10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2003.

or

o Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from                       to                        .

Commission File No. 0-19222

GENELABS TECHNOLOGIES, INC.

(Exact name of Registrant as specified in its charter)

California	94-3010150
(State or other jurisdiction of incorporation or organization)	(I.R.S. employer identification number)
505 Penobscot Drive, Redwood City, California	94063
(Address of principal executive offices)	(Zip code)

Registrant’s telephone number, including area code: (650) 369-9500

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 o

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

There were 63,337,318 shares of the Registrant’s Common Stock issued and outstanding on August 8, 2003.

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
	Item 1. Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
PART II — OTHER INFORMATION
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
EXHIBIT 10.04
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

FORWARD LOOKING STATEMENTS

     This quarterly report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Any statements herein that are not statements of historical fact may be deemed to be forward-looking statements including, but not limited to, Genelabs’ estimates with respect to its cash resources and related matters. We may identify these statements by the use of words such as believe, expect, anticipate, intend, potential, strategy, plan, and similar expressions. These forward-looking statements involve known and unknown risks and uncertainties. Our actual results may differ materially from those set forth in these forward-looking statements as a result of a number of different factors, including those described under the caption “Risk Factors” and elsewhere in this Form 10-Q. These forward-looking statements include, among others, statements regarding:

• estimates relating to our cash resources and our ability to obtain additional funding for our business plans;

• our ability to complete the divestment of our diagnostics business on a timely basis, if at all;

• estimates relating to the timing and completion of our pending clinical trials;

• the results of our confirmatory clinical trial of Prestara™;

• potential FDA actions with respect to our NDA for Prestara, including whether or not the Prestara NDA ultimately will receive marketing approval;

• if the NDA for Prestara is ultimately approved, our plans and ability to successfully commercialize Prestara for systemic lupus erythematosus;

• our ability to secure European and Japanese partners for Prestara;

• our ability to obtain approval of Prestara in Europe;

• our ability to secure and defend intellectual property rights important to our business; and

• the potential success of our research efforts, including our ability to identify compounds for preclinical development.

All statements in this Quarterly Report on Form 10-Q that are not historical are forward-looking statements and are subject to risks and uncertainties, including those set forth in the Risk Factors section, and actual results could differ materially from those expressed or implied in these statements. All forward-looking statements included in this Form 10-Q are made as of the date hereof. We assume no obligation to update any such forward-looking statement for subsequent events or any reason why actual results might differ, except as required by the Securities Act.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

GENELABS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

				June 30,			December 31,
				2003			2002
				(Unaudited)
			ASSETS
Current assets:
	Cash, cash equivalents and short-term investments:
	Cash and cash equivalents			$	4,753		$	3,035
	Short-term investments				–			3,535
	Total cash, cash equivalents and short-term investments				4,753			6,570
	Net assets of diagnostics subsidiary held for sale				411			417
	Other current assets				352			512
Total current assets					5,516			7,499
Property and equipment, net					1,095			1,306
Long-term investments					960			960
				$	7,571		$	9,765
		LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Accounts payable and other accrued liabilities			$	1,539		$	1,853
	Accrued compensation and related expenses				1,209			912
	Unearned contract revenue				2,050			2,050
Total current liabilities					4,798			4,815
Accrued compensation					71			186
Unearned contract revenue					1,025			2,050
Total liabilities					5,894			7,051
Shareholders’ equity:
	Common stock				194,707			187,264
	Accumulated deficit				(193,030	)		(184,550	)
Total shareholders’ equity					1,677			2,714
				$	7,571		$	9,765

See notes to condensed consolidated financial statements.

GENELABS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)

			For the three months ended						For the six months ended
			June 30,						June 30,
			2003			2002			2003			2002
Contract revenue			$	776		$	991		$	1,503		$	2,022
Operating expenses:
	Research and development			3,771			3,958			7,328			7,338
	General and administrative			1,489			1,568			2,880			2,934
		Total operating expenses		5,260			5,526			10,208			10,272
Operating loss				(4,484	)		(4,535	)		(8,705	)		(8,250	)
Interest income, net				10			120			31			192
Loss from continuing operations				(4,474	)		(4,415	)		(8,674	)		(8,058	)
Income from discontinued operations of diagnostic subsidiary				194			183			194			259
Net loss			$	(4,280	)	$	(4,232	)	$	(8,480	)	$	(7,799	)
Loss per share from continuing operations			$	(0.08	)	$	(0.09	)	$	(0.15	)	$	(0.16	)
Net loss per share			$	(0.07	)	$	(0.08	)	$	(0.15	)	$	(0.16	)
Weighted average shares outstanding				58,617			49,850			56,005			49,849

See notes to condensed consolidated financial statements.

GENELABS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(increase/(decrease) in cash and cash equivalents)
(in thousands)
(Unaudited)

			For the six months ended
			June 30,
			2003			2002
Cash flows from operating activities:
	Net loss		$	(8,480	)	$	(7,799	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation and amortization expense		263			502
		(Income) from discontinued operations of diagnostics subsidiary, net of cash received		6			(259	)
	Changes in assets and liabilities:
		Other current assets		160			322
		Accounts payable, accrued liabilities, accrued compensation and long-term obligations		(132	)		61
		Unearned contract revenue		(1,025	)		(1,500	)
	Net cash used in operating activities			(9,208	)		(8,673	)
Cash flows from investing activities:
	Proceeds from sales and maturities of short-term investments			3,535			4,671
	Purchases of short-term investments			–			(1,655	)
	Capital expenditures			(52	)		(646	)
	Net cash provided by investing activities			3,483			2,370
Cash flows from financing activities:
	Proceeds from issuance of common stock and warrants, net			7,443			350
Net increase/(decrease) in cash and cash equivalents				1,718			(5,953	)
Cash and cash equivalents, beginning of the period				3,035			8,626
Cash and cash equivalents, end of the period			$	4,753		$	2,673

See notes to condensed consolidated financial statements.

GENELABS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2003

1. Significant Accounting Policies

     Basis of Presentation

     Genelabs Technologies, Inc. is a biopharmaceutical company focused on the discovery and development of novel pharmaceutical products to improve human health. We have built drug discovery and clinical development capabilities that can support various research and development projects. We are currently concentrating our capabilities on developing a late-stage product for lupus and discovering novel lead compounds that selectively inhibit replication of the hepatitis C virus.

     The accompanying unaudited condensed consolidated financial statements include the accounts of Genelabs Technologies, Inc. and its wholly owned subsidiaries, Accelerated Clinical Research Organization, Inc., Genelabs Diagnostic, Inc. and Genelabs Europe B.V. Genelabs Technologies, Inc. and its subsidiaries are collectively referred to as Genelabs or the Company. All intercompany accounts and transactions have been eliminated. The Company operates in one business segment, the discovery and development of pharmaceutical products. Genelabs accounts for its diagnostics operation, Genelabs Diagnostics Pte. Ltd., referred to as GLD, as a discontinued operation.

     These financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three month and six month periods ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.

     These unaudited condensed consolidated financial statements are meant to be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

     The Company’s consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business for the foreseeable future.

     The preparation of financial statements in conformity with GAAP 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.

2. Comprehensive Loss

     During the three month and six month periods ended June 30, 2003 and 2002, the Company’s comprehensive loss was the same as the net loss.

3. 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. The following table presents information showing the effects to the reported net loss and net loss per share if Genelabs had accounted for employee stock-based compensation using the fair value method (in thousands, except per share amounts):

		For the three months ended						For the six months ended
		June 30, 2003			June 30, 2002			June 30, 2003			June 30, 2002
Net loss as reported		$	(4,280	)	$	(4,232	)	$	(8,480	)	$	(7,799	)
Stock-based employee compensation cost:
	Included in net loss as reported		–			–			–			–
	Amount that would have been included in net loss if we had accounted for all stock-based employee compensation at its theoretical (Black-Scholes) fair value		(825	)		(930	)		(1,258	)		(1,610	)
Pro forma net loss as if the fair value method had been applied to all awards		$	(5,105	)	$	(5,162	)	$	(9,738	)	$	(9,409	)
Net loss per share as reported		$	(0.07	)	$	(0.08	)	$	(0.15	)	$	(0.16	)
Pro forma net loss per share as if the fair value method had been applied to all awards		$	(0.09	)	$	(0.10	)	$	(0.17	)	$	(0.19	)

4. Restructuring Charges

     In February 2003, Genelabs reduced its workforce by approximately 20%, or 20 employees. The workforce reductions occurred in the drug discovery research and general and administrative areas. Genelabs did not make any reductions to its drug development staff working on its investigational drug Prestara™ for systemic lupus erythematosus. Termination and other costs associated with the reduction in workforce totaled $0.3 million, substantially all of which had been paid out as of June 30, 2003.

