the Genelabs logo are
registered trademarks, and PrestaraTM,
AnastarTM and AsleraTM are trademarks of
Genelabs Technologies, Inc. This Annual Report on
Form 10-K also includes trade names and trademarks of
companies other than Genelabs.

Government Regulation

The research and development, preclinical testing
and clinical trials, manufacture, distribution, marketing and
sales of human pharmaceutical and medical device products are
subject to regulation by the FDA in the U.S. and by comparable
authorities in other countries. These national agencies and
other federal, state and local entities regulate, among other
things, research and development activities and the testing,
manufacture, safety, effectiveness, labeling, storage, record
keeping, approval, advertising and promotion of the products
that we are developing.

Research and
Development.Our research and
development programs involve the use of hazardous, chemical,
radiological and biological materials, such as infectious
disease agents. Accordingly, our present and future business is
subject to regulations under state and federal laws regarding
work force safety, environmental protection and hazardous
substance control and to other present and possible future
local, state and federal regulations.

Pre-Clinical
Testing.In the U.S., prior to the
testing of a new drug in human subjects, the FDA requires the
submission of an Investigational New Drug application, or IND,
which consists of, among other things, results of preclinical
laboratory and animal tests, information on the chemical
compositions, manufacturing and controls of the products, a
protocol, an investigators brochure and a proposed
clinical program. Preclinical tests include laboratory
evaluation of the product and animal studies to assess the
potential safety and efficacy of the product and its
formulation. Unless the FDA objects, the IND becomes effective
30 days after receipt by the FDA. FDA objection to the
initiation of clinical trials is not uncommon, and the FDA may
request additional data, clarification or validation of data
submitted, or modification of a proposed clinical trial design.

Clinical Trials.Clinical trials are conducted in accordance with protocols that
detail the objectives and designs of the study, the parameters
to be used to monitor safety and the efficacy criteria to be
evaluated. Each protocol is submitted to the FDA as part of the
IND. Each clinical study is conducted under the auspices of an
Institutional Review Board, or IRB. The IRB will consider, among
other things, ethical factors, the informed consent and the
safety of human subjects and the possible liability of the
institution. Clinical trials are typically conducted in three
sequential phases, although the phases may overlap. In
Phase I, the initial introduction of the drug into human
subjects, the product is tested for safety, dosage tolerance,
absorption, metabolism, distribution and excretion.
Phase II involves studies in a limited patient population
to (i) determine the efficacy of the product for specific,
targeted indications, (ii) determine dosage tolerance and
optimal dosage and (iii) identify the common short-term
adverse effects and safety risks. When Phase II evaluations
indicate that a product is effective and has an acceptable
safety profile, two Phase III trials are normally required
to further test for safety and efficacy within an expanded
patient population at multiple clinical sites.

Manufacturing.Each
manufacturing establishment must be determined to be adequate by
the FDA before approval of product manufacturing. Manufacturing
establishments are subject to inspections by the FDA for
compliance with current Good Manufacturing Practices and
licensing specifications before and after an NDA has been
approved, and international manufacturing facilities are subject
to periodic FDA inspections or inspections by the international
regulatory authorities.

11



---



##### Table of Contents



Marketing and
Distribution.The results of product
development, pre-clinical studies and clinical studies are
submitted to the FDA as part of the NDA for approval of the
marketing and commercial shipment of a new drug. The FDA may
deny approval if applicable regulatory criteria are not
satisfied or may require additional clinical or other testing.
Even if additional testing data are submitted, the FDA may
ultimately decide that the NDA does not satisfy the criteria for
approval or it may limit the scope of any approval it does
grant. Product approvals may be withdrawn if compliance with
regulatory standards is not maintained or if problems occur or
are first discovered after the product reaches the market. The
FDA may also require post-approval testing and surveillance
programs to monitor the effect of products that have been
commercialized and has the power to prevent or limit further
marketing of the product based on the results of these
post-marketing programs.

Sales.Sales of our
products outside the U.S. are subject to regulatory
requirements governing human clinical trials and marketing for
drugs and biological products. The requirements vary widely from
country to country. The process of obtaining government approval
for a new human drug or biological product usually takes a
number of years and involves the expenditure of substantial
resources.

Employees

As of December 31, 2003, Genelabs had
74 full-time employees, of whom 60 were involved in
research and development and 14 were in administration. Our
employees are not represented by any collective bargaining
agreements, and we have never experienced a work stoppage.

Available Information

The Company is subject to the informational
requirements of the Securities Exchange Act of 1934. The Company
therefore files periodic reports, proxy statements and other
information with the Securities and Exchange Commission. Such
reports may be obtained by visiting the Public Reference Room of
the Commission at 450 Fifth Street, NW, Washington,
D.C. 20549, or by calling the SEC at 1-800-732-0330. In
addition, the SEC maintains an Internet site
(http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding issuers
that file electronically.

The Companys Internet address is
www.genelabs.com. The Company makes available, free of charge,
through its Internet website copies of its annual report on
Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act as soon as reasonably practicable after filing such
material electronically or otherwise furnishing it to the
Commission.

12



---



##### Table of Contents








RISK FACTORS


There are a number of risk factors that should be
considered by Genelabs shareholders and prospective
investors. It is not possible to comprehensively address all
risks that exist, but the following risks in particular should
be considered, in addition to other information in this Annual
Report on Form 10-K.

Risks Related to Genelabs



| |                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If the results of our confirmatory clinical
    trial of PrestaraTM, Genelabs drug candidate
    for systemic lupus erythematosus, are not positive, the FDA will
    not approve Prestara and our business prospects will suffer
    because the U.S. royalties for Prestara are the most
    significant near-term source of potential revenue.

Genelabs has focused its development efforts to
date on conducting clinical trials for an investigational new
drug, Prestara, also referred to as GL701, AsleraTM
and AnastarTM, for the treatment of women with
systemic lupus erythematosus, or lupus. Lupus is a severe,
chronic and debilitating autoimmune disease that can affect the
musculoskeletal and nervous systems, lungs, heart, kidneys, skin
and joints. Prestara is a pharmaceutical formulation containing
highly purified prasterone, the synthetic equivalent of
dehydroepiandrosterone or DHEA, a naturally occurring hormone.

Before our North American partner, Watson, can
market Prestara in the United States, the FDA must approve the
Prestara New Drug Application, or NDA, submitted by Genelabs. In
2000, we submitted the NDA for Prestara to the FDA. In 2001 we
received a letter from the FDA stating that the Prestara NDA was
not approvable, listing deficiencies that must be addressed
before the NDA could be approved. Throughout 2001 we worked with
the FDA to respond to these issues. In 2002 we received an
approvable letter which, among other things, requires us to
conduct an additional clinical trial to confirm the positive
effect of Prestara we previously noted on the bone mineral
density of women with lupus who are receiving treatment with
glucocorticoids. Even if the results of our clinical trial are
positive, the FDA still has the authority to decline to approve
Prestara. Genelabs business plans depend on FDA approval
of Prestara in the United States, and if the clinical trial
currently underway does not confirm our previous findings or if
significant and new safety issues emerge, the FDA will not
approve our new drug application in a timely manner, if at all,
and our business would suffer because 1) we would not be
entitled to a milestone payment from Watson and
2) royalties we are entitled to receive from Prestara sales
in the United States are our most significant near-term source
of potential revenue.



| |                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to find a European
    marketing partner for PrestaraTMour business
    prospects will suffer because we do not have capabilities to
    market Prestara in Europe ourselves and we would lose a
    significant near-term source of revenue.

Because we have limited sales, marketing and
distribution capabilities and no established presence in Europe,
our business plans include licensing the European marketing
rights to Prestara to a larger pharmaceutical or biotechnology
company with established marketing capabilities. If we are
unable to find a European marketing partner, we would not be
able to launch Prestara in Europe in a timely manner, if at all,
even if it is approved. Our business would suffer because we
would not be able to generate revenue from Prestara in Europe.



| |                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If the FDA and the EMEA do not approve
    PrestaraTM for marketing, our business prospects will
    suffer because Prestara is our only near-term source of
    potential revenue.

Before our North American partner, Watson, and
any potential European partner can market Prestara in their
respective territories, appropriate regulatory agencies must
review and approve applications seeking to market the
investigational drug which have been submitted by Genelabs. Our
business plans depend on approval of Prestara in both the United
States and in Europe. If the regulatory agencies do not approve
one or both of our applications in a timely manner, our business
would suffer because we have no other near-term source of
potential revenue.

13



---



##### Table of Contents



If the regulatory agencies determine that
Prestara can only be approved with significant additional
requirements and we determine that it is not feasible for us to
satisfy one or more of the requirements requested, we could be
forced to abandon the development of Prestara. We cannot predict
whether the regulatory agencies will require the submission of
additional data in order to approve our applications, what these
requirements may be, whether we will be successful in responding
to requests from these agencies for additional requirements or
whether there will be additional substantial obstacles to, or
delays in, our development of Prestara for lupus.

Similar regulatory requirements exist in Japan
and elsewhere in the world. Genelabs has not conducted any
clinical trials for Prestara for lupus in other countries. We
plan to enter into collaborations or licensing agreements for
commercializing Prestara in other areas with pharmaceutical
companies that have resources greater than Genelabs. If we do
not enter into these agreements, we may not be able to sell, or
might face delays related to commercial introduction of,
Prestara in these other territories, because we lack the
necessary resources.



| |                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If PrestaraTM is approved in the
    United States or Europe but does not gain sufficient market
    acceptance, our business will suffer because we would not
    receive anticipated royalties to fund future
    operations.

A number of factors may affect the market
acceptance of Prestara for lupus, even if it is approved,
including:



| |   |                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | availability and level of reimbursement by
    insurance companies or government programs such as Medicaid;                                                          
|
| |  | the price of Prestara relative to other drugs for
    lupus treatment;                                                                                               
|
| |  | the perception by patients, physicians and other
    members of the health care community of the effectiveness and
    safety of Prestara for the treatment of lupus;
|
| |  | the effectiveness of sales and marketing efforts
    by our licensees;                                                                                               
|
| |  | side effects;                                                                                                                                                        
|
| |  | competition from other prescription and
    over-the-counter products; and                                                                                           
|
| |  | unfavorable publicity concerning Prestara or
    other drugs on the market.                                                                                          

In addition, if regulatory authorities fail to
restrict the sale of dietary supplement DHEA products, which do
not require a prescription, the market may not accept Prestara.
A number of dietary supplement manufacturers market products
containing DHEA as dietary supplements in the United States.
Prestara contains highly purified prasterone, the synthetic
equivalent of DHEA, as the active ingredient. The body produces
DHEA, an androgenic hormone or steroid hormone that develops and
maintains masculine characteristics, which is not a component of
the diet. While we have consistently maintained that a
governmental entity should regulate DHEA as a drug and as a
controlled substance, neither the FDA nor the Drug Enforcement
Agency, or DEA, has taken any specific action to date to limit
or regulate the sale of dietary supplement DHEA. The FDA and DEA
may not wish to, or may be unable to, regulate DHEA in the
future. We have submitted documentation to the FDA requesting
clarification of DHEAs status as a drug and removal from
the market as a dietary supplement. We have also submitted
documentation to the DEA requesting clarification of DHEAs
status as an anabolic steroid, a steroid that promotes the
storage of protein and growth of tissue. Anabolic steroids are
scheduled as controlled substances. If the FDA restricts the
marketing of DHEA as a dietary supplement or the DEA agrees that
DHEA is an anabolic steroid, DHEA may no longer be publicly
available as a dietary supplement. In the event that Prestara
receives FDA approval, the concurrent sale of these dietary
supplement products could significantly adversely affect or
significantly limit the market for or the selling price of
Prestara.

14



---



##### Table of Contents





| |                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our outside suppliers and manufacturers for
    PrestaraTM are subject to regulation, including by
    the FDA, and if they do not meet their commitments, we would
    have to find substitute suppliers or manufacturers which could
    delay supply of product to the market.

Regulatory requirements applicable to
pharmaceutical products tend to make the substitution of
suppliers and manufacturers costly and time consuming. We rely
on a single supplier of prasterone, the active ingredient in
Prestara, and we rely on a single finished product manufacturer,
Patheon Inc., for production of Prestara capsules and for
packaging. The disqualification of these suppliers and
manufacturers through their failure to comply with regulatory
requirements could negatively impact our business because of
delays and costs in obtaining and qualifying alternate
suppliers. We have no internal manufacturing capabilities for
pharmaceutical products and are entirely dependent on contract
manufacturers and suppliers for the manufacture of Prestara as a
finished product and for its active ingredient.

Our manufacturing and supply agreement with
Patheon for Prestara capsules has an initial term through
December 31, 2008, and is renewable for three-year terms
thereafter, unless either party provides the other with twelve
months notice prior to the end of the then-current term.
The Patheon manufacturing supply agreement also provides for
termination by either party upon failure of the other party to
remedy a material breach within sixty days or upon bankruptcy of
the other party; by us in the event of an action preventing us
from importing, exporting, purchasing or selling the product; or
by Patheon on six months prior notice if we assign the
agreement to an assignee that is not acceptable to Patheon. Our
supply agreement for prasterone, the active ingredient in
Prestara, has an initial term through August 27, 2005 and
is automatically renewed for one-year periods unless either
party provides the other with two years notice. The
supplier may not terminate without cause during the initial
term. The active ingredient supply agreement also provides for
termination by either party upon failure of the other party to
remedy a material breach within sixty days or upon bankruptcy of
the other party.

We believe that we are current in all material
obligations under both of these agreements. In the event of
termination or expiration of one or both of these agreements, we
believe that we would be able to find alternative suppliers,
however, we may not be able to secure these arrangements in a
timely manner or on favorable terms and the amount of time and
expense involved in transferring the process of manufacture, and
receiving regulatory qualifications, could negatively impact the
timing or probability of approval of our NDA, or if the product
is approved by the FDA, the supply of the product to the market.

The FDA requires the existence of at least one
qualified manufacturer before it will approve a drug for
commercialization. If we fail to maintain a relationship with at
least one qualified supplier of prasterone and at least one
qualified manufacturer of the Prestara finished pharmaceutical
product it would negatively impact our business because the NDA
could not be approved by the FDA. If our NDA is approved and our
supplier or manufacturer fails to meet and maintain compliance
with FDA requirements or if they fail to manufacture Prestara
active ingredient, capsules and packaging as required for our
needs, we may not be able to ship product in a timely manner, if
at all. This failure could negatively impact our relationships
with customers and would harm sales of Prestara. The following
could harm our ability to manufacture and market Prestara:



| |   |                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the unavailability of adequate quantities of the
    active ingredient for commercial sale;                                                                                                 
|
| |  | the loss of a suppliers or
    manufacturers regulatory approval;                                                                                                                         
|
| |  | the failure of a supplier or manufacturer to meet
    regulatory agency pre-approval inspection requirements;                                                                               
|
| |  | the failure of a supplier or manufacturer to
    maintain compliance with ongoing regulatory agency requirements;                                                                           
|
| |  | the inability to develop alternative sources in a
    timely manner or at all;                                                                                                              
|
| |  | an interruption in supply of prasterone or
    finished product; and                                                                                                                        
|
| |  | competing demands on the contract
    manufacturers capacity, for example, shifting
    manufacturing priorities to their own products or more
    profitable products for other customers.

15



---



##### Table of Contents





| |                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are dependent on Watson Pharmaceuticals
    to market PrestaraTM in North America and if Prestara
    is approved by the FDA and they fail to meet expected levels of
    sales our business will suffer.

We must rely on Watson to market Prestara in
North America. Because royalties from sales of Prestara would be
our primary near-term source of revenue, successful marketing,
promotion and distribution of this product in the United States
are critical to our success. Though Genelabs has the right to
co-promote the product in the United States beginning the third
calendar year after the first commercial sale of the product by
Watson, we currently have limited internal sales, marketing and
distribution capabilities and are entirely dependent on Watson
to promote Prestara. If Prestara is approved by the FDA and
Watson fails to promote Prestara, our business will suffer
because we will not receive anticipated revenue from product
sales. Though the agreement with Watson requires them to use
commercially reasonable efforts to promote the sale, marketing
and distribution of the product in their territory, it does not
prevent them from marketing competing products should they
become available. Our agreement with Watson provides us with the
right to terminate the agreement or make it non-exclusive in the
event that Watson fails to meet specified minimum sales
requirement or materially breaches the agreement; however, it
may be difficult or impossible to find a marketing partner to
replace Watson should they breach the agreement or fail to meet
these minimum requirements.

Our ability to market Prestara in Europe will
depend upon our ability to obtain a European partner. Similar to
the United States, successful marketing, promotion and
distribution of this product in Europe are important to our
success. As we have limited capabilities and will rely on our
potential future European partner for marketing, promotion and
distribution, if they fail to promote Prestara our business will
suffer because we will not receive anticipated revenue from
product sales.



| |                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------
| | We may not be profitable in the near future
    or at all and we will require additional funds to carry out our
    business plans.

We have incurred losses each year since our
inception and have accumulated approximately $204 million
in net losses through December 31, 2003, including a net
loss of $19.8 million in 2003. If the FDA approves
Prestara, we anticipate realizing a net loss at least until
Prestara is sufficiently accepted by the market, and we may
never achieve profitability. If the FDA does not approve
Prestara, we may never be profitable and our revenues may never
be sufficient to fund operations.

