<PAGE>   1
                                                                      EXHIBIT 13

THE FOLLOWING INFORMATION IS INCORPORATED BY REFERENCE TO PART II ITEMS 5-8 OF
THE ANNUAL REPORT ON FORM 10-K

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements, which involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors (see "Factors that May Affect Future Results" below).

OVERVIEW

Medicis is the leading independent pharmaceutical company in the United States
focusing primarily on the treatment of dermatological conditions. The Company
offers prescription products and an over-the-counter ("OTC") product,
emphasizing the clinical effectiveness, quality, affordability and cosmetic
elegance of its products. Medicis has achieved a leading position in branded
products for the treatment of acne, acne-related conditions, dyschromias and
hyperpigmentation disorders and also offers the leading OTC fade cream product
in the United States. The Company has built its business through successfully
introducing prescription products such as DYNACIN(R) and TRIAZ(R) for the
treatment of acne, LUSTRA(R) for the treatment of skin dyschromia and
photoaging, as well as marketing ESOTERICA,(R) an OTC fade cream product line.
In addition, Medicis has acquired the dermatological assets LOPROX,(R)
TOPICORT(R) and A/T/S(R) from Hoechst Marion Roussel ("HMR") and LIDEX(R) and
SYNALAR(R) corticosteroid product lines from Syntex USA, Inc.
("Syntex").

      Prescription pharmaceuticals accounted for 77.0%, 77.0% and 86.5% of net
revenues in the fiscal years ending June 30, 1999 ("fiscal 1999"), June 30, 1998
("fiscal 1998") and June 30, 1997 ("fiscal 1997"), respectively.

      The Company derives a majority of its revenue from sales of the
DYNACIN,(R) TRIAZ,(R) and LIDEX(R) products, the newly developed and expanded
LUSTRA(R) line and the newly acquired LOPROX(R) and TOPICORT(R) products
(collectively the "Key Products"). The Company believes that sales of the Key
Products will constitute the majority of net revenues for the foreseeable
future. Accordingly, any factor adversely affecting the sale of the Key
Products, individually or collectively, would have a material adverse effect on
the Company's business, financial condition and results of operations. Each of
the Key Products could be rendered obsolete or uneconomical by regulatory or
competitive changes. The sale of Key Products could also be adversely affected
by other factors, including manufacturing or supply interruptions; the
development of new competitive pharmaceuticals to treat the conditions addressed
by the Key Products; technological advances; factors affecting the cost of
production; marketing or pricing actions by one or more of the Company's
competitors; changes in the prescribing practices of dermatologists; changes in
the reimbursement policies of third-party payors; product liability claims; the
outcome of disputes relating to trademarks, patents and other rights or other
factors.

      The Company's results of operations may vary from period to period due to
a variety of factors, including expenditures incurred to acquire, license and
promote pharmaceuticals; expenditures and timing relating to the acquisition and
integration of businesses; changes in the prescribing practices of
dermatologists; the introduction of new products by the Company or its
competitors; cost increases from third-party manufacturers; manufacturing and
supply interruptions; the availability and cost of raw materials; the mix of
products sold by the Company; changes in marketing and sales expenditures;
market acceptance of the Company's products; competitive pricing pressures; the
outcome of disputes relating to trademarks, patents and other rights; general
economic and industry conditions that affect customer demand and the Company's
level of research and development activities. In addition, the Company's
business has historically been subject to seasonal fluctuations, with lower
sales generally being experienced in the first quarter of each fiscal year. As a
result of customer buying patterns, a substantial portion of the Company's
revenues has been in the last month of each quarter. The Company schedules its
inventory purchases to meet anticipated customer demand. As a result, relatively
small delays in the receipt of manufactured products by the Company could result
in revenues being deferred or lost. The Company's operating expenses are based
upon anticipated sales levels, and a high percentage of the Company's operating
expenses are relatively fixed in the short term. Consequently, variations in the
timing of revenue recognition could cause significant fluctuations in operating
results from period to period and may result in unanticipated earnings
shortfalls or losses. There can be no assurance that the Company will maintain
or increase revenues or profitability or avoid losses in any future period.


                                       1
<PAGE>   2
      The Company recognizes revenues from sales upon shipment to its customers.
At the time of sale, the Company records reserves for returns based upon
estimates using historical experience. Sales are reported net of actual and
estimated product returns and net of pricing adjustments and/or discounts. The
Company applies royalty obligations to the cost of sales in the period the
corresponding sales are recognized.