5. Private Placement Financing

     On May 2, 2003, Genelabs completed the sale of 8.1 million shares of its common stock at a price of $1.00 per share for gross proceeds of $8.1 million. In connection with the sale, Genelabs also issued warrants to purchase an additional 2.43 million shares of Genelabs common stock at an exercise price of $1.50 per share. Net proceeds from the placement are estimated to be approximately $7.3 million.

6. Subsequent Events

     On August 1, 2003, Genelabs completed the sale of 1,666,667 shares of its common stock at a price of $1.595 per share for gross proceeds of $2,658,333. In connection with the sale, Genelabs also issued warrants to purchase an additional 1,666,667 shares of Genelabs common stock at an exercise price of $1.50 per share. Net proceeds from the placement are estimated to be approximately $2.4 million.

     On August 7, 2003, Genelabs and a potential purchaser of GLD mutually terminated a February 2003 agreement for the sale of GLD.

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

Overview

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

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

• developing our late-stage product for lupus, Prestara™; and

• discovering novel lead compounds that selectively inhibit replication of the hepatitis C virus, or HCV.

     On August 8, 2003, after giving effect to a private placement completed on August 1, 2003, Genelabs had cash and cash equivalents totaling approximately $5.1 million. We estimate that our current cash resources are adequate to provide liquidity only into November 2003. Our auditors have included a going concern qualification in their opinion in our Annual Report on Form 10-K for 2002 because there is substantial doubt about the Company’s ability to continue as a going concern due to its historical negative cash flow and because we do not currently have sufficient committed capital to meet our projected operating needs for at least the next twelve months. In the event that Genelabs is unable to raise additional funds, we may be required to commence bankruptcy or similar proceedings, which could result in no value to the holders of the Genelabs common stock. Alternatively, we may be required to license or sell our rights in Prestara™ in a manner that could be adverse to Genelabs and our stockholders.

Results of Operations – Second Quarter 2003 compared to Second Quarter 2002

     Summary

     Genelabs’ net loss was $4.3 million for the three months ended June 30, 2003 compared to a net loss of $4.2 million for the three months ended June 30, 2002. Lower contract revenues and interest income approximately offset the savings from lower operating expenses in both research and development and general and administrative expenses.

     Contract Revenue

     The Company recorded contract revenue of $0.8 million in the second quarter of 2003, $0.5 million of which represents the recognition into income of a previously received up-front license payment from Watson Pharmaceuticals, Inc. This up-front license payment from Watson is being deferred and recognized as revenue over the term Genelabs’ management estimates that we have significant obligations to Watson, which extends to the submission of a complete response to the approvable letter from the U.S. Food and Drug Administration, or FDA, and the FDA reaching a final

decision regarding approval of our New Drug Application, or NDA. The date upon which we may receive a final FDA decision on approval will vary based on, among other things, the time period necessary for the enrollment of a sufficient number of patients in the clinical trial, the results of the trial, and the length of time the FDA will take to review the data submitted after the conclusion of the trial. Based on management’s estimates, Genelabs currently believes that an FDA decision on the NDA may not be delivered until December 2004. Therefore, the up-front payment from Watson is being amortized into revenue on a straight line-basis through December 2004.

     Our contract revenue of $0.8 million in the second quarter 2003 compares to $1.0 million for the second quarter of 2002. The decrease in contract revenue in the second quarter of 2003 compared to the second quarter of 2002 was primarily due to our change in estimate of the amortization period for the up-front payment received from Watson from a period ending March 2004 to a period ending December 2004 upon the FDA’s clarification of issues in the approvable letter we received in August 2002. The change in estimate of the amortization period began in the third quarter of 2002, and reduced contract revenue by $0.2 million in the second quarter of 2003 compared to the second quarter of 2002.

     Research and Development Expenses

     Research and development expenses were $3.8 million and $4.0 million for the second quarter 2003 and 2002, respectively. Research and development expenses include related salaries and benefits, clinical trial and related clinical manufacturing costs, contract and outside service fees, supplies and chemicals used in laboratories and allocated facilities and overhead costs. Research and development costs are expensed as incurred. There are three major categories of costs for which management separately tracks its research and development, or R&D, activities, which are represented in the table below (in thousands):

	For the three months ended
	June 30, 2003		June 30, 2002
Drug development (Prestara™)	$	1,447	$	1,198
Drug discovery (HCV & DNA-binding/antifungal)		1,128		1,404
Support costs & other R&D		1,196		1,356
Total research and development	$	3,771	$	3,958

     Drug development costs for Prestara, our investigational drug for lupus, were $0.2 million higher in the second quarter of 2003 compared to the second quarter of 2002. The increase in costs in the second quarter of 2003 compared to the second quarter of 2002 reflected the costs of conducting the confirmatory clinical trial measuring the effect of Prestara on the bone mineral density of women with lupus and were partially offset by lower outside medical and regulatory consulting costs that were incurred in the second quarter of 2002. During the second quarter of 2002, we were working with the FDA toward the goal of receiving an approvable letter following our receipt of the not-approvable letter in 2001. We subsequently received our approvable letter in August 2002. Drug discovery costs were lower by $0.3 million in the second quarter of 2003 compared to the second quarter of 2002 primarily as a result of a reduction in the drug discovery workforce that was implemented in February 2003. Support costs and other R&D, which is primarily comprised of costs necessary to maintain an R&D facility, such as rent, support staff, maintenance and utilities, is not tracked by management to specific R&D projects. These costs decreased $0.2 million in the second quarter of 2003 compared to the second quarter of 2002 due to a lower 2003 cost structure following the February 2003 reduction in workforce. In the second quarter of 2003, the majority of the drug discovery costs incurred were for our hepatitis C program, through which we are attempting to discover a new treatment for infection with HCV. In the second quarter of 2002, the majority of the drug discovery costs incurred were related to our DNA-binding program, specifically directed toward discovery of new antibacterials and antifungals.

     Genelabs began work on its current drug development program, Prestara™ for systemic lupus erythematosus, in 1993 when Genelabs licensed rights to Prestara from Stanford University. To develop this drug candidate, we have built internal clinical development capabilities including clinical trial design, monitoring, analysis and reporting, regulatory affairs and quality control and assurance. Direct costs incurred to build these capabilities and advance Prestara through clinical trials to its current approvable status with the FDA through June 30, 2003 have been approximately $38 million. Genelabs is targeting completion of enrollment in its current clinical trial by the end of the third quarter 2003, which would lead to completion of treatment of the last patient in the trial by the end of the first quarter 2004. However, this timeframe is dependent on outside physicians meeting their estimates for finding qualified patients willing to enroll in a clinical trial for our investigational drug. If we meet our enrollment projections and complete treatment in the clinical trial at the end of the first quarter 2004, Genelabs expects that analysis of the data, submission to the FDA if the results are positive and the FDA’s review would take until the end of 2004. However, this timeframe is also uncertain since items such as unexpected results or incomplete patient records could require additional time, and we are dependent on the FDA to meet their review time of six months or less as specified under the Prescription Drug User Fee Act, referred to as PDUFA. If the clinical trial results are positive and the FDA approves Prestara for lupus, Genelabs expects to continue work on this project, seeking approval in other countries and investigating other indications and potential uses of the investigational drug. If the clinical trial results are not positive and the FDA does not approve Prestara for lupus, Genelabs plans to evaluate the results and requirements for approval prior to making a decision on further development.