On March 15, 2004, after giving effect to
the 2004 payments we received from entering into the license
agreement with Tanabe Seiyaku Co. Ltd., Genelabs had cash, cash
equivalents and short-term investment balances totaling
approximately $26.3 million. Genelabs estimates that our
current cash resources are adequate to provide liquidity into
2005. However, we will still require additional capital to carry
out our business plans. The following are illustrations of
potential impediments to our ability to successfully secure
additional funds:



| |   |                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our stock price and market capitalization are
    low, therefore there are limited funds we can raise through
    equity financings;                                                                                                                                                                                     
|
| |  | our ability to successfully complete an
    additional equity financing will be negatively impacted should
    we become unable to meet Nasdaqs listing requirements;                                                                                                                                                   
|
| |  | our ability to find a European marketing partner
    for Prestara would be negatively impacted if we receive
    indications that the EMEAs review of our MAA is unlikely
    to result in approval of our application; and                                                                                             
|
| |  | our research programs are in an early stage,
    therefore there are fewer opportunities to enter into
    collaborations with other companies and up-front payments for
    early-stage pharmaceutical research collaborations are generally
    smaller for projects that are further from potential
    marketability.

The results of our clinical trial measuring the
effect of Prestara on the bone mineral density of women with
lupus and future FDA actions with respect to our NDA for
Prestara will each have a material impact on our ability to
successfully secure funding in the future. If
PrestaraTM is ultimately approved for marketing in

16



---



##### Table of Contents



the U.S., Genelabs may receive a milestone
payment of up to $45 million and significant royalties on
Watsons net sales of Prestara. However, the clinical trial
results may not be positive and/or the FDA may never approve
Prestara and, even if they do, we may never receive a milestone
payment or royalties on net sales.


Additional funds for our research and development
activities may not be available on acceptable terms, if at all.
The unavailability of additional funds could delay or prevent
the development, approval or marketing of some or all of our
products and technologies, which would have a material adverse
effect on our business, financial condition and results of
operations.



| |                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------
| | If we are unable to obtain patents or
    protect our intellectual property rights, we would lose
    competitive advantage.

Agency or court proceedings could invalidate our
current patents, or patents that issue on pending applications.
Our business would suffer if we do not successfully defend or
enforce our patents, which would result in loss of proprietary
protection for our technologies and products. Patent litigation
may be necessary to enforce patents to determine the scope and
validity of our proprietary rights or the proprietary rights of
another.

The active ingredient in Prestara is prasterone,
more commonly known as dehydroepiandrosterone, or DHEA. DHEA is
a compound that has been in the public domain for many years. It
is not possible to obtain patent protection for the chemical
compound anywhere in the world. Genelabs licensed two United
States patents covering uses of DHEA in treating lupus from
Stanford University in 1993. The Stanford patents expire in 2013
and the license expires when the patents expire. In addition, we
have filed patent applications covering additional uses for
Prestara and various pharmaceutical formulations and intend to
file additional applications as appropriate. We have filed
patent applications covering compounds from our drug discovery
programs; however, no patents are currently issued. A number of
patents have issued covering Genelabs drug discovery
technologies and methods related to selective regulation of gene
expression and the control of viral infections. A number of
patent applications are pending.

If another company successfully brings legal
action against us claiming our activities violate, or infringe,
their patents, a court may require us to pay significant damages
and prevent us from using or selling products or technologies
covered by those patents. Others could independently develop the
same or similar discoveries and may have priority over any
patent applications Genelabs has filed on these discoveries.
Prosecuting patent priority proceedings and defending litigation
claims can be very expensive and time-consuming for management.
In addition, intellectual property that is important for
advancing our drug discovery efforts or for uses for the active
ingredient in Prestara owned by others might exist that we do
not currently know about now or in the future. We might not
obtain licenses to a necessary product or technology on
commercially reasonable terms, or at all, and therefore, we may
not pursue research, development or commercialization of
promising products.



| |                                                                                                          
| | ---------------------------------------------------------------------------------------------------------
| | Our research programs are in an early stage
    and may not successfully produce commercial
    products.

Pharmaceutical discovery research is inherently
high-risk because of the high failure rate of projects. To date,
our research has been focused on a limited number of mechanisms
which have not been proven as a viable mechanism of drug action,
such as DNA-binding. Although we have identified an antifungal
compound that has met our criteria for advancement to
preclinical status, we have not devoted resources to preclinical
development of this compound, but have initiated preclinical
development in our HCV research program in early 2004.
Genelabs product candidates, other than Prestara, are in
an early stage of research. The goal of our research programs is
to discover novel chemical compounds and develop them into
drugs. All of our research projects may fail to produce
commercial products.

If Genelabs discovers compounds that have the
potential to be drugs, public information about our research
success may lead other companies with greater resources to focus
more efforts in areas similar to ours. Genelabs has limited
human and financial resources. Creation of the type of compounds
we seek to discover requires sophisticated and expensive lab
equipment and facilities, a team of scientists with advanced
scientific knowledge in many disciplines such as chemistry,
biochemistry and biology, and time and effort.

17



---



##### Table of Contents



Large pharmaceutical companies have access to the
latest equipment and have many more personnel available to focus
on solving particular research problems, including those that
Genelabs is investigating. Therefore, even if our research
programs are successful, we have a competitive disadvantage.


Industry Risks



| |                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our activities involve hazardous materials
    and improper handling of these materials by our employees or
    agents could expose us to significant legal and financial
    penalties.

Our research and development activities involve
the controlled use of hazardous materials, including infectious
agents, chemicals and various radioactive compounds. Our organic
chemists use solvents, such as chloroform, isopropyl alcohol and
ethanol, corrosives such as hydrochloric acid and other highly
flammable materials, some of which are pressurized, such as
hydrogen. We use the following radioactive compounds in small
quantities under license from the State of California, including
Carbon(14), Cesium(137), Chromium(51), Hydrogen(3), Iodine(125),
Phosphorus(32), Phosphorus(33) and Sulfur(35). Our biologists
use biohazardous materials, such as bacteria, fungi, parasites,
viruses and blood and tissue products. We also handle chemical,
medical and radioactive waste, byproducts of our research,
through licensed contractors. As a consequence, we are subject
to numerous environmental and safety laws and regulations,
including those governing laboratory procedures, exposure to
blood-borne pathogens and the handling of biohazardous
materials. Federal, state and local governments may adopt
additional laws and regulations affecting us in the future. We
may incur substantial costs to comply with, and substantial
fines or penalties if we violate, current or future laws or
regulations.

Although we believe that our safety procedures
for using, handling, storing and disposing of hazardous
materials comply with the standards prescribed by state and
federal regulations, we cannot eliminate the risk of accidental
contamination or injury from these materials. In the event of an
accident, state or federal authorities may curtail our use of
these materials and we could be liable for any civil damages
that result, the cost of which could be substantial. Further,
any failure by us to control the use, disposal, removal or
storage of, or to adequately restrict the discharge of, or
assist in the cleanup of, hazardous chemicals or hazardous,
infectious or toxic substances could subject us to significant
liabilities, including joint and several liability under state
or federal statutes. While we believe that the amount of general
liability insurance we carry, $6 million, is sufficient for
typical risks regarding our handling of these materials, it may
not be sufficient to cover extraordinary or unanticipated
events. We do not specifically insure against environmental
liabilities. Additionally, an accident could damage, or force us
to shut down, our research facilities and operations.



| |                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may not be able to obtain or maintain
    sufficient insurance on commercially reasonable terms or with
    adequate coverage against potential liabilities in order to
    protect ourselves against product liability
    claims.

Our business exposes us to potential product
liability risks that are inherent in the testing, manufacturing
and marketing of human therapeutic products. We may become
subject to product liability claims if someone alleges that the
use of our products, such as Prestara for lupus, if approved,
injured subjects or patients. This risk exists for products
tested in human clinical trials as well as products that are
sold commercially. Although we currently have insurance coverage
in amounts that we believe are customary for companies of our
size and industry and sufficient for risks we typically face, we
may not be able to maintain this type of insurance for any of
our clinical trials or in a sufficient amount. We currently
maintain $5 million of product liability insurance for
claims arising from the use of our products in clinical trials.
In addition, product liability insurance is becoming
increasingly expensive. As a result, we may not be able to
obtain or maintain product liability insurance in the future on
acceptable terms or with adequate coverage against potential
liabilities which could harm our business by requiring us to use
our resources to pay potential claims.

18



---



##### Table of Contents



Market Risks



| |                                                                                                            
| | -----------------------------------------------------------------------------------------------------------
| | Because our stock is volatile, the value of
    your investment in Genelabs may substantially
    decrease.

The market price of our common stock, like the
stock prices of many publicly traded biopharmaceutical
companies, has been and will probably continue to be highly
volatile. Between January 1, 2003 and December 31,
2003, the price of our common stock fluctuated between $1.12 and
$2.85 per share. Between January 1, 2004 and
March 1, 2004, the price of our common stock fluctuated
between $2.01 and $3.25 per share. In addition to the
factors discussed in this Risk Factors section, a variety of
events can impact the stock price, including the low percentage
of institutional ownership of our stock, which contributes to
lack of stability for the stock price. The availability of a
large block of stock for sale in relation to our normal trading
volume could also result in a decline in the market price of our
common stock.

In addition, numerous events occurring outside of
our control may also impact the price of our common stock,
including market conditions related to the biopharmaceutical
industry. Other companies have defended themselves against
securities class action lawsuits following periods of volatility
in the market price of their common stock. If a party brings
this type of lawsuit against us, it could result in substantial
costs and diversion of managements time.



| |                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because we may not continue to qualify for
    listing on the Nasdaq quotation system, the value of your
    investment in Genelabs may substantially decrease.

Genelabs may be unable to meet the requirements
of the Nasdaq National Market System in the future. To maintain
its listing on the Nasdaq National Market, Genelabs is required,
among other things, to either maintain stockholders equity
of at least $10 million or a market value of at least
$50 million, as well as to maintain a bid price of at least
$1.00 per share of common stock. If Genelabs is unable to
meet these requirements, it may be delisted from the National
Market System. If delisted from the Nasdaq National Market,
Genelabs might apply for listing on the Nasdaq SmallCap Market.
The Nasdaq SmallCap Market, however, also has listing
requirements, which Genelabs may fail to meet for initial
listing or with which Genelabs may fail to maintain compliance.
Delisting from the National Market System could adversely affect
the trading price of our common stock, and delisting from the
Nasdaq SmallCap Market would significantly limit the liquidity
of our common stock and would adversely affect its trading price.






|        |            
|------- | -----------
|Item 2. | Properties.

We lease our principal research, clinical
development and office facilities under an operating lease
expiring in November 2006, and have an option to renew this
lease for an additional four-year term following its expiration.
This location encompasses approximately 50,000 square feet
located in Redwood City, California, with an annual base rent
averaging approximately $1,250,000. Genelabs believes that this
facility is adequate for its current needs and that suitable
additional or substitute space will be available as needed to
accommodate its operations.






|        |                   
|------- | ------------------
|Item 3. | Legal Proceedings.

Not applicable.






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

Not applicable.

19



---



##### Table of Contents






PART II






|        |                                                                           
|------- | --------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity
    and Related Shareholder Matters.

The Common Stock of Genelabs began trading
publicly on the Nasdaq Stock Market on June 13, 1991 under
the symbol GNLB. The following table sets forth for
the periods indicated the high and low sale prices of the
Companys common stock as reported by the Nasdaq Stock
Market.

|            |  |      |      |     |  |  |      | 
|----------- |  | ---- | ---- | --- |  |  | ---- | 
|            |  | High |      | Low
|            |  |      |      |    
|2003        |  |      |      |     |  |  |      | 
|1st Quarter |  |      | 1.88 |     |  |  | 1.12 | 
|2nd Quarter |  |      | 2.10 |     |  |  | 1.26 | 
|3rd Quarter |  |      | 1.86 |     |  |  | 1.38 | 
|4th Quarter |  |      | 2.85 |     |  |  | 1.37 | 
|2002        |  |      |      |     |  |  |      | 
|1st Quarter |  |      | 2.69 |     |  |  | 1.75 | 
|2nd Quarter |  |      | 2.50 |     |  |  | 0.63 | 
|3rd Quarter |  |      | 3.55 |     |  |  | 1.07 | 
|4th Quarter |  |      | 2.24 |     |  |  | 1.07 | 

As of March 1, 2004, there were
approximately 704 holders of record of Genelabs Common
Stock.

Genelabs has never declared or paid any cash
dividends on its capital stock. We currently intend to retain
any earnings for use in the operation and expansion of our
business and do not anticipate paying any cash dividends in the
foreseeable future.

The following table represents certain
information with respect to our equity compensation plans as of
December 31, 2003.

Equity Compensation Plan Information

|                                                               |       |                            |           |                           |  |                              |      |      |  |  |           |           | 
|-------------------------------------------------------------- | ----- | -------------------------- | --------- | ------------------------- |  | ---------------------------- | ---- | ---- |  |  | --------- | --------- | 
|                                                               |       |                            |           |                           |  | Number of Securities        
|                                                               |       |                            |           |                           |  | Remaining Available for     
|                                                               |       | Number of Securities to be |           |                           |  | Future Issuance Under Equity
|                                                               |       | Issued Upon Exercise of    |           | Weighted-Average Price of |  | Compensation Plans          
|                                                               |       | Outstanding Options,       |           | Outstanding Options,      |  | (Excluding Securities       
|Plan Category                                                  |       | Warrants and Rights        |           | Warrants and Rights       |  | Reflected in Column(a))     
|                                                               |       |                            |           |                           |  |                             
|                                                               |       | (a)                        |           | (b)                       |  | (c)                         
|Equity compensation plans approved by security
    holders     |       |                            | 6,182,000 |                           |  | $                            | 2.87 |      |  |  | 2,887,000 |          
|Equity compensation plans not approved by
    security holders |       |                            |          |                           |  |                              |     |      |  |  |          |          
|                                                               |       |                            |           |                           |  |                              |      |      |  |  |           |          
|                                                               | Total |                            |           | 6,182,000                 |  |                              | $    | 2.87 |  |  |           | 2,887,000 | 
|                                                               |       |                            |           |                           |  |                              |      |      |  |  |           |          

Genelabs equity compensation plans do not
contain evergreen provisions.






|        |                         
|------- | ------------------------
|Item 6. | Selected Financial Data.

The following selected consolidated financial
information has been derived from the audited consolidated
financial statements. The information below is not necessarily
indicative of results of future operations, and should be read
in conjunction with Item 7, Managements
Discussion and Analysis of Financial Condition and Results of
Operations and the consolidated financial statements and
related notes thereto included in

20



---



##### Table of Contents



Item 8 of this Annual Report on
Form 10-K in order to fully understand factors that may
affect the comparability of the information presented below.


The following table summarizes quarterly
financial data (unaudited).

|                                          |  |                                          |        |              |  |         |        |          |  |   |        |   |  |   |        |  
|----------------------------------------- |  | ---------------------------------------- | ------ | ------------ |  | ------- | ------ | -------- |  | - | ------ | - |  | - | ------ | -
|                                          |  | December 31                              |        | September 30 |  | June 30 |        | March 31
|                                          |  |                                          |        |              |  |         |        |         
|                                          |  |                                         
|                                          |  | (In thousands, except per share amounts)
|2003 Quarter Ended:                       |  |                                          |        |              |  |         |        |          |  |   |        |   |  |   |        |  
|Contract revenue                          |  | $                                        | 715    |              |  | $       | 698    |          |  | $ | 776    |   |  | $ | 727    |  
|Research and development expenses         |  |                                          | 5,518  |              |  |         | 4,581  |          |  |   | 3,771  |   |  |   | 3,557  |  
|General and administrative expenses       |  |                                          | 1,924  |              |  |         | 1,091  |          |  |   | 1,489  |   |  |   | 1,391  |  
|Loss from continuing operations           |  |                                          | (6,678 | )            |  |         | (4,970 | )        |  |   | (4,474 | ) |  |   | (4,200 | )
|Net loss                                  |  |                                          | (6,490 | )            |  |         | (4,837 | )        |  |   | (4,280 | ) |  |   | (4,200 | )
|Loss per share from continuing operations |  |                                          | (0.08  | )            |  |         | (0.08  | )        |  |   | (0.08  | ) |  |   | (0.08  | )
|Net loss per share                        |  |                                          | (0.08  | )            |  |         | (0.08  | )        |  |   | (0.07  | ) |  |   | (0.08  | )

|                                          |  |                                          |        |              |  |         |        |          |  |   |        |   |  |   |        |  
|----------------------------------------- |  | ---------------------------------------- | ------ | ------------ |  | ------- | ------ | -------- |  | - | ------ | - |  | - | ------ | -
|                                          |  | December 31                              |        | September 30 |  | June 30 |        | March 31
|                                          |  |                                          |        |              |  |         |        |         
|                                          |  |                                         
|                                          |  | (In thousands, except per share amounts)
|2002 Quarter Ended:                       |  |                                          |        |              |  |         |        |          |  |   |        |   |  |   |        |  
|Contract revenue                          |  | $                                        | 849    |              |  | $       | 774    |          |  | $ | 991    |   |  | $ | 1,031  |  
|Research and development expenses         |  |                                          | 3,450  |              |  |         | 3,749  |          |  |   | 3,958  |   |  |   | 3,380  |  
|General and administrative expenses       |  |                                          | 1,294  |              |  |         | 1,301  |          |  |   | 1,568  |   |  |   | 1,366  |  
|Loss from continuing operations           |  |                                          | (3,862 | )            |  |         | (4,160 | )        |  |   | (4,415 | ) |  |   | (3,643 | )
|Net loss                                  |  |                                          | (3,860 | )            |  |         | (4,291 | )        |  |   | (4,232 | ) |  |   | (3,567 | )
|Loss per share from continuing operations |  |                                          | (0.07  | )            |  |         | (0.08  | )        |  |   | (0.09  | ) |  |   | (0.07  | )
|Net loss per share                        |  |                                          | (0.07  | )            |  |         | (0.08  | )        |  |   | (0.08  | ) |  |   | (0.07  | )

All of Genelabs employees participate in an
incentive bonus plan in which a portion of their compensation is
tied to meeting corporate objectives. For 2002, Genelabs board
of directors determined that certain critical objectives were
substantially achieved and designated that 2002 objectives had
been achieved at 90% of the target level. However, because of
financial constraints, the board also determined that bonuses
would only be paid contingent upon Genelabs ability in the
future to secure a specified level of additional financing. This
additional financing had not been secured at the time the
Company filed its 2002 Annual Report on Form 10-K.
Significant uncertainties existed as to whether this financing
would be obtained and it was not probable that the bonus would
be paid. Therefore, in the fourth quarter of 2002 Genelabs
reversed its provision for accrued bonuses. In the fourth
quarter of 2002, research and development expenses and general
and administrative expenses decreased from the prior two
quarters of 2002 because of this unusual circumstance. The
reversal of accrued bonuses lowered research and development
expenses by $642,000 and general and administrative expenses by
$214,000 in the fourth quarter of 2002, for a reduction of
operating expenses aggregating $856,000.

