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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
 
                            ------------------------
 
                                   FORM 10-K
 
[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
     THE SECURITIES EXCHANGE ACT OF 1934
 
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
 
                                       OR
[ ]  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)
 
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<S>                                            <C>
                  CALIFORNIA                                     94-3010150
       (STATE OR OTHER JURISDICTION OF                         (IRS EMPLOYER
        INCORPORATION OR ORGANIZATION)                     IDENTIFICATION NUMBER)
</TABLE>
 
                              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 [X]  No [ ]
 
     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.  [X]
 
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<CAPTION>
                                                              AS OF MARCH 10, 1999
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Aggregate market value of the voting stock held by
non-affiliates of the Registrant............................      $76,000,000
Number of shares of Common Stock outstanding................       39,785,042
</TABLE>
 
                      DOCUMENTS INCORPORATED BY REFERENCE:
 
     Portions of the Registrant's definitive Proxy Statement for its 1999 Annual
Meeting of Shareholders are incorporated by reference into Part III (Items 10,
11, 12 and 13) hereof.
 
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                                     PART I
 
ITEM 1. BUSINESS.
 
     All statements in this 10-K that are not historical are forward-looking
statements. Forward-looking statements involve a number of risks and
uncertainties. These risks and uncertainties include, but are not limited to,
those statements concerning clinical trials, progress of drug discovery
programs, the Company's business plans, anticipated expenditures and the timing
and need for additional funds. Forward-looking statements may be identified by
terminology such as "may," "will," "expects," "anticipates," "intends," "plans,"
"believes," "potential" and similar expressions. Some of the factors that could
cause material differences in actual results of the Company's activities are
product development, regulatory approval and manufacturing risks. Additional
factors include intellectual property rights and the Company's relationships
with its collaborators and potential collaborators. These and additional factors
and risks are discussed in "Risk Factors" at the end of this Item 1.
Shareholders and prospective investors in the Company should carefully consider
these risk factors. The Company disclaims any obligation to update these
statements for subsequent events.
 
     Genelabs Technologies, Inc. ("Genelabs" or the "Company") is a
biopharmaceutical company that focuses on the discovery and development of
drugs. The Company's principal drug discovery program is based on proprietary
enabling technologies for creating gene-specific, small organic, DNA-binding
molecules. Related technologies are being applied to the discovery of novel
antiviral RNA-binding compounds. The lead development program is in its second
Phase III clinical trial as a new therapy for systemic lupus erythematosus
("SLE"), following successful completion of the initial Phase III trial in 1997.
 
     The Company's business is primarily comprised of drug discovery and
development programs. The Company also has investments in other companies, which
include Genelabs Diagnostics Pte. Ltd. ("GLD") and Genelabs Biotechnology Co.,
Ltd. ("GBL"). GLD, which is based in Singapore, develops, manufactures and
distributes tests for the diagnosis of infectious disease. While Genelabs has
previously consolidated the results of GLD in its financial statements, the
Company recently adopted a plan to divest this subsidiary and, accordingly, no
longer consolidates GLD but instead accounts for it as a discontinued operation.
GBL, which is based in Taiwan, develops, manufactures and distributes
pharmaceutical products for the Asian market.
 
DRUG DISCOVERY PROGRAM
 
     Genelabs' research focus is to produce drug candidates targeted to specific
genes using its novel drug discovery approach. The Company believes its
DNA-binding program, an integrated platform of drug discovery technologies, has
the potential to create an entirely new class of pharmaceutical products. While
traditional drugs typically affect the activity of proteins derived from the
expression of genes, Genelabs' drug discovery approach targets the
disease-causing genes directly. The Company believes its techniques for
discovering drug candidates are applicable to a number of diseases and other
therapeutic areas.
 
     The Company's DNA-binding drug discovery program is comprised of an
integrated platform of technologies that include:
 
     - High-throughput screening of random and structure-biased chemical
       libraries to select small DNA-binding molecules, or drug subunits, that
       are the building blocks for Genelabs' drug candidates.
 
     - Multiple proprietary and nonproprietary assay systems, including the
       proprietary Merlin(TM) assay system, for identifying the DNA
       sequence-binding preferences of the DNA-binding molecules. These assays
       characterize the specific DNA sequences to which the compounds will bind.
 
     - Chemistry capabilities for generating additional DNA-binding drug
       subunits and for combining the DNA-binding molecules in multiple
       combinations to create molecules that bind to longer, more gene-specific
       strands of DNA.
 
     - Gene promoter analysis for discovering and validating key DNA sequences
       of disease-causing genes. This analysis determines the specific DNA
       sequence targets for which Genelabs will design a drug.
 
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     - Generation of lead compounds using cell-based assays to validate the
       effects of a DNA-binding molecule against a specific gene target.
 
     The initial phase of the drug discovery process utilizes Genelabs'
expertise and proprietary technologies to identify and characterize small
organic molecules, called monomers, that bind to short sections of DNA. A
database of information on the monomer's DNA-binding properties forms the basis
for selecting drug candidate subunits. In the next phase, based on information
about the DNA sequences of disease-causing genes, the Company links these
monomers together in selected combinations to form dimers that bind to longer (8
to 12 base pair) sections of DNA. Genelabs believes that the dimers, which
represent potential drug candidates for further optimization into drugs, will be
sufficiently gene-target specific to produce the desired therapeutic effect with
minimal toxicity.
 
     In addition to technologies for identifying and characterizing DNA-binding
molecules, the Company has related technologies for the discovery and creation
of novel antiviral RNA-binding molecules. Genelabs believes that drug candidates
in this program may have advantages over existing antiviral therapeutics and
could address large unmet market needs.
 
     To date, the Company's technologies have identified DNA sequence-binding
preferences for many molecules. Several compounds have been designed and
synthesized from these molecules. In addition, the Company has performed tests
that demonstrated predicted effects on the expression of target genes. In these
tests, Genelabs' scientists engineered a dimer-binding DNA sequence into the
regulatory site of a test gene and inserted the engineered test gene into
cultured human cells, the results of which demonstrated a dose dependent
alteration in the expression of the targeted test gene. Tests performed in
unaltered bacterial cells on dimer binding sites also demonstrated alterations
in the expression of test genes. These data demonstrated that the dimer affects
the targeted gene and is not toxic at the levels shown to alter gene expression.
 
     Genelabs has already identified key DNA sequences in several
disease-related genes that are likely to be effective drug targets. The Company
is actively engaged, on its own and in collaboration with corporate partners, in
synthesizing drug candidates that may alter the expression of these medically
important gene targets. The Company believes that its focus on sequence
specificity will produce pharmaceutical products that are more efficacious and
less toxic than currently known DNA-binding drugs.
 
     Through its DNA- and RNA-binding technologies, the Company believes it has
an entirely new approach to identifying therapeutics for disease intervention.
The Company's business strategy is to identify, develop and commercialize a
broad portfolio of lead compounds from its integrated drug discovery program,
both independently and in collaboration with established pharmaceutical and
biotechnology companies. Genelabs maintains a flexible business model that
allows its technology to be used in other applications for which the Company is
also exploring corporate collaborations.
 
     The Company is in its third year of a collaborative research and license
agreement with DuPont Pharmaceuticals Company ("DuPont") under which Genelabs is
working on a number of target genes. This agreement provides Genelabs with
research funding, milestone payments upon reaching predetermined research and
development objectives, and royalties upon the commercial sale of products
resulting from the collaboration. Additionally, the Company is in its second
year of a research grant from the Defense Advanced Research Projects Agency
("DARPA") to apply Genelabs' DNA-binding and RNA-binding technologies to the
discovery of drugs that can be used as countermeasures to agents of biological
warfare. Genelabs receives research funding and has the right to commercialize
any invention it makes during the term of the grant. Genelabs currently is
pursuing additional drug discovery research collaborations with various other
pharmaceutical and biotechnology companies.
 
DRUG DEVELOPMENT PROGRAM: GL701 FOR SYSTEMIC LUPUS ERYTHEMATOSUS
 
     Systemic lupus erythematosus is a severe, chronic and frequently
debilitating autoimmune disease that can affect the skin, joints, kidneys and
nervous system. Current treatment is often inadequate, due either to limited
benefits or to severe adverse side effects. According to the American College of
Rheumatology, SLE affects approximately 150,000 patients in the U.S., and
Genelabs believes that there are at least three times
 
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that number of patients worldwide. GL701, Genelabs' therapeutic candidate for
SLE, is a pharmaceutical formulation designed for oral administration that
contains dehydroepiandrosterone ("DHEA") as the active ingredient. DHEA is a
naturally occurring hormone that is produced by the adrenal glands.
 
     SLE patients generally have abnormally low levels of DHEA, and studies have
shown that hormonal influences play a role in the development and progression of
SLE. Genelabs has exclusive worldwide rights under U.S. patents granted to
Stanford University for the use of DHEA to treat SLE. Genelabs has sublicensed
Asian marketing rights, excluding Japan, to GBL.
 
     Genelabs has completed its first Phase III trial of GL701 for SLE. This 191
patient double-blind, placebo controlled clinical trial was designed to evaluate
GL701's ability to reduce steroid dependency in women with mild to moderate SLE.
All women in this trial previously required prednisone or other steroids for
their treatment. Patients in the trial received daily doses of either 200 mg of
GL701, 100 mg of GL701 or placebo for seven to nine months. Data presented to
the American College of Rheumatology on behalf of the Company showed that
patients who received 200 mg daily doses of GL701 achieved the study's primary
endpoint at a higher rate than patients who received placebo. This primary
endpoint was a sustained reduction in their steroid dose to 7.5 mg per day or
less. The beneficial effect was most evident in the 137 SLE patients with active
disease, defined as a SLE Disease Activity Index (SLEDAI) score greater than 2.
In these patients, 51% of those who received daily doses of 200 mg of GL701
achieved the primary endpoint compared to 29% of those who received placebo.
 
     Patient enrollment in the Company's second Phase III trial was completed in
March 1998 with approximately 380 patients. This double-blind, placebo
controlled trial is designed to determine whether GL701 can improve clinical
outcome or disease symptoms. Patients in the trial receive daily doses of either
200 mg of GL701 or placebo for one year. The Company anticipates the clinical
portion of this trial to be completed at the end of March 1999 with preliminary
results available approximately mid-year 1999. Like the results of all
double-blind clinical trials, the results of this clinical trial are uncertain.
Genelabs will not know how GL701 has performed in this trial until the data
analysis is completed. For further discussion, see "Risk Factors -- Clinical
trial results are unpredictable."
 
     The U.S. Food and Drug Administration ("FDA") has recognized the severely
debilitating nature of SLE and the lack of adequate treatment by granting
Subpart E designation to GL701. This designation permits the possibility of
expedited development of the candidate drug and has typically only been granted
for products such as cancer and AIDS therapies. The FDA also granted Orphan Drug
status to GL701 for the treatment of SLE, a designation that provides up to
seven years of U.S. marketing exclusivity for this indication to Genelabs if it
is the first company to sponsor an approved new drug application for such
indication. In late March 1999, the FDA designated GL701 for SLE as a Fast Track
product. Fast Track designation provides for expedited submission and review of
a New Drug Application.
 
INVESTMENTS AND OTHER PROGRAMS
 
     Diagnostics Business -- Genelabs' wholly owned diagnostics subsidiary,
Genelabs Diagnostics Pte. Ltd., is headquartered in Singapore, which houses its
manufacturing, research and development, administrative and Asian sales
functions. Marketing, sales and distribution for Europe, the Middle East and
Africa are managed from offices in Geneva, Switzerland, while these functions
for North and South America are managed from the Company's corporate
headquarters in Redwood City, California. GLD markets both directly and through
a network of distributors. GLD's products include Western Blot assays, rapid and
ELISA tests. These products are used primarily for the diagnosis of human
immunodeficiency virus ("HIV"), human T-cell leukemia virus ("HTLV"), and
hepatitis viruses, in addition to others. GLD also manufactures hepatitis B
surface antigen and related raw materials used for the production of diagnostic
kits.
 