     Genelabs’ current drug discovery efforts have evolved from a program that started in 1995 and initially focused on DNA as a target for drug intervention. Since initiating this drug discovery program, Genelabs has built medicinal chemistry, combinatorial chemistry, computational modeling, molecular biology, assay development and high-throughput screening, drug metabolism, pharmacokinetics and toxicology capabilities. Genelabs has incurred direct drug discovery costs for these efforts through June 30, 2003 of approximately $31 million, which, in addition to building these drug discovery capabilities, includes the Company’s DNA-binding drug discovery efforts, from which we generated lead compounds for fungal and bacterial infections as well as our preclinical candidate for Aspergillus, an often fatal systemic fungal infection, and our more recent efforts toward identifying a new drug to combat infection with HCV. Due to the nature of drug discovery research, we cannot reliably estimate the outcome of scientific experiments, many of which will impact the design and conduct of subsequent scientific experiments, and all of which provide additional information on both the direction of the research program and likelihood of its success. As such, the potential timing for key future events that may occur in our drug discovery programs cannot reliably be estimated and we cannot estimate whether a compound will advance to a later stage of development or when we may determine that a program is no longer viable for potentially producing a drug candidate. We also cannot reasonably predict the costs to reach these stages, and cannot predict whether any of our compounds will result in commercial products or lead to revenue for the Company. Management continually evaluates the status of our drug discovery research programs and expects to continue to devote resources toward our hepatitis C drug discovery program, while at the same time managing the level of expenditures to balance advancement of potential product candidates against Genelabs’ limited cash resources and the cash requirements for development of Prestara.

     General and Administrative Expenses

     General and administrative expenses were $1.5 million for the second quarter of 2003 compared to $1.6 million for the second quarter of 2002. Our general and administrative expenses consist primarily of personnel costs for executive management, finance, marketing, business development, human resources and legal departments, as well as professional expenses, such as legal and audit, and facilities costs such as rent and insurance. The decrease in general and administrative expenses in the second quarter of 2003 compared to the second quarter of 2002 was primarily due to lower personnel costs as a result of the reduction in workforce implemented in February 2003.

Results of Operations – First Six Months 2003 compared to First Six Months 2002

     Summary

     Genelabs’ net loss was $8.5 million for the first six months of 2003 compared to a net loss of $7.8 million for the first six months of 2002. The increased net loss was due to lower contract revenue, interest income and income from the discontinued operations of the Company’s diagnostics subsidiary.

     Contract Revenue

     The Company recorded contract revenue of $1.5 million for the first six months of 2003, $1.0 million of which represents the recognition into income of a previously received up-front license payment from Watson Pharmaceuticals, Inc. This up-front license payment from Watson is being deferred and recognized as revenue over the term Genelabs’ management estimates that we have significant obligations to Watson, which extends to the submission of a complete response to the approvable letter from the FDA, and the FDA reaching a final decision regarding approval of the NDA. The date upon which we may receive a final FDA decision on approval will vary based on, among other things, the time period necessary for the enrollment of a sufficient number of patients in the clinical trial, the results of the trial, and the length of time the FDA will take to review the data submitted after the conclusion of the trial. Based on management’s estimates, Genelabs currently believes that an FDA decision on the NDA may not be delivered until December 2004. Therefore, the up-front payment from Watson is being amortized into revenue on a straight line-basis through December 2004.

     Contract revenue was $1.5 million in first six months of 2003 compared to $2.0 million for the first six months of 2002. The decrease in contract revenue in the second quarter of 2003 compared to the second quarter of 2002 was primarily due to our change in estimate of the amortization period for the up-front payment received from Watson from a period ending March 2004 to a period ending December 2004 upon the FDA’s clarification of issues in the approvable letter we received in August 2002. The change in estimate of the amortization period began in the third quarter of 2002, and reduced contract revenue by $0.5 million in the first six months of 2003 compared to the first six months of 2002.

     Research and Development Expenses

     Research and development expenses were $7.3 million for the first six months of both 2003 and 2002. Research and development expenses include related salaries and benefits, clinical trial and related clinical manufacturing costs, contract and outside service fees, supplies and chemicals used in laboratories and allocated facilities and overhead costs. Research and development costs are expensed as incurred. There are three major categories of costs for which management separately tracks its research and development activities, which are represented in the table below (in thousands):

	For the six months ended
	June 30, 2003		June 30, 2002
Drug development (Prestara™)	$	2,504	$	2,141
Drug discovery (HCV & DNA-binding/antifungal)		2,532		2,542
Support costs & other R&D		2,292		2,655
Total research and development	$	7,328	$	7,338

     Drug development costs for Prestara, an investigational drug for lupus, were $0.4 million higher in the first six months of 2003 compared to the first six months of 2002. The increase in costs in the first six months of 2003 compared to the first six months of 2002 reflected the costs of conducting the

confirmatory clinical trial measuring the effect of Prestara on the bone mineral density of women with lupus and were partially offset by lower outside medical and regulatory consulting costs that were incurred in the first six months of 2002. During the first six months of 2002 we were working with the FDA toward the goal of receiving an approvable letter following our receipt of the not-approvable letter in 2001. We subsequently received the approvable letter in August 2002. Drug discovery costs were similar in the first six months of 2003 compared to the first six months of 2002 as savings resulting from a reduction in the drug discovery workforce that was implemented in February 2003 were approximately offset by costs of implementing the reduction in workforce. Support costs and other R&D, which is primarily comprised of costs necessary to maintain an R&D facility, such as rent, support staff, maintenance and utilities, is not tracked by management to specific R&D projects. These costs decreased $0.4 million in the first six months of 2003 compared to the first six months of 2002 due to a lower 2003 cost structure following the February 2003 reduction in workforce and a lower provision in 2003 for employee bonuses. In the first six months of 2003 the majority of the drug discovery costs incurred were for our hepatitis C program, through which we are attempting to discover a new treatment for infection with the hepatitis C virus. In the first six months of 2002, the majority of the drug discovery costs incurred were related to our DNA-binding program, specifically directed toward discovery of new antibacterials and antifungals.

     General and Administrative Expenses

     General and administrative expenses were $2.9 million for both the first six months of 2003 and the first six months of 2002. Our general and administrative expenses consist primarily of personnel costs for executive management, finance, marketing, business development, human resources and legal departments, as well as professional expenses, such as legal and audit, and facilities costs such as rent and insurance. During the first six months of 2003 compared to the first six months of 2002, the savings resulting from lower personnel costs as a result of the reduction in workforce implemented in February 2003 were approximately offset by the costs of implementing the reduction in workforce.

     Interest Income

     Interest income was lower in the first six months of 2003 compared to the first six months of 2002 due to lower cash and short-term investments balances and lower interest rates.

     Income from Discontinued Operation of Diagnostics Subsidiary

     We account for our subsidiary Genelabs Diagnostics Pte. Ltd., referred to as GLD, as a discontinued operation because we plan to sell this business. Income from the operations of GLD was slightly lower in the first six months of 2003 compared to the first six months of 2002 because of higher marketing costs incurred in 2003 that more than offset increased sales revenue of GLD. In February 2003 we entered into an agreement for the sale of GLD to a potential purchaser which has been terminated by mutual agreement of the parties. We are presently in negotiations with other potential purchasers of GLD and believe that GLD will be divested during 2003.

Liquidity and Capital Resources

     At June 30, 2003, the Company had cash, cash equivalents and short-term investment balances totaling $4.8 million compared to $6.6 million at December 31, 2002. The decrease in cash, cash equivalents and short-term investments during the first six months of 2003 was primarily attributable to $9.2 million cash used in operations, partially offset by $7.4 million received from the sale of common stock. The cash used in operations funded our development of Prestara for lupus, the continued work on our HCV drug discovery program, and work toward the discovery of follow-on compounds to our antifungal preclinical drug candidate. On August 8, 2003, Genelabs had cash, cash equivalents and short-

term investment balances totaling approximately $5.1 million. Genelabs estimates that our current cash resources are adequate to provide liquidity only into November 2003.