In the fourth quarter of 2003, Genelabs secured
sufficient additional financing to satisfy conditions the board
of directors had established for payment of the contingent
bonuses, and bonus payments were made aggregating $853,000.
These payments increased research and development expenses by
$640,000 and general and administrative expenses by $213,000.
The board also determined that an important objective for
payment of employee bonuses for 2003 was the securing of
additional financing and additional charges were also accrued in
the fourth quarter of 2003. The accruals for 2003 bonuses
aggregated $1,133,000 in the fourth quarter of 2003, of which
$850,000 was included in research and development and $283,000
was included in general and administrative expenses. As a result
of the contingency and the 2003 objective both being met during
the fourth quarter of 2003, the total charges incurred for the
incentive bonus plan during the quarter were $1,986,000, of
which $1,490,000 was included in research and development and
$496,000 was included in general and administrative expenses.
The 2003 bonuses were paid out in the first quarter of 2004. As
a result of these circumstances, the costs recorded in the
fourth quarter of 2003 aggregate more that what would

21



---



##### Table of Contents



otherwise be recorded in a complete year, and are
approximately 50% greater than what has been budgeted for 2004.


The selected financial data presented below
summarize certain financial information from the consolidated
financial statements.

|                              |                                           |                                          |   |         |   |      |   |         |   |      |   |         |   |  |   |         |   |  |   |         |  
|----------------------------- | ----------------------------------------- | ---------------------------------------- | - | ------- | - | ---- | - | ------- | - | ---- | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                              |                                           |                                         
|                              |                                           | Years Ended December 31,                
|                              |                                           |                                         
|                              |                                           | 2003                                     |   | 2002    |   | 2001 |   | 2000    |   | 1999
|                              |                                           |                                          |   |         |   |      |   |         |   |     
|                              |                                           |                                         
|                              |                                           | (In thousands, except per share amounts)
|Statement of Operations Data: |                                           |                                          |   |         |   |      |   |         |   |      |   |         |   |  |   |         |   |  |   |        
|                              | Contract revenue                          |                                          | $ | 2,916   |   |      | $ | 3,645   |   |      | $ | 4,769   |   |  | $ | 7,075   |   |  | $ | 8,017   |  
|                              | Research and development expenses         |                                          |   | 17,427  |   |      |   | 14,537  |   |      |   | 13,238  |   |  |   | 14,671  |   |  |   | 13,953  |  
|                              | General and administrative expenses       |                                          |   | 5,895   |   |      |   | 5,529   |   |      |   | 6,464   |   |  |   | 5,626   |   |  |   | 4,704   |  
|                              | Loss from continuing operations           |                                          |   | (20,322 | ) |      |   | (16,080 | ) |      |   | (13,287 | ) |  |   | (12,282 | ) |  |   | (10,139 | )
|                              | Net loss                                  |                                          |   | (19,807 | ) |      |   | (15,950 | ) |      |   | (13,000 | ) |  |   | (12,282 | ) |  |   | (12,821 | )
|                              | Loss per share from continuing operations |                                          |   | (0.32   | ) |      |   | (0.31   | ) |      |   | (0.27   | ) |  |   | (0.28   | ) |  |   | (0.25   | )
|                              | Net loss per share                        |                                          |   | (0.31   | ) |      |   | (0.31   | ) |      |   | (0.26   | ) |  |   | (0.28   | ) |  |   | (0.32   | )

|                    |                                                   |                |   |        |  |      |   |       |  |      |   |        |  |  |   |        |  |  |   |        | 
|------------------- | ------------------------------------------------- | -------------- | - | ------ |  | ---- | - | ----- |  | ---- | - | ------ |  |  | - | ------ |  |  | - | ------ | 
|                    |                                                   |               
|                    |                                                   | December 31,  
|                    |                                                   |               
|                    |                                                   | 2003           |   | 2002   |  | 2001 |   | 2000  |  | 1999
|                    |                                                   |                |   |        |  |      |   |       |  |     
|                    |                                                   |               
|                    |                                                   | (In thousands)
|Balance Sheet Data: |                                                   |                |   |        |  |      |   |       |  |      |   |        |  |  |   |        |  |  |   |       
|                    | Cash, cash equivalents and short-term investments |                | $ | 26,530 |  |      | $ | 6,570 |  |      | $ | 19,000 |  |  | $ | 34,671 |  |  | $ | 8,099  | 
|                    | Working capital                                   |                |   | 22,379 |  |      |   | 2,684 |  |      |   | 13,646 |  |  |   | 28,758 |  |  |   | 3,010  | 
|                    | Total assets                                      |                |   | 29,866 |  |      |   | 9,765 |  |      |   | 22,100 |  |  |   | 37,594 |  |  |   | 11,689 | 
|                    | Shareholders equity                              |                |   | 22,815 |  |      |   | 2,714 |  |      |   | 11,900 |  |  |   | 24,000 |  |  |   | 5,571  | 






|        |                                                                                           
|------- | ------------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations.

All statements in Managements Discussion
and Analysis of Financial Condition and Results of Operations
that are not historical are forward-looking statements. Actual
results may differ from the forward-looking statements due to a
number of risks and uncertainties that are discussed under
Risk Factors in Item 1 and elsewhere on this
Annual Report on Form 10-K. Shareholders and prospective
investors in the Company should carefully consider these risk
factors. We disclaim any obligation to update these statements
for subsequent events.

Genelabs Technologies, Inc., referred to as
Genelabs or the Company, is a biopharmaceutical company
pioneering the discovery and development of novel pharmaceutical
products to improve human health. Genelabs is pursuing
regulatory approval of Prestara, its investigational drug for
women with systemic lupus erythematosus, a disease for which no
new drug has been approved in the past 40 years and for
which current therapies are not adequate. We are also pursuing
the discovery of novel antiviral compounds for treatment of
hepatitis C infections, and are initiating preclinical
development work in this area. We believe that these high-risk,
potentially high reward programs focus our research and
development expertise in areas where we have the opportunity to
be scientific pioneers and, if successful, we believe that these
programs will yield products that will address diseases for
which current therapies are inadequate. At the same time, our
established capabilities can be utilized as we diversify our
research and development programs.

Critical Accounting Estimates

The preparation of our financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make judgments, assumptions
and estimates that affect the amounts reported in our financial
statements and accompanying notes. Actual results could differ
materially from those estimates. The following are critical
accounting estimates which are important to understanding our
financial condition and results of operations as presented in
the financial statements.

22



---



##### Table of Contents



Revenue Recognition.Revenue from non-refundable upfront license fees where we
continue involvement through a collaboration or other obligation
is recognized ratably over the development period. Unearned
contract revenue at December 31, 2003 and at
December 31, 2002, is from a single source, an up-front
payment received in 2000 from Watson Pharmaceuticals, Inc.,
referred to as Watson, for our license to them of the North
American marketing rights to Prestara. Genelabs management
considers the amortization period for the up-front payment from
Watson a critical accounting estimate. The amortization period
we use is based on our current estimate of the period we have
significant obligations to Watson. In August 2002, the FDA
issued an approvable letter to Genelabs for Prestara, citing
issues to be addressed prior to approval, including, among other
things, the successful completion of an additional clinical
trial to confirm the positive effect of Prestara on bone mineral
density previously observed in women with mild to moderate lupus
while on low-dose glucocorticoids. Genelabs management
believes that its significant obligations under the agreement
with Watson extend to the submission of a complete response to
the approvable letter to the FDA and the FDA reaching a final
decision regarding approval of the NDA. The date upon which we
may receive a final FDA decision on approval will vary based on,
among other things, the time period necessary for analysis of
the results of the clinical trial, what the results of the trial
are, our preparation of a re-submission to the FDA, and the
length of time the FDA will take to review the data submitted
after the conclusion of the trial. Genelabs currently estimates
that it will take until June 2005 for an FDA decision on the
NDA. The estimated period for amortization has a noteworthy
impact on the revenue recognized, and, in turn, the net loss
reported in Genelabs financial statements. For example, if
a longer term were estimated Genelabs revenue would be
lower and the net loss would be higher. Conversely, if a shorter
amortization term were estimated, Genelabs revenue would
be greater and the net loss lower. We periodically assess the
remaining term over which the up-front payment from Watson is
being recognized into the statement of operations and will make
changes based on updated information. One of these changes
occurred in 2002, when we lengthened the amortization period
based on FDAs clarification of requirements for approval
in the approvable letter, and subsequently, we made additional
changes during 2003 based on new information about the time
required to enroll patients in the clinical trial.

We have assessed the remaining term over which
the up-front payment from Watson is being recognized into the
statement of operations, and believe it is the most appropriate
term based on the facts known to us as of the date of the filing
of this Annual Report on Form 10-K. However, actions taken
by the FDA, or other changes in circumstances, after the filing
of this Annual Report on Form 10-K may either reduce or
lengthen the remaining period over which Genelabs records the
up-front revenue from Watson.

Discontinued
Operations.We account for our
diagnostics subsidiary, Genelabs Diagnostics Pte. Ltd., referred
to as GLD, as a discontinued operation because we are selling
this business. Accounting treatment for discontinued operations
involves segregation of the net assets and operating results of
the discontinued operation for separate disclosure in the
financial statements, rather than including the results within
the other line-items of the financial statements. We have
accounted for GLD as a discontinued operation since 1998, the
year we adopted a plan to divest GLD. We have determined that
GLD meets held-for-sale criteria of current accounting
requirements as of December 31, 2003, and that discontinued
operation accounting continues to apply. Judgments and estimates
were used in reaching this conclusion. A different
interpretation of current accounting literature that concluded
discontinued operation accounting did not apply would have a
significant impact on the financial statements, increasing
revenues, operating expenses, assets and liabilities, although
shareholders equity and the net loss would remain the
same. In March 2004 we entered into an agreement to sell GLD and
its immediate parent corporation, Genelabs Asia Pte. Ltd.,
subject to certain closing conditions.

Results of Operations



| |                                           
| | ------------------------------------------
| | Years Ended December 31, 2003 and
    2002

Introduction.Genelabs net loss was $19.8 million in 2003, an
increase of $3.8 million from the $16.0 million net
loss in 2002. This increase in net loss is primarily the result
of higher research and development costs during 2003, related to
the confirmatory clinical trial we are conducting in women with
lupus and also due to incentive bonus costs that were incurred
as a result of the liquidity provided by financings

23



---



##### Table of Contents



closed by Genelabs during the year. Partially
offsetting these increases were lower salary and benefit costs
resulting from a reduction in workforce implemented in early
2003. A more detailed discussion of the changes in
Genelabs statement of operations follows.


Contract Revenue.Contract revenues were $2.9 million in 2003, a decrease of
$0.7 million from $3.6 million in contract revenues in
2002. The following table breaks down contract revenue by major
source:

|                           |  |      |       |      |  |   |       | 
|-------------------------- |  | ---- | ----- | ---- |  | - | ----- | 
|                           |  | 2003 |       | 2002
|                           |  |      |       |     
|Watson                     |  | $    | 1,841 |      |  | $ | 2,525 | 
|Royalties and license fees |  |      | 623   |      |  |   | 520   | 
|Data analysis services     |  |      | 452   |      |  |   | 600   | 
|                           |  |      |       |      |  |   |       | 
|Total contract revenue     |  | $    | 2,916 |      |  | $ | 3,645 | 
|                           |  |      |       |      |  |   |       | 

In 2003, approximately 63% of revenue was the
recognition into income of a previously received up-front
license payment from Watson. In 2003, this source of revenue
decreased due to a revision we made to the estimate of time it
would take us to obtain an answer from the FDA on approval of
Prestara after we submit a complete response to the approvable
letter. The period of time to receive an answer from the FDA is
the period over which we have significant obligation to Watson
and are amortizing the deferred revenue. Genelabs currently
estimates that it will take until June 2005 for an FDA decision
on the NDA. Accordingly, during the third and fourth quarters of
2003, Genelabs extended the amortization period of the up-front
payment received from Watson from a period ending
December 31, 2004 to a period ending June 30, 2005. If
this change were applied over a full year, this change would
reduce annual revenue by approximately $0.5 million from
the rate used at the end of 2002. This amount is less than the
decrease in the contract revenue recognized from Watson for 2003
compared to 2002 because during 2002 a separate adjustment was
made to the amortization period upon the FDAs issuance of
the approvable letter, which clarified the obligations of
Genelabs under its agreement with Watson.

Aside from the revenue recognized from Watson,
other sources of revenue include data analysis services
performed for larger pharmaceutical companies, royalties and
license fees. Collectively, these other sources aggregated
approximately $1.1 million in both 2003 and 2002.

Operating Expenses.The following table breaks down operating expenses into the two
major categories of costs on our financial statements.

|                           |  |      |        |      |  |        |        |  |  |  |      | 
|-------------------------- |  | ---- | ------ | ---- |  | ------ | ------ |  |  |  | ---- | 
|                           |  | 2003 |        | 2002 |  | Change
|                           |  |      |        |      |  |       
|Research and development   |  | $    | 17,427 |      |  | $      | 14,537 |  |  |  | +20% | 
|General and administrative |  |      | 5,895  |      |  |        | 5,529  |  |  |  | +7%  | 
|                           |  |      |        |      |  |        |        |  |  |  |      | 
|Total operating expenses   |  | $    | 23,322 |      |  | $      | 20,066 |  |  |  | +16% | 
|                           |  |      |        |      |  |        |        |  |  |  |      | 

All operating expenses are related to
Genelabs business of discovering and developing
pharmaceutical products. The two key increases in operating
expenses for 2003 compared to 2002 were costs related to
conducting our confirmatory clinical trial of Prestara for lupus
and costs incurred for our employees incentive bonuses.
These are each explained in more detail below.

Research and
Development Expenses  Background

Because we are in the business of drug discovery
and development and have not developed any products that have
been approved for sale, the majority of our costs are classified
as research and development and are expensed as incurred.
Research and development expenses include related salaries and
benefits, clinical trial and related clinical manufacturing
costs, contract and outside service fees, supplies and chemicals
used in laboratories and allocated facilities and overhead
costs. Over the last ten years, the majority of Genelabs
research and development has been directed toward two major
projects  developing PrestaraTM as an
investigational new drug for lupus and discovery of entirely new
drugs, both of which are on-going.

24



---



##### Table of Contents



Research and
Development Expenses by Project

In 2003, $17.4 million of operating expenses
were in research and development, compared to $14.5 million
in 2002, an increase of $2.9 million for 2003 as compared
to 2002. The following table breaks down the research and
development expenses by major project (in thousands):

|                                     |  |      |        |      |  |        |        |  |  |  |      | 
|------------------------------------ |  | ---- | ------ | ---- |  | ------ | ------ |  |  |  | ---- | 
|                                     |  | 2003 |        | 2002 |  | Change
|                                     |  |      |        |      |  |       
|Drug development (PrestaraTM)        |  | $    | 6,539  |      |  | $      | 4,847  |  |  |  | +35% | 
|Drug discovery (HCV and DNA-binding) |  |      | 4,847  |      |  |        | 5,505  |  |  |  | -12% | 
|Support costs and other R&D          |  |      | 6,041  |      |  |        | 4,185  |  |  |  | +44% | 
|                                     |  |      |        |      |  |        |        |  |  |  |      | 
|Total research and development       |  | $    | 17,427 |      |  | $      | 14,537 |  |  |  | +20% | 
|                                     |  |      |        |      |  |        |        |  |  |  |      | 

Drug Development
(PrestaraTM)

Costs for Prestara increased to $6.5 million
in 2003 compared to $4.8 million in 2002 primarily as a
result of our confirmatory Phase III clinical trial, which
enrolled patients throughout 2003. In addition, Genelabs also
incurred additional incremental costs in 2003 for qualification
of a manufacturing site for Prestara. Genelabs began developing
PrestaraTM for systemic lupus erythematosus in 1993
when Genelabs licensed exclusive rights to patents related to
Prestara from Stanford University. To develop this drug
candidate, we have built internal clinical development
capabilities including clinical trial design, monitoring,
analysis and reporting, regulatory affairs and quality control
and assurance. Direct costs incurred to build these capabilities
and advance Prestara through clinical trials to its current
approvable status with the FDA have been approximately
$42 million through December 31, 2003. If the clinical
trial results, currently expected in the fourth quarter of 2004,
are positive and the FDA approves Prestara for lupus, Genelabs
expects to continue work on this project, seeking approval in
other countries and investigating other indications and
potential uses of the investigational drug. If the clinical
trial results are not positive and the FDA does not approve
Prestara for lupus, Genelabs plans to evaluate the results and
the requirements for approval prior to making a decision on
further development. As these results are not expected to be
available until the fourth quarter of 2004, we do not expect the
clinical trial results will significantly impact our costs for
2004, which are expected to increase approximately 5% to 10% in
2004. We expect to incur additional costs after 2004, but these
will be dependent on the clinical trial results and future
decisions from the FDA and regulatory authorities in Europe and
other countries. Major collaborations for Prestara are with
Watson Pharmaceuticals, Inc. in North America and with
Tanabe Seiyaku Co., Ltd. in Japan.