     In or around May 2000, Genelabs' Series A Convertible Preferred Stock
("Preferred Stock") is convertible into one of two options. The first of these
options is conversion into 49.99% of Genelabs' diagnostics business. This option
also requires the Preferred Stockholders to purchase the remaining 50.01% of
Genelabs' diagnostics business at its then fair market value. In the event that
this conversion option is exercised, Genelabs will no longer own its diagnostics
subsidiary. If the Preferred Stock is not converted into
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Genelabs' diagnostics business, the Preferred Stock will be converted into
Genelabs Technologies, Inc. common stock based upon a formula. If this is the
manner in which the Preferred Stock is converted, Genelabs plans to divest its
interest in GLD through a sale of this subsidiary. As a result, under either
conversion scenario the Company will not maintain a continuing interest in its
diagnostics business, and, accordingly, Genelabs has accounted for GLD as a
discontinued operation. The Company is currently exploring other options for
earlier divestment of its diagnostics subsidiary. However, Genelabs can provide
no assurance as to its ability to obtain favorable terms upon the eventual
divestment of GLD, whether through conversion of the Preferred Stock or any
other manner of divestment.
 
     Asian Biopharmaceutical Investment -- Genelabs' Taiwan-based affiliate,
Genelabs Biotechnology Co. Ltd., develops, manufactures and distributes
pharmaceutical products in Asia. Since its formation in late 1995, GBL has
purchased a pharmaceutical manufacturing plant, acquired rights to manufacture
and distribute pharmaceutical products in parts of Taiwan, and acquired a
pharmaceutical product marketing organization. In 1998, through a GBL equity
offering in which Genelabs did not contribute any cash and through the sale of a
portion of its investment, Genelabs reduced its ownership of GBL from 40% to
16%. Approximately 60% of the GBL shares owned by Genelabs were not paid for in
cash and contain restrictions preventing their immediate sale; Genelabs intends
to sell the remainder of its holdings in GBL.
 
     Novel Immunomodulatory Genes -- The Company's scientists have isolated
certain novel immunomodulatory genes on human chromosome 5 which may be
associated with asthma. Patent applications have been filed in the U.S. to claim
these novel sequences, and Genelabs is pursuing funding through government
grants and external collaborations in order to investigate the biological
function and commercial potential of these genes.
 
     Novel Viruses -- In connection with its discovery of the hepatitis E virus
("HEV"), Genelabs has granted SmithKline Beecham p.l.c. ("SB") an exclusive
worldwide royalty-bearing license to make, use and sell an HEV vaccine. SB is
currently in the process of developing this vaccine. In addition, Genelabs has
granted Abbott Laboratories a royalty-bearing, non-exclusive worldwide license
to develop and commercialize diagnostic products for HEV.
 
     In connection with its discovery of the hepatitis G virus ("HGV"), Genelabs
has entered into royalty-bearing license agreements with Roche Diagnostics GmbH,
Chiron Corporation and Ortho Diagnostic Systems Inc. to develop and
commercialize diagnostic products for HGV. 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. Additionally, there
are currently no assays developed for screening the blood bank supply.
 
     GL331: Multiple Drug Resistant Cancers -- Genelabs and GBL are currently
developing GL331, a topoisomerase II inhibitor, as a potential treatment for
multiple drug resistant cancers. In laboratory and animal tests, GL331 has
demonstrated anti-cancer activity against malignant cells that had already
developed resistance to chemotherapeutic agents most frequently used for the
treatment of small cell lung cancer. Genelabs has completed a Phase I human
clinical safety study at M.D. Anderson Cancer Center in Houston, Texas, which
determined the maximum tolerable dose of the drug. GBL is initiating a Phase II
study of this agent in patients with small cell lung cancer. Depending on the
results of this study, Genelabs may further develop GL331.
 
PATENTS AND LICENSES
 
     The Company seeks patent protection for its proprietary technologies and
potential products in the U.S. and internationally. Genelabs owns 26 issued U.S.
patents, eight of which cover the novel drug discovery technologies. The
remaining 18 issued U.S. patents cover GL701, the Company's HEV and HGV
discoveries, immunomodulatory genes, and other proprietary technologies.
Genelabs also owns 39 international patents that cover similar claims to its
U.S. patents. In addition, Genelabs possesses many pending patent applications
covering the Company's novel drug discovery technologies and other proprietary
technologies, but Genelabs cannot estimate how many of these pending patent
applications will be granted as patents. The Company also has exclusive and
non-exclusive licenses under a number of patents and patent applications owned
by third parties.
 
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     Genelabs(R) and the Genelabs logo are registered trademarks of Genelabs
Technologies, Inc. Merlin(TM) and Viria(TM) are trademarks of Genelabs. This
Form 10-K also includes trade names and trademarks of companies other than
Genelabs.
 
GOVERNMENT REGULATION
 
     The research and development, manufacture, distribution and marketing 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 the Company is developing. 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 ("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 the proposed clinical trial design.
 
     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 ("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. Although the Company has been
granted Subpart E designation with respect to GL701, which provides for the
potential accelerated development of the drug, the Company plans to complete its
second Phase III trial of GL701 and further demonstrate satisfactory results of
GL701 prior to filing of a New Drug Application ("NDA"). The Company can provide
no assurance that the results of the Company's second Phase III trial will
warrant continuing the development of GL701 or proceeding with an NDA.
 
     The results of product development, preclinical studies and clinical
studies are submitted to the FDA as part of the NDA for approval of the
marketing and commercial shipment of the 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.
 
     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 foreign manufacturing facilities are subject to periodic FDA inspections or
inspections by the foreign regulatory authorities.
 
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     Sales of the Company's 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 FDA and other domestic and foreign government approval for
a new human drug or biological product is likely to take a number of years and
involve the expenditure of substantial resources.
 
     The Company's research and development programs involve the use of
hazardous, chemical, radiological and biological materials, such as infectious
disease agents. Accordingly, the Company's 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.
 
EMPLOYEES
 
     As of March 10, 1999, the Company had 91 full time employees. 70 employees
were involved in research and development, and 21 were in administration. The
Company's employees are not represented by any collective bargaining agreements,
and the Company has never experienced a work stoppage.
 
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                                  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.
 
        - Clinical trial results are unpredictable
 
        - Regulatory approvals are uncertain
 
        - Research programs are likely to require additional funds
 
        - Genelabs has limited sales, marketing and distribution capabilities
 
        - Genelabs is in an early stage of drug discovery
 
        - The Company depends on key employees for the execution of its business
          plan
 
        - Competition in biotechnology is intense
 
        - Patent and trade secret protection is uncertain
 
        - The Company is dependent on outside manufacturing and supplier sources
 
        - The Company's stock price is volatile
 
     A more detailed discussion of each of these risk factors follows.
 
CLINICAL TRIAL RESULTS ARE UNPREDICTABLE
 
     Before obtaining regulatory approvals for the commercial sale of any of its
products under development, the Company must demonstrate through preclinical
studies and clinical trials that the product is safe and efficacious for use in
each target indication. The results from preclinical studies and initial
clinical trials of products under development by the Company may not be
predictive of results that will be obtained in large-scale testing. The Company
cannot ensure that clinical trials will demonstrate the safety and efficacy of
any products or will result in marketable products. The safety and efficacy of a
therapeutic product under development by the Company, such as GL701, must be
supported by extensive data from clinical trials. In 1999, Genelabs expects to
receive the data from its second Phase III trial of GL701 for SLE and to decide
on whether to continue with the development of this drug candidate. Many
biopharmaceutical companies have suffered significant setbacks in advanced
clinical trials, even after obtaining promising results in earlier trials. The
Company can provide no assurance that it will view the results of this second
Phase III trial of GL701 for SLE as sufficient to support proceeding with an NDA
or continuing development of the drug candidate.
 
REGULATORY APPROVALS ARE UNCERTAIN
 
     The production and marketing of the Company's products are subject to
rigorous requirements by the FDA as described in more detail under the caption
"Government Regulation" in Item 1 of this Form 10-K, and also by comparable
agencies in other countries and by state regulatory authorities. The process of
conducting clinical trials and obtaining regulatory approval for a product
typically takes a number of years and involves substantial expenditures. In
addition, product approvals may be withdrawn or limited for noncompliance with
regulatory standards or the occurrence of unforeseen problems following initial
marketing. The Company may encounter significant delays or excessive costs in
its efforts to secure and maintain necessary approvals or licenses. Future
federal, state, local or foreign legislative or administrative acts could also
prevent or delay regulatory approval of the Company's products. There can be no
assurance that the Company will be able to obtain or maintain the necessary
approvals for manufacturing or marketing the Company's products for proposed
indications or that the data it obtains in clinical trials will be sufficient to
establish the safety and efficacy of its products. In particular, Genelabs can
provide no assurance that the FDA will view the results of the Company's Phase
III trials of GL701 as sufficient to serve as the basis for filing or approval
of an NDA.
 
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     Even if the Company obtains regulatory approval for GL701, identification
of certain side effects after it is on the market or the occurrence of
manufacturing problems could cause subsequent withdrawal of approval or require
reformulation, additional testing, and changes in labeling of the product. The
Company's inability to obtain or maintain requisite governmental approvals, the
identification of side effects or other factors could delay or preclude the
Company from further developing or marketing GL701, which would have a material
adverse effect on the Company's business, financial condition and results of
operations.
 
     The Company has obtained orphan drug status for GL701 for the treatment of
SLE. Orphan drug status may, under present regulations, entitle the Company to
seven years of U.S. marketing exclusivity provided that the Company is the first
to sponsor an approved new drug application for such indication. While the
marketing exclusivity of an orphan drug would prevent other sponsors from
obtaining approval of the same compound for the same indication, it would not
prevent the same compound from being approved for a different use. There can be
no assurance that the scope of protection or the level of exclusivity that is
currently afforded by orphan drug status will remain in effect in the future.
 
     The Company is also subject to other regulations under numerous federal,
state and local laws regarding, among other things, occupational safety,
laboratory practices, the use and handling of radioisotopes and hazardous
chemicals, prevention of illness and injury, environmental protection and
hazardous substance control. Failure to comply with such regulations could have
a material adverse effect on the Company's business, financial condition and
results of operations.
 
RESEARCH PROGRAMS ARE LIKELY TO REQUIRE ADDITIONAL FUNDS
 
     The Company has incurred losses in each year since its inception and has
accumulated approximately $130 million in net losses through December 31, 1998,
including a net loss of $6.6 million in 1998. The Company anticipates realizing
a net loss at least until 2000, and profitability thereafter is subject to
significant uncertainty. Genelabs cannot provide assurance that revenues will be
sufficient to fund operations or that the Company will achieve profitability or
positive cash flow. Additional financing may be required to fund the Company's
continuing operations and research and development activities. This financing
may dilute existing shareholders or provide certain rights to Genelabs' assets.
 
     Genelabs fundraising strategy is to minimize dilution to current
shareholders to the extent feasible in the currently unfavorable equity market
for small capitalization biotechnology companies. The Company's business plan
involves raising funds primarily through corporate collaborations and license
agreements, and secondarily through sales of assets that are not essential for
the Company's core business of drug discovery and drug development. Genelabs is
currently pursuing additional drug discovery research collaborations and GL701
licensing agreements, but can provide no assurance that collaborations or
license agreements can be obtained on acceptable terms, if at all. The Company
is also pursuing sales of several assets that it does not consider essential for
its primary business, including its interest in GLD and GBL. Genelabs can
provide no assurance that it will be able to find buyers willing to purchase
these assets within an acceptable timeframe or on commercially favorable terms,
if at all.
 
     The unavailability of additional funds through the above-described
potential financing sources could delay or prevent the development, testing,
regulatory approval, manufacturing or marketing of some or all of the Company's
products and technologies and could have a material adverse effect on the
Company's business, financial condition and results of operations.
 
GENELABS HAS LIMITED SALES, MARKETING AND DISTRIBUTION CAPABILITIES
 
     The Company has only limited sales, marketing and distribution
capabilities. If the Company successfully develops any new products, including
pharmaceutical products, Genelabs must either rely on large pharmaceutical
companies to market such products or must develop a marketing and sales force
with technical expertise and supporting distribution capability in order to
market such products directly. If the Company successfully develops GL701 and
obtains FDA approval, there is a possibility that it may not be economically
feasible for Genelabs to commercially introduce the product.
 
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     DHEA, the active ingredient in GL701, is currently being marketed by others
as a dietary supplement. The Company believes that DHEA is a drug that should be
subject to regulation and approval by the FDA. The Company further believes that
in a few instances these supplements do not contain true DHEA, but instead
contain related substances that are not biologically equivalent. The Company has
submitted documentation to the FDA requesting clarification of DHEA's status as
a drug and removal from the market as a dietary supplement. However, to date the
FDA has taken no action to limit or regulate the sale of these dietary
supplements, and no assurance can be given as to the willingness or ability of
the FDA to do so in the future. In the event that clinical trials for GL701 are
promising and the drug candidate receives FDA approval, the concurrent sale of
these dietary supplements could adversely affect the market for or the selling
price of GL701. While the Company has obtained exclusive licenses under U.S.
patents relating to the use of GL701 to treat SLE and to reduce steroid dosage
in SLE patients, Genelabs is unable to obtain patent protection for the compound
itself.
 