     The ability of the Company to continue as a going concern is dependent upon our ability to achieve profitable operations and to obtain additional capital. The Company is aggressively seeking funding in order to satisfy its projected cash needs. The Company is pursuing the sale of its diagnostics operation and also negotiating licenses for the European and Japanese rights to Prestara, which, if completed, the company expects would provide additional cash resources to Genelabs. The Company may be unable to complete any of these transactions as currently contemplated or at all. Genelabs is also evaluating the sale of non-core assets and exploring other potential partnerships as additional ways to fund operations. However, we will continue to rely on outside sources of financing to meet our capital needs. The outcome of these matters cannot be predicted at this time. Further, there can be no assurance, assuming the Company successfully raises additional funds, that the Company will achieve positive cash flow. If the Company is not able to secure additional funding, we will be required to scale back our research and development programs, including clinical trials, and general and administrative activities and may not be able to continue in business. These condensed consolidated financial statements do not include any adjustments to the specific amounts and classifications of assets and liabilities, which might be necessary should the Company be unable to continue in business. The following are illustrations of potential impediments to our ability to successfully secure additional funds:

• our stock price and market capitalization are low, therefore there are limited funds we can raise through equity financings;

• our ability to successfully complete an additional near-term equity financing will be more difficult due to Nasdaq requirements that may require us to obtain shareholder approval as a condition to such financings and will be further impacted should we become unable to meet Nasdaq’s listing requirements;

• our ability to find a European marketing partner for Prestara would be negatively impacted if we receive indications that the EMEA’s review of our MAA is unlikely to result in approval of our application; and

• our research programs are in an early stage, therefore there are fewer opportunities to enter into collaborations with other companies and up-front payments for early-stage pharmaceutical research collaborations are generally smaller for projects that are further from potential marketability.

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

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

including any FDA actions, progress of our research and development programs and the status of corporate partnership agreements.

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

Risk Factors

     The following section summarizes risk factors which management believes are particularly relevant at this time. It is not possible to comprehensively address all risks that exist, but the following risks should be considered, in addition to other information that is included in our Annual Report on Form 10-K and other filings with the SEC, which shareholders and prospective investors are encouraged to review.

RISKS RELATED TO GENELABS

If we cannot obtain additional funds, we will not be able to carry out our business plans.

     On August 8, 2003, Genelabs had cash, cash equivalents and short-term investment balances totaling approximately $5.1 million. Genelabs estimates that its current cash resources, including the resources from the August 2003 private placement, are adequate to provide liquidity only into November 2003. Genelabs’ auditors have included a going concern qualification in their opinion in our Annual Report on Form 10-K for 2002 because there is substantial doubt about the Company’s ability to continue as a going concern due to its historical negative cash flow and because the Company does not currently have sufficient committed capital to meet its projected operating needs for at least the next twelve months. In the event that Genelabs is unable to raise additional funds, Genelabs may be required to commence bankruptcy or similar proceedings, which could result in no value to the holders of the Genelabs common stock. Alternatively, Genelabs may be required to license or sell is rights in Prestara™ in a manner that could be adverse to Genelabs and its stockholders.

     Though we plan to seek additional funds, which may include the sale of equity, sale of long-term investments, establishment of corporate partnerships, funding under government grants, licensing of our clinical data or intellectual property, royalty-sharing and/or other arrangements, it is possible that none of these efforts to seek additional funds will be successful. The sale of additional equity would dilute existing shareholders. If we do not sell equity, we may have to seek other sources of capital, such as strategic alliances, which may require us to grant third parties rights to our intellectual property assets, or by adversely renegotiating the terms of our existing collaboration. We have also been engaged in efforts to divest our Singapore-based diagnostics business, which we refer to as GLD. We entered into an agreement to sell GLD in February 2003, which has been terminated by mutual agreement of the parties. We are currently negotiating with other potential purchasers of the business. We may also need to change our operating plans. Longer-term, we plan to fund our operations principally from royalties on sales of Prestara by marketing partners. However, Prestara may never receive FDA approval, and, if it does, we may never generate revenue from sales of Prestara. Although we are currently seeking to enter into licensing agreements for the marketing rights to Prestara in Europe and Japan, we may fail to enter into such license agreements on acceptable terms, if at all. We also may be unable to find buyers willing to purchase our equity or to license our products or technology on commercially favorable terms, if at all. The unavailability of additional funds would harm our business by delaying or preventing the development, testing, regulatory approval, manufacturing or marketing of our products and technologies.

     The following are illustrations of potential impediments to our ability to successfully secure additional funds:

• our stock price and market capitalization are low, therefore there are limited funds we can raise through equity financings;

• our ability to successfully complete an additional near-term equity financing will be more difficult due to Nasdaq requirements that may require us to obtain shareholder approval as a condition to such financings and will be further impacted should we become unable to meet Nasdaq’s listing requirements;

• our ability to find a European marketing partner for Prestara would be negatively impacted if we receive indications that the EMEA’s review of our MAA is unlikely to result in approval of our application; and

• our research programs are in an early stage, therefore there are fewer opportunities to enter into collaborations with other companies and up-front payments for early-stage pharmaceutical research collaborations are generally smaller for projects that are further from potential marketability.

     FDA actions with respect to our NDA for Prestara will have a material impact on our ability to successfully secure funding, the amount and terms of funding available and our ability to successfully secure such funding. If Prestara™ is ultimately approved for marketing in the U.S., Genelabs may receive a milestone payment of up to $45 million and significant royalties on Watson’s net sales of Prestara. However, the FDA may never approve Prestara and, even if they do, we may never receive a milestone payment or royalties on net sales.

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

We have incurred losses each year since our inception and may not be profitable in the near future or at all.

     We have incurred losses each year since our inception and have accumulated approximately $193 million in net losses through June 30, 2003, including a net loss of $8.5 million in the first half of 2003 and $16 million in the year ended December 31, 2002. In 2003 we have been consuming, and currently expect to continue to consume, cash at an average rate of approximately $1.5 million per month. If the FDA approves Prestara, we anticipate realizing a net loss at least until Prestara is sufficiently accepted by the market, and we may never achieve profitability. If the FDA does not approve Prestara, we may never be profitable and our revenues may never be sufficient to fund operations.

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

     Genelabs has focused its development efforts to date on conducting clinical trials for an investigational new drug, Prestara, also referred to as GL701, Aslera™ and Anastar™, for the treatment of women with systemic lupus erythematosus, or lupus. Lupus is a severe, chronic and debilitating autoimmune disease that can affect the musculoskeletal and nervous systems, lungs, heart, kidneys, skin

and joints. Prestara is a pharmaceutical formulation containing highly purified prasterone, the synthetic equivalent of dehydroepiandrosterone or DHEA, a naturally occurring hormone.

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

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

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

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

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

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

     Similar regulatory requirements exist in Japan and elsewhere in the world. Genelabs has not conducted any clinical trials for Prestara for lupus in other countries. We plan to enter into collaborations or licensing agreements for commercializing Prestara in other areas with pharmaceutical companies that have resources greater than Genelabs. If we do not enter into these agreements, we may

not be able to sell, or might face delays related to commercial introduction of, Prestara in these other territories, because we lack the necessary resources.

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

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

• availability and level of reimbursement by insurance companies or government programs such as Medicaid;

• the price of Prestara relative to other drugs for lupus treatment;

• the perception by patients, physicians and other members of the health care community of the effectiveness and safety of Prestara for the treatment of lupus;

• the effectiveness of sales and marketing efforts by our licensees;

• side effects;

• competition from other prescription and over-the-counter products; and

• unfavorable publicity concerning Prestara or other drugs on the market.

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

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

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

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

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

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

• the unavailability of adequate quantities of the active ingredient for commercial sale;

• the loss of a supplier’s or manufacturer’s regulatory approval;

• the failure of a supplier or manufacturer to meet regulatory agency pre-approval inspection requirements;

• the failure of a supplier or manufacturer to maintain compliance with ongoing regulatory agency requirements;

• the inability to develop alternative sources in a timely manner or at all;

• an interruption in supply of prasterone or finished product; and

• competing demands on the contract manufacturer’s capacity, for example, shifting manufacturing priorities to their own products or more profitable products for other customers.

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

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

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

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

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

     The active ingredient in Prestara is prasterone, more commonly known as dehydroepiandrosterone, or DHEA. DHEA is a compound that has been in the public domain for many years. It is not possible to obtain patent protection for the chemical compound anywhere in the world. Genelabs licensed two United States patents covering uses of DHEA in treating lupus from Stanford University in 1993. The Stanford patents expire in 2015 and the license expires when the patents expire. In addition, we have filed patent applications covering additional uses for Prestara and various pharmaceutical formulations and intend to file additional applications as appropriate. We have filed patent applications covering compounds from our drug discovery programs; however, no patents are currently issued. A number of patents have issued covering Genelabs’ drug discovery technologies and

methods related to selective regulation of gene expression and the control of viral infections. A number of patent applications are pending.