      Medicis' customers include the nation's leading wholesale pharmaceutical
distributors, such as McKesson HBOC, Inc. ("McKesson"), Bergen Brunswig
Corporation ("Bergen Brunswig"), Cardinal Health, Inc. ("Cardinal"), Bindley
Western Industries, Inc. ("Bindley") and other major drug chains. During fiscal
1999, McKesson and Cardinal accounted for 18.0% and 14.1%, respectively, of the
Company's sales. During fiscal 1998, McKesson, Bergen Brunswig and Cardinal
accounted for 16.9%, 13.2% and 12.6%, respectively, of the Company's sales.
During fiscal 1997, McKesson, Cardinal and Bergen Brunswig accounted for 20.6%,
16.3% and 10.9%, respectively, of the Company's sales. The loss of any of these
customers' accounts could have a material adverse effect upon the Company's
business, financial condition or results of operations.

      The Company plans to spend substantial amounts of capital to continue the
research and development of pharmaceutical products. Actual expenditures will
depend upon the Company's financial condition, as well as the results of
clinical testing, delays or changes in government-required testing and approval
procedures, technological and competitive developments and strategic marketing
decisions. The Company may increase total expenditures for research and
development and expects that research and development expenditures as a
percentage of net revenues will fluctuate from period to period. The Company can
give no assurance that the research and development projects will provide
technologies or products that will be patentable, commercially feasible or
acceptable to government agencies whose approval may be necessary.

      The Company intends to seek additional acquisitions of products or
companies to leverage its existing distribution channels and marketing
infrastructure, and to aggressively market formulations of existing products.
The success of the Company's efforts is subject to a number of risks and
uncertainties including: dependence on sales of Key Products; integration of new
product acquisitions; risks associated with the GenDerm Corporation and
subsidiaries ("GenDerm") acquisition; reliance upon third-party manufacturers to
produce certain Key Products; the ability to effectively manage a changing
business; uncertainties related to pharmaceutical pricing and reimbursement; the
uncertainty of competitive forces within the pharmaceutical industry that affect
both the market for its products and the availability of product lines for
acquisitions that meet the Company's acquisition criteria. The future results of
operations, both annually and from quarter to quarter, are subject to a variety
of factors applicable to the Company and to the industries and markets in which
it operates.

      To enable Medicis to focus on its core marketing and sales activities, the
Company selectively out-sources certain non-sales and non-marketing functions,
such as laboratory research, manufacturing and warehousing. As the Company
expands its activities in these areas, additional financial resources are
expected to be utilized. The Company typically does not enter into long-term
manufacturing contracts with third-party manufacturers. Whether or not such
contracts exist, there can be no assurance that the Company will be able to
obtain adequate supplies of its products in a timely fashion, on acceptable
terms, or at all.

RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes to Consolidated Financial Statements
contained elsewhere herein. The following table sets forth certain data as a
percentage of net revenues for the periods indicated.


<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES                                                 June 30,
                                                   -----------------------------------------------
                                                      1999*            1998**           1997
--------------------------------------------------------------------------------------------------
<S>                                                   <C>              <C>             <C>
Net revenues                                          100.0%           100.0%          100.0%
Gross profit                                           81.5             82.0            77.3
Operating expenses                                     40.6             42.8            46.0
Operating income                                       40.9             39.2            31.3
Interest income, net                                    8.3              9.0             9.2
Income tax (expense) benefit                          (17.8)           (18.6)            1.6
                                                  ------------------------------------------------
Net income                                             31.4%            29.6%           42.1%
--------------------------------------------------------------------------------------------------
</TABLE>


                                       2
<PAGE>   3
*Absent tax-effected special charge for in-process research and development and
tax-effected gain on divested products

**Absent special charge for in-process research and development

      The following table reflects certain selected unaudited quarterly
operating results of the Company for each of the last eight quarters through the
quarter ended June 30, 1999. The Company believes that all necessary adjustments
have been included to fairly present the quarterly information. The operating
results for any quarter are not necessarily indicative of the results for any
future period. Gross profit does not include amortization of the related
intangibles.