GENELABS IS IN AN EARLY STAGE OF DRUG DISCOVERY
 
     Genelabs' drug discovery technologies are at an early stage of development,
and its product candidates are varying stages of development. The Company's
technologies, including the DNA- and RNA-binding technologies, are in many cases
new and still under development. These approaches have not yet been proven to
have a therapeutic effect. There can be no assurance that these technologies or
any of the Company's product candidates resulting therefrom will be successfully
developed.
 
     Genelabs' drug discovery technologies will require substantial additional
research and development efforts prior to any commercial use, including
extensive preclinical testing and clinical trials as well as potentially lengthy
regulatory approval. There can be no assurance that any of these products or
technologies will be successfully developed, prove to be safe and efficacious at
each stage of clinical trials, meet applicable regulatory standards, be capable
of being produced in commercial quantities at reasonable costs or be
successfully marketed.
 
THE COMPANY DEPENDS ON KEY EMPLOYEES FOR THE EXECUTION OF ITS BUSINESS PLAN
 
     The introduction of chemistry capabilities into the Company's research
department required restructuring of the responsibilities of some scientists.
Genelabs' success depends on the services of key employees in executive and
research and development positions. The April 1, 1999 retirement of the
Company's President and Chief Executive Officer and her appointment to Chairman
will result in her spending relatively less time at the Company. The loss of the
services of key executives or other employees could have a material adverse
impact on Genelabs' ability to execute its business plan.
 
COMPETITION IN BIOTECHNOLOGY IS INTENSE
 
     Competition is intense in the human healthcare industry, particularly in
the application of biotechnology, and the level of competition is expected to
increase in the future. In seeking to develop proprietary pharmaceutical
products and technologies, Genelabs faces competition from a number of major
pharmaceutical companies as well as emerging biotechnology companies. Many of
these competitors have substantially greater financial and other resources,
larger research and development staffs and more extensive manufacturing and
marketing capabilities than the Company. In addition, many of the Company's
competitors have significantly greater resources and more experience than the
Company in preclinical testing and in conducting human clinical trials of
potential pharmaceutical products and in obtaining FDA and other regulatory
approvals. These factors may enable these competitors to develop products
competitive with or superior to those the Company plans to develop. Such
competitive products could enter the marketplace before the Company's products.
 
     A significant amount of research in biotechnology is performed at
universities and nonprofit research organizations. These entities are becoming
more active in seeking patent protection and licensing revenues for their
discoveries. The competition among large pharmaceutical companies and smaller
biotechnology
 
                                        9
<PAGE>   11
 
companies to acquire technologies from these entities also is intensifying.
These institutions also compete with Genelabs to recruit scientific personnel
and to establish proprietary technology positions.
 
     The Company faces particularly significant competition from a number of
large companies with respect to the Company's diagnostic business. Many of these
competitors have substantially greater resources and more extensive marketing
capabilities than the Company's diagnostics subsidiary. These factors may enable
these competitors to develop products competitive with or superior to GLD's and
may adversely impact the Company's ability to successfully divest its
diagnostics business.
 
PATENT AND TRADE SECRET PROTECTION IS UNCERTAIN
 
     The biotechnology, pharmaceutical and diagnostic industries are subject to
conflicting patent rights of various parties. The patent positions of all
companies in these industries, including Genelabs, are uncertain and involve
complex legal and factual issues. A patent application may be rejected or the
claims may be significantly altered or narrowed before a patent issues. As a
consequence, Genelabs does not know whether any of its patent applications will
result in the issuance of patents. Genelabs can provide no assurance that its
patents will effectively protect its technologies. The priority of patent
applications is determined under complex and sometimes conflicting U.S. and
international laws. Therefore, Genelabs cannot assure that its patent
applications would have priority over competitors' patent applications, if any.
Should the priority of a patent application come into question, Genelabs may
have to participate in interference proceedings to determine priority of
invention, which could result in substantial costs, even if the eventual outcome
is favorable. Additionally, Genelabs may have to participate in opposition
proceedings in European and other countries prior to the granting of a patent.
The biotechnology industry is very competitive and other companies may own
patents and applications and other proprietary rights relating to products or
technology similar Genelabs' technologies. Genelabs cannot provide assurance
that any patents it owns or controls will protect it against infringement
litigation or afford commercially significant protection of its technology. The
patent laws of foreign countries differ from those of the U.S. and the degree of
protection, if any, afforded by foreign patents may be different.
 
     If another company were to successfully bring legal action against Genelabs
claiming patent or other intellectual property right infringements, Genelabs
could be liable for damages and prevented from using or selling such products or
technologies. Genelabs might also be required to obtain a license to use,
manufacture or sell the affected product or technology. Genelabs cannot provide
assurance that it will prevail in any dispute regarding its intellectual
property or that it will be able to obtain an acceptable license. Any
litigation, whether or not resolved in favor of Genelabs, could be expensive and
time-consuming, could consume substantial management resources and could have a
material adverse effect on Genelabs' business, financial condition and results
of operations.
 
     GL701 is a pharmaceutical formulation designed for oral administration that
contains DHEA as the active ingredient. DHEA is a compound that has been in the
public domain for many years, and even though the Company has obtained U.S.
patents relating to the use of GL701 to treat SLE and reduce steroid dosage in
SLE patients, Genelabs is unable to obtain patent protection for the compound
itself.
 
     There may be intellectual property owned by third parties that is important
to Genelabs' drug discovery programs of which Genelabs is not currently aware.
Furthermore, in the future others may obtain patents or develop proprietary
rights necessary or useful for the operation of Genelabs' business. Certain of
these potentially competing patents or rights may be sufficiently broad to
prevent or delay the Company from practicing its technology, and Genelabs may
need to obtain licenses under these patents.
 
     Genelabs also relies on unpatented proprietary technology including trade
secrets, know-how and continuing technological innovation to enhance and develop
its competitive position. The Company seeks to protect these types of
information through a policy of having its employees, consultants and advisors
execute confidentiality and assignment of invention agreements. Genelabs cannot
assure that these agreements will not be breached or that Genelabs will have
adequate legal recourse in case of such breach. It is possible that others will
independently develop the same or similar proprietary information, and Genelabs
cannot provide assurance about protecting its rights in unpatented proprietary
technology. Furthermore, there can be no
                                       10
<PAGE>   12
 
assurance that others have not obtained or will not obtain patent protection
that will preclude the Company from using its unpatented proprietary technology.
 
     The Company is aware that others, including various competitors,
educational institutions and governmental organizations, have intellectual
property, particularly patents and pending patent applications, in the U.S. and
other countries potentially useful or necessary to the Company's diagnostic
subsidiary. The Company is aware that others are pursuing and have obtained
patents covering inventions in the field of HTLV-I, HTLV-II and HIV-2 peptides.
In particular, one of GLD's competitors and the owner of a patent have filed a
claim in Singapore alleging that two GLD products infringe their patent as
described in Item 3 -- Legal Proceedings. While the Company and its diagnostics
subsidiary believe there are substantial defenses and they are defending the
suit vigorously, it is possible that the competitor will receive monetary
damages and injunctive relief. Such an outcome could have a material adverse
effect on the Company. There can be no assurance that the Company's diagnostic
subsidiary will be able to continue manufacturing or selling its products
without obtaining licenses to such patents or without modifying certain of its
products to avoid the claims in such patents. The Company cannot assure that the
diagnostic subsidiary will be able to obtain acceptable licenses to such
patents. This could have a material adverse effect on the diagnostics business
and the value of Genelabs' investment in it.
 
THE COMPANY IS DEPENDENT ON OUTSIDE MANUFACTURING AND SUPPLIER SOURCES
 
     The Company has no internal manufacturing capabilities for pharmaceutical
products and is entirely dependent on contract manufacturers to manufacture
clinical and, if successfully developed, commercial-scale quantities of GL701
pursuant to supply agreements. There can be no assurance that these third party
manufacturers will continue to meet FDA or product specification standards or
that the Company's manufacturing requirements can be met in a consistent and
timely manner. In addition, the Company may be unable to obtain sufficient
contract manufacturing capacity due to competing demands on the contract
manufacturer's capacity or other reasons. In the event of any interruption of
supply from the contract manufacturer due to regulatory reasons, significant
batch failures, capacity constraints or other causes, there can be no assurance
that the Company could make alternative manufacturing arrangements on a timely
basis, if at all. Such an interruption would have a material adverse effect on
the Company's business, financial condition and results of operations.
Completion of the Company's clinical trials and any submission of an NDA will be
subject to the establishment of a commercial formulation and manufacturing
process. As manufacturing process development and formulation activities are
ongoing throughout the development process, the Company may encounter
difficulties at any time that could result in delays in clinical trials,
regulatory submissions and commercialization of its products, or cause potential
negative financial and competitive consequences.
 
     The Company relies on certain suppliers of key raw materials to provide an
adequate supply of such materials for production of finished products. In
particular, GL701 currently is supplied to the Company by a limited number of
sources. The disqualification or loss of one of these suppliers could have a
material adverse effect on the Company because of difficulties and costs in
obtaining and qualifying alternate suppliers. Regulatory requirements applicable
to pharmaceutical products tend to make the substitution of suppliers costly and
time consuming. The unavailability of adequate commercial quantities, the loss
of a supplier's regulatory approval, the inability to develop alternative
sources or an interruption in supply could impair the Company's ability to
manufacture and market its products. If Genelabs is unable to renew or extend an
agreement with a third party manufacturer or supplier, if an existing agreement
is terminated, or if a third party manufacturer or supplier otherwise cannot
meet our needs for a product, the Company may not be able to obtain an
alternative source of manufacture or supply. This could have a material adverse
effect on the Company's business, financial condition and results of operations.
 
     The year 2000 issue is a result of computer programs being written using
only two digits to define the applicable year. Any date-sensitive computer
programs, hardware or embedded chips may recognize a date ending in "00" as 1900
rather than 2000. This could result in a system failure or a miscalculation that
causes operating disruptions. A system failure or operating disruption at one of
our key manufacturers or suppliers could result in their failure to provide
Genelabs with adequate supplies of products or services, potentially
                                       11
<PAGE>   13
 
impacting Genelabs' ability to engage in its planned business activities. While
Genelabs has obtained representations that its key suppliers are year 2000
compliant, the Company cannot provide assurance that their computer systems will
adequately handle all year 2000 issues, and such noncompliance could have an
adverse effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Impact of Year 2000."
 
THE COMPANY'S STOCK PRICE IS VOLATILE
 
     The market price of the Company's common stock, like the stock prices of
many publicly traded biopharmaceutical companies, has been and will probably
continue to be highly volatile. A variety of events can impact the stock price.
Several of the events concerning Genelabs that can impact the price are
discussed in this Risk Factor section. Numerous events occurring outside of
Genelabs' control may also impact the price of Genelabs common stock. Securities
class action lawsuits have been brought against other companies following
periods of volatility in the market price of their common stock. This type of
litigation, if brought against Genelabs, could result in substantial costs and
diversion of management's time, which could materially affect our business plan,
financial condition and results of operations.
 
ITEM 2. PROPERTIES.
 
     The Company leases its principal research, clinical development and office
facilities under an operating lease expiring in November 2002. This location
encompasses approximately 50,000 square feet located in Redwood City,
California, with an annual base rent of $855,000. 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 the Company's
operations.
 
ITEM 3. LEGAL PROCEEDINGS.
 
     On October 5, 1998, Institut Pasteur and Pasteur Sanofi Diagnostics
(collectively, the "Plaintiffs") filed a Writ of Summons in the High Court of
the Republic of Singapore against GLD, the wholly-owned diagnostics subsidiary
of Genelabs and Nagase Singapore Pte. Ltd., GLD's Malaysian distributor. In the
Writ, the Plaintiffs allege that GLD has, by making, using and selling HIV-2
Western Blot diagnostic products, infringed a Singaporean patent owned by
Institut Pasteur and exclusively licensed to Pasteur Sanofi. The Plaintiffs are
seeking injunctive relief and damages in an unspecified amount. See "Risk
Factors -- Patent and trade secret protection is uncertain." GLD believes that
it has substantial defenses and is defending the suit vigorously.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
 
     Not Applicable.
 