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

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

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

     If Genelabs discovers compounds that have the potential to be drugs, public information about our research success may lead other companies with greater resources to focus more efforts in areas similar to ours. Genelabs has limited human and financial resources. Creation of the type of compounds we seek to discover requires sophisticated and expensive lab equipment and facilities, a team of scientists with advanced scientific knowledge in many disciplines such as chemistry, biochemistry and biology, and time and effort. Large pharmaceutical companies have access to the latest equipment and have many more personnel available to focus on solving particular research problems, including those that Genelabs is investigating. Therefore, even if our research programs are successful, we have a competitive disadvantage.

INDUSTRY RISKS

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

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

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

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

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

MARKET RISKS

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

     The market price of our common stock, like the stock prices of many publicly traded biopharmaceutical companies, has been and will probably continue to be highly volatile. Between January 1, 2002 and December 31, 2002, the price of our common stock fluctuated between $0.63 and $3.55 per share. Between January 1, 2003 and August 8, 2003, the price of our common stock fluctuated between $1.12 and $2.10 per share. In addition to the factors discussed in this Risk Factors section, a variety of events can impact the stock price, including the low percentage of institutional ownership of our stock, which contributes to lack of stability for the stock price. The availability of a large block of stock for sale in relation to our normal trading volume could also result in a decline in the market price of our common stock.

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

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

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

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

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

PART II — OTHER INFORMATION

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

     On June 10, 2003, we held our annual meeting of shareholders. Shareholders voted on four proposals at the meeting and the voting results were as follows:

1. Election of our Directors:

	Affirmative		Withheld
	Votes		Votes
Irene A. Chow		41,048,985		3,234,113
J. Richard Crout, M.D.		42,698,471		1,584,627
Thomas E. Dewey, Jr.		42,693,911		1,589,187
Arthur Gray, Jr.		42,695,775		1,587,323
H. H. Haight		42,698,941		1,584,157
Alan Y. Kwan		42,646,596		1,636,502
James A. D. Smith		41,807,311		2,475,787
Nina K. Wang		42,602,149		1,680,949

2.	A proposal to approve an amendment to the Company’s Articles of Incorporation increasing the number of authorized shares of common stock by 50,000,000 shares was approved with 41,757,504 affirmative votes, 2,365,636 negative votes and 159,958 abstentions.
3.	A proposal to approve an amendment to the Company’s 2001 Stock Option Plan increasing the number of shares of common stock reserved and available for issuance under the plan by 2,000,000 shares was approved with 42,166,008 affirmative votes, 1,953,562 negative votes and 163,528 abstentions.
4.	A proposal to ratify the selection of Ernst & Young LLP as our independent auditors for the fiscal year ending December 31, 2003 was approved with 43,940,472 affirmative votes, 271,315 negative votes, and 71,311 abstentions.

Item 6. Exhibits and Reports on Form 8-K

(b) Reports on Form 8-K

     During the quarter ended June 30, 2003, we filed the following Current Reports on Form 8-K:

     On May 5, 2003, we filed a Current Report on Form 8-K attaching a press release and a Securities Purchase Agreement for a private placement of common stock and warrants to purchase common stock.

     On May 16, 2003, we filed a Current Report on Form 8-K attaching a press release for our first quarter 2003 operating results.

     On June 10, 2003, we filed a Current Report on Form 8-K attaching a press release announcing and providing highlights from a corporate update to be presented at our annual meeting of shareholders

After the quarter ended June 30, 2003, we filed the following Current Report on Form 8-K:

     On August 4, 2003, we filed a Current Report on Form 8-K attaching a press release and a Securities Purchase Agreement for a private placement of common stock and warrants to purchase common stock.

SIGNATURES

     Pursuant to the requirements 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. (Registrant)
	Principal Executive Officer:
Date:August 13, 2003	/s/ IRENE A. CHOW Irene A. Chow Chairman and Chief Executive Officer
	Principal Financial and Accounting Officer:
Date:August 13, 2003	/s/ MATTHEW M. LOAR Matthew M. Loar Chief Financial Officer

EXHIBIT INDEX

Exhibit
Number	Description
10.04	Registrant’s Amended and Renewed 1994 Annual and Long-Term Incentive Based Compensation Plan.
31.1	Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
31.2	Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
32	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

EX-10.04 3 f91625exv10w04.txt EXHIBIT 10.04 EXHIBIT 10.04 GENELABS TECHNOLOGIES, INC. ANNUAL & LONG-TERM INCENTIVE BASED COMPENSATION PLAN Effective July 29, 1994, Amended October 7, 1994 Amended & Renewed July 29, 1997 Renewed June 1, 2000 for term July 29, 2000 through July 28, 2003 and Amended February 2, 2001 Amended and Renewed July 18, 2003 for term July 29, 2003 through July 28, 2006 1. PURPOSE The purpose of this Genelabs Technologies, Inc. Annual and Long-Term Incentive Based Compensation Program (the "Plan") is to enable Genelabs Technologies, Inc. and its wholly owned subsidiaries (the "Company") to (i) attract, retain and motivate employees who contribute to the success of the Company, (ii) reward performance in the achievement of corporate objectives and, (iii) provide an incentive to senior executives and designated key employees to increase the profitability and advance the interests of the Company through participation in a bonus plan in accordance with the provisions of this Plan. 2. DEFINITIONS For purposes of this Plan, the following terms shall be defined as follows: a. "Award" means an Incentive Award that may be granted to a Participant upon completion of certain performance conditions set forth in this Plan. b. "Award Cycle" means a period during which Company and individual performance is measured as determined by the Board of Directors of the Company (the "Board") from time to time. Participants may participate in one or more Award Cycles, which may run concurrently or successively. c. "Award Level" means one of three categories into which Participants are classified as set forth in Section 5 of this Plan. - 1 - d. "Company Objectives" means the criteria of measurement of individual, division, department or company wide performance goals. In the case of individual, division or departmental performance goals, these are established by the Participant's manager and approved by management of the Company; in the case of company-wide performance goals, these are approved by the Board, pursuant to Section 4 of this Plan for each Award Cycle, including but not limited to budgeting and cash flow objectives. e. "Fiscal Year" means the fiscal year of the Company, which is January 1 to December 31. f. "Incentive Award" means an Award that may be granted to a Participant upon completion of Company Objectives pursuant to the terms of Sections 4, 5, and 6 of this Plan. g. "Incentive Percentage" means the percentage, if any, of the total base salaries of the Participants during an Award Cycle, as determined by the Board, in the case of company wide performance or performance of senior executives, and as determined by management, in the case of individual, division or department performance, for each Award Cycle if certain Company Objectives are satisfied. h. "Participant" means any regular employee of the Company who has been with the Company a minimum of 90 days. 3. MAXIMUM AMOUNT OF AWARDS There is no maximum limit on aggregate Awards paid with respect to any Award Level. 4. DETERMINATION OF COMPANY AND INDIVIDUAL PERFORMANCE OBJECTIVES a. Company Objectives. With respect to each Award Cycle, the Board shall establish the company-wide Company Objectives, based upon the recommendations of executive management. The measurement of the Company Objectives for each Award Cycle shall be based on (i) the attainment of certain division, department or company wide strategic objectives, and (ii) the - 2 - attainment of certain individual, division, department or company-wide financial objectives, including annual budgeted spending and/or annual revenue/income and cash flow targets. b. Written Description. The Company Objectives shall be set forth in writing and communicated to each Participant during each Award Cycle. 5. CALCULATION OF AMOUNT OF INCENTIVE AWARD a. Award Levels. Unless otherwise determined by the Board, each Participant will be eligible to receive an Incentive Award in an amount calculated according to the Award Level for such Participant set forth below. A Participant may participate in more than one Award Level if such Participant is eligible for such Award Level.