Drug
Discovery

Costs for our drug discovery program decreased to
$4.8 million in 2003 from $5.5 million in 2002. Drug
discovery costs were lower in 2003 compared to 2002 because of a
reduction in the drug discovery workforce that was implemented
in early 2003. Genelabs current drug discovery efforts
have evolved from a program that initially focused on DNA as a
target for drug intervention. Since initiating this drug
discovery program, Genelabs has built medicinal chemistry,
combinatorial chemistry, computational modeling, molecular
biology, assay development and high-throughput screening, drug
metabolism, pharmacokinetics and toxicology capabilities.
Genelabs has incurred direct drug discovery costs for these
efforts from the inception of our DNA-binding program in 1993
through December 31, 2003 of approximately
$33 million. Our drug discovery efforts have generated lead
compounds for fungal, bacterial and viral infections. In
addition, these efforts have generated a preclinical candidate
for Aspergillus, an often fatal systemic fungal infection, and
we have initiated preclinical studies in our hepatitis C
virus research program. Our drug discovery efforts are presently
concentrated on identifying a new drug to combat infection with
HCV, which includes the further testing of our preclinical

25



---



##### Table of Contents



drug candidates and other lead compounds, as well
as identification of additional potential lead compounds. The
following table breaks down the percentage of direct drug
discovery costs by major project:


|                                  |  |      |      |      |  |  |      | 
|--------------------------------- |  | ---- | ---- | ---- |  |  | ---- | 
|                                  |  | 2003 |      | 2002
|                                  |  |      |      |     
|Hepatitis C virus                 |  |      | 87%  |      |  |  | 67%  | 
|DNA-binding                       |  |      | 13%  |      |  |  | 33%  | 
|                                  |  |      |      |      |  |  |      | 
|Total direct drug discovery costs |  |      | 100% |      |  |  | 100% | 
|                                  |  |      |      |      |  |  |      | 

Due to the nature of drug discovery research, we
cannot reliably estimate the outcome of scientific experiments,
many of which will impact the design and conduct of subsequent
scientific experiments, and all of which provide additional
information on both the direction of the research program and
likelihood of its success. As such, the potential timing for key
future events that may occur in our drug discovery programs
cannot reliably be estimated and we cannot estimate whether a
compound will advance to a later stage of development or when we
may determine that a program is no longer viable for potentially
producing a drug candidate. We also cannot reasonably predict
the costs to reach these stages, and cannot predict whether any
of our compounds will result in commercial products or lead to
revenue for the Company. However, we presently estimate that
drug discovery costs for 2004 will be approximately 10% greater
than 2003, although the outcome of our corporate partnering
discussions and current scientific experiments may result in
significant changes to this estimate. Management continually
evaluates the status of our drug discovery research programs and
expects to continue to devote resources toward our
hepatitis C drug discovery program, while at the same time
managing the level of expenditures to balance advancement of
potential product candidates against Genelabs limited cash
resources and the cash requirements for development of Prestara.

Support
Costs and Other R&D

Support costs and other R&D is primarily
comprised of costs necessary to maintain a research and
development facility, such as rent, support staff, maintenance
and utilities, and the company bonus, all allocated based on the
headcount ratio between research and development and general and
administrative. Support costs and other R&D were
$6.0 million in 2003 and $4.2 million in 2002, an
increase of $1.8 million. The following table breaks down
by percentage the major components of support costs and other
R&D:

|                                                      |  |      |      |      |  |  |      | 
|----------------------------------------------------- |  | ---- | ---- | ---- |  |  | ---- | 
|                                                      |  | 2003 |      | 2002
|                                                      |  |      |      |     
|Employee bonus                                        |  |      | 33%  |      |  |  | 0%   | 
|Facility rent                                         |  |      | 18%  |      |  |  | 15%  | 
|Insurance and depreciation                            |  |      | 14%  |      |  |  | 27%  | 
|Support staff                                         |  |      | 9%   |      |  |  | 16%  | 
|Utilities, maintenance and security                   |  |      | 9%   |      |  |  | 14%  | 
|Other R&D and related intellectual property
    costs |  |      | 17%  |      |  |  | 28%  | 
|                                                      |  |      |      |      |  |  |      | 
|Total support and other R&D costs                     |  |      | 100% |      |  |  | 100% | 
|                                                      |  |      |      |      |  |  |      | 

The $1.8 million increase in costs during
2003 was primarily due to approximately $2.0 million
related to bonuses for all employees incurred in 2003 as
compared to no bonus charge in 2002. No bonus charge was
incurred in 2002 due to liquidity issues. In addition, we
entered into a new facility lease at the end of 2002, increasing
the support and other R&D costs by an additional
$0.4 million, although this did not significantly increase
the percentage of support and other R&D costs in 2003
compared to 2002 because the total was higher. Other costs
included in support costs and other R&D decreased in 2003 as
compared to 2002, both in total dollars and as a percentage of
the total support and other R&D costs, as a result of
facility improvements becoming fully depreciated at the end of
2002 and our reduction in workforce. In 2004, we expect support
costs and other R&D to decrease approximately 10%, primarily
because we expect the bonus charges to be lower.

26



---



##### Table of Contents



General
and Administrative

In 2003, $5.9 million in operating expenses
were general and administrative expenses, compared to
$5.5 million in 2002, an increase of $0.4 million. Our
general and administrative expenses consist primarily of
personnel costs for executive management, finance, marketing,
business development, human resources and legal departments, as
well as professional expenses, such as legal and audit, and
allocated facilities costs such as rent and insurance. During
2003, higher general and administrative costs were incurred due
to accrual of bonuses in 2003 upon meeting board-determined
goals for our level of funding compared to no expense in 2002.
Meeting these goals increased general and administrative costs
by $0.5 million in 2003 compared to 2002. Offsetting this
increase were lower salary costs as a result of the reduction in
workforce implemented in early 2003. Future general and
administrative expenses will vary depending upon our execution
of our business plans, although management currently expects
2004 general and administrative expenses to be within
approximately 5% of the 2003 general and administrative expenses.

Nonoperating
Expenses.Interest income was
$0.1 million in 2003, a decrease of $0.2 million from
2002. The decrease in interest income was due to lower average
cash and short-term investment balances during 2003 than during
2002.

In 2003, we recorded $0.5 million in income
from the discontinued operations of Genelabs Diagnostics Pte.
Ltd., an increase of $0.4 million from $0.1 million in
income for 2002. The increase in income from discontinued
operations was primarily due to higher sales of diagnostics
products.

Years Ended
December 31, 2002 and 2001

Introduction.Genelabs net loss was $16.0 million in 2002, an
increase of $3.0 million from the $13.0 million net
loss in 2001. This increase is primarily the result of lower
contract revenue and interest income in 2002. A more detailed
discussion of the changes in Genelabs statement of
operations follows.

Contract Revenue.Contract revenues were $3.6 million in 2002, a decrease of
$1.2 million from $4.8 million in contract revenues in
2001. In 2002, approximately 69% of revenue, or
$2.5 million, was the recognition of a previously received
up-front license payment from Watson. In 2002, this source of
revenue decreased by $0.5 million from the
$3.0 million recorded as revenue from Watson in 2001 due to
the FDAs clarification in the August 2002 approvable
letter of the period over which we have significant obligation
to Watson. Based on this clarification, beginning in the third
quarter of 2002, Genelabs extended the amortization period of
the up-front payment received from Watson to a period ending
December 31, 2004. This change reduced 2002 revenue by
$0.5 million, as it was implemented beginning in the third
quarter. If this change were applied over a full year, it would
have reduced annual revenue by approximately $1.0 million.

Aside from the revenue recognized from Watson,
none of our other sources of revenue for 2002 exceeded
$0.6 million. Other sources of revenue include data
analysis services performed for larger pharmaceutical companies,
royalties and grants. Collectively, these other sources declined
by $0.7 million in 2002 compared to 2001. One component of
this decrease was the scheduled expiration of Genelabs
Defense Advanced Research Projects Agency (DARPA) grant at the
end of January 2001, resulting in a decrease in contract revenue
of $0.4 million in 2002 compared to 2001. In addition,
revenues from data analysis services performed for
pharmaceutical companies also decreased by $0.4 million.
Partially offsetting these decreases, in 2002 Genelabs
recognized $0.1 million in revenue from the license of DNA
amplification technologies to a leading genetic analysis tool
company.

Operating Expenses.Operating expenses were $20.1 million in 2002, an increase
of $0.4 million from the $19.7 million in operating
expenses in 2001. All operating expenses are related to
Genelabs business of discovering and developing
pharmaceutical products. In 2002, $14.5 million of
operating expenses were in research and development, compared to
$13.2 million in 2000, an increase of $1.3 million for
2002 as compared to 2001. Costs related to Prestara were
approximately $0.5 million higher in 2002 due to our
frequent meetings with the FDA and initiation of a confirmatory
Phase III clinical trial for Prestara for lupus. Costs for
Genelabs drug discovery efforts increased by
$0.8 million in 2002 compared to 2001, as we built

27



---



##### Table of Contents



additional discovery research capabilities in
chemistry and pharmacokinetics while initiating a new project
directed towards discovery of a new treatment for infection with
the hepatitis C virus.


In 2002, $5.5 million in operating expenses
were general and administrative expenses, compared to
$6.5 million in 2001, a decrease of $1.0 million.
Lower general and administrative costs were incurred in 2002
compared to 2001 as a result of the resolution of a legal matter
in 2001, the costs of which included legal fees and payments to
the other party of approximately $0.4 million. The balance
of the savings, $0.6 million, was due to overall cost
savings measures implemented in the majority of administrative
areas.

Nonoperating
Expenses.Interest income was
$0.3 million in 2002, a decrease of $1.3 million from
2001. The decrease in interest income was due to lower interest
rates and lower average cash and short-term investment balances
during 2002 than during 2001.

In 2002, we recorded $0.1 million in income
from the discontinued operations of Genelabs Diagnostics Pte.
Ltd., a decrease from $0.3 million in income for 2001
primarily due to lower sales of diagnostics products.

Liquidity and Capital Resources

Genelabs had cash, cash equivalents and
short-term investment balances totaling $26.5 million at
December 31, 2003. During 2003, our cash and short-term
investments balance increased by $19.9 million, largely due
to $39.9 million, net, raised from the sale of common
stock, partially offset by $20.2 million cash used in
operations. The cash used in operations funded our development
of Prestara for lupus and the continued research on the
discovery of a new treatment for hepatitis C virus
infection. On March 15, 2004, after giving effect to
$4.6 million received upon execution of the collaboration
and license agreement with Tanabe Seiyaku, Genelabs had cash,
cash equivalents and short-term investment balances totaling
approximately $26.3 million. Genelabs estimates that our
current cash resources are adequate to provide liquidity into
2005. However, we will require additional capital to carry out
our business plans in 2005 and expect to continue to rely on
outside sources of financing to meet our capital needs. The
Company is pursuing the sale of its diagnostics operation and
also negotiating licenses for the European rights to Prestara,
which, if completed, we expect would provide additional cash
resources to Genelabs. Genelabs is also evaluating the sale of
non-core assets and exploring other potential partnerships as
sources of funding. The Company may be unable to complete any of
these transactions as currently contemplated or at all. In
addition, the results of our clinical trial measuring the effect
of Prestara on bone mineral density of women with lupus will
have a material impact on our ability to secure funding and the
amount and terms of funding that may be available.

Longer-term, Genelabs liquidity and capital
resources will be materially impacted by FDA actions with
respect to our NDA for Prestara. If Prestara is approved for
marketing in the U.S., Genelabs may receive a one-time milestone
payment of up to $45 million from Watson. Receipt of a
milestone payment from Watson would materially improve
Genelabs liquidity and capital resources. However,
Genelabs believes that the most important impact of the Watson
collaboration for Genelabs long-term liquidity and capital
resources is the significant royalties Genelabs is entitled to
receive on net sales of Prestara. During the first three
quarters after product launch, a separate royalty schedule
applies to support the product launch.

Since Genelabs inception, the Company has
operated at a loss and has funded operations primarily through
public and private offerings of equity securities and, to a
lesser extent, contract revenues. We expect to incur substantial
additional costs, including research costs for drug discovery
and development costs for Prestara. The amount of additional
costs in our business plans will depend on numerous factors
including any FDA actions, progress of our research and
development programs and the status of corporate partnership
agreements.

Additional funds for our research and development
activities may not be available on acceptable terms, if at all.
The unavailability of additional funds could delay or prevent
the development, approval or marketing of some or all of our
products and technologies, which would have a material adverse
effect on our business, financial condition and results of
operations.

28



---



##### Table of Contents



Other Contractual
Arrangements.Genelabs principal
research, clinical development and office facilities are leased
from third-parties under operating leases. As such, Genelabs
expenses its facility rental costs as those costs are incurred
over the term of the lease. Other than the facility operating
leases, Genelabs does not have any off-balance sheet
arrangements. There are no contractual financial obligations
that extend beyond the next five years, although we have an
option to extend our current operating lease for a four-year
period beyond its current expiration in November 2006. Our
contractual obligations for the next five years are as follows:

|                 |  |                |       |             |  |            |       |       |  |  |   |  |  |   |       | 
|---------------- |  | -------------- | ----- | ----------- |  | ---------- | ----- | ----- |  |  | - |  |  | - | ----- | 
|                 |  | Less than      |       | One to      |  | Three to   |       |      
|                 |  | One Year       |       | Three Years |  | Five Years |       | Total
|                 |  |                |       |             |  |            |       |      
|                 |  |               
|                 |  | (In thousands)
|Operating leases |  | $              | 1,269 |             |  | $          | 2,539 |       |  |  |  |  |  | $ | 3,808 | 
|Equipment loans  |  |                | 104   |             |  |            | 70    |       |  |  |  |  |  |   | 174   | 
|                 |  |                |       |             |  |            |       |       |  |  |   |  |  |   |       | 
|Total            |  | $              | 1,373 |             |  | $          | 2,609 |       |  |  |  |  |  | $ | 3,982 | 
|                 |  |                |       |             |  |            |       |       |  |  |   |  |  |   |       | 






|         |                                                                
|-------- | ---------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risk.

Genelabs exposure to market risk for
changes in interest rates relates primarily to the
Companys short-term investments. We consider the risk
minimal as each security in our portfolio of short-term
investments matures in less than two years, to date we have not
used derivative instruments, and we have placed our investments
with high quality debt issuers. As of December 31, 2003,
the overall average maturity of Genelabs short-term
investment portfolio was less than six months, as all of
Genelabs short-term investments were in a money market fund,
leaving little exposure to changes in interest rates.

Genelabs exposure to market risk for
changes in foreign currency exchange rates relates primarily to
the Companys investment in a Taiwan-based
biopharmaceutical company, Genovate Biotechnology Co., Ltd.,
which is accounted for at cost, based on the lower of cost or
market value method. This investment is the only item included
in the balance sheet caption Long-term investments.
Genelabs may attempt to divest a portion of this investment, in
which case changes in foreign currency exchange rates would
impact the proceeds received upon sale of these shares. Because
the book value of Genelabs ownership percentage of
Genovate is greater than our carrying cost, we currently do not
believe that any foreign currency exchange rate changes would
impact the value of this investment as reported in the financial
statements unless the value of a Taiwan dollar depreciates by
greater than 60% compared to the U.S. dollar, which,
depending on other circumstances, might require Genelabs to
record a non-cash charge to write-down the long-term investment.






|        |                                                              
|------- | -------------------------------------------------------------
|Item 8. | Consolidated Financial Statements and
    Supplementary Data.

The Companys Consolidated Financial
Statements are set forth in the Genelabs
Technologies, Inc. Consolidated Financial Statements and
Annual Report on Form 10-K Index on page F-1 of this
Annual Report on Form 10-K.






|        |                                                                                              
|------- | ---------------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial
    Disclosure.

Not applicable.






|         |                         
|-------- | ------------------------
|Item 9A. | Controls and Procedures.