                                       12
<PAGE>   14
 
ITEM 4A. EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE REGISTRANT.
 
     The executive officers and key employees of the Company are as follows:
 
<TABLE>
<CAPTION>
             NAME               AGE                       POSITION
             ----               ---                       --------
<S>                             <C>   <C>
Irene A. Chow, Ph.D. .........  60    Chief Executive Officer, President and Director
                                      through March 31, 1999. Chairman of the Board of
                                        Directors effective April 1, 1999.
James A. D. Smith.............  40    Chief Operating Officer through March 31, 1999.
                                        President effective April 1, 1999.
Cynthia A. Edwards, Ph.D. ....  45    Chief Scientific Officer
Marc Gurwith, M.D. ...........  59    Vice President, Drug Development and Chief
                                      Medical Officer
Rich B. Meyer, Jr., Ph.D. ....  55    Vice President, Research
Debra Catz Bannister..........  46    Vice President, Corporate Communications and
                                      Investor Relations
Matthew M. Loar...............  36    Vice President, Finance
Gilbert R. Mintz, Ph.D. ......  47    Vice President, Business Development
Marco F. Rosa.................  48    Vice President, Human Resources
Heather Criss Keller..........  33    Director of Legal Affairs
</TABLE>
 
     Irene A. Chow has been Chief Executive Officer and President since July
1995. As part of her planned transition to retirement, Dr. Chow becomes Chairman
of the Board of Directors effective April 1, 1999, and resigns from her role as
President and Chief Executive Officer. Before being appointed President and
Chief Operating Officer of Genelabs in May 1995, she served the Company as
President of the Biopharmaceutical Division beginning in August 1993 when she
also became a Director. In addition to her duties at the Company, Dr. Chow also
chairs GBL's Board of Directors. From 1975 to 1993, Dr. Chow held several
positions at Ciba-Geigy Corporation, USA, a pharmaceutical company, most
recently as Senior Vice President of Drug Development for the pharmaceuticals
division. She holds a B.A. degree in Literature from National Taiwan University,
and both an M.A. and a Ph.D. in Biostatistics from the University of California,
Berkeley.
 
     James A. D. Smith has been Chief Operating Officer since October 1996.
Effective April 1, 1999, Mr. Smith becomes President. From June 1995 through
September 1996 he was Vice President, Marketing and Business Development, and
from January 1994 through June 1995 he was Director of Marketing. Prior to
joining Genelabs in early 1994, Mr. Smith served for more than ten years in
various marketing and business development positions with ICN Pharmaceuticals,
most recently as Director of Worldwide Business Development. Mr. Smith has a
B.S. in Molecular and Cellular Biology from the University of California, San
Diego.
 
     Cynthia A. Edwards has been Chief Scientific Officer since October 1998.
From July 1995 through October 1998 she was Vice President, Research. From 1994
to July 1995 Dr. Edwards was Vice President, Pharmaceutical Research, preceded
by various Director and Scientist positions at Genelabs. Before joining the
Company in 1987, Dr. Edwards completed postdoctoral studies at the National
Institutes of Health. She has a Ph.D. in Biology from the University of
California, San Diego, an M.A. in Plant Physiology from Oregon State University
and a B.S. in Botany from Oregon State University.
 
     Marc Gurwith has been Vice President, Drug Development and Chief Medical
Officer since August 1997. From January 1995 until August 1997 he was Vice
President, Clinical Research and Associate Medical Director at Sequus
Pharmaceuticals. Previously, he served as Vice President of Medical and
Scientific Affairs at Boehringer Mannheim Pharmaceuticals and Senior Director of
Clinical Research at Wyeth-Ayerst Research. Dr. Gurwith received his M.D. from
Harvard University, his J.D. from Temple University School of Law and his B.A.
from Yale University.
 
     Rich B. Meyer, Jr. has been Vice President, Research since October 1998.
From 1993 to October 1998 he was Vice President, Research and Development and
Chief Scientific Officer of Epoch Pharmaceuticals,
 
                                       13
<PAGE>   15
 
Inc., a company he joined in 1986. Before joining Epoch, Dr. Meyer was a group
leader at the Nucleic Acid Research Institute and Associate Professor of
Medicinal Chemistry and Acting Associate Dean for Research of the Graduate
School at Washington State University. He has also been Assistant Professor in
the Department of Pharmaceutical Chemistry at the University of California, San
Francisco. Dr. Meyer received his Ph.D. in Chemistry from the University of
California, Santa Barbara.
 
     Debra Catz Bannister has been Vice President, Corporate Communications and
Investor Relations since April 1996. From 1993 until April 1996 she was
Director, Corporate Relations at CV Therapeutics. Previously, she served in
similar positions at several biotechnology companies including Aviron, Synergen
and as the first investor relations manager at Genentech. Ms. Bannister has also
been a Senior Consultant at Regis McKenna, Inc., providing corporate
communications and investor relations counsel to high technology and
biotechnology clients. She began working in the biotechnology industry in 1983
and previously held a number of positions in advertising and marketing
communications.
 
     Matthew M. Loar has been Vice President, Finance since January 1999. From
November 1996 until January 1999 he was Director of Finance and Controller, and
from September 1995 through November 1996 he was Finance Manager. From 1991
through September 1995 he was Corporate Accounting Manager at CBR Cement
Corporation and prior to that was Audit Manager at Coopers & Lybrand. Mr. Loar
is a Certified Public Accountant and has a B.A. in Legal Studies from the
University of California, Berkeley.
 
     Gilbert R. Mintz has been Vice President, Business Development since May
1998. Prior to joining the Company, he was Vice President, Marketing and
Business Development at Anergen from March 1997 to May 1998, and was Director,
Marketing and Business Development at Cygnus, Inc. from 1994 until 1997. Dr.
Mintz has also held the position of Director of Licensing and Business
Development with Trega Biosciences prior to joining Cygnus. Dr, Mintz received
his Ph.D. in biochemistry from Washington University in St. Louis and completed
his post-graduate training at Johns Hopkins School of Medicine, Department of
Biological Chemistry. He received his B.S. in Chemistry from the University of
Pittsburgh.
 
     Marco F. Rosa has been Vice President, Human Resources since October 1996.
From 1994 through September 1996, he was Senior Human Resources Business
Strategist for Sony Electronics, Inc. From 1992 through 1994 he was Director of
Human Resources at Centigram Communications and before then held senior human
resource positions at Conner Peripherals and the General Electric Company. Mr.
Rosa received his M.A. in Counseling Psychology from New York University and his
B.A. in Psychology from St. Michael's College. He also served as a Captain in
the United States Air Force.
 
     Heather Criss Keller has been Director of Legal Affairs since October 1998.
From September 1996 until July 1998 she was Senior Corporate Counsel at
Heartport, Inc. Prior to joining Heartport, Ms. Keller was an associate with the
law firm of Brobeck, Phleger & Harrison LLP. Ms. Keller received a J.D. from
Vanderbilt University School of Law and a B.A. from Duke University.
 
                                       14
<PAGE>   16
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
 
     The Common Stock of the Company began trading publicly on the NASDAQ
National 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 National Market.
 
<TABLE>
<CAPTION>
                                               HIGH      LOW
                                               ----      ---
<S>                                            <C>       <C>
1998
1st Quarter..................................  4 5/8    2 7/16
2nd Quarter..................................  4 1/32   2 3/4
3rd Quarter..................................  3 3/32   1 1/2
4th Quarter..................................  3 1/16   1 1/2
 
1997
1st Quarter..................................  7 3/4    4 3/8
2nd Quarter..................................  4 5/8    1 15/16
3rd Quarter..................................  5 5/16   2 1/4
4th Quarter..................................  4 3/8    2 7/16
</TABLE>
 
     As of March 10, 1999, there were approximately 700 holders of record of
Genelabs Common Stock. In addition, there were approximately 7,800 beneficial or
"street-name" stockholders.
 
     Genelabs has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain any earnings for use in the
operation and expansion of its business and does not anticipate paying any cash
dividends in the foreseeable future.
 
ITEM 6. SELECTED FINANCIAL DATA.
 
     The selected financial data presented below summarizes certain financial
information from the Company's consolidated financial statements. The data
presented below reflects GLD as a discontinued operation.
 
<TABLE>
<CAPTION>
                                                      YEARS ENDED DECEMBER 31,
                                       -------------------------------------------------------
                                        1998        1997        1996        1995        1994
                                       -------    --------    --------    --------    --------
                                                (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                    <C>        <C>         <C>         <C>         <C>
STATEMENT OF OPERATIONS DATA:
  Contract revenue...................  $ 7,800    $  3,115    $  2,006    $  8,499    $  4,474
  Research and development
     expenses........................   12,615      12,022       9,647      11,451      13,821
  General and administrative
     expenses........................    4,349       4,508       5,063       5,474       5,310
  Loss from continuing operations....   (8,139)    (12,038)    (11,482)     (7,823)    (14,521)
  Net loss...........................   (6,605)    (12,897)    (11,397)    (10,511)    (15,609)
  Loss per share from continuing
     operations......................    (0.21)      (0.31)      (0.32)      (0.28)      (0.63)
  Net loss per share.................    (0.17)      (0.33)      (0.32)      (0.38)      (0.68)
                                                            DECEMBER 31,
                                       -------------------------------------------------------
                                        1998        1997        1996        1995        1994
                                       -------    --------    --------    --------    --------
                                                           (IN THOUSANDS)
BALANCE SHEET DATA:
  Cash, cash equivalents and
     short-term investments..........  $20,301    $ 21,099    $ 30,465    $ 22,557    $  4,584
  Working capital....................   12,310      15,793      25,805      15,289       1,015
  Total assets.......................   26,807      29,925      41,908      33,862      13,009
  Long-term debt.....................       --          --          --          --       2,828
  Shareholders' equity...............   17,786      23,210      35,924      25,752       5,741
</TABLE>
 
                                       15
<PAGE>   17
 
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. Forward-looking statements involve a number of risks and
uncertainties. These risks and uncertainties include, but are not limited to,
those statements concerning clinical trials, progress of drug discovery
programs, the Company's business plans, anticipated expenditures and the timing
and need for additional funds. Forward-looking statements may be identified by
terminology such as "may," "will," "expects," "anticipates," "intends," "plans,"
"believes," "potential" and similar expressions. Some of the factors that could
cause material differences in actual results of the Company's activities are
product development, regulatory approval and manufacturing risks. Additional
factors include intellectual property rights and the Company's relationships
with its collaborators and potential collaborators. These and additional risks
are discussed under "Risk Factors" in Item 1 and elsewhere in this Report.
Shareholders and prospective investors in the Company should carefully consider
these risk factors. The Company disclaims any obligation to update these
statements for subsequent events.
 
     Genelabs Technologies, Inc. is a biopharmaceutical company that focuses on
the discovery and development of drugs. The Company's principal drug discovery
program is based on proprietary enabling technologies for creating
gene-specific, small organic, DNA-binding molecules. Related technologies are
being applied to the discovery of novel antiviral RNA-binding compounds. The
lead development program is in its second Phase III clinical trial as a new
therapy for systemic lupus erythematosus, following successful completion of the
initial Phase III trial in 1997.
 
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
 
     Genelabs has adopted a plan to divest its diagnostics operations. As a
result, the Company's financial statements have been reclassified to reflect the
results of Genelabs' diagnostics subsidiary as a discontinued operation for all
periods that the financial statements are presented. This reclassification
changes how the diagnostics subsidiary is incorporated into the financial
statements, but does not change the previously reported net loss or
shareholders' equity. With the diagnostics subsidiary reported as a discontinued
operation, its net assets and results of operations are now reported in one
line-item on each of the balance sheets and statements of operations, rather
than being combined into the individual line-item descriptions.
 
1998 COMPARED TO 1997
 
     The net loss decreased 49% in 1998, to $6.6 million from $12.9 million in
1997. The decrease in net loss was due to increased contract revenue and a gain
on the sale of an investment, partially offset by slightly higher operating
expenses.
 
     Contract revenues increased 150% in 1998, to $7.8 million from $3.1 million
in 1997. The increase is attributable to two primary factors. The first of these
was recognition of approximately $3.5 million in revenue under a grant from the
Defense Advanced Research Projects Agency for development of agents to
counteract biological warfare. Second, the Company received a $1 million payment
from SmithKline Beecham for expansion of their rights to market a vaccine they
are developing for the hepatitis E virus under license from Genelabs.
 