Award Level Description Participant ----- ----------- ----------- 1 Annual Award All Participants 2 Annual Award Directors and Above 3 Long-Term Vice Presidents and Above Incentive or at the discretion of the HR Committee

Unless otherwise determined by the Board the achievement of Company Objectives will be apportioned for each Award Level as follows: (1) Award Level 1 - Annual Award. A Participant shall be eligible to receive up to ten (10%) percent of his or her salary multiplied by the applicable percentage for completion of Company objectives. (2) Award Level 2 - Annual Award. A designated Participant shall be eligible to receive up to forty (40%) percent of his or her salary as determined pursuant to Section 5(b). (3) Award Level 3 - Long-Term Incentive. A designated Participant shall be eligible to receive up to - 3 - thirty-five (35%) percent of his or her salary on a deferral basis (Long-Term Incentive) over a period of three (3) years paid 33% each year. This discretionary level may include any employee of the Company approved by the CEO and presented at the HR Committee. b. Percentage of Salary. With respect to each Award Cycle, the Board shall establish for all Participants based upon the recommendations of the Chief Executive Officer, the Incentive Percentage to be paid to each organizational level for achievement of each of the Company Objectives. c. Incentive Awards made to a designated Participant. Incentive Awards made to Participants in Award Level 3 (Long-Term Incentive) shall be paid in accordance with the following vesting schedule, unless otherwise determined by the Board of Directors:

YEARS OF EMPLOYMENT PERCENTAGE BASED ON AWARD CYCLE OF AWARD (JAN 1 - DEC 31) Less than one full year of up to 10% employment from the first day of pro-rated the Award Cycle (discretionary) One full year of service (1/3) from the first day of the 33.3% of Award previous Award Cycle Two full years of service (2/3) 66.6% of Award Three or more full years (3/3) of service 100% of Award

6. GRANT OF THE INCENTIVE AWARDS a. As soon as practicable after the end of an Award Cycle, but no later than April 1 following the end of such Award Cycle, the Board shall determine whether the Company has achieved any of the Company Objectives. Based upon (A) the degree of achievement of Company Objectives and (B) the Incentive Percentage determined by the Board for the Award Cycle, the Board - 4 - shall grant an Incentive Award to Participants in accordance with Section 5 of this Plan. b. Participants who do not complete 12 months of employment in the calendar year shall be eligible for a pro-rated share of an Award with respect to such Award Cycle. 7. TERMINATION OF SERVICE If, during an Award Cycle, a Participant's employment with the Company terminates by reason of death, permanent disability (as defined in the Company's group long-term disability plan) or retirement, the Board in its sole discretion may cause to be paid to the Participant or his or her designated beneficiary an Award, or a pro-rated share of an Award, if any, based upon the service performed during the Award Cycle and upon the degree of achievement of Company Objectives for such Award Cycle. Any such payment of an Award shall be made to the Participant or his or her beneficiary in the Fiscal Year following permanent disability, death or retirement. A Participant who terminates employment with the Company prior to the end of an Award Cycle for any reason other than death, permanent disability or retirement shall not be entitled to receive any Award. 8. TIME AND FORM OF PAYMENT An Award shall be paid to the Participant or his or her designated beneficiary as soon as practicable after the end of the Award Cycle, or in the case of a Level 3 Award, at the time that such Award becomes vested pursuant to Section 5(c) of this Plan, in cash. The form of payment of Awards in Award Level 3 is intended to be primarily in the form of cash. Notwithstanding the foregoing, Awards will be paid to Participants who are Directors or Officers (as defined in Section 16 of the Exchange Act of 1934, as amended) of the Company only in the form of cash. 9. DESIGNATION OF BENEFICIARY The effective designation of a beneficiary under the Company's Section 401(k) Plan (including any required spousal consent) shall for all purposes also be deemed a designation of beneficiary under this Plan. If no such beneficiary designation is in effect at the time of a - 5 - Participant's death, or if no designated beneficiary survives the Participant, or if such designation conflicts with the law, the payment of the amount, if any, payable under the Plan upon his or her death shall be made to the Participant's estate. If the Company is in doubt as to the right of any person to receive any amount, the Company may retain such amount, without liability for any interest thereon, until the rights thereto are determined, or the Company may pay such amount into any court of appropriate jurisdiction, and such payment shall be a complete discharge of the liability of the Company. 10. NO CONTINUED EMPLOYMENT Nothing in this Plan or any Award granted hereunder shall confer upon any Participant any right to continue in the employ of the Company or interfere in any way with the right of the Company to terminate his or her employment at any time. No Award payable under the Plan shall be deemed salary or compensation for the purpose of computing benefits under any other employee benefit plan or other arrangement of the Company for the benefit of its employees unless the Company shall determine otherwise. 11. LEAVE OF ABSENCE Absence on leave approved by the Company shall not be considered interruption or termination of employment for any purposes of the Plan unless the Board determines otherwise; provided, however, that no Award may be granted to an employee while he or she is absent on leave. 12. ADMINISTRATION The Plan shall be administered by the Board or by the Human Resources Committee or such other committee appointed by the Board. The Board shall have full power, discretion and authority to interpret, review, renew, and administer the Plan. The Board's interpretation and application of the Plan shall be binding and conclusive for all persons for all purposes. The Board may conclusively rely upon any opinion, computations or other advice received from any such counsel, independent auditors or consultants. The Board's actions may include, but not be limited to, the determination of: a. the employees of the Company to be designated as - 6 - Participants upon recommendation of the Chief Executive Officer of the Company, b. the Incentive Percentage for each Award Cycle, c. the achievement of Company Objectives, d. the Award Levels or the amount of any Award payable with respect to any Award Level, and e. the specific terms, conditions and restrictions of any Award consistent with the terms of this Plan. 13. WITHHOLDING The amount payable to a Participant or his or her beneficiary shall be reduced by any amount that the Company is required to withhold with respect to such payments under the then applicable provisions of federal, foreign, state or local income tax laws unless the Participant satisfies such withholding requirements in some other manner approved by the Board. 14. UNFUNDED PLAN; GOVERNING LAW Nothing contained in the Plan, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind, or a fiduciary relationship between the Company or the Board, or both, on the one hand, and any Participant or other person on the other. To the extent that any person acquires a right to receive payments from the Company under this Plan, such right shall be no greater than the right of an unsecured general creditor of the Company. All payments to be made hereunder shall be paid from the general funds of the Company and no special or separate fund shall be established and no segregation of assets shall be made to assure payments of such amounts. The Plan is an unfunded incentive compensation plan and all rights hereunder shall be governed by and construed in accordance with the laws of California. 15. AMENDMENT OR TERMINATION OF THE PLAN The Plan shall be effective on July 29, 1994. Awards may be granted pursuant to this Plan from time to time within a period of three (3) years from the date on which this Plan is approved by the Board. The Board may terminate this Plan - 7 - at any time, or amend it from time to time. - 8 - EX-31.1 4 f91625exv31w1.txt EXHIBIT 31.1 EXHIBIT 31.1 Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended CERTIFICATION I, Irene A. Chow, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Genelabs Technologies, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal controls over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal controls over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: August 13, 2003 /s/ Irene A. Chow ----------------------------- Irene A. Chow Chairman and Chief Executive Officer EX-31.2 5 f91625exv31w2.txt EXHIBIT 31.2 EXHIBIT 31.2 Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended CERTIFICATION I, Matthew M. Loar, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Genelabs Technologies, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal controls over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal controls over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: August 13, 2003 /s/ Matthew M. Loar ------------------------ Matthew M. Loar Chief Financial Officer EX-32 6 f91625exv32.txt EXHIBIT 32 EXHIBIT 32 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002* Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C Section 1350, as adopted), Irene A. Chow, Chairman and Chief Executive Officer of Genelabs Technologies, Inc. (the "Company"), and Matthew M. Loar, Chief Financial Officer of the Company, each hereby certifies that, to the best of her/his knowledge: 1. The Company's Quarterly Report on Form 10-Q for the period ended June 30, 2003, to which this Certification is attached as Exhibit 32 (the "Periodic Report"), fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Periodic Report fairly presents, in all material respects, the financial condition of the Company at the end of the period covered by the Periodic Report and results of operations of the Company for the period covered by the Periodic Report. Dated: August 13, 2003 /s/ Irene A. Chow /s/ Matthew M. Loar - ------------------------------------ ---------------------- Irene A. Chow Matthew M. Loar Chairman and Chief Executive Officer Chief Financial Officer A signed original of this written statement required by Section 906, or other document authentication, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this statement required by section 906, has been provided to Genelabs Technologies and will be retained by Genelabs Technologies and furnished to the Securities and Exchange Commission ("SEC") or its staff upon request. - -------------- * This certification accompanies the Form 10-Q to which it relates, is not deemed filed with the SEC and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing. -----END PRIVACY-ENHANCED MESSAGE-----

EX-10.04

                                                                   EXHIBIT 10.04

                           GENELABS TECHNOLOGIES, INC.
                          ANNUAL & LONG-TERM INCENTIVE
                             BASED COMPENSATION PLAN

                Effective July 29, 1994, Amended October 7, 1994
                         Amended & Renewed July 29, 1997
          Renewed June 1, 2000 for term July 29, 2000 through July 28,
                        2003 and Amended February 2, 2001
        Amended and Renewed July 18, 2003 for term July 29, 2003 through
                                  July 28, 2006

1.       PURPOSE

         The purpose of this Genelabs Technologies, Inc. Annual and Long-Term
         Incentive Based Compensation Program (the "Plan") is to enable Genelabs
         Technologies, Inc. and its wholly owned subsidiaries (the "Company") to
         (i) attract, retain and motivate employees who contribute to the
         success of the Company, (ii) reward performance in the achievement of
         corporate objectives and, (iii) provide an incentive to senior
         executives and designated key employees to increase the profitability
         and advance the interests of the Company through participation in a
         bonus plan in accordance with the provisions of this Plan.