(a) Disclosure Controls and Procedures. The
Companys management, with the participation of the
Companys Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the Companys
disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended, or the Exchange Act) as of the end of
the period covered by this report. Based on such evaluation, the
Companys Chief Executive Officer and Chief Financial
Officer have concluded that, as of the end of such period, the
Companys disclosure controls and procedures are effective
in recording, processing, summarizing and reporting, on a timely
basis, information required to be disclosed by the Company in
the reports that it files or submits under the Exchange Act.

29



---



##### Table of Contents



(b) Internal Control Over Financial
Reporting. There have not been any changes in the Companys
internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) during the fiscal quarter to which this report relates that
have materially affected, or are reasonably likely to materially
affect, the Companys internal control over financial
reporting.






PART III







|         |                                                    
|-------- | ---------------------------------------------------
|Item 10. | Directors and Executive Officers of
    Registrant.

The information concerning the Companys
directors required by Item 10 is incorporated herein by
reference to the section entitled Proposal
No. 1  Election of Directors of the
definitive Proxy Statement for the Companys 2004 Annual
Meeting of Shareholders (the Proxy Statement). The
information concerning the Companys executive officers
required by Item 10 is incorporated herein by reference to
the section of the Proxy Statement entitled Executive
Officers. The information concerning compliance with
Section 16 of the Securities Exchange Act of 1934, as
amended, required by Item 10 is incorporated herein by
reference to the section of the Proxy Statement entitled
Compliance With Section 16(a) of the Exchange
Act.

In January 2004, the board of directors adopted a
Code of Business Ethics and Conduct applicable to all employees,
including the principal executive officer, principal financial
officer, principal accounting officer or controller, or persons
performing similar functions. A copy of the Code of Business
Ethics and Conduct is available on our website at
www.genelabs.com under Investor Information, Corporate
Governance and is also available free of charge upon written
request to: Compliance Officer, Genelabs
Technologies, Inc., 505 Penobscot Drive, Redwood City,
California 94063.






|         |                        
|-------- | -----------------------
|Item 11. | Executive Compensation.

The information required by Item 11 is
incorporated herein by reference to the sections of the Proxy
Statement entitled Executive Compensation and Other
Information and Compensation of Directors.






|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management.

The information required by Item 12 is
incorporated herein by reference to the section of the Proxy
Statement entitled Security Ownership of Certain
Beneficial Owners and Management.






|         |                                                    
|-------- | ---------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions.

The information required by Item 13 is
incorporated herein by reference to the section of the Proxy
Statement entitled Certain Relationships and Related
Transactions.






|         |                                            
|-------- | -------------------------------------------
|Item 14. | Principal Accounting Fees and
    Services.

Information required by Item 14 is
incorporated herein by reference to the section of the Proxy
Statement entitled Proposal No. 2 
Ratification of Selection of Independent Auditors.

30



---



##### Table of Contents






PART IV






|         |                                                                      
|-------- | ---------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules,
    and Reports on Form 8-K.

(a)(1), (a)(2) and (d) Financial Statements
and Schedules. Reference is made to Genelabs
Technologies, Inc. Consolidated Financial Statements Annual
Report on Form 10-K Index on page F-1 of this Annual
Report on Form 10-K. All financial statement schedules have
been omitted because they are not applicable or because the
information is included elsewhere in the Consolidated Financial
Statements or notes thereto.

(a)(3) and (c) Index to Exhibits. The
following documents are filed herewith or incorporated by
reference herein.

|        |       |               |  |                                                                                                                                                                                                                                                                                                                                                                          
|------- | ----- | ------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |              
|No.     |       | Exhibit Title
|        |       |              
|        | 3.01  |               |  | Registrants Amended and Restated Articles
    of Incorporation (incorporated herein by reference to
    Exhibit 3.01 to Registrants Quarterly Report on
    Form 10-Q for the quarter ended March 31, 2001).                                                                                                                                                           
|        | 3.02  |               |  | Registrants Certificate of Amendment of
    Articles of Incorporation (incorporated herein by reference to
    Exhibit 3.2 to Registrants Quarterly Report on
    Form 10-Q for the quarter ended September 30, 2003).                                                                                                                                                 
|        | 3.03  |               |  | Registrants Amended and Restated Bylaws
    (incorporated herein by reference to Exhibit 3.02 to
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2000 (the 2000
    Form 10-K)).                                                                                                                                                      
|        | 4.01  |               |  | Specimen Certificate for Registrants Common
    Stock (incorporated herein by reference to Exhibit 4.01 to
    Registrants Registration Statement on Form S-1 filed
    with the Commission on April 29, 1991 (File
    No. 33-40120) (the Form S-1)).                                                                                                               
|        | 10.01 |               |  | Registrants 1985 Employee Stock Option Plan
    and related documents, as amended to date (incorporated herein
    by reference to Exhibit 4.03 to the Registrants
    Registration Statement on Form S-8 (File No. 33-81894)
    filed on July 25, 1994 (the July 1994
    Form S-8).                                                                               
|        | 10.02 |               |  | Registrants 1995 Stock Option Plan, as
    amended to date (incorporated herein by reference to
    Exhibit 10.07 of the Registrants Annual Report on
    Form 10-K for the year ended December 31, 1997).                                                                                                                                                             
|        | 10.03 |               |  | Registrants 2001 Stock Option Plan
    (incorporated herein by reference to Exhibit 10.07 of the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2001 (the 2001
    Form 10-K)).                                                                                                                                                      
|        | 10.04 |               |  | Registrants Amended and Renewed 1994 Annual
    and Long-Term Incentive Based Compensation Plan (incorporated
    herein by reference to Exhibit 10.04 to the
    Registrants Quarterly Report on Form 10-Q for the
    quarter ended June 30, 2003).                                                                                                                  
|        | 10.05 |               |  | Registrants 2001 Employee Stock Purchase
    Plan (incorporated herein by reference to Exhibit 10.08 of
    the 2001 Form 10-K).                                                                                                                                                                                                                                        
|        | 10.06 |               |  | Form of Registrants Indemnity Agreement
    entered into by Registrant with certain officers and directors
    (incorporated herein by reference to Exhibit 10.04 to the
    Form S-1).                                                                                                                                                                                 
|        | 10.07 |               |  | Industrial Net Lease Agreement by and between
    Registrant and Lincoln Property Company N.C., Inc. dated
    July 29, 1986, as amended to date (incorporated herein by
    reference to Exhibit 10.06 to the Form S-1).                                                                                                                                                
|        | 10.08 |               |  | Amendment to Lease by and between Registrant and
    Metropolitan Life Insurance Company, successor to Lincoln
    Property Company N.C., dated as of September 25, 2002
    (incorporated herein by reference to Exhibit 10.19 to
    Registrants Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2002 (the Third Quarter
    2002 Form 10-Q)).
|        | 10.09 |               |  | Agreement, dated as of January 26, 1996, by
    and between Registrant and Dr. Edgar G. Engleman
    (incorporated herein by reference to Exhibit 10.15 to
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 1996 (the 1996
    Form 10-K))*.                                                                                            

31



---



##### Table of Contents



|        |       |               |  |                                                                                                                                                                                                                                                                                                                                  
|------- | ----- | ------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |              
|No.     |       | Exhibit Title
|        |       |              
|        | 10.10 |               |  | License Agreement, dated as of October 1,
    1993, by and between Registrant and Stanford University
    (incorporated herein by reference to Exhibit 10.16 to the
    1996 Form 10-K)*.                                                                                                                                        
|        | 10.11 |               |  | Joint Investment Agreement for formation of
    Genelabs Biotechnology Co., Ltd., a company organized under the
    laws of Taiwan, Republic of China (incorporated herein by
    reference to Exhibit 10.28 to the Registrants Annual
    Report on Form 10-K for the year ended December 31,
    1995 (the 1995 Form 10-K)*.
|        | 10.12 |               |  | Technology Transfer Agreement, dated as of
    November 21, 1995, by and between Registrant and Genelabs
    Biotechnology Co., Ltd. (incorporated herein by reference to
    Exhibit 10.29 to the 1995 Form 10-K)*.                                                                                                             
|        | 10.13 |               |  | Collaboration and License Agreement made as of
    November 12, 2000 by and between Registrant and Watson
    Pharmaceuticals, Inc. (incorporated herein by reference to
    Exhibit 10.17 to the 2000 Form 10-K)*.                                                                                                              
|        | 10.14 |               |  | Agreement entered into by Registrant with Irene
    A. Chow, Ph.D., as of January 3, 2002 (incorporated
    herein by reference to Exhibit 10.17 of the 2001
    Form 10-K).                                                                                                                                                     
|        | 10.15 |               |  | Form of Agreement entered into by Registrant with
    certain employees of Registrant (incorporated herein by
    reference to Exhibit 10.18 of the 2001 Form 10-K).                                                                                                                                                             
|        | 10.16 |               |  | Toll Manufacturing and Supply Agreement dated as
    of August 30, 2002 between Registrant and
    Patheon, Inc. (incorporated herein by reference to
    Exhibit 10.20 to the Third Quarter 2002 Form 10-Q)*.                                                                                                                   
|        | 21.01 |               |  | List of Subsidiaries.                                                                                                                                                                                                                                                                                                            
|        | 23.01 |               |  | Consent of Ernst & Young
    LLP, Independent Auditors.                                                                                                                                                                                                                                                                          
|        | 31.1  |               |  | Certification of Chief Executive Officer pursuant
    to Rules 13a-14(a) and 15d-14(a) promulgated under the
    Securities Exchange Act of 1934, as amended.                                                                                                                                                                    
|        | 31.2  |               |  | Certification of Chief Financial Officer pursuant
    to Rules 13a-14(a) and 15d-14(a) promulgated under the
    Securities Exchange Act of 1934, as amended.                                                                                                                                                                    
|        | 32.1  |               |  | Certification of Chief Executive Officer and
    Chief Financial Officer pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.                                                                                                                                       



---



| |   |                                                                                               
| | - | ----------------------------------------------------------------------------------------------
| | * | Confidential treatment has been granted with
    respect to certain portions of this document.

(b) Reports on Form 8-K.

During the quarter ended December 31, 2003,
we filed the following Current Reports on Form 8-K:

On October 1, 2003, we filed a Current
Report on Form 8-K announcing a best efforts public
offering of up to 15,000,000 shares of our common stock
under an exclusive Agency Agreement with Natexis Bleichroeder
Inc., or Natexis, and attaching the Agency Agreement.

On October 22, 2003, we filed a Current
Report on Form 8-K announcing an Underwriting Agreement
with Natexis providing for the issuance and sale of up to
23,000,000 shares of our common stock and attaching the
Underwriting Agreement. Pursuant to the terms of the
Underwriting Agreement, the earlier Agency Agreement between the
Company and Natexis dated September 30, 2003 was terminated.

On November 14, 2003, we filed a Current
Report on Form 8-K attaching a press release for our third
quarter 2003 operating results.

After the year ended December 31, 2003, we
filed the following Current Report on Form 8-K:

On February 13, 2004, we filed a Current
Report on Form 8-K announcing the retirement of
Dr. Irene Chow from her responsibilities as Chief Executive
Officer and the appointment of Mr. James A.D. Smith as
Chief Executive Officer.

32



---



##### Table of Contents








SIGNATURES


Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.



| |                            
| | ---------------------------
| | GENELABS TECHNOLOGIES, INC.



| |     |                     
| | --- | --------------------
| | By: | /s/ JAMES A.D. SMITH

| |                                          
| | -----------------------------------------
| |                                          
| | James A.D. Smith                         
| | President and Chief Executive
    Officer

March 15, 2004

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS that each
individual whose signature appears below constitutes and
appoints James A. D. Smith and Matthew M. Loar,
and each of them, his or her true and lawful attorneys-in-fact
and agents with full power of substitution, for him or her and
in his or her name, place and stead, in any and all capacities,
to sign any and all amendments to this Annual Report on
Form 10-K, and to file the same, with all exhibits thereto
and all documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to
be done in and about the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or his, her or their substitute or
substitutes, may lawfully do or cause to be done by virtue
hereof.

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the
capacities and on the dates indicated.

Principal Executive Officer:

|                                     |  |                                       |  |                |  | 
|------------------------------------ |  | ------------------------------------- |  | -------------- |  | 
|                                    
|/s/ JAMES A.D. SMITHJames A.D. Smith |  | President and Chief Executive Officer |  | March 15, 2004

Principal Financial and Accounting
Officer:

|                                   |  |                         |  |                |  | 
|---------------------------------- |  | ----------------------- |  | -------------- |  | 
|                                  
|/s/ MATTHEW M. LOARMatthew M. Loar |  | Chief Financial Officer |  | March 15, 2004

Additional Directors:

|                                     |  |          |  |                |  | 
|------------------------------------ |  | -------- |  | -------------- |  | 
|                                    
|/s/ IRENE A. CHOWIrene A. Chow       |  | Chairman |  | March 15, 2004
|                                    
|/s/ J. RICHARD CROUTJ. Richard Crout |  |          |  | March 15, 2004
|                                    
|/s/ ARTHUR GRAY, JR.Arthur Gray, Jr. |  |          |  | March 15, 2004

33



---



##### Table of Contents



|                             |  |  |  |                |  | 
|---------------------------- |  |  |  | -------------- |  | 
|                            
|/s/ H. H. HAIGHTH. H. Haight |  |  |  | March 15, 2004
|                            
|/s/ ALAN Y. KWANAlan Y. Kwan |  |  |  | March 15, 2004
|                            
|/s/ NINA K. WANGNina K. Wang |  |  |  | March 15, 2004

34



---



##### Table of Contents



GENELABS TECHNOLOGIES, INC.






CONSOLIDATED FINANCIAL STATEMENTS
AND


ANNUAL REPORT ON FORM 10-K


INDEX

|                                                      |                                                                                                         |      |     |            | 
|----------------------------------------------------- | ------------------------------------------------------------------------------------------------------- | ---- | --- | ---------- | 
|                                                      |                                                                                                         | Page
|                                                      |                                                                                                         |     
|Report of Ernst & Young
    LLP, Independent Auditors |                                                                                                         |      | F-2 |           
|Consolidated Financial Statements:                    |                                                                                                         |      |     |           
|                                                      | Consolidated Balance Sheets as of
    December 31, 2003 and 2002                                        |      |     | F-3        | 
|                                                      | Consolidated Statements of Operations for the
    Years Ended December 31, 2003, 2002 and 2001          |      |     | F-4        | 
|                                                      | Consolidated Statement of Shareholders
    Equity for the Years Ended December 31, 2003, 2002 and 2001 |      |     | F-5        | 
|                                                      | Consolidated Statements of Cash Flows for the
    Years Ended December 31, 2003, 2002 and 2001          |      |     | F-6        | 
|                                                      | Notes to Consolidated Financial Statements                                                              |      |     | F-7  F-15 | 

All schedules are omitted because they are not
required or the required information is included in the
consolidated financial statements or notes thereto.

F-1



---



##### Table of Contents








REPORT OF ERNST & YOUNG
LLP, INDEPENDENT AUDITORS


The Board of Directors and Shareholders

Genelabs Technologies, Inc.


We have audited the accompanying consolidated
balance sheets of Genelabs Technologies, Inc. as of
December 31, 2003 and 2002, and the related consolidated
statements of operations, shareholders equity and cash
flows for each of the three years in the period ended
December 31, 2003. 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
auditing standards generally accepted in the United States.
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
consolidated financial position of Genelabs
Technologies, Inc. at December 31, 2003 and 2002, and
the consolidated results of its operations and its cash flows
for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles
generally accepted in the United States.



| |                      
| | ---------------------
| | /s/ ERNST & YOUNG LLP

Palo Alto, California

February 6, 2004


F-2



---



##### Table of Contents



GENELABS TECHNOLOGIES, INC.