     Operating expenses increased 3% in 1998, to $17.0 million from $16.5
million in 1997. In 1998, 74% of the operating expenses were in research and
development, compared to 73% in 1997. Research and development expenses
increased 5% in 1998, to $12.6 million from $12.0 million in 1997. The increase
in research and development was due to significantly higher spending on the
Company's drug discovery program, partially offset by lower spending on GL701
for SLE. Increased expenditures on the drug discovery program consisted
primarily of sourcing chemical compounds as possible DNA- or RNA-binding agents,
screening these compounds for DNA- and RNA-binding activity, and characterizing
potential drug target binding sites on disease-causing genes. The decreased
expenditures on the GL701 program consisted of lower purchases of drug supply
necessary for conducting the clinical trials and lower clinical trial costs
since the majority of patients had completed their treatment by the end of 1998.
General and Administrative expenses decreased
 
                                       16
<PAGE>   18
 
4% in 1998, to $4.3 million from $4.5 million in 1997. The Company anticipates
that further declines in general and administrative expenses are unlikely.
 
     Interest income decreased 26% in 1998, to $1.0 million from $1.4 million in
1997 due to declines in short-term interest rates and lower average balances in
the Company's short-term investment accounts.
 
     In 1998, the Company recorded a $1.6 million gain on the partial sale of an
investment in its Taiwan-based affiliate, GBL, offset by $0.2 million of equity
in losses through the time of the sale, which occurred during the second quarter
of 1998. Since the sale reduced Genelabs' ownership of this company to less than
20%, Genelabs no longer records its proportionate share of this affiliate's
income or loss, accounting for the decreased equity in loss compared to 1997.
 
     Results from the discontinued diagnostics business, GLD, improved to income
of $0.1 million in 1998 compared to a loss of $0.3 million in 1997. The improved
operating results in 1998 were due to a 1997 charge resulting from a terminated
sales agreement in which the customer could not meet its contractual
obligations.
 
1997 COMPARED TO 1996
 
     The net loss increased 13% in 1997, to $12.9 million from $11.4 million in
1996. The increase in net loss was due to increased research and development
expenses and higher losses from the Company's affiliates, which were only
partially offset by higher contract revenues.
 
     Contract revenues increased 55% in 1997, to $3.1 million from $2.0 million
in 1996. The increase is attributable to revenue from a research collaboration
with DuPont, which was partially offset by a decline in milestone revenue from a
separate collaboration.
 
     Operating expenses increased 12% in 1997, to $16.5 million from $14.7
million in 1996. In 1997, 73% of the operating expenses were in research and
development compared to 66% in 1996. Research and development expenses increased
25% in 1997, to $12.0 million from $9.6 million in 1996. The increase in
research and development in 1997 compared to 1996 resulted primarily from
additional research conducted for a gene-regulating drug discovery collaboration
and also from higher development costs as a result of higher patient enrollment
in the Company's clinical trials of GL701 for SLE. In 1997, general and
administrative expenses decreased 11%, to $4.5 million from $5.1 million in
1996. The decrease in 1997 compared to 1996 was due to a reduction in corporate
administrative headcount.
 
     Interest income increased 13% in 1997, to $1.4 million from $1.2 million in
1996 due to higher average balances in the Company's short-term investment
accounts.
 
     Equity in loss of the Company's Taiwan-based affiliate increased by $0.3
million in 1997 to $0.6 million from $0.3 million in 1996, reflecting costs
incurred after this affiliate purchased a pharmaceutical manufacturing facility.
 
     The 1997 loss of $0.3 million from the Company's diagnostics business was
due to a $0.4 million charge resulting from a terminated sales agreement in
which the customer could not meet its contractual obligations. Without this
charge, operating results would have been income of $0.1 million in 1997.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     The Company had cash, cash equivalents and short-term investment balances
totaling $20.3 million at December 31, 1998, compared to $21.1 million at
December 31, 1997. The $0.8 million decrease in cash, cash equivalents and
short-term investments was attributable to $7.6 million cash used in operations
and $1.4 million used to purchase research equipment. The net cash used in
operations included the expansion of the drug discovery research program and the
continuation of the development of GL701 for SLE. The cash uses were partially
offset by $4.3 million received on the sale of a portion of the GBL investment,
$2.5 million in short-term borrowings, $0.7 million received from issuance of
common stock under employee stock plans, and $0.7 million received from the
Company's diagnostics subsidiary.
 
                                       17
<PAGE>   19
 
     Genelabs has operated at a loss since its inception and has funded its
operations primarily through public and private offerings of its common stock,
private offerings of its preferred stock and contract revenues. Due to the net
losses, income taxes have not been a significant expense. Genelabs expects to
incur substantial additional costs, including research costs for the Company's
drug discovery technologies and development costs for GL701. The amount of the
additional costs will depend on numerous factors including the progress of
Genelabs' research and development programs, the status of its corporate
partnerships, results of clinical trials and actions of regulatory agencies.
 
     The Company anticipates that its current resources and expected revenues
from existing collaborative agreements will enable it to maintain its current
and planned operations through 2000, although the Company intends to seek
additional funds through corporate collaborations, asset sales or other means
prior to such time. The Company anticipates realizing a net loss for this time
frame and profitability thereafter is subject to significant uncertainty.
Additional funds for the Company's 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 the Company's products and technologies, which would have a material
adverse effect on the Company's business, financial condition and results of
operations.
 
IMPACT OF YEAR 2000
 
     The Company has evaluated its computer systems and believes that such
systems will function properly with respect to dates in the year 2000 and
thereafter. The Company is assessing the possible effects on the Company's
operations of the year 2000 readiness of key suppliers, contractors and
collaborators, which is nearly complete and is expected to be completed by
mid-year 1999. To date, no problems have been identified. While Genelabs has
obtained representations that its key suppliers are year 2000 compliant, the
Company cannot provide assurance that their computer systems will adequately
handle all year 2000 issues. In addition, there are a few additional suppliers
that have not yet indicated their year 2000 readiness. The potential impact and
related costs of the year 2000 issue are not expected to be significant at this
time, and the Company does not anticipate that these costs will exceed $0.2
million in aggregate, most of which has already been incurred. Genelabs expects
to continually assess its year 2000 readiness.
 
     Certifications from Genelabs' software and hardware providers indicate that
Genelabs will not be exposed to any material year 2000 costs, but there can be
no assurance of this. While third-party assurances and internal testing are
useful in assessing year 2000 issues, neither can provide absolute assurance
about whether the Company will experience year 2000 problems and/or costs. The
Company currently does not have contingency plans to deal with major year 2000
failures.
 
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. Genelabs considers the risk
minimal as the Company maintains a short six to nine-month average maturity,
does not use derivative instruments, and places its investments with high
quality debt issuers, primarily the U.S. government.
 
     Genelabs' exposure to market risk for changes in foreign currency exchange
rates relates primarily to the Company's investments in its diagnostics
subsidiary, GLD, and its Taiwan-based affiliate, GBL, which are both separately
identified on the balance sheet. GLD manufactures products in Singapore and its
principal sales office is located in Switzerland, but sales are largely
denominated in U.S. dollars. Genelabs is attempting to divest both GLD and GBL.
Changes in foreign currency exchange rates may impact the proceeds received upon
divestiture of Genelabs' investments in these entities, but the Company does not
believe that such foreign currency exchange rate changes will materially impact
the value reported in the financial statements, even if the changes are
significant.
 
                                       18
<PAGE>   20
 
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.
 
                                    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
1999 Annual Meeting of Shareholders to be held on June 16, 1999 (the "Proxy
Statement"), and the information concerning the Company's executive officers
required by Item 10 is incorporated herein by reference to Item 4A of this
Annual Report on Form 10-K. The information concerning compliance with Section
16 of the Securities Exchange Act of 1934 required by Item 10 is incorporated
herein by reference to the section entitled "Compliance Under Section 16(a) of
the Securities Exchange Act of 1934" of the Proxy Statement.
 
ITEM 11. EXECUTIVE COMPENSATION.
 
     The information required by Item 11 is incorporated herein by reference to
the sections entitled "Executive Compensation" and "Compensation of Directors"
of the Proxy Statement.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
 
     The information required by Item 12 is incorporated herein by reference to
the section entitled "Security Ownership of Certain Beneficial Owners and
Management" of the Proxy Statement.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
 
     The information required by Item 13 is incorporated herein by reference to
the section entitled "Certain Transactions" of the Proxy Statement.
 
                                    PART IV
 
ITEM 14.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.
 
                                       19
<PAGE>   21
 
(a)(3) and (c) Index to Exhibits.
 
     The following documents are filed herewith or incorporated by reference
herein.
 
<TABLE>
<CAPTION>
        EXHIBIT
        NUMBER                            EXHIBIT TITLE
        -------                           -------------
        <S>        <C>
         3.01      Registrant's Amended and Restated Articles of Incorporation
                   (incorporated herein by reference to Exhibit 3.01 to
                   Registrant's Annual Report on Form 10-K for the fiscal year
                   ended December 31, 1991 (the "1991 Form 10-K")).
         3.02      Registrant's Bylaws, as amended to date.
         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")).
         4.02      Certificate of Determination of Preferences of Series A
                   Convertible Preferred Stock of Genelabs Technologies, Inc.
                   (incorporated herein by reference to Exhibit 10.37 to
                   Registrant's Form 10-Q for the quarter ended June 30, 1995).
        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 1987 Directors Stock Option Plan and related
                   documents, as amended to date (incorporated herein by
                   reference to Exhibit 10.02 to Registrant's Annual Report on
                   Form 10-K for the year ended December 31, 1995 (the "1995
                   Form 10-K")).
        10.03      Registrant's 1991 Employee Stock Purchase Plan, as amended
                   to date (incorporated herein by reference to Exhibit 4.04 to
                   Registrant's Registration Statement on Form S-8 (File No.
                   333-30083) filed on June 26, 1997).
        10.04      Registrant's 1994 Annual and Long-Term Incentive Based
                   Compensation Program (incorporated herein by reference to
                   Exhibit 4.03 to Registrant's Registration Statement on Form
                   S-8 (File No. 33-85914) filed on November 3, 1994).
        10.05      Amendment to Registrant's 1994 Annual and Long-Term
                   Incentive Based Compensation Program (incorporated herein by
                   reference to Exhibit 10.05 to Registrant's Annual Report on
                   Form 10-K for the year ended December 31, 1997 ("the 1997
                   Form 10-K")).
        10.06      Registrant's 1992 Restricted Stock Award Plan, as amended to
                   date (incorporated herein by reference to Exhibit 4.06 to
                   the Registrant's Registration Statement on Form S-8 (File
                   No. 333-4806) filed on May 7, 1996).
        10.07      Registrant's 1995 Stock Option Plan, as amended to date
                   (incorporated herein by reference to the 1997 Form 10-K).
        10.08      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).
        10.09      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).
        10.10      Amendment to Industrial Net Lease Agreement by and between
                   Registrant and Metropolitan Life Insurance Company dated
                   June 17, 1997 (incorporated herein by reference to Exhibit
                   10.36 to Registrant's Form 10-Q for the quarter ended
                   September 30, 1997).
</TABLE>
 