2.       DEFINITIONS

         For purposes of this Plan, the following terms shall be defined as
         follows:

         a.       "Award" means an Incentive Award that may be granted to a
                  Participant upon completion of certain performance conditions
                  set forth in this Plan.

         b.       "Award Cycle" means a period during which Company and
                  individual performance is measured as determined by the Board
                  of Directors of the Company (the "Board") from time to time.
                  Participants may participate in one or more Award Cycles,
                  which may run concurrently or successively.

         c.       "Award Level" means one of three categories into which
                  Participants are classified as set forth in Section 5 of this
                  Plan.


                                     - 1 -

         d.       "Company Objectives" means the criteria of measurement of
                  individual, division, department or company wide performance
                  goals. In the case of individual, division or departmental
                  performance goals, these are established by the Participant's
                  manager and approved by management of the Company; in the case
                  of company-wide performance goals, these are approved by the
                  Board, pursuant to Section 4 of this Plan for each Award
                  Cycle, including but not limited to budgeting and cash flow
                  objectives.

         e.       "Fiscal Year" means the fiscal year of the Company, which is
                  January 1 to December 31.

         f.       "Incentive Award" means an Award that may be granted to a
                  Participant upon completion of Company Objectives pursuant to
                  the terms of Sections 4, 5, and 6 of this Plan.

         g.       "Incentive Percentage" means the percentage, if any, of the
                  total base salaries of the Participants during an Award Cycle,
                  as determined by the Board, in the case of company wide
                  performance or performance of senior executives, and as
                  determined by management, in the case of individual, division
                  or department performance, for each Award Cycle if certain
                  Company Objectives are satisfied.

         h.       "Participant" means any regular employee of the Company who
                  has been with the Company a minimum of 90 days.

3.       MAXIMUM AMOUNT OF AWARDS

         There is no maximum limit on aggregate Awards paid with respect to any
         Award Level.

4.       DETERMINATION OF COMPANY AND INDIVIDUAL PERFORMANCE OBJECTIVES

         a.       Company Objectives. With respect to each Award Cycle, the
                  Board shall establish the company-wide Company Objectives,
                  based upon the recommendations of executive management. The
                  measurement of the Company Objectives for each Award Cycle
                  shall be based on (i) the attainment of certain division,
                  department or company wide strategic objectives, and (ii) the


                                     - 2 -

                  attainment of certain individual, division, department or
                  company-wide financial objectives, including annual budgeted
                  spending and/or annual revenue/income and cash flow targets.

         b.       Written Description. The Company Objectives shall be set forth
                  in writing and communicated to each Participant during each
                  Award Cycle.

5.       CALCULATION OF AMOUNT OF INCENTIVE AWARD

         a.       Award Levels. Unless otherwise determined by the Board, each
                  Participant will be eligible to receive an Incentive Award in
                  an amount calculated according to the Award Level for such
                  Participant set forth below. A Participant may participate in
                  more than one Award Level if such Participant is eligible for
                  such Award Level.



                       Award
                       Level     Description            Participant
                       -----     -----------            -----------
                                                  
                         1       Annual Award           All Participants

                         2       Annual Award           Directors and Above

                         3       Long-Term              Vice Presidents and Above
                                 Incentive              or at the discretion of
                                                        the HR Committee


         Unless otherwise determined by the Board the achievement of Company
         Objectives will be apportioned for each Award Level as follows:

                  (1)      Award Level 1 - Annual Award. A Participant shall be
                           eligible to receive up to ten (10%) percent of his or
                           her salary multiplied by the applicable percentage
                           for completion of Company objectives.

                  (2)      Award Level 2 - Annual Award. A designated
                           Participant shall be eligible to receive up to forty
                           (40%) percent of his or her salary as determined
                           pursuant to Section 5(b).

                  (3)      Award Level 3 - Long-Term Incentive. A designated
                           Participant shall be eligible to receive up to


                                     - 3 -

                           thirty-five (35%) percent of his or her salary on a
                           deferral basis (Long-Term Incentive) over a period of
                           three (3) years paid 33% each year. This
                           discretionary level may include any employee of the
                           Company approved by the CEO and presented at the HR
                           Committee.

         b.       Percentage of Salary. With respect to each Award Cycle, the
                  Board shall establish for all Participants based upon the
                  recommendations of the Chief Executive Officer, the Incentive
                  Percentage to be paid to each organizational level for
                  achievement of each of the Company Objectives.

         c.       Incentive Awards made to a designated Participant. Incentive
                  Awards made to Participants in Award Level 3 (Long-Term
                  Incentive) shall be paid in accordance with the following
                  vesting schedule, unless otherwise determined by the Board of
                  Directors:



                      YEARS OF EMPLOYMENT                   PERCENTAGE
                     BASED ON AWARD CYCLE                    OF AWARD
                       (JAN 1 - DEC 31)
                                                       
                  Less than one full year of                 up to 10%
                  employment  from the first day of          pro-rated
                  the Award Cycle                         (discretionary)

                  One full year of service                     (1/3)
                  from the first day of the               33.3% of Award
                  previous Award Cycle

                  Two full years of service                    (2/3)
                                                          66.6% of Award

                  Three or more full years                     (3/3)
                  of service                               100% of Award


6.       GRANT OF THE INCENTIVE AWARDS

         a.       As soon as practicable after the end of an Award Cycle, but no
                  later than April 1 following the end of such Award Cycle, the
                  Board shall determine whether the Company has achieved any of
                  the Company Objectives. Based upon (A) the degree of
                  achievement of Company Objectives and (B) the Incentive
                  Percentage determined by the Board for the Award Cycle, the
                  Board


                                     - 4 -

                  shall grant an Incentive Award to Participants in accordance
                  with Section 5 of this Plan.

         b.       Participants who do not complete 12 months of employment in
                  the calendar year shall be eligible for a pro-rated share of
                  an Award with respect to such Award Cycle.

7.       TERMINATION OF SERVICE

         If, during an Award Cycle, a Participant's employment with the Company
         terminates by reason of death, permanent disability (as defined in the
         Company's group long-term disability plan) or retirement, the Board in
         its sole discretion may cause to be paid to the Participant or his or
         her designated beneficiary an Award, or a pro-rated share of an Award,
         if any, based upon the service performed during the Award Cycle and
         upon the degree of achievement of Company Objectives for such Award
         Cycle. Any such payment of an Award shall be made to the Participant or
         his or her beneficiary in the Fiscal Year following permanent
         disability, death or retirement. A Participant who terminates
         employment with the Company prior to the end of an Award Cycle for any
         reason other than death, permanent disability or retirement shall not
         be entitled to receive any Award.

8.       TIME AND FORM OF PAYMENT

         An Award shall be paid to the Participant or his or her designated
         beneficiary as soon as practicable after the end of the Award Cycle, or
         in the case of a Level 3 Award, at the time that such Award becomes
         vested pursuant to Section 5(c) of this Plan, in cash. The form of
         payment of Awards in Award Level 3 is intended to be primarily in the
         form of cash. Notwithstanding the foregoing, Awards will be paid to
         Participants who are Directors or Officers (as defined in Section 16 of
         the Exchange Act of 1934, as amended) of the Company only in the form
         of cash.