CONSOLIDATED BALANCE SHEETS


|                                         |                                                                                                                                                                                |                           |        |          |        |   |       |          |       | 
|---------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------- | ------ | -------- | ------ | - | ----- | -------- | ----- | 
|                                         |                                                                                                                                                                                |                          
|                                         |                                                                                                                                                                                | December 31,             
|                                         |                                                                                                                                                                                |                          
|                                         |                                                                                                                                                                                | 2003                      |        | 2002    
|                                         |                                                                                                                                                                                |                           |        |         
|                                         |                                                                                                                                                                                |                          
|                                         |                                                                                                                                                                                | (In thousands)           
|ASSETS                                  
|Current assets:                          |                                                                                                                                                                                |                           |        |          |        |   |       |         
|                                         | Cash, cash equivalents and short-term investments:                                                                                                                             |                           |        |          |        |   |       |          |      
|                                         |                                                                                                                                                                                | Cash and cash equivalents |        | $        | 26,530 |   |       | $        | 3,035 | 
|                                         |                                                                                                                                                                                | Short-term investments    |        |          |       |   |       |          | 3,535 | 
|                                         |                                                                                                                                                                                |                           |        |          |        |   |       |         
|                                         | Total cash, cash equivalents and short-term
    investments                                                                                                                    |                           |        | 26,530   |        |   |       | 6,570    |      
|                                         | Net assets of diagnostics subsidiary held for sale                                                                                                                             |                           |        | 582      |        |   |       | 417      |      
|                                         | Other current assets                                                                                                                                                           |                           |        | 874      |        |   |       | 512      |      
|                                         |                                                                                                                                                                                |                           |        |          |        |   |       |         
|Total current assets                     |                                                                                                                                                                                |                           | 27,986 |          |        |   | 7,499 |         
|Property and equipment, net              |                                                                                                                                                                                |                           | 920    |          |        |   | 1,306 |         
|Long-term investments                    |                                                                                                                                                                                |                           | 960    |          |        |   | 960   |         
|                                         |                                                                                                                                                                                |                           |        |          |        |   |       |         
|                                         |                                                                                                                                                                                | $                         | 29,866 |          |        | $ | 9,765 |         
|                                         |                                                                                                                                                                                |                           |        |          |        |   |       |         
|LIABILITIES AND SHAREHOLDERS
    EQUITY
|Current liabilities:                     |                                                                                                                                                                                |                           |        |          |        |   |       |         
|                                         | Accounts payable and other accrued liabilities                                                                                                                                 |                           | $      | 2,528    |        |   | $     | 1,853    |      
|                                         | Accrued compensation and related expenses                                                                                                                                      |                           |        | 1,573    |        |   |       | 912      |      
|                                         | Unearned contract revenue                                                                                                                                                      |                           |        | 1,506    |        |   |       | 2,050    |      
|                                         |                                                                                                                                                                                |                           |        |          |        |   |       |         
|Total current liabilities                |                                                                                                                                                                                |                           | 5,607  |          |        |   | 4,815 |         
|Accrued compensation                     |                                                                                                                                                                                |                           | 691    |          |        |   | 186   |         
|Unearned contract revenue                |                                                                                                                                                                                |                           | 753    |          |        |   | 2,050 |         
|                                         |                                                                                                                                                                                |                           |        |          |        |   |       |         
|Total liabilities                        |                                                                                                                                                                                |                           | 7,051  |          |        |   | 7,051 |         
|                                         |                                                                                                                                                                                |                           |        |          |        |   |       |         
|Commitments and contingencies            |                                                                                                                                                                                |                           |        |          |        |   |       |         
|Shareholders equity:                    |                                                                                                                                                                                |                           |        |          |        |   |       |         
|                                         | Preferred stock, no par value, 4,990 shares
    authorized, none issued or outstanding at December 31, 2003
    or 2002                                                        |                           |        |         |        |   |       |         |      
|                                         | Common stock, no par value, 125,000 and
    75,000 shares authorized, and 86,936 and 53,393 shares
    issued and outstanding, at December 31, 2003 and 2002,
    respectively |                           |        | 227,172  |        |   |       | 187,264  |      
|                                         | Accumulated deficit                                                                                                                                                            |                           |        | (204,357 | )      |   |       | (184,550 | )    
|                                         |                                                                                                                                                                                |                           |        |          |        |   |       |         
|Total shareholders equity               |                                                                                                                                                                                |                           | 22,815 |          |        |   | 2,714 |         
|                                         |                                                                                                                                                                                |                           |        |          |        |   |       |         
|                                         |                                                                                                                                                                                | $                         | 29,866 |          |        | $ | 9,765 |         
|                                         |                                                                                                                                                                                |                           |        |          |        |   |       |         

See accompanying notes.

F-3



---



##### Table of Contents



GENELABS TECHNOLOGIES, INC.






CONSOLIDATED STATEMENTS OF
OPERATIONS


|                                                                  |                            |                                          |         |        |  |      |         |        |  |   |         |        | 
|----------------------------------------------------------------- | -------------------------- | ---------------------------------------- | ------- | ------ |  | ---- | ------- | ------ |  | - | ------- | ------ | 
|                                                                  |                            | 2003                                     |         | 2002   |  | 2001
|                                                                  |                            |                                          |         |        |  |     
|                                                                  |                            |                                         
|                                                                  |                            | (In thousands, except per share amounts)
|Contract revenue                                                  |                            | $                                        | 2,916   |        |  | $    | 3,645   |        |  | $ | 4,769   |       
|                                                                  |                            |                                          |         |        |  |      |         |        |  |   |         |       
|Operating expenses:                                               |                            |                                          |         |        |  |      |         |        |  |   |         |       
|                                                                  | Research and development   |                                          |         | 17,427 |  |      |         | 14,537 |  |   |         | 13,238 | 
|                                                                  | General and administrative |                                          |         | 5,895  |  |      |         | 5,529  |  |   |         | 6,464  | 
|                                                                  |                            |                                          |         |        |  |      |         |        |  |   |         |       
|Total operating expenses                                          |                            |                                          | 23,322  |        |  |      | 20,066  |        |  |   | 19,702  |       
|                                                                  |                            |                                          |         |        |  |      |         |        |  |   |         |       
|Operating loss                                                    |                            |                                          | (20,406 | )      |  |      | (16,421 | )      |  |   | (14,933 | )     
|Interest income, net                                              |                            |                                          | 84      |        |  |      | 341     |        |  |   | 1,646   |       
|                                                                  |                            |                                          |         |        |  |      |         |        |  |   |         |       
|Loss from continuing operations                                   |                            |                                          | (20,322 | )      |  |      | (16,080 | )      |  |   | (13,287 | )     
|Income from discontinued operations of
    diagnostics subsidiary |                            |                                          | 515     |        |  |      | 130     |        |  |   | 287     |       
|                                                                  |                            |                                          |         |        |  |      |         |        |  |   |         |       
|Net loss                                                          |                            | $                                        | (19,807 | )      |  | $    | (15,950 | )      |  | $ | (13,000 | )     
|                                                                  |                            |                                          |         |        |  |      |         |        |  |   |         |       
|Loss per share from continuing operations                         |                            | $                                        | (0.32   | )      |  | $    | (0.31   | )      |  | $ | (0.27   | )     
|                                                                  |                            |                                          |         |        |  |      |         |        |  |   |         |       
|Net loss per share  basic and diluted                            |                            | $                                        | (0.31   | )      |  | $    | (0.31   | )      |  | $ | (0.26   | )     
|                                                                  |                            |                                          |         |        |  |      |         |        |  |   |         |       
|Weighted average shares outstanding 
    basic and diluted       |                            |                                          | 63,888  |        |  |      | 51,443  |        |  |   | 49,584  |       
|                                                                  |                            |                                          |         |        |  |      |         |        |  |   |         |       

See accompanying notes.

F-4



---



##### Table of Contents



GENELABS TECHNOLOGIES, INC.






CONSOLIDATED STATEMENT OF SHAREHOLDERS
EQUITY


|                                                                         |          |                |        |              |  |             |         |               |  |   |          |         |   |   |        |         |  
|------------------------------------------------------------------------ | -------- | -------------- | ------ | ------------ |  | ----------- | ------- | ------------- |  | - | -------- | ------- | - | - | ------ | ------- | -
|                                                                         |          |                |        |              |  |             |         | Total        
|                                                                         |          | Shares of      |        |              |  | Accumulated |         | Shareholders
|                                                                         |          | Common Stock   |        | Common Stock |  | Deficit     |         | Equity       
|                                                                         |          |                |        |              |  |             |         |              
|                                                                         |          |               
|                                                                         |          | (In thousands)
|Balance, December 31, 2000                                               |          |                | 49,398 |              |  | $           | 179,600 |               |  | $ | (155,600 | )       |   | $ | 24,000 |        
|Comprehensive loss:                                                      |          |                |        |              |  |             |         |               |  |   |          |         |   |   |        |        
|                                                                         | Net loss |                |        |              |  |             |         |               |  |   |          | (13,000 | ) |   |        | (13,000 | )
|Shares issued under employee stock purchase plans                        |          |                | 336    |              |  |             | 504     |               |  |   |          |         |   |   | 504    |        
|Shares issued under stock options                                        |          |                | 109    |              |  |             | 278     |               |  |   |          |         |   |   | 278    |        
|Non-employee equity awards                                               |          |                |        |              |  |             | 118     |               |  |   |          |         |   |   | 118    |        
|                                                                         |          |                |        |              |  |             |         |               |  |   |          |         |   |   |        |        
|Balance, December 31, 2001                                               |          |                | 49,843 |              |  |             | 180,500 |               |  |   | (168,600 | )       |   |   | 11,900 |        
|Comprehensive loss:                                                      |          |                |        |              |  |             |         |               |  |   |          |         |   |   |        |        
|                                                                         | Net loss |                |        |              |  |             |         |               |  |   |          | (15,950 | ) |   |        | (15,950 | )
|Shares issued in financing agreement                                     |          |                | 3,100  |              |  |             | 6,001   |               |  |   |          |         |   |   | 6,001  |        
|Shares issued under the employee stock purchase
    plan                 |          |                | 403    |              |  |             | 617     |               |  |   |          |         |   |   | 617    |        
|Shares issued under stock options                                        |          |                | 47     |              |  |             | 122     |               |  |   |          |         |   |   | 122    |        
|Non-employee equity awards                                               |          |                |        |              |  |             | 24      |               |  |   |          |         |   |   | 24     |        
|                                                                         |          |                |        |              |  |             |         |               |  |   |          |         |   |   |        |        
|Balance, December 31, 2002                                               |          |                | 53,393 |              |  |             | 187,264 |               |  |   | (184,550 | )       |   |   | 2,714  |        
|Comprehensive loss:                                                      |          |                |        |              |  |             |         |               |  |   |          |         |   |   |        |        
|                                                                         | Net loss |                |        |              |  |             |         |               |  |   |          | (19,807 | ) |   |        | (19,807 | )
|Shares issued in private placements, net of
    issuance costs of $1,104 |          |                | 9,767  |              |  |             | 9,654   |               |  |   |          |         |   |   | 9,654  |        
|Shares issued upon exercise of warrants                                  |          |                | 360    |              |  |             | 529     |               |  |   |          |         |   |   | 529    |        
|Shares issued in public offering, net of issuance
    costs of $2,345    |          |                | 23,000 |              |  |             | 29,165  |               |  |   |          |         |   |   | 29,165 |        
|Shares issued under the employee stock purchase
    plan                 |          |                | 373    |              |  |             | 483     |               |  |   |          |         |   |   | 483    |        
|Shares issued under stock options                                        |          |                | 43     |              |  |             | 58      |               |  |   |          |         |   |   | 58     |        
|Non-employee equity awards                                               |          |                |        |              |  |             | 19      |               |  |   |          |         |   |   | 19     |        
|                                                                         |          |                |        |              |  |             |         |               |  |   |          |         |   |   |        |        
|Balance, December 31, 2003                                               |          |                | 86,936 |              |  | $           | 227,172 |               |  | $ | (204,357 | )       |   | $ | 22,815 |        
|                                                                         |          |                |        |              |  |             |         |               |  |   |          |         |   |   |        |        

See accompanying notes.

F-5



---



##### Table of Contents



GENELABS TECHNOLOGIES, INC.






CONSOLIDATED STATEMENTS OF CASH
FLOWS


(Increase (Decrease) in Cash and Cash
Equivalents)


|                                                         |                                                                                 |                                                                     |        |         |        |      |        |         |        |   |        |         |        |  
|-------------------------------------------------------- | ------------------------------------------------------------------------------- | ------------------------------------------------------------------- | ------ | ------- | ------ | ---- | ------ | ------- | ------ | - | ------ | ------- | ------ | -
|                                                         |                                                                                 | 2003                                                                |        | 2002    |        | 2001
|                                                         |                                                                                 |                                                                     |        |         |        |     
|                                                         |                                                                                 |                                                                    
|                                                         |                                                                                 | (In thousands)                                                     
|Cash flows from operating activities:                    |                                                                                 |                                                                     |        |         |        |      |        |         |        |   |        |        
|                                                         | Net loss                                                                        |                                                                     | $      | (19,807 | )      |      | $      | (15,950 | )      |   | $      | (13,000 | )     
|                                                         | Adjustments to reconcile net loss to net cash
    used in operating activities: |                                                                     |        |         |        |      |        |         |        |   |        |         |       
|                                                         |                                                                                 | Depreciation and amortization expense                               |        |         | 493    |      |        |         | 1,014  |   |        |         | 692    |  
|                                                         |                                                                                 | Income of discontinued diagnostics subsidiary                       |        |         | (515   | )    |        |         | (130   | ) |        |         | (287   | )
|                                                         |                                                                                 | Non-employee equity awards                                          |        |         | 19     |      |        |         | 24     |   |        |         | 118    |  
|                                                         | Changes in assets and liabilities:                                              |                                                                     |        |         |        |      |        |         |        |   |        |         |       
|                                                         |                                                                                 | Other current assets                                                |        |         | (362   | )    |        |         | 90     |   |        |         | (124   | )
|                                                         |                                                                                 | Accounts payable, accrued liabilities, and
    accrued compensation |        |         | 1,841  |      |        |         | (624   | ) |        |         | 23     |  
|                                                         |                                                                                 | Unearned contract revenue                                           |        |         | (1,841 | )    |        |         | (2,525 | ) |        |         | (3,417 | )
|                                                         |                                                                                 |                                                                     |        |         |        |      |        |         |        |   |        |        
|                                                         | Net cash used in operating activities                                           |                                                                     |        | (20,172 | )      |      |        | (18,101 | )      |   |        | (15,995 | )     
|                                                         |                                                                                 |                                                                     |        |         |        |      |        |         |        |   |        |        
|Cash flows from investing activities:                    |                                                                                 |                                                                     |        |         |        |      |        |         |        |   |        |        
|                                                         | Proceeds from sales and maturities of short-term
    investments                |                                                                     |        | 3,535   |        |      |        | 13,545  |        |   |        | 48,866  |       
|                                                         | Purchases of short-term investments                                             |                                                                     |        |        |        |      |        | (6,706  | )      |   |        | (36,215 | )     
|                                                         | Capital expenditures                                                            |                                                                     |        | (107    | )      |      |        | (1,069  | )      |   |        | (484    | )     
|                                                         | Remittances from diagnostics subsidiary                                         |                                                                     |        | 350     |        |      |        |        |        |   |        |        |       
|                                                         | Proceeds from sale of long-term investments                                     |                                                                     |        |        |        |      |        |        |        |   |        | 26      |       
|                                                         |                                                                                 |                                                                     |        |         |        |      |        |         |        |   |        |        
|                                                         | Net cash provided by investing activities                                       |                                                                     |        | 3,778   |        |      |        | 5,770   |        |   |        | 12,193  |       
|                                                         |                                                                                 |                                                                     |        |         |        |      |        |         |        |   |        |        
|Cash flows from financing activities:                    |                                                                                 |                                                                     |        |         |        |      |        |         |        |   |        |        
|                                                         | Proceeds from issuance of common stock and
    warrants, net                    |                                                                     |        | 39,889  |        |      |        | 6,740   |        |   |        | 782     |       
|                                                         |                                                                                 |                                                                     |        |         |        |      |        |         |        |   |        |        
|Net increase/(decrease) in cash and cash
    equivalents |                                                                                 |                                                                     | 23,495 |         |        |      | (5,591 | )       |        |   | (3,020 | )      
|Cash and cash equivalents, beginning of the period       |                                                                                 |                                                                     | 3,035  |         |        |      | 8,626  |         |        |   | 11,646 |        
|                                                         |                                                                                 |                                                                     |        |         |        |      |        |         |        |   |        |        
|Cash and cash equivalents, end of the period             |                                                                                 | $                                                                   | 26,530 |         |        | $    | 3,035  |         |        | $ | 8,626  |        
|                                                         |                                                                                 |                                                                     |        |         |        |      |        |         |        |   |        |        

See accompanying notes.

F-6



---



##### Table of Contents



GENELABS TECHNOLOGIES, INC.






NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


December 31, 2003


(Tabular amounts in thousands, except per
share data)




|   |                                
|-- | -------------------------------
|1. | Significant Accounting Policies



| |                     
| | --------------------
| | Business Description

Genelabs Technologies, Inc., referred to as
Genelabs or the Company, is a biopharmaceutical company focused
on the discovery and development of novel pharmaceutical
products to improve human health. The Company has built drug
discovery and clinical development capabilities that can support
various research and development projects. The Company is
currently concentrating its capabilities on developing a
late-stage product for lupus, discovering novel lead compounds
that selectively inhibit replication of the hepatitis C
virus, or HCV, and advancing our HCV research program into
preclinical development.



| |                      
| | ---------------------
| | Basis of Presentation

The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries,
Accelerated Clinical Research Organization, Inc., Genelabs
Diagnostic, Inc. and Genelabs Europe B.V. All intercompany
accounts and transactions have been eliminated. Genelabs
operates in one business segment, the discovery and development
of pharmaceutical products. See Note 4 for discussion of
the Companys diagnostics subsidiary.

Certain reclassifications of prior year amounts
have been made to conform to the current year presentation.

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. It is possible that actual amounts will
differ from those estimates.



| |                    
| | -------------------
| | Revenue Recognition

Contract revenue for research and development, or
R&D, is recorded as earned based on the performance
requirements of the contract. Non-refundable contract fees for
which no further performance obligations exist, and there is no
continuing involvement by Genelabs, are recognized on the
earlier of when the payments are received or when collection is
assured.

Revenue received for arrangements with multiple
deliverables is allocated among the deliverables based on
objective and reliable evidence of each deliverables fair
value using available internal or third-party evidence. Revenue
from non-refundable upfront license fees where the Company
continues involvement through development, a collaboration, or
an obligation to supply product is recognized ratably over the
development period when, at the execution of the agreement, the
development period involves significant risk due to the
incomplete stage of the products development.