                                       20
<PAGE>   22
 
<TABLE>
<CAPTION>
        EXHIBIT
        NUMBER                            EXHIBIT TITLE
        -------                           -------------
        <S>        <C>
        10.11      License Agreement, dated October 2, 1991, by and between
                   Registrant, the University of North Carolina at Chapel Hill
                   and Yale University (incorporated herein by reference to
                   Exhibit 10.16 to the 1991 Form 10-K).*
        10.12      Heads of Agreement, dated August 27, 1992, by and between
                   Registrant and SmithKline Beecham p.l.c. ("Heads of
                   Agreement") (incorporated herein by reference to Exhibit
                   10.19 to the Registrant's Form 10-Q for the quarter ended
                   September 30, 1992).*
        10.13      Second Amendment to Heads of Agreement.**
        10.14      License Agreement, dated May 26, 1993, by and between the
                   Registrant and Boehringer Mannheim America Ltd.
                   (incorporated herein by reference to Exhibit 10.22 to the
                   Registrant's Form 10-Q for the quarter ended June 30,
                   1993).*
        10.15      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).*
        10.16      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")).*
        10.17      Common Stock and Warrant Purchase Agreement, dated as of
                   December 31, 1992, by and between Registrant and Abbott
                   Laboratories (incorporated herein by reference to Exhibit
                   10.19 to Registrant's Annual Report on the 1992 Form 10-K).*
        10.18      Stock Purchase Agreement, dated as of May 15, 1995, by and
                   among Registrant, Genelabs Diagnostic, Inc., a wholly owned
                   subsidiary of the Registrant, Johnson & Johnson Development
                   Corporation, and Chiron Corporation (incorporated herein by
                   reference to Exhibit 10.34 to Registrant's Form 10-Q for the
                   quarter ended March 31, 1995 (the "1st Quarter 1995 Form
                   10-Q")).*
        10.19      License and Supply Agreement, dated as of May 15, 1995, by
                   and among Registrant, Genelabs Diagnostic, Inc., Chiron
                   Corporation, and Ortho Diagnostic Systems, Inc.
                   (incorporated herein by reference to Exhibit 10.35 to the
                   1st Quarter 1995 Form 10-Q).*
        10.20      Asset Purchase Agreement, dated as of May 15, 1995, by and
                   between Registrant and Genelabs Diagnostic, Inc.
                   (incorporated herein by reference to Exhibit 10.36 to the
                   1st Quarter 1995 Form 10-Q).*
        10.21      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 1995 Form 10-K).*
        10.22      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).*
        10.23      Collaborative Research and License Agreement, dated as of
                   December 13, 1996, by and between Registrant and The DuPont
                   Merck Pharmaceutical Company ("Collaborative Research and
                   License Agreement") (incorporated herein by reference to
                   Exhibit 10.27 to the 1996 Form 10-K).*
        10.24      Second Amendment to Collaborative Research and License
                   Agreement.**
        10.25      Grant from the Space and Naval Warfare Systems Command,
                   sponsored by the Defense Advanced Research Projects Agency,
                   effective as of February 3, 1998 (incorporated herein by
                   reference to the 1997 Form 10-K).
</TABLE>
 
                                       21
<PAGE>   23
 
<TABLE>
<CAPTION>
        EXHIBIT
        NUMBER                            EXHIBIT TITLE
        -------                           -------------
        <S>        <C>
        10.26      First Modification to Grant from the Space and Naval Warfare
                   Systems Command.
        23.01      Consent of Ernst & Young LLP, Independent Auditors.
        27         Financial Data Schedules (Exhibit 27 is submitted as an
                   exhibit only in the electronic format of this Annual Report
                   on Form 10-K submitted to the Securities and Exchange
                   Commission).
</TABLE>
 
---------------
 * Confidential treatment has been granted with respect to certain portions of
   this document.
 
** Confidential treatment has been requested with respect to certain portions of
   this document.
 
(b) Reports on Form 8-K.
 
     There were no reports on Form 8-K filed for the quarter ended December 31,
1998.
 
                                       22
<PAGE>   24
 
                                   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/ IRENE A. CHOW
 
                                            ------------------------------------
                                                       Irene A. Chow
                                             Chief Executive Officer, President
                                                        and Director
 
March 26, 1999
 
                               POWER OF ATTORNEY
 
     KNOW ALL PERSONS BY THESE PRESENTS that each individual whose signature
appears below constitutes and appoints Irene A. Chow and James A.D. Smith, 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.
 
<TABLE>
<C>                                                       <C>                            <S>
              PRINCIPAL EXECUTIVE OFFICER:
 
                   /s/ IRENE A. CHOW                        Chief Executive Officer,     March 26, 1999
  ---------------------------------------------------               President
                     Irene A. Chow                                and Director
 
      PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER:
 
                  /s/ MATTHEW M. LOAR                        Vice President, Finance     March 26, 1999
  ---------------------------------------------------
                    Matthew M. Loar
 
                 ADDITIONAL DIRECTORS:
 
                  /s/ J. RICHARD CROUT                                                   March 26, 1999
  ---------------------------------------------------
                    J. Richard Crout
 
                /s/ THOMAS E. DEWEY, JR.                                                 March 26, 1999
  ---------------------------------------------------
                  Thomas E. Dewey, Jr.
 
  ---------------------------------------------------
                    Frank L. Douglas
 
                 /s/ EDGAR G. ENGLEMAN                                                   March 26, 1999
  ---------------------------------------------------
                   Edgar G. Engleman
 
                  /s/ ARTHUR GRAY, JR.                                                   March 26, 1999
  ---------------------------------------------------
                    Arthur Gray, Jr.
 
                    /s/ H. H. HAIGHT                                                     March 26, 1999
  ---------------------------------------------------
                      H. H. Haight
 
                    /s/ ALAN Y. KWAN                                                     March 26, 1999
  ---------------------------------------------------
                      Alan Y. Kwan
 
                    /s/ NINA K. WANG                                                     March 26, 1999
  ---------------------------------------------------
                      Nina K. Wang
</TABLE>
 
                                       23
<PAGE>   25
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
  EXHIBIT
  NUMBER                             DESCRIPTION
  -------                            -----------
<S>          <C>
 3.02        Registrant's Bylaws, as amended to date.
10.13*       Second Amendment to Heads of Agreement.
10.24*       Second Amendment to Collaborative Research and License
             Agreement.
10.26        Modification to Grant from the Space and Naval Warfare
             Systems Command.
23.01        Consent of Ernst & Young LLP, Independent Auditors.
27.1996      1996 Restated Financial Data Schedule.
27.1997      1997 Restated Financial Data Schedule.
27.1998      1998 Financial Data Schedule.
27.97Q1      1st Quarter 1997 Restated Financial Data Schedule.
27.97Q2      2nd Quarter 1997 Restated Financial Data Schedule.
27.97Q3      3rd Quarter 1997 Restated Financial Data Schedule.
27.98Q1      1st Quarter 1998 Restated Financial Data Schedule.
27.98Q2      2nd Quarter 1998 Restated Financial Data Schedule.
27.98Q3      3rd Quarter 1998 Restated Financial Data Schedule.
</TABLE>
 
---------------
* Confidential treatment has been requested with respect to certain portions of
  this document.
<PAGE>   26
 
                          GENELABS TECHNOLOGIES, INC.
 
                     CONSOLIDATED FINANCIAL STATEMENTS AND
                            ANNUAL REPORT ON FORM 10-K
 
                                      INDEX
 
<TABLE>
<CAPTION>
                                                                PAGE
                                                              --------
<S>                                                           <C>
Report of Ernst & Young LLP, Independent Auditors...........    F-2
Consolidated Financial Statements:
  Consolidated Balance Sheets as of December 31, 1998 and
     1997...................................................    F-3
  Consolidated Statements of Operations for the Years Ended
     December 31, 1998, 1997 and 1996.......................    F-4
  Consolidated Statement of Shareholders' Equity for the
     Years Ended December 31, 1998, 1997 and 1996...........    F-5
  Consolidated Statements of Cash Flows for the Years Ended
     December 31, 1998, 1997 and 1996.......................    F-6
  Notes to Consolidated Financial Statements................  F-7-F-14
</TABLE>
 
     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
<PAGE>   27
 
               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, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Genelabs Technologies, Inc. at December 31, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
 
                                          ERNST & YOUNG LLP
 
Palo Alto, California
February 10, 1999
 
                                       F-2
<PAGE>   28
 
                          GENELABS TECHNOLOGIES, INC.
 
                          CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                              ----------------------
                                                                1998         1997
                                                              ---------    ---------
<S>                                                           <C>          <C>
Current assets:
  Cash, cash equivalents and short-term investments:
     Cash and cash equivalents..............................  $   3,631    $   4,230
     Short-term investments.................................     16,670       16,869
                                                              ---------    ---------
  Total cash, cash equivalents and short-term investments...     20,301       21,099
  Other current assets......................................        383          713
                                                              ---------    ---------
Total current assets........................................     20,684       21,812
Property and equipment, net.................................      1,401          432
Net assets of diagnostics subsidiary........................      3,372        3,882
Investment in Taiwan-based affiliate........................      1,174        3,658
Other assets................................................        176          141
                                                              ---------    ---------
                                                              $  26,807    $  29,925
                                                              =========    =========
 
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Short-term borrowings.....................................  $   2,500    $      --
  Accounts payable and other accrued liabilities............      3,671        3,631
  Accrued compensation and related expenses.................      1,458        1,545
  Unearned contract revenue.................................        745          843
                                                              ---------    ---------
Total current liabilities...................................      8,374        6,019
Long-term obligations.......................................        647          696
                                                              ---------    ---------
Total liabilities...........................................      9,021        6,715
                                                              ---------    ---------
Commitments and contingencies
Shareholders' equity:
  Preferred stock, no par value, 5,000 shares authorized, 10
     shares convertible Series A issued and outstanding,
     with liquidation preference of $10,000.................      9,682        9,682
  Common stock, no par value, 75,000 shares authorized,
     39,737 and 39,410 shares issued and outstanding at
     December 31, 1998 and 1997,
     respectively...........................................    138,335      137,604
  Accumulated deficit.......................................   (130,497)    (123,892)
  Accumulated other comprehensive income....................        266         (184)
                                                              ---------    ---------
Total shareholders' equity..................................     17,786       23,210
                                                              ---------    ---------
                                                              $  26,807    $  29,925
                                                              =========    =========
</TABLE>
 
                            See accompanying notes.
                                       F-3
<PAGE>   29
 
                          GENELABS TECHNOLOGIES, INC.
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                               1998        1997        1996
                                                              -------    --------    --------
<S>                                                           <C>        <C>         <C>
Contract revenue............................................  $ 7,800    $  3,115    $  2,006
                                                              -------    --------    --------
Operating expenses:
 
  Research and development..................................   12,615      12,022       9,647
  General and administrative................................    4,349       4,508       5,063
                                                              -------    --------    --------
          Total operating expenses..........................   16,964      16,530      14,710
                                                              -------    --------    --------
 
Operating loss..............................................   (9,164)    (13,415)    (12,704)
Interest income, net........................................    1,025       1,377       1,222
                                                              -------    --------    --------
Loss from continuing operations.............................   (8,139)    (12,038)    (11,482)
                                                              -------    --------    --------
Equity in loss of Taiwan-based affiliate, net of $1,645 gain
  on partial sale in 1998...................................    1,422        (577)       (265)
Income/(loss) from discontinued operations of diagnostics
  subsidiary................................................      112        (282)        350
                                                              -------    --------    --------
 
Net loss....................................................  $(6,605)   $(12,897)   $(11,397)
                                                              =======    ========    ========
 
Loss per share from continuing operations...................  $ (0.21)   $  (0.31)   $  (0.32)
                                                              =======    ========    ========
 
Net loss per share..........................................  $ (0.17)   $  (0.33)   $  (0.32)
                                                              =======    ========    ========
 
Weighted average shares outstanding.........................   39,603      38,983      35,746
                                                              =======    ========    ========
</TABLE>
 
                            See accompanying notes.
                                       F-4
<PAGE>   30
 
                          GENELABS TECHNOLOGIES, INC.
 