9.       DESIGNATION OF BENEFICIARY

         The effective designation of a beneficiary under the Company's Section
         401(k) Plan (including any required spousal consent) shall for all
         purposes also be deemed a designation of beneficiary under this Plan.
         If no such beneficiary designation is in effect at the time of a


                                     - 5 -

         Participant's death, or if no designated beneficiary survives the
         Participant, or if such designation conflicts with the law, the payment
         of the amount, if any, payable under the Plan upon his or her death
         shall be made to the Participant's estate. If the Company is in doubt
         as to the right of any person to receive any amount, the Company may
         retain such amount, without liability for any interest thereon, until
         the rights thereto are determined, or the Company may pay such amount
         into any court of appropriate jurisdiction, and such payment shall be a
         complete discharge of the liability of the Company.

10.      NO CONTINUED EMPLOYMENT

         Nothing in this Plan or any Award granted hereunder shall confer upon
         any Participant any right to continue in the employ of the Company or
         interfere in any way with the right of the Company to terminate his or
         her employment at any time. No Award payable under the Plan shall be
         deemed salary or compensation for the purpose of computing benefits
         under any other employee benefit plan or other arrangement of the
         Company for the benefit of its employees unless the Company shall
         determine otherwise.

11.      LEAVE OF ABSENCE

         Absence on leave approved by the Company shall not be considered
         interruption or termination of employment for any purposes of the Plan
         unless the Board determines otherwise; provided, however, that no Award
         may be granted to an employee while he or she is absent on leave.

12.      ADMINISTRATION

         The Plan shall be administered by the Board or by the Human Resources
         Committee or such other committee appointed by the Board. The Board
         shall have full power, discretion and authority to interpret, review,
         renew, and administer the Plan. The Board's interpretation and
         application of the Plan shall be binding and conclusive for all persons
         for all purposes. The Board may conclusively rely upon any opinion,
         computations or other advice received from any such counsel,
         independent auditors or consultants. The Board's actions may include,
         but not be limited to, the determination of:

         a.       the employees of the Company to be designated as


                                     - 6 -

                  Participants upon recommendation of the Chief Executive
                  Officer of the Company,

         b.       the Incentive Percentage for each Award Cycle,

         c.       the achievement of Company Objectives,

         d.       the Award Levels or the amount of any Award payable with
                  respect to any Award Level, and

         e.       the specific terms, conditions and restrictions of any Award
                  consistent with the terms of this Plan.

13.      WITHHOLDING

         The amount payable to a Participant or his or her beneficiary shall be
         reduced by any amount that the Company is required to withhold with
         respect to such payments under the then applicable provisions of
         federal, foreign, state or local income tax laws unless the Participant
         satisfies such withholding requirements in some other manner approved
         by the Board.

14.      UNFUNDED PLAN; GOVERNING LAW

         Nothing contained in the Plan, and no action taken pursuant to its
         provisions, shall create or be construed to create a trust of any kind,
         or a fiduciary relationship between the Company or the Board, or both,
         on the one hand, and any Participant or other person on the other. To
         the extent that any person acquires a right to receive payments from
         the Company under this Plan, such right shall be no greater than the
         right of an unsecured general creditor of the Company. All payments to
         be made hereunder shall be paid from the general funds of the Company
         and no special or separate fund shall be established and no segregation
         of assets shall be made to assure payments of such amounts. The Plan is
         an unfunded incentive compensation plan and all rights hereunder shall
         be governed by and construed in accordance with the laws of California.

15.      AMENDMENT OR TERMINATION OF THE PLAN

         The Plan shall be effective on July 29, 1994. Awards may be granted
         pursuant to this Plan from time to time within a period of three (3)
         years from the date on which this Plan is approved by the Board. The
         Board may terminate this Plan


                                     - 7 -

         at any time, or amend it from time to time.



                                     - 8 -

EX-31.1

EXHIBIT 31.1 Certification of Chief Executive Officer pursuant to Rules
13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934,
as amended

                                  CERTIFICATION

         I, Irene A. Chow, certify that:

         1. I have reviewed this quarterly report on Form 10-Q of Genelabs
Technologies, Inc.;

         2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;

         3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

         4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

                  a) Designed such disclosure controls and procedures, or caused
         such disclosure controls and procedures to be designed under our
         supervision, to ensure that material information relating to the
         registrant, including its consolidated subsidiaries, is made known to
         us by others within those entities, particularly during the period in
         which this quarterly report is being prepared;

                  b) Evaluated the effectiveness of the registrant's disclosure
         controls and procedures and presented in this quarterly report our
         conclusions about the effectiveness of the disclosure controls and
         procedures as of the end of the period covered by this report based on
         such evaluation; and

                  c) Disclosed in this report any change in the registrant's
         internal controls over financial reporting that occurred during the
         registrant's most recent fiscal quarter that has materially affected,
         or is reasonably likely to materially affect, the registrant's internal
         controls over financial reporting; and

         5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

                  a) All significant deficiencies and material weaknesses in the
         design or operation of internal controls over financial reporting which
         are reasonably likely to adversely affect the registrant's ability to
         record, process, summarize and report financial information; and

                  b) Any fraud, whether or not material, that involves
         management or other employees who have a significant role in the
         registrant's internal controls over financial reporting.

Date:  August 13, 2003                /s/ Irene A. Chow
                                      -----------------------------
                                      Irene A. Chow
                                      Chairman and Chief Executive Officer

EX-31.2

EXHIBIT 31.2 Certification of Chief Financial Officer pursuant to Rules
13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934,
as amended

                                  CERTIFICATION

         I, Matthew M. Loar, certify that:

         1. I have reviewed this quarterly report on Form 10-Q of Genelabs
Technologies, Inc.;

         2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;

         3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

         4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

                  a) Designed such disclosure controls and procedures, or caused
         such disclosure controls and procedures to be designed under our
         supervision, to ensure that material information relating to the
         registrant, including its consolidated subsidiaries, is made known to
         us by others within those entities, particularly during the period in
         which this quarterly report is being prepared;

                  b) Evaluated the effectiveness of the registrant's disclosure
         controls and procedures and presented in this quarterly report our
         conclusions about the effectiveness of the disclosure controls and
         procedures as of the end of the period covered by this report based on
         such evaluation; and

                  c) Disclosed in this report any change in the registrant's
         internal controls over financial reporting that occurred during the
         registrant's most recent fiscal quarter that has materially affected,
         or is reasonably likely to materially affect, the registrant's internal
         controls over financial reporting; and

         5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

                  a) All significant deficiencies and material weaknesses in the
         design or operation of internal controls over financial reporting which
         are reasonably likely to adversely affect the registrant's ability to
         record, process, summarize and report financial information; and

                  b) Any fraud, whether or not material, that involves
         management or other employees who have a significant role in the
         registrant's internal controls over financial reporting.

Date:  August 13, 2003                              /s/ Matthew M. Loar
                                                    ------------------------
                                                     Matthew M. Loar
                                                     Chief Financial Officer

EX-32

EXHIBIT 32

                    CERTIFICATION OF CHIEF EXECUTIVE OFFICER
                      AND CHIEF FINANCIAL OFFICER PURSUANT
                TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002*

         Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C
Section 1350, as adopted), Irene A. Chow, Chairman and Chief Executive Officer
of Genelabs Technologies, Inc. (the "Company"), and Matthew M. Loar, Chief
Financial Officer of the Company, each hereby certifies that, to the best of
her/his knowledge:

         1. The Company's Quarterly Report on Form 10-Q for the period ended
June 30, 2003, to which this Certification is attached as Exhibit 32 (the
"Periodic Report"), fully complies with the requirements of Section 13(a) of the
Securities Exchange Act of 1934, as amended; and

         2. The information contained in the Periodic Report fairly presents, in
all material respects, the financial condition of the Company at the end of the
period covered by the Periodic Report and results of operations of the Company
for the period covered by the Periodic Report.

Dated: August 13, 2003

 /s/ Irene A. Chow                                       /s/ Matthew M. Loar
- ------------------------------------                     ----------------------
Irene A. Chow                                            Matthew M. Loar
Chairman and Chief Executive Officer                     Chief Financial Officer

A signed original of this written statement required by Section 906, or other
document authentication, acknowledging, or otherwise adopting the signature that
appears in typed form within the electronic version of this statement required
by section 906, has been provided to Genelabs Technologies and will be retained
by Genelabs Technologies and furnished to the Securities and Exchange Commission
("SEC") or its staff upon request.

- --------------
* This certification accompanies the Form 10-Q to which it relates, is not
deemed filed with the SEC and is not to be incorporated by reference into any
filing of the Company under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended (whether made before or after the
date of the Form 10-Q), irrespective of any general incorporation language
contained in such filing.