Revenue associated with development milestones,
if any, is recognized based upon the achievement of the
milestones, as defined in the respective agreements. Revenue
associated with royalty payments based on third party sales, if
any, is recognized as earned in accordance with contract terms,
when third-party results are reliably measured and
collectibility is reasonably assured.

Revenue under R&D cost reimbursement
contracts is recognized as the related costs are incurred.

Advance payments received in excess of amounts
earned are classified as deferred revenue.

In November 2000, Genelabs entered into an
agreement with Watson Pharmaceuticals, Inc. providing
Watson with an exclusive license to PrestaraTM
(formerly AsleraTM) in North America. Under the
agreement, Genelabs received a $10 million non-refundable
up-front license fee in 2000. The non-refundable license fee has
been deferred and is being recognized on a straight-line basis
over the term that Genelabs management

F-7



---



##### Table of Contents



GENELABS TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS   (Continued)

believes it has significant ongoing obligations
to Watson, currently estimated to be the completion of a
confirmatory clinical trial, submission of a complete response
to the U.S. Food and Drug Administrations (FDA)
approvable letter for Prestara and the FDA reaching a final
decision on approval of Prestara. Of the $10 million
non-refundable up-front license fee, $1,841,000, $2,525,000 and
$3,000,000 was recognized as revenue in 2003, 2002 and 2001,
respectively. Unearned contract revenue at December 31,
2003 of $2,259,000 consists entirely of the remaining portion of
the up-front fee received from Watson in 2000. During 2003
Genelabs extended the amortization period of the upfront payment
received from Watson from a period ending December 31, 2004
to a period ending June 30, 2005. During 2002 Genelabs
extended the amortization period of the upfront payment received
from Watson from a period ending March 31, 2004 to a period
ending December 31, 2004. The estimated period for
amortization has a noteworthy impact on the revenue recognized
and the net loss reported in Genelabs financial
statements. The 2003 change in accounting estimate had the
effect of decreasing revenue in the second half of the year by
$209,000 although this did not increase the loss per share. The
2002 change in accounting estimate had the effect of decreasing
revenue earned in the second half of 2002 by an aggregate amount
of $425,000 with a resulting increase of $0.01 in loss per
share. The collaboration and license agreement with Watson also
provides Genelabs with significant royalties on product sales
and a milestone payment of up to $45 million if the FDA
approves the marketing of Prestara for the treatment of systemic
lupus erythematosus.

Revenue recognized from certain of Companys
grants and collaborations represents 10% or more of total
contract revenue. In 2003, there were two significant sources of
revenue accounting for 63%, and 16% of total contract revenue.
In 2002, there were two significant sources of revenue
accounting for 73% and 11% of total contract revenue. In 2001,
there was one significant source of revenue accounting for 63%
of total contract revenue.



| |                   
| | ------------------
| | Earnings per Share

Net loss per share has been computed using the
weighted average number of shares of common stock outstanding
during the period. Diluted net loss per share has not been
presented, as, due to the Companys net loss position, it
is antidilutive. Had the Company been in a net income position,
diluted earnings per share for 2003, 2002 and 2001 would have
included an additional 310,000, 201,000 and 529,000 shares,
respectively, related to the Companys outstanding stock
options.



| |                         
| | ------------------------
| | Stock-Based Compensation

The Company grants employee stock options at an
exercise price equal to the fair market value of the shares at
the date of grant. The Company accounts for employee stock-based
compensation using the intrinsic value method and, accordingly,
recognizes no compensation expense for stock options granted to
employees. Option valuation models have been developed for use
in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. These models
require highly subjective assumptions regarding expected stock
price volatility. Because the Companys stock options have
characteristics significantly different from those of traded
options and changes in the volatility assumptions can materially
affect the fair value estimate, the Companys management
believes that these models do not provide a representative
measure of the fair value of options actually granted to
employees under the Companys stock-based compensation
plans. Using one of these models, the following table presents
information showing what the

F-8



---



##### Table of Contents



GENELABS TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS   (Continued)

effects to the reported net loss and net loss per
share would be if the company had accounted for employee
stock-based compensation using the fair-value method:

|                                                                                            |                                                                                                                                                                                |      |         |        |   |      |         |        |   |   |         |        |  
|------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---- | ------- | ------ | - | ---- | ------- | ------ | - | - | ------- | ------ | -
|                                                                                            |                                                                                                                                                                                | 2003 |         | 2002   |   | 2001
|                                                                                            |                                                                                                                                                                                |      |         |        |   |     
|Net loss as reported                                                                        |                                                                                                                                                                                | $    | (19,807 | )      |   | $    | (15,950 | )      |   | $ | (13,000 | )     
|Stock-based employee compensation cost:                                                     |                                                                                                                                                                                |      |         |        |   |      |         |        |   |   |         |       
|                                                                                            | Included in net loss as reported                                                                                                                                               |      |         |       |   |      |         |       |   |   |         |       |  
|                                                                                            | Amount that would have been included in net loss
    if we had accounted for all stock-based employee compensation at
    its theoretical (Black-Scholes) fair value           |      |         | (1,895 | ) |      |         | (2,813 | ) |   |         | (3,695 | )
|                                                                                            |                                                                                                                                                                                |      |         |        |   |      |         |        |   |   |         |       
|Pro forma net loss as if the fair value method
    had been applied to all awards           |                                                                                                                                                                                | $    | (21,702 | )      |   | $    | (18,763 | )      |   | $ | (16,695 | )     
|                                                                                            |                                                                                                                                                                                |      |         |        |   |      |         |        |   |   |         |       
|Net loss per share as reported                                                              |                                                                                                                                                                                | $    | (0.31   | )      |   | $    | (0.31   | )      |   | $ | (0.26   | )     
|Stock-based employee compensation cost:                                                     |                                                                                                                                                                                |      |         |        |   |      |         |        |   |   |         |       
|                                                                                            | Included in net loss per share as reported                                                                                                                                     |      |         |       |   |      |         |       |   |   |         |       |  
|                                                                                            | Amount that would have been included in net loss
    per share if we had accounted for all stock-based employee
    compensation at its theoretical (Black-Scholes) fair value |      |         | (0.03  | ) |      |         | (0.05  | ) |   |         | (0.08  | )
|                                                                                            |                                                                                                                                                                                |      |         |        |   |      |         |        |   |   |         |       
|Pro forma net loss per share as if the fair value
    method had been applied to all awards |                                                                                                                                                                                | $    | (0.34   | )      |   | $    | (0.36   | )      |   | $ | (0.34   | )     
|                                                                                            |                                                                                                                                                                                |      |         |        |   |      |         |        |   |   |         |       

Compensation expense for options or warrants
granted to non-employees is recorded at fair value of the
consideration received or fair value of the equity instruments
issued, whichever is more reliably measured. The fair value of
options granted to non-employees is remeasured and adjusted over
the vesting term of the underlying options.



| |                                                      
| | -----------------------------------------------------
| | Cash, Cash Equivalents and Short-Term
    Investments

Cash, cash equivalents and short-term investments
are held primarily in demand deposit, money market and custodial
accounts with United States banks. Cash equivalents consist of
financial investments with maturities of 90 days or less at
acquisition that are readily convertible into cash and have
insignificant interest rate risk.

The Company invests funds that are not required
for immediate operating needs either in money market mutual
funds or in a diversified portfolio of debt securities.
Management determines the appropriate classification of these
marketable debt securities at the time of purchase and
reevaluates such designation as of each balance sheet date. As
of December 31, 2003 and 2002, all marketable securities
are classified as available-for-sale as the Company does not
intend to hold them to maturity. These securities are stated at
estimated fair value based upon market quotes. Unrealized gains
and losses, when material, are included in accumulated other
comprehensive income. Amortization of premiums and discounts and
realized gains and losses are included in interest income. The
cost of securities sold is based on the specific identification
method. The Company has not experienced any significant losses
on its investments.



| |                       
| | ----------------------
| | Property and Equipment

Property and equipment are stated at cost.
Depreciation on equipment is calculated on a straight-line basis
over the estimated useful lives of the assets, generally three
to five years. Leasehold improvements are amortized over the
shorter of the lease term or the estimated useful lives of the
improvements.

F-9



---



##### Table of Contents



GENELABS TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS   (Continued)



| |                      
| | ---------------------
| | Long-Term Investments

The Company uses the cost method of accounting
for its equity investment in a private company. The Company
holds less than 20% of the voting shares of this entity and
management periodically monitors the liquidity and financing
activities of this entity to determine if an impairment
write-down is required.



| |                                      
| | -------------------------------------
| | Research and Development
    Expenses

Our research and development costs are expensed
as incurred. Research and development expenses include, but are
not limited to, payroll and personnel expense, lab supplies,
consulting costs, clinical trial costs and allocations of
corporate costs.



| |                                     
| | ------------------------------------
| | Recent Accounting
    Pronouncements

In January 2003, the FASB issued FIN 46,
Consolidation of Variable Interest Entities, which
requires consolidation of a variable interest entity by the
primary beneficiary of the entity if the entitys equity
investors do not have sufficient equity at risk or if the entity
cannot finance its activities without additional financial
support. As Genelabs does not have any variable interest
entities, our adoption of this interpretation did not have a
material effect on our financial position or results of
operations.

In November 2002, the FASBs Emerging Issues
Task Force reached a consensus on Issue 00-21,
Multiple-Deliverable Revenue Arrangements, which
addresses accounting for arrangements that involve the delivery
or performance of multiple products, services and/or rights to
use assets. The consensus applies to agreements entered into
after June 15, 2003, and our adoption did not have a
material impact on our financial position or results of
operations.



|   |                              
|-- | -----------------------------
|2. | Available-for-Sale Securities

The following table summarizes estimated fair
value and cost of available-for-sale securities at
December 31:

|                                                                         |  |      |        |      |  |   |       | 
|------------------------------------------------------------------------ |  | ---- | ------ | ---- |  | - | ----- | 
|                                                                         |  | 2003 |        | 2002
|                                                                         |  |      |        |     
|Description:                                                             |  |      |        |      |  |   |       | 
|Money-market mutual funds                                                |  | $    | 25,821 |      |  | $ | 2,035 | 
|U.S. Treasury securities and obligations of
    U.S. government agencies |  |      |       |      |  |   | 2,678 | 
|Corporate debt securities                                                |  |      |       |      |  |   | 244   | 
|Asset-backed securities                                                  |  |      |       |      |  |   | 613   | 
|                                                                         |  |      |        |      |  |   |       | 
|                                                                         |  | $    | 25,821 |      |  | $ | 5,570 | 
|                                                                         |  |      |        |      |  |   |       | 
|Balance Sheet Classification:                                            |  |      |        |      |  |   |       | 
|Included in cash and cash equivalents                                    |  | $    | 25,821 |      |  | $ | 2,035 | 
|Included in short-term investments                                       |  |      |       |      |  |   | 3,535 | 
|                                                                         |  |      |        |      |  |   |       | 
|                                                                         |  | $    | 25,821 |      |  | $ | 5,570 | 
|                                                                         |  |      |        |      |  |   |       | 
|Maturity:                                                                |  |      |        |      |  |   |       | 
|Due within one year                                                      |  | $    | 25,821 |      |  | $ | 4,021 | 
|Due after one year through two years                                     |  |      |       |      |  |   | 1,549 | 
|                                                                         |  |      |        |      |  |   |       | 
|                                                                         |  | $    | 25,821 |      |  | $ | 5,570 | 
|                                                                         |  |      |        |      |  |   |       | 

F-10



---



##### Table of Contents



GENELABS TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS   (Continued)



|   |                       
|-- | ----------------------
|3. | Property and Equipment

The components of property and equipment are as
follows:

|                                               |  |      |         |      |  |   |         |  
|---------------------------------------------- |  | ---- | ------- | ---- |  | - | ------- | -
|                                               |  | 2003 |         | 2002
|                                               |  |      |         |     
|Laboratory equipment                           |  | $    | 5,063   |      |  | $ | 4,990   |  
|Leasehold improvements                         |  |      | 4,639   |      |  |   | 4,639   |  
|Office and other equipment                     |  |      | 2,600   |      |  |   | 2,566   |  
|                                               |  |      |         |      |  |   |         |  
|                                               |  |      | 12,302  |      |  |   | 12,195  |  
|Less accumulated depreciation and amortization |  |      | (11,382 | )    |  |   | (10,889 | )
|                                               |  |      |         |      |  |   |         |  
|                                               |  | $    | 920     |      |  | $ | 1,306   |  
|                                               |  |      |         |      |  |   |         |  

4.     Discontinued
Operation  Diagnostics Subsidiary

At December 31, 2003, the Company owned 100%
of the common stock of Genelabs Diagnostics Pte. Ltd.
(GLD) through a series of separate domestic and
foreign corporations. Genelabs plans to divest GLD and
accordingly accounts for it as a discontinued operation.
Summarized financial information for GLD for the years ended and
as of December 31, is as follows:






Statements of Operations


|                                                                |  |      |       |      |  |      |       |  |  |   |       | 
|--------------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                                                |  | 2003 |       | 2002 |  | 2001
|                                                                |  |      |       |      |  |     
|Product sales                                                   |  | $    | 6,168 |      |  | $    | 4,520 |  |  | $ | 6,676 | 
|Cost of sales                                                   |  |      | 3,323 |      |  |      | 2,544 |  |  |   | 3,467 | 
|                                                                |  |      |       |      |  |      |       |  |  |   |       | 
|Gross profit                                                    |  |      | 2,845 |      |  |      | 1,976 |  |  |   | 3,209 | 
|Operating expenses                                              |  |      | 2,330 |      |  |      | 1,846 |  |  |   | 2,792 | 
|                                                                |  |      |       |      |  |      |       |  |  |   |       | 
|Income prior to additional charge incurred in
    consolidation |  |      | 515   |      |  |      | 130   |  |  |   | 417   | 
|Additional charge accrued in consolidation                      |  |      |      |      |  |      |      |  |  |   | 130   | 
|                                                                |  |      |       |      |  |      |       |  |  |   |       | 
|Income from discontinued operations                             |  | $    | 515   |      |  | $    | 130   |  |  | $ | 287   | 
|                                                                |  |      |       |      |  |      |       |  |  |   |       | 




Balance Sheets

|                                                  |  |      |       |      |  |   |       | 
|------------------------------------------------- |  | ---- | ----- | ---- |  | - | ----- | 
|                                                  |  | 2003 |       | 2002
|                                                  |  |      |       |     
|Cash, cash equivalents and short-term investments |  | $    | 655   |      |  | $ | 714   | 
|Accounts receivable                               |  |      | 1,037 |      |  |   | 545   | 
|Inventories                                       |  |      | 565   |      |  |   | 432   | 
|                                                  |  |      |       |      |  |   |       | 
|Total assets                                      |  | $    | 2,257 |      |  | $ | 1,691 | 
|                                                  |  |      |       |      |  |   |       | 
|Liabilities, principally current                  |  | $    | 1,675 |      |  | $ | 1,274 | 
|Net equity of Genelabs Diagnostics Pte.
    Ltd.  |  |      | 582   |      |  |   | 417   | 
|                                                  |  |      |       |      |  |   |       | 
|Total liabilities and net equity                  |  | $    | 2,257 |      |  | $ | 1,691 | 
|                                                  |  |      |       |      |  |   |       | 



|   |                              
|-- | -----------------------------
|5. | Commitments and Contingencies

The Company leases its primary office and
laboratory facilities under a non-cancelable operating lease
that has a term expiring November 2006. The Company is required
to pay certain maintenance expenses in addition to monthly rent.
At December 31, 2003, future minimum lease payments under
all operating leases

F-11



---



##### Table of Contents



GENELABS TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS   (Continued)

with original terms greater than one year are
$1,269,000, $1,308,000 and $1,231,000 for 2004, 2005, and 2006,
respectively, for a total of $3,808,000, excluding sublease
rentals. Future minimum rental payments to be received by
Genelabs under one noncancelable sublease agreement are
$134,000, $139,000 and $130,000 for 2004, 2005 and 2006,
respectively. Total lease expense, net of sublease income, was
$1,465,000, $879,000 and $883,000 for 2003, 2002 and 2001,
respectively.

The Company leases equipment under a
non-cancelable capital lease that has a term expiring August
2005. At December 31, 2003, future minimum lease payments
are $104,000 and $70,000 for 2004 and 2005, respectively, for a
total of $174,000.

The Company is subject to legal proceedings and
claims that arise in the ordinary course of business. Management
currently believes that the ultimate amount of liability, if
any, with respect to any pending actions, either individually or
in the aggregate, will not materially affect Genelabs
financial position or results of operations. However, the
ultimate outcome of any litigation is uncertain. If an
unfavorable outcome were to occur, the impact could be material.
Furthermore, any litigation, regardless of the outcome, can have
an adverse impact on the Companys results of operations as
a result of defense costs, diversion of management resources,
and other factors.



|   |                     
|-- | --------------------
|6. | Shareholders Equity

Common
Stock

On May 2, 2003, Genelabs completed the sale
of 8.1 million shares of its common stock at a price of
$1.00 per share for gross proceeds of $8.1 million. In
connection with the sale, Genelabs also issued warrants to
purchase an additional 2.43 million shares of Genelabs
common stock at an exercise price of $1.50 per share. Net
proceeds from the placement were approximately
$7.2 million. The exercise price of the warrants issued in
this offering adjusted to $1.47 per share after the public
offering in October 2003.