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                     SERIES A                                             ACCUMULATED
                                    CONVERTIBLE                COMMON                        OTHER           TOTAL
                                     PREFERRED     COMMON    STOCK TO BE   ACCUMULATED   COMPREHENSIVE   SHAREHOLDERS'
                                       STOCK       STOCK       ISSUED        DEFICIT        INCOME          EQUITY
                                    -----------   --------   -----------   -----------   -------------   -------------
<S>                                 <C>           <C>        <C>           <C>           <C>             <C>
BALANCE, DECEMBER 31, 1995........    $9,682      $115,002     $    --      $ (99,598)       $ 666         $ 25,752
                                                                                                           --------
Comprehensive loss:
Net loss..........................                                            (11,397)                      (11,397)
Foreign currency translation
  adjustment......................                                                              27               27
                                                                                                           --------
         Total comprehensive
           loss...................                                                                          (11,370)
89 shares issued under the
  employee stock purchase plan....                     223                                                      223
711 shares issued under stock
  options.........................                   1,526                                                    1,526
3,169 shares issued upon exercise
  of warrants, net................                  10,313                                                   10,313
700 shares issued and 1,900 shares
  to be issued in a private
  placement, net..................                   2,527       6,953                                        9,480
                                      ------      --------     -------      ---------        -----         --------
BALANCE, DECEMBER 31, 1996........     9,682       129,591       6,953       (110,995)         693           35,924
                                                                                                           --------
Comprehensive loss:
Net loss..........................                                            (12,897)                      (12,897)
Foreign currency translation
  adjustment......................                                                            (877)            (877)
                                                                                                           --------
         Total comprehensive
           loss...................                                                                          (13,774)
124 shares issued under the
  employee stock purchase plan....                     413                                                      413
189 shares issued under stock
  options.........................                     647                                                      647
1,900 shares issued in a private
  placement, net..................                   6,953      (6,953)                                          --
                                      ------      --------     -------      ---------        -----         --------
BALANCE, DECEMBER 31, 1997........     9,682       137,604          --       (123,892)        (184)          23,210
                                                                                                           --------
Comprehensive loss:
Net loss..........................                                             (6,605)                       (6,605)
Foreign currency translation
  adjustment......................                                                             450              450
                                                                                                           --------
         Total comprehensive
           loss...................                                                                           (6,155)
222 shares issued under the
  employee stock purchase plan....                     499                                                      499
105 shares issued under stock
  options.........................                     232                                                      232
                                      ------      --------     -------      ---------        -----         --------
BALANCE, DECEMBER 31, 1998........    $9,682      $138,335     $    --      $(130,497)       $ 266         $ 17,786
                                      ======      ========     =======      =========        =====         ========
</TABLE>
 
                            See accompanying notes.
                                       F-5
<PAGE>   31
 
                          GENELABS TECHNOLOGIES, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
               (INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS)
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                               1998        1997        1996
                                                             --------    --------    --------
<S>                                                          <C>         <C>         <C>
Cash flows from operating activities:
  Net loss.................................................  $ (6,605)   $(12,897)   $(11,397)
  Adjustments to reconcile net loss to net cash used in
     operating activities:
     Depreciation and amortization expense.................       437          54         333
     (Income)/loss of discontinued diagnostics
       subsidiary..........................................      (112)        282        (350)
     Equity in loss of Taiwan-based affiliate, net of
       $1,645 gain on partial sale in 1998.................    (1,422)        577         265
  Changes in assets and liabilities:
     Receivables and other current assets..................       330         611        (482)
     Accounts payable, accrued liabilities, accrued
       compensation and long-term obligations..............       (96)      1,088        (498)
     Unearned contract revenue.............................       (98)       (357)      1,200
                                                             --------    --------    --------
  Net cash used in operating activities....................    (7,566)    (10,642)    (10,929)
                                                             --------    --------    --------
Cash flows from investing activities:
  Purchases of securities available-for-sale...............   (24,556)    (19,797)    (43,488)
  Proceeds from sale and maturities of securities
     available-for-sale....................................    24,755      22,063      24,353
  Capital expenditures.....................................    (1,434)       (100)       (165)
  Proceeds from partial sale of Taiwan-based affiliate.....     4,300          --          --
  Net remittances from diagnostics subsidiary..............       678         457         317
  Other....................................................        (7)       (141)        (29)
                                                             --------    --------    --------
  Net cash provided by/(used in) investing activities......     3,736       2,482     (19,012)
                                                             --------    --------    --------
Cash flows from financing activities:
  Payments on long-term obligations........................        --          --      (2,828)
  Proceeds from short-term borrowings......................     2,500          --          --
  Proceeds from issuance of common stock...................       731       8,013      14,589
                                                             --------    --------    --------
  Net cash provided by financing activities................     3,231       8,013      11,761
                                                             --------    --------    --------
Net decrease in cash and cash equivalents..................      (599)       (147)    (18,180)
Cash and cash equivalents, beginning of the period.........     4,230       4,377      22,557
                                                             --------    --------    --------
Cash and cash equivalents, end of the period...............     3,631       4,230       4,377
Cash held in escrow, end of the period.....................        --          --       6,953
Short-term investments, end of the period..................    16,670      16,869      19,135
                                                             --------    --------    --------
Cash, cash equivalents and short-term investments, end of
  the period...............................................  $ 20,301    $ 21,099    $ 30,465
                                                             ========    ========    ========
Supplemental Cash Flow Information:
  Interest paid............................................        --          --    $    170
</TABLE>
 
                            See accompanying notes.
                                       F-6
<PAGE>   32
 
                          GENELABS TECHNOLOGIES, INC.
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 1998
 
 1. SIGNIFICANT ACCOUNTING POLICIES
 
BASIS OF PRESENTATION
 
     Genelabs Technologies, Inc. ("Genelabs" or the "Company") is a
biopharmaceutical company that focuses on the discovery and development of
drugs. The Company's principal drug discovery program is based on proprietary
enabling technologies for creating gene-specific, small organic, DNA-binding
molecules. Related technologies are being applied to the discovery of novel
antiviral RNA-binding compounds. The lead development program is in its second
phase III clinical trial as a new therapy for systemic lupus erythematosus
("SLE"), following successful completion of the initial phase III trial in 1997.
 
     The Company also operates a wholly-owned subsidiary, Genelabs Diagnostics
Pte. Ltd. ("GLD"), which sells diagnostic tests for infectious diseases
primarily in Europe and Asia. In the fourth quarter of 1998, the Company adopted
a plan to divest this subsidiary, and accordingly, the operating results of GLD
have been segregated from continuing operations and reported separately (see
Note 4). The Company has restated its prior financial statements in order to
present the operating results and net assets of GLD as a discontinued operation.
Since the restatement is only a change in the manner by which GLD is included in
the financial statements, there is no impact on the previously reported net
income or shareholders' equity. As a result of the discontinued operation, the
Company now operates in one business segment, the discovery and development of
pharmaceutical products.
 
     The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All intercompany accounts and transactions
have been eliminated. Investments in which Genelabs holds a 20% - 50% ownership
interest are accounted for on the equity method.
 
     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 consists of revenue from contracts and grants awarded to
the Company by corporations and government agencies and is recognized in
accordance with the terms of the contracts and grants. Revenue related to
research contracts and grants is recognized over the related funding periods for
each contract. The Company is generally required to perform research activities
as specified in the agreements, and the Company is generally reimbursed based on
the costs incurred on the contract. Revenue related to license agreements with
non-cancelable, nonrefundable terms and no significant future obligations is
recognized upon the execution of the agreements. Revenue from milestone payments
is recognized upon the achievement of specified events under collaborative
agreements.
 
     Revenue recognized from several of the Company's grants and collaborations
represent 10% or more of total contract revenue. There were three significant
sources of revenue which accounted for 45%, 29%, and 13% of total contract
revenue in 1998. There were two sources of revenue in the previous two years
which accounted for 70% and 15% of total contract revenue in 1997, and 50% and
20% of total contract revenue in 1996.
 
                                       F-7
<PAGE>   33
                          GENELABS TECHNOLOGIES, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1998
 
FOREIGN CURRENCY TRANSLATION
 
     The functional currency of the Company is the U.S. Dollar. The functional
currency of GLD is the Singapore dollar. The Company's share of the net assets
in this foreign operation is translated at the exchange rate in effect at
year-end and the net operating results are translated at the average exchange
rate for the period. Adjustments resulting from the translation of financial
statements denominated in foreign currency are reflected in accumulated other
comprehensive income, a separate component of shareholders' equity.
 
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.
 
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 1998, 1997 and 1996 would have included an additional 230,000,
598,000 and 1,273,000 shares, respectively, related to the Company's outstanding
stock options, and 3,465,000, 3,333,000 and 3,333,000 shares, respectively,
related to the Series A Convertible Preferred Stock.
 
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 time of 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 principally 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, 1998 and 1997, all marketable securities are classified
as available-for-sale. These securities are stated at estimated fair value based
upon market quotes. Unrealized gains and losses, when material, are included in
retained earnings. 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 five years. Leasehold improvements are amortized over the
shorter of the lease term or the estimated useful lives of the improvements.
 
                                       F-8
<PAGE>   34
                          GENELABS TECHNOLOGIES, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1998
 
CHANGES IN ACCOUNTING STANDARDS
 
     In 1998, the Company adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130
establishes new rules for the reporting and display of comprehensive income and
its components, although it has no impact on Company's financial position or
results of operations. Comprehensive income is comprised of net income and other
comprehensive income, which includes certain changes to shareholders' equity
that are excluded from net income. Specifically, SFAS No. 130 requires certain
foreign currency translation adjustments, which are currently reported in
shareholders' equity, to be included in other comprehensive income.
Comprehensive income for the years ended December 31, 1998, 1997 and 1996 has
been reflected in the Consolidated Statement of Shareholders' Equity to conform
to the requirements of SFAS No. 130.
 
     In 1998, the Company adopted Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133"). SFAS No. 133 requires carrying derivative instruments at their fair
value on the balance sheet. Due to the Company's limited use of derivatives, the
adoption of SFAS No. 133 did not impact the Company's financial position or
results of operations.
 
 2. AVAILABLE-FOR-SALE SECURITIES
 
     The following table summarizes the estimated fair value, which approximates
cost, of available-for-sale securities at December 31:
 
<TABLE>
<CAPTION>
                                                               1998      1997
                                                              -------   -------
                                                               (IN THOUSANDS)
<S>                                                           <C>       <C>
DESCRIPTION:
U.S. Treasury securities and obligations of U.S. government
  agencies..................................................  $12,333   $11,873
Corporate debt securities...................................    4,054     6,043
Asset-backed securities.....................................    1,081       954
Money-market mutual funds...................................       89       228
                                                              -------   -------
                                                              $17,557   $19,098
                                                              =======   =======
BALANCE SHEET CLASSIFICATION:
Included in cash and cash equivalents.......................  $   887   $ 2,229
Included in short-term investments..........................   16,670    16,869
                                                              -------   -------
                                                              $17,557   $19,098
                                                              =======   =======
MATURITY:
Due within one year.........................................  $12,117   $13,890
Due after one year through two years........................    5,440     5,208
                                                              -------   -------
                                                              $17,557   $19,098
                                                              =======   =======
</TABLE>
 
                                       F-9
<PAGE>   35
                          GENELABS TECHNOLOGIES, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1998
 
 3. PROPERTY AND EQUIPMENT
 
     The components of property and equipment are as follows:
 
<TABLE>
<CAPTION>
                                                               1998      1997
                                                              -------   -------
                                                               (IN THOUSANDS)
<S>                                                           <C>       <C>
Laboratory equipment........................................  $ 3,384   $ 2,279
Leasehold improvements......................................    4,009     3,819
Office and other equipment..................................    1,682     1,627
                                                              -------   -------
                                                                9,075     7,725
Less accumulated depreciation and amortization..............   (7,674)   (7,293)
                                                              -------   -------
                                                              $ 1,401   $   432
                                                              =======   =======
</TABLE>
 
 4. DISCONTINUED OPERATION -- DIAGNOSTICS SUBSIDIARY
 
     The Company owns 100% of Genelabs Diagnostics Pte. Ltd. The Company has
adopted a plan to divest this subsidiary, and accordingly has accounted for GLD
as a discontinued operation. Summarized financial information for GLD is as
follows:
 
                            STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                           1998      1997      1996
                                                          ------    ------    -------
                                                                (IN THOUSANDS)
<S>                                                       <C>       <C>       <C>
Product sales...........................................  $7,905    $9,675    $11,324
Cost of sales...........................................   4,207     5,818      6,177
                                                          ------    ------    -------
Gross margin............................................   3,698     3,857      5,147
Operating expenses......................................   3,586     4,139      4,797
                                                          ------    ------    -------
Net income/(loss).......................................  $  112    $ (282)   $   350
                                                          ======    ======    =======
</TABLE>
 
                                 BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                               1998      1997
                                                              ------    ------
                                                               (IN THOUSANDS,
                                                              AT DECEMBER 31)
<S>                                                           <C>       <C>
Accounts receivable.........................................  $1,551    $1,855
Inventories.................................................   2,098     2,281
Net property & equipment and other assets...................     716       960
                                                              ------    ------
Total assets................................................  $4,365    $5,096
                                                              ======    ======
Liabilities, principally current............................  $  993    $1,214
Net equity of Genelabs Diagnostics (Pte.) Ltd...............   3,372     3,882
                                                              ------    ------
Total liabilities and net equity............................  $4,365    $5,096
                                                              ======    ======
</TABLE>
 
 5. INVESTMENT IN TAIWAN-BASED AFFILIATE
 
     At the beginning of 1998 the Company owned 40% of its Taiwan-based
affiliate, Genelabs Biotechnology Co., Ltd. ("GBL"), which manufactures and
distributes pharmaceutical products for the Asian market. In 1998 the Company
reduced its ownership in this affiliate to 16% by not contributing cash during a
GBL equity offering and also by selling a portion of its investment. The
realized gain of $1.6 million from the sale consisted of $4.3 million in
proceeds less its basis of $2.4 million and an accumulated foreign currency
translation adjustment of $0.3 million. Concurrent with the reduction in
 
                                      F-10
<PAGE>   36
                          GENELABS TECHNOLOGIES, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1998
 
ownership interest to less than 20%, the Company changed its method of
accounting for this investment from the equity method to the cost method. GBL's
net loss for 1997 and 1996 was $1.5 million and $0.5 million, respectively, and
sales were not material. At December 31, 1997, GBL had cash and cash equivalents
of $1.6 million, accounts receivable of $1.1 million and property, plant and
equipment of $8.8 million for total assets of $11.5 million; liabilities were
$1.4 million.
 
 6. SHORT-TERM BORROWINGS
 
     At December 31, 1998, the Company's short-term borrowings consisted of a
$2.5 million reverse repurchase agreement bearing interest at 5.04%,
collateralized by certain U.S. treasury securities held in the Company's
short-term investment accounts.
 
 7. COMMITMENTS AND CONTINGENCIES
 
     The Company leases its primary office and laboratory facilities under a
non-cancelable operating lease which has a term expiring November 2002. The
Company is required to pay certain maintenance expenses in addition to monthly
rent. The Company also leases certain office and production facilities and
laboratory equipment under other non-cancelable operating leases. At December
31, 1998, future minimum lease payments under all operating leases with original
terms greater than one year are $1,010,000, $967,000, $928,000 and $859,000 for
1999, 2000, 2001, and 2002, respectively, for a total of $3,764,000, excluding
sublease rentals. Total lease expense, net of sublease income, was $953,000,
$838,000 and $1,055,000 for 1998, 1997 and 1996, respectively.
 
     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.
 
 8. SHAREHOLDERS' EQUITY
 
CONVERTIBLE PREFERRED STOCK
 
     In May 2000 the 10,000 outstanding shares of Series A Convertible Preferred
Stock can be converted into 49.99% of Genelabs' diagnostics business, if the
remainder of this business is purchased by the Preferred Stockholders at its
then fair market value. Alternatively, these shares, purchased for $10 million,
can be converted into Genelabs common stock at the lesser of the fair market
value at the time of conversion or $3.00 per share, but in no event more than
49.99% of Genelabs common stock after the conversion. The Series A Convertible
Preferred stockholders are entitled to non-cumulative dividends in preference to
common stock dividends at the annual rate of $40 per share, payable quarterly,
if declared by the Company's Board of Directors. No dividends have been declared
or paid by the Company. Preferred stockholders are entitled to one vote for each
share of common stock into which their preferred stock could be converted at the
time of voting.
 
COMMON STOCK
 
     At December 31, 1998, the Company had 19,777,000 shares reserved for future
issues and conversions.
 
                                      F-11
<PAGE>   37
                          GENELABS TECHNOLOGIES, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1998
 
 9. 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, for which 1,000,000 shares of Common Stock have been reserved.
Eligible employees are entitled to purchase stock at 85% of the price 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 10% of total
compensation. Through December 31, 1998 and 1997, 663,000 and 451,000 shares,
respectively, had been issued under the Stock Purchase Plan. In 1998, the
Company terminated the Genelabs Biotechnology Co., Ltd. Employee Stock Purchase
Plan and prior to such termination, 24,000 shares had been issued under terms
similar to the Stock Purchase Plan.
 
     STOCK AWARD PLANS. The Company has stock award plans which provide for the
issuance of shares of Common Stock to employees and independent contractors who
are not officers or directors. There are 700,000 shares of Common Stock reserved
for issuance under these plans and through December 31, 1998 and 1997, 106,000
shares had been issued.
 
     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, 1998, 419,000 shares were available for future grants.
 
     Stock option transactions from 1996 through 1998 are summarized as follows:
 
<TABLE>
<CAPTION>
                                                                              WEIGHTED          RANGE OF
                                                              NUMBER OF        AVERAGE          EXERCISE
                                                               SHARES      EXERCISE PRICE        PRICES
                                                              ---------    ---------------    -------------
<S>                                                           <C>          <C>                <C>
Outstanding at December 31, 1995............................  2,966,000         $2.85         $1.25 - $7.06
  Granted...................................................   967,000          $6.01         $3.56 - $9.16
  Exercised.................................................  (758,000)         $2.34         $1.25 - $5.00
  Canceled..................................................  (273,000)         $4.97         $1.25 - $7.62
                                                              ---------         -----         -------------
Outstanding at December 31, 1996............................  2,902,000         $3.83         $1.41 - $9.16
  Granted...................................................   880,000          $4.34         $2.09 - $7.09
  Exercised.................................................  (260,000)         $2.66         $1.41 - $4.81
  Canceled..................................................  (282,000)         $5.02         $2.37 - $8.56
                                                              ---------         -----         -------------
Outstanding at December 31, 1997............................  3,240,000         $3.96         $1.41 - $9.16
  Granted...................................................   626,000          $2.94         $1.78 - $4.38
  Exercised.................................................  (104,000)         $1.97         $1.41 - $2.63
  Canceled..................................................  (340,000)         $4.44         $1.41 - $8.50
                                                              ---------         -----         -------------
Outstanding at December 31, 1998............................  3,422,000         $3.79         $1.41 - $9.16
                                                              =========         =====         =============
</TABLE>
 
     There were options for 1,778,000 and 1,373,000 shares exercisable at
December 31, 1997 and 1996, respectively. For options outstanding and
exercisable at December 31, 1998, the exercise price ranges and average
remaining terms were:
 
<TABLE>
<CAPTION>
                        NUMBER OF                                             NUMBER OF
                         OPTIONS                              WEIGHTED         OPTIONS           WEIGHTED
RANGE OF EXERCISE    OUTSTANDING AT     WEIGHTED AVERAGE      AVERAGE       EXERCISABLE AT       AVERAGE
     PRICES             12/31/98         REMAINING TERM    EXERCISE PRICE      12/31/98       EXERCISE PRICE
-----------------   -----------------   ----------------   --------------   --------------   ----------------
<S>                 <C>                 <C>                <C>              <C>              <C>
$1.41 - $2.97..         1,734,000          6.4 years           $2.44          1,212,000           $2.42
$3.03 - $5.81..           892,000          7.8 years           $3.97            325,000           $4.31
$6.19 - $9.16..           796,000          7.1 years           $6.51            547,000           $6.54
  -------------         ---------          ---------           -----          ---------           -----
$1.41 - $9.16..         3,422,000          6.9 years           $3.79          2,084,000           $3.80
  =============         =========          =========           =====          =========           =====
</TABLE>
 
                                      F-12
<PAGE>   38
                          GENELABS TECHNOLOGIES, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1998
 
     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 principals 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 necessarily 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
1998, 1997 and 1996, respectively: dividend yields of zero, risk-free interest
rates of 5.0%, 5.6% and 5.8%, a volatility factor of the expected market price
of the Company's common stock of .80, and a one-year expected life of the
options after vesting. Based on these assumptions, the weighted-average fair
value of options granted during 1998, 1997 and 1996 was $1.70, $2.56, and $3.48,
respectively. For purposes of pro forma disclosures, the estimated fair value of
the options is expensed ratably over the options' vesting period. If the Company
elected to record the fair value estimate of stock options in its financial
statements, the net loss for 1998, 1997 and 1996, respectively, would have been
$8,168,000, $14,767,000 and $13,072,000 and the net loss per share would have
been $0.21, $0.38 and $0.37.
 
10. COLLABORATIVE AGREEMENTS
 
     The Company has the following collaborative agreements:
 
     DuPont Pharmaceuticals Company -- Gene-Regulating Drugs. On January 1,
1997, the Company commenced work under a collaborative research and license
agreement with DuPont Pharmaceuticals Company ("DuPont") to develop small
molecule gene-regulating drugs. Genelabs is conducting a drug discovery program
directed towards a number of target genes, and DuPont plans to develop any drug
candidates discovered under this collaboration by Genelabs. Under the terms of
the agreement, Genelabs receives research funding, will receive payments for
milestones reached and will receive royalties upon commercial sale of products
resulting from this collaboration.
 
     Defense Advanced Research Projects Agency -- Countermeasures to Agents of
Biological Warfare. Effective February 1, 1998, the company received a research
grant from the Defense Advanced Research Projects Agency ("DARPA") to apply
Genelabs' DNA-binding and RNA-binding technologies towards the discovery of
drugs that can be used as countermeasures to agents of biological warfare. Under
the terms of the grant, Genelabs receives research funding for up to three years
and has the right to commercialize any invention it makes during the term of the
grant.
 
     Stanford University -- SLE. The Company has an exclusive licensing
agreement with Stanford University for rights to certain U.S. patents covering
the development, manufacture and sale of GL701 (dehydroepiandrosterone) for the
treatment of systemic lupus erythematosus ("SLE"). Under this agreement,
Stanford receives milestone payments based on clinical development goals and
will receive royalty payments on sales. A director of Genelabs will also receive
a fee based on sales of the product for SLE.
 
                                      F-13
<PAGE>   39
                          GENELABS TECHNOLOGIES, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1998
 
     Sanofi Diagnostics Pasteur -- HCV Diagnostic. The Company has granted
Sanofi Diagnostics Pasteur exclusive and co-exclusive licenses to sell certain
HCV products in exchange for royalty payments to Genelabs.
 
     SmithKline Beecham p.l.c. -- HEV Vaccine. The Company has granted
SmithKline Beecham p.l.c. ("SB") exclusive worldwide manufacturing and marketing
rights for a hepatitis E virus ("HEV") vaccine. In return, Genelabs receives
milestone payments when SB reaches predetermined goals and Genelabs will receive
royalties based on sales of licensed HEV vaccine products.
 
     Chiron Corporation, Ortho Diagnostic Systems, Inc. and Roche Diagnostics
GmbH -- HGV. The Company has granted these companies the rights to develop and
commercialize hepatitis G virus diagnostic products. In return, Genelabs
receives milestone payments when its partners reach predetermined goals and
Genelabs receives royalties based on sales of licensed HGV products.
 
11. INCOME TAXES
 
     At December 31, 1998, the Company has net operating loss carryforwards for
federal and California income tax purposes of approximately $104 million and $7
million, respectively. In addition, the Company has federal and California
research and development tax credit carryforwards of approximately $2 million
and $1 million, respectively. The federal net operating loss and federal and
California credit carryforwards expire in various amounts between the years 2000
and 2018. The California net operating loss carryforwards expire in various
amounts between the years 1999 and 2003. Under provisions of the Internal
Revenue Code the availability of the Company's net operating loss and tax credit
carryforwards may be subject to future limitations because of changes in
ownership resulting from financing transactions. To date, no restriction in the
ability to utilize the Company's carryforwards is anticipated. However, future
equity transactions which the Company may enter into could cause ownership
changes which may result in substantial limitation, or expiration, of loss and
tax credit carryforwards.
 
     Deferred tax assets and liabilities reflect the net tax effects of net
operating loss and credit carryforwards and of temporary differences between the
carrying amounts of assets and liabilities for financial reporting and income
tax purposes. Significant components of the Company's deferred tax assets and
liabilities as of December 31, are as follows:
 
<TABLE>
<CAPTION>
                                                           1998        1997
                                                         --------    --------
                                                            (IN THOUSANDS)
<S>                                                      <C>         <C>
Deferred tax assets:
  Net operating loss carryforwards.....................  $ 35,800    $ 33,500
  Research credits.....................................     2,500       2,100
  Capitalized research expenditures....................     1,300       1,300
  Other individually immaterial items, net.............     1,500       2,400
                                                         --------    --------
  Total deferred tax assets............................    41,100      39,300
Valuation allowance for deferred tax assets............   (41,100)    (39,300)
                                                         --------    --------
Net deferred tax assets................................  $     --    $     --
                                                         ========    ========
</TABLE>
 
     For 1998, 1997 and 1996, the valuation allowance increased by $1.8 million,
$5.7 million and $4.2 million, respectively. Approximately $1.4 million of the
valuation allowance for deferred tax assets relates to benefits of stock option
deductions which, when recognized, will be allocated directly to contributed
capital.
 
                                      F-14