On August 1, 2003, Genelabs completed the
sale of approximately 1.7 million shares of its common
stock at a price of $1.595 per share for gross proceeds of
approximately $2.7 million. In connection with the sale,
Genelabs also issued warrants to purchase approximately
1.7 million shares of Genelabs common stock at an exercise
price of $1.50 per share. Net proceeds from the placement
were approximately $2.4 million.

On October 22, 2003, Genelabs completed the
sale of 23 million shares of its common stock in a public
offering at a price of $1.37 per share for gross proceeds
of approximately $31.5 million. Net proceeds from the
offering were approximately $29.2 million. In connection
with the offering, Genelabs also issued to the underwriter
warrants to purchase 460,000 shares of our common stock at
an exercise price of $1.42 per share.

At December 31, 2003, the Company had a
total of 14,993,000 shares reserved for future stock
issuances, which is comprised of warrants and shares authorized
for issuance under employee stock purchase and option plans.

At December 31, 2003 there were warrants
outstanding for the purchase of 4,847,000 shares of common
stock exercisable in 2004 through 2010 at a weighted average
exercise price of $2.14 per share.

At December 31, 2003, there were
23,071,000 shares available for future issuance.



|   |                         
|-- | ------------------------
|7. | Stock-Based Compensation

Employee Stock Purchase Plan (Stock
Purchase Plan).Employees who
meet certain minimum requirements are eligible to participate in
the Companys Stock Purchase Plan. Eligible employees are
entitled to purchase stock at 85% of the market value at the
beginning or ending of six-month purchase periods, whichever is
lower, and stock may be purchased at the same price for up to
four periods. Purchases are limited to a maximum of
$25,000 per year and employees can contribute up to 15% of
total compensation. Through

F-12



---



##### Table of Contents



GENELABS TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS   (Continued)

December 31, 2003 and 2002, a cumulative
total of 2,237,000 and 1,864,000 shares, respectively, had
been issued under the Stock Purchase Plan and a similar
predecessor plan, with 1,078,000 shares remaining for
future purchases.

Stock Award Plan.During 2003, the Company terminated its stock award plan.

Stock Option Plan.The Companys stock option plan provides for the issuance
of incentive stock options and nonqualified stock options to
employees, officers, directors and independent contractors. The
number of stock options granted is determined by the Board of
Directors or a committee designated by the Board of Directors,
except for grants to directors, who receive options based on a
formula. Stock options generally may not be granted at prices
lower than fair market value on the date of grant and vest over
periods ranging from two to four years, with expiration no later
than ten years from the date of grant. At December 31,
2003, 2,887,000 shares were available for future grants.

Stock option transactions from 2001 through 2003
are summarized as follows:

|                                 |           |           |       |                |   |   |      |      | 
|-------------------------------- | --------- | --------- | ----- | -------------- | - | - | ---- | ---- | 
|                                 |           |           |       | Weighted      
|                                 |           | Number of |       | Average       
|                                 |           | Shares    |       | Exercise Price
|                                 |           |           |       |               
|Outstanding at December 31, 2000 |           |           | 3,428 |                |   | $ | 3.85 |     
|                                 | Granted   |           |       | 1,392          |   |   |      | 4.22 | 
|                                 | Exercised |           |       | (109           | ) |   |      | 2.50 | 
|                                 | Canceled  |           |       | (524           | ) |   |      | 4.63 | 
|                                 |           |           |       |                |   |   |      |     
|Outstanding at December 31, 2001 |           |           | 4,187 |                |   |   | 3.91 |     
|                                 | Granted   |           |       | 1,808          |   |   |      | 1.81 | 
|                                 | Exercised |           |       | (47            | ) |   |      | 2.62 | 
|                                 | Canceled  |           |       | (518           | ) |   |      | 3.62 | 
|                                 |           |           |       |                |   |   |      |     
|Outstanding at December 31, 2002 |           |           | 5,430 |                |   |   | 3.25 |     
|                                 | Granted   |           |       | 1,427          |   |   |      | 1.54 | 
|                                 | Exercised |           |       | (43            | ) |   |      | 1.33 | 
|                                 | Canceled  |           |       | (632           | ) |   |      | 3.38 | 
|                                 |           |           |       |                |   |   |      |     
|Outstanding at December 31, 2003 |           |           | 6,182 |                |   | $ | 2.87 |     
|                                 |           |           |       |                |   |   |      |     

The exercise price ranges and average remaining
terms of options outstanding and exercisable at
December 31, 2003 were:

|                |  |             |       |           |  |          |            |             |  |          |      |  |  |  |       |  |  |   |      | 
|--------------- |  | ----------- | ----- | --------- |  | -------- | ---------- | ----------- |  | -------- | ---- |  |  |  | ----- |  |  | - | ---- | 
|                |  | Number of   |       | Weighted  |  | Weighted |            | Number of   |  | Weighted
|                |  | Options     |       | Average   |  | Average  |            | Options     |  | Average 
|Range of        |  | Outstanding |       | Remaining |  | Exercise |            | Exercisable |  | Exercise
|Exercise Prices |  | at 12/31/03 |       | Term      |  | Price    |            | at 12/31/03 |  | Price   
|                |  |             |       |           |  |          |            |             |  |         
|$0.71-$2.00     |  |             | 2,589 |           |  |          | 8.3  years |             |  | $        | 1.45 |  |  |  | 1,347 |  |  | $ | 1.52 | 
|$2.01-$4.00     |  |             | 2,161 |           |  |          | 5.2  years |             |  | $        | 2.50 |  |  |  | 1,798 |  |  | $ | 2.56 | 
|$4.01-$10.91    |  |             | 1,432 |           |  |          | 5.1  years |             |  | $        | 5.99 |  |  |  | 1,301 |  |  | $ | 5.96 | 
|                |  |             |       |           |  |          |            |             |  |          |      |  |  |  |       |  |  |   |      | 
|$0.71-$10.91    |  |             | 6,182 |           |  |          | 6.5  years |             |  | $        | 2.87 |  |  |  | 4,446 |  |  | $ | 3.24 | 
|                |  |             |       |           |  |          |            |             |  |          |      |  |  |  |       |  |  |   |      | 

There were options for 4,446,000 and
3,420,000 shares exercisable at December 31, 2003 and
2002, respectively.

Disclosure of Fair Value of Stock
Options.As disclosed in Note 1,
Genelabs accounts for employee stock options using their
intrinsic value at the time of grant. However, generally
accepted accounting

F-13



---



##### Table of Contents



GENELABS TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS   (Continued)

principles require companies that account for
stock options under the intrinsic value method to also disclose
the pro forma impact as if they had accounted for stock options
using a fair value approach. Accordingly, for disclosure
purposes, the fair value of stock options was estimated at the
date of grant using a Black-Scholes option valuation model. The
Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. This model requires
highly subjective assumptions regarding expected stock price
volatility. Because the Companys stock options have
characteristics significantly different from those of traded
options and changes in the volatility assumptions can materially
affect the fair value estimate, the Companys management
believes that this model does not provide a representative
measure of the fair value of the options actually granted under
the Companys stock-based compensation plans. To determine
the pro forma disclosure, the Company used the following
weighted average assumptions for 2003, 2002 and 2001,
respectively: dividend yields of zero, risk-free interest rates
of 3.0%, 3.0% and 4.0%, volatility factors of 1.0 and a one to
five year expected life of the options after vesting. Based on
these assumptions, the weighted-average fair value of options
granted during 2003, 2002 and 2001 was $0.87, $1.41 and
$3.53 per share, respectively. For purposes of pro forma
disclosures, the estimated fair value of the options is expensed
ratably over the options vesting period.



|   |             
|-- | ------------
|8. | Income Taxes

There is no provision for income taxes because
the Company has incurred operating losses.

Deferred tax assets and liabilities reflect the
net tax effects of net operating loss and tax credit carryovers
and temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of the
Companys deferred tax assets as of December 31 are as
follows:

|                                            |                                          |      |         |        |  |   |         |        | 
|------------------------------------------- | ---------------------------------------- | ---- | ------- | ------ |  | - | ------- | ------ | 
|                                            |                                          | 2003 |         | 2002  
|                                            |                                          |      |         |       
|Deferred tax assets:                        |                                          |      |         |        |  |   |         |       
|                                            | Net operating loss carryforwards         |      | $       | 61,000 |  |   | $       | 53,900 | 
|                                            | Foreign net operating loss carryforwards |      |         | 1,900  |  |   |         | 2,100  | 
|                                            | Research credits                         |      |         | 3,500  |  |   |         | 3,300  | 
|                                            | Capitalized research expenditures        |      |         | 1,500  |  |   |         | 1,800  | 
|                                            | Deferred revenue                         |      |         | 900    |  |   |         | 1,600  | 
|                                            | Other individually immaterial items, net |      |         | 1,600  |  |   |         | 1,600  | 
|                                            |                                          |      |         |        |  |   |         |       
|                                            | Total deferred tax assets                |      |         | 70,400 |  |   |         | 64,300 | 
|Valuation allowance for deferred tax assets |                                          |      | (70,400 | )      |  |   | (64,300 | )     
|                                            |                                          |      |         |        |  |   |         |       
|Net deferred tax assets                     |                                          | $    |        |        |  | $ |        |       
|                                            |                                          |      |         |        |  |   |         |       

Realization of deferred tax assets is dependent
upon future earnings, if any, the timing and amount of which are
uncertain. Accordingly, the net deferred tax assets have been
fully offset by a valuation allowance. For 2003, 2002 and 2001,
the valuation allowance increased by $6.1 million,
$5.7 million and $4.8 million, respectively. Deferred
tax assets at December 31, 2003 include approximately
$2.8 million associated with stock option activity for
which any subsequently recognized tax benefits will be credited
directly to shareholders equity.

At December 31, 2003, the Company had net
operating loss carryforwards for federal income tax purposes of
approximately $175 million which expire in the years 2004
through 2023 and federal research and development tax credits of
approximately $2.2 million which expire in the years 2004
through 2023. In addition the Company had net operating loss
carryforwards for state income tax purposes of approximately
$23 million which expire in the years 2004 through 2013 and
state research and development tax credits of

F-14



---



##### Table of Contents



GENELABS TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS   (Continued)

approximately $1.8 million which do not
expire. Utilization of the Companys net operating loss and
tax credit carryforwards may be subject to substantial annual
limitation due to the ownership change limitations provided by
the Internal Revenue Code and similar state provisions. Such an
annual limitation could result in the expiration of the net
operating loss and tax credits before utilization.



|   |                 
|-- | ----------------
|9. | Subsequent Event

On January 28, 2004, Genelabs granted Tanabe
Seiyaku Co. Ltd. (Tanabe) an exclusive license to Prestara in
Japan and received a $2 million non-refundable initial
license fee. Under the terms of the agreement, Genelabs is
entitled to additional milestone payments based on
pre-determined development goals and is also entitled to
royalties on sales of Prestara in Japan. In connection with the
agreement, Genelabs also sold 818,897 shares of its common
stock to Tanabe for $2.6 million.

F-15



---



##### Table of Contents



|        |    |               |  |                                                                                                                                                                                                                                                                                                                                                                          
|------- | -- | ------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |              
|No.     |    | Exhibit Title
|        |    |              
|        | 3  | .01           |  | Registrants Amended and Restated Articles
    of Incorporation (incorporated herein by reference to
    Exhibit 3.01 to Registrants Quarterly Report on
    Form 10-Q for the quarter ended March 31, 2001).                                                                                                                                                           
|        | 3  | .02           |  | Registrants Certificate of Amendment of
    Articles of Incorporation (incorporated herein by reference to
    Exhibit 3.2 to Registrants Quarterly Report on
    Form 10-Q for the quarter ended September 30, 2003).                                                                                                                                                 
|        | 3  | .03           |  | Registrants Amended and Restated Bylaws
    (incorporated herein by reference to Exhibit 3.02 to
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2000 (the 2000
    Form 10-K)).                                                                                                                                                      
|        | 4  | .01           |  | Specimen Certificate for Registrants Common
    Stock (incorporated herein by reference to Exhibit 4.01 to
    Registrants Registration Statement on Form S-1 filed
    with the Commission on April 29, 1991 (File
    No. 33-40120) (the Form S-1)).                                                                                                               
|        | 10 | .01           |  | Registrants 1985 Employee Stock Option Plan
    and related documents, as amended to date (incorporated herein
    by reference to Exhibit 4.03 to the Registrants
    Registration Statement on Form S-8 (File No. 33-81894)
    filed on July 25, 1994 (the July 1994
    Form S-8).                                                                               
|        | 10 | .02           |  | Registrants 1995 Stock Option Plan, as
    amended to date (incorporated herein by reference to
    Exhibit 10.07 of the Registrants Annual Report on
    Form 10-K for the year ended December 31, 1997).                                                                                                                                                             
|        | 10 | .03           |  | Registrants 2001 Stock Option Plan
    (incorporated herein by reference to Exhibit 10.07 of the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2001 (the 2001
    Form 10-K)).                                                                                                                                                      
|        | 10 | .04           |  | Registrants Amended and Renewed 1994 Annual
    and Long-Term Incentive Based Compensation Plan (incorporated
    herein by reference to Exhibit 10.04 to the
    Registrants Quarterly Report on Form 10-Q for the
    quarter ended June 30, 2003).                                                                                                                  
|        | 10 | .05           |  | Registrants 2001 Employee Stock Purchase
    Plan (incorporated herein by reference to Exhibit 10.08 of
    the 2001 Form 10-K).                                                                                                                                                                                                                                        
|        | 10 | .06           |  | Form of Registrants Indemnity Agreement
    entered into by Registrant with certain officers and directors
    (incorporated herein by reference to Exhibit 10.04 to the
    Form S-1).                                                                                                                                                                                 
|        | 10 | .07           |  | Industrial Net Lease Agreement by and between
    Registrant and Lincoln Property Company N.C., Inc. dated
    July 29, 1986, as amended to date (incorporated herein by
    reference to Exhibit 10.06 to the Form S-1).                                                                                                                                                
|        | 10 | .08           |  | Amendment to Lease by and between Registrant and
    Metropolitan Life Insurance Company, successor to Lincoln
    Property Company N.C., dated as of September 25, 2002
    (incorporated herein by reference to Exhibit 10.19 to
    Registrants Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2002 (the Third Quarter
    2002 Form 10-Q)).
|        | 10 | .09           |  | Agreement, dated as of January 26, 1996, by
    and between Registrant and Dr. Edgar G. Engleman
    (incorporated herein by reference to Exhibit 10.15 to
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 1996 (the 1996
    Form 10-K))*.                                                                                            
|        | 10 | .10           |  | License Agreement, dated as of October 1,
    1993, by and between Registrant and Stanford University
    (incorporated herein by reference to Exhibit 10.16 to the
    1996 Form 10-K)*.                                                                                                                                                                                
|        | 10 | .11           |  | Joint Investment Agreement for formation of
    Genelabs Biotechnology Co., Ltd., a company organized under the
    laws of Taiwan, Republic of China (incorporated herein by
    reference to Exhibit 10.28 to the Registrants Annual
    Report on Form 10-K for the year ended December 31,
    1995 (the 1995 Form 10-K)*.                                        
|        | 10 | .12           |  | Technology Transfer Agreement, dated as of
    November 21, 1995, by and between Registrant and Genelabs
    Biotechnology Co., Ltd. (incorporated herein by reference to
    Exhibit 10.29 to the 1995 Form 10-K)*.                                                                                                                                                     
|        | 10 | .13           |  | Collaboration and License Agreement made as of
    November 12, 2000 by and between Registrant and Watson
    Pharmaceuticals, Inc. (incorporated herein by reference to
    Exhibit 10.17 to the 2000 Form 10-K)*.                                                                                                                                                      

F-16



---



##### Table of Contents



|        |    |               |  |                                                                                                                                                                                                               
|------- | -- | ------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |              
|No.     |    | Exhibit Title
|        |    |              
|        | 10 | .14           |  | Agreement entered into by Registrant with Irene
    A. Chow, Ph.D., as of January 3, 2002 (incorporated
    herein by reference to Exhibit 10.17 of the 2001
    Form 10-K).                                  
|        | 10 | .15           |  | Form of Agreement entered into by Registrant with
    certain employees of Registrant (incorporated herein by
    reference to Exhibit 10.18 of the 2001 Form 10-K).                                          
|        | 10 | .16           |  | Toll Manufacturing and Supply Agreement dated as
    of August 30, 2002 between Registrant and
    Patheon, Inc. (incorporated herein by reference to
    Exhibit 10.20 to the Third Quarter 2002 Form 10-Q)*.
|        | 21 | .01           |  | List of Subsidiaries.                                                                                                                                                                                         
|        | 23 | .01           |  | Consent of Ernst & Young
    LLP, Independent Auditors.                                                                                                                                                       
|        | 31 | .1            |  | Certification of Chief Executive Officer pursuant
    to Rules 13a-14(a) and 15d-14(a) promulgated under the
    Securities Exchange Act of 1934, as amended.                                                 
|        | 31 | .2            |  | Certification of Chief Financial Officer pursuant
    to Rules 13a-14(a) and 15d-14(a) promulgated under the
    Securities Exchange Act of 1934, as amended.                                                 
|        | 32 | .1            |  | Certification of Chief Executive Officer and
    Chief Financial Officer pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.                    



---



|  |                                                                                               
|- | ----------------------------------------------------------------------------------------------
|* | Confidential treatment has been granted with
    respect to certain portions of this document.

F-17