FISCAL 1999* AND FISCAL 1998** ANALYSIS
(in thousands, except per share data)


<TABLE>
<CAPTION>
                                     September    December     March        June
----------------------------------------------------------------------------------
<S>                                  <C>         <C>         <C>         <C>
Net revenues                         $  24,780   $  28,016   $  30,183   $  33,892
                                     $  13,911   $  16,928   $  22,527   $  24,205
Gross profit                            20,073      22,700      25,158      27,305
                                        11,365      13,924      18,535      19,768
Operating expenses                      10,279      10,964      11,739      14,443
                                         6,403       7,718       9,871       9,220
Operating income                         9,794      11,736      13,419      12,862
                                         4,962       6,206       8,664      10,548
Net income                               8,089       8,976       9,708       9,883
                                         3,751       4,349       6,434       8,459
</TABLE>

NET INCOME PER COMMON SHARE:


<TABLE>
<CAPTION>
                                     September    December     March        June
----------------------------------------------------------------------------------
<S>                                  <C>         <C>         <C>         <C>
Basic                                $    0.29   $    0.32   $    0.34   $    0.35
                                     $    0.17   $    0.20   $    0.25   $    0.30
Diluted                                   0.28        0.30        0.33        0.34
                                          0.17        0.19        0.24        0.29
</TABLE>

SHARES USED IN COMPUTING NET INCOME PER COMMON SHARE:


<TABLE>
<CAPTION>
                                     September    December     March        June
----------------------------------------------------------------------------------
<S>                                  <C>         <C>         <C>         <C>
Basic                                   28,161      28,279      28,576      28,645
                                        21,471      21,552      25,326      28,127
Diluted                                 28,791      29,585      29,811      29,343
                                        22,366      22,429      26,329      28,909
</TABLE>

*Absent tax-effected special charge for in-process research and development in
December quarter; absent tax effected gain on divested products in March and
June quarters

**Absent special charge December quarter

      Quarterly results may vary from period to period due to a variety of
factors including: expenditures incurred to acquire, license and promote
pharmaceutical products; expenditures and timing relating to the acquisition and
integration of products or businesses; changes in the prescribing practices of
physicians; the introduction of new products by the Company or its competitors;
cost increases from third-party manufacturers; supply interruptions; the
availability and cost of raw materials; the mix of products sold by the Company;
changes in marketing and sales expenditures; market acceptance of the Company's
products; competitive pricing pressures; the outcome of disputes relating to
trademarks, patents and other rights; general economic and industry conditions
that affect customer demand and the Company's level of research and development
activities. There can be no assurance that the Company will maintain or increase
revenues or profitability or avoid losses in any future period.


YEARS ENDED JUNE 30, 1999 AND 1998

NET REVENUES. Net revenues for fiscal 1999 increased 50.7%, or $39.3 million, to
$116.9 million from $77.6 million for fiscal 1998. The Company's net revenues
increased in fiscal 1999 primarily as a result of both unit and dollar sales
growth associated with the Company's prescription products. The Company's
prescription products accounted for 77.0% of net revenues in fiscal 1999 and in
fiscal 1998. Net revenues of the Company's prescription



                                       3
<PAGE>   4
products grew 50.8%, or $30.3 million, to $90.0 million in 1999 from $59.7
million in fiscal 1998, primarily due to the continued growth of the DYNACIN(R)
and LUSTRA(R) products and the newly acquired LOPROX(R) line. In fiscal 1999,
the Company's OTC products, contract revenue and the physician-dispensed
division accounted for 23.0% of net revenues. In fiscal 1998, the Company's OTC
products and physician-dispensed division accounted for 23.0% of net revenues.

GROSS PROFIT. Gross profit during fiscal 1999 increased 49.8%, or $31.6 million,
to $95.2 million from $63.6 million in fiscal 1998. As a percentage of net
revenues, gross profit was 81.5% and 82.0% in fiscal 1999 and fiscal 1998,
respectively.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses in fiscal 1999 increased 39.4%, or $10.8 million, to
$38.2 million from $27.4 million in fiscal 1998. This increase was primarily
attributable to an increase in personnel costs. The increase in personnel costs
was primarily due to an increase in the number of employees to 144 in fiscal
1999 from 125 in fiscal 1998 and yearly salary escalations for existing
employees. The increase was also due to promotional costs associated with the
sampling and advertising of the Company's products, promotional and
administrative costs associated with the EXOREX(TM) joint venture with IMX
Pharmaceuticals, Inc. ("IMX") and variable costs commensurate with increased
sales volumes. Selling, general and administrative expenses as a percentage of
net revenues in fiscal 1999 decreased 2.7 percentage points, to 32.7% from 35.4%
in fiscal 1998, primarily attributable to a decrease in promotional and
personnel costs as a percentage of sales.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses in fiscal
1999 increased 17.7%, or $0.5 million, to $3.4 million from $2.9 million in
fiscal 1998. The increase is primarily due to development efforts on
LUSTRA-AF(TM) and DYNACIN(R) 75 mg. line extensions in the fourth quarter of
fiscal 1999, development efforts related to new products and expenses associated
with the clinical support of the Company's existing products.

DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization expenses
in fiscal 1999 increased 100.1%, or $2.9 million, to $5.8 million from $2.9
million in fiscal 1998. This increase is primarily attributable to the
amortization of the purchase price of the LOPROX,(R) TOPICORT(R) and A/T/S(R)
products purchased by the Company in November 1998. The Company is amortizing
this purchase price over a 25-year period. The Company's depreciation and
amortization also increased due to the full year of amortization of the
intangible assets acquired in connection with the acquisition of GenDerm in
December 1997.

IN-PROCESS RESEARCH AND DEVELOPMENT. In fiscal 1999, the Company recorded a $9.5
million charge to operations as in-process research and development as part of
the allocated purchase price on the acquisition of the LOPROX, (R) TOPICORT(R)
and A/T/S(R) products. The acquired in-process research and development consists
of technologies related to new indications and forms of certain products
acquired. The acquired in-process research and development projects are in
various stages of development, have not reached technological feasibility and
have no known alternative uses.

         The nature and efforts required to develop the acquired in-process
research and development into commercially viable products include completion of
the development stages of the commercially viable products, clinical trial
testing and FDA approval and commercialization. Due to the nature of the
pharmaceutical development process, the Company anticipates incurring additional
costs to develop these products. However, there is no certainty that any of
these development efforts will result in commercially viable products. During
the upcoming fiscal year, the Company anticipates research and development
expenditures of approximately $500,000 relating to the development of
commercially viable products. Such amounts may increase if the FDA should
require additional studies, testing or supplemental information.

         In fiscal 1998, the Company recorded a $35.4 million charge to
operations as in-process research and development as part of the allocated
purchase price of GenDerm.

         The value of the acquired in-process research and development was
determined by estimating the projected net cash flows related to such products,
including costs to complete the development, and future revenues to be earned
upon commercialization of the products. These cash flows were discounted back to
their net present value. The resulting projected net cash flows from such
projects were based upon management's estimates of revenues and



                                       4
<PAGE>   5
operating profits at the time of the acquisition related to such projects.
Management also reviewed the probability of product success which was estimated
using certain probability factors for each stage of development.

OPERATING INCOME (LOSS). Operating income for fiscal 1999 increased $43.3
million, to $38.3 million from a $5.0 million operating loss in fiscal 1998.
This increase is primarily a result of the $35.4 million in-process research and
development charge relating to the Company's purchase of GenDerm in fiscal 1998
and a $9.5 million in-process research and development charge relating to the
LOPROX,(R) TOPICORT(R) and A/T/S(R) product acquisition in fiscal 1999. Absent
special charges in fiscal 1999 and 1998, operating income in fiscal 1999
increased 57.4%, or $17.4 million, to $47.8 million from $30.4 million in fiscal
1998. This increase was primarily a result of higher sales volume and a decrease
of 2.7 percentage points in selling, general and administrative expenses as a
percentage of sales offset by an increase in research and development and
depreciation and amortization expenses.

NET INTEREST INCOME (EXPENSE). Interest income in fiscal 1999 increased $4.4
million, to $11.5 million from $7.1 million in fiscal 1998, primarily due to
higher average cash, cash equivalent and short-term investment balances during
fiscal 1999. The Company's higher average cash, cash equivalent and short-term
investment balances are due to a full year of proceeds from the Company's
February 1998 public offering. The Company raised offering proceeds of $209.4
million before related expenses, or $197.9 million net of related expenses.
Interest expense in fiscal 1999 increased $1.8 million, to $1.8 million from
$23,600 in fiscal 1998. This increase is primarily related to interest expense
of $1.8 million related to the contract obligation recorded in connection with
the acquisition of the LOPROX,(R) TOPICORT(R) and A/T/S(R) products.

INCOME TAX (EXPENSE) BENEFIT. Income tax expense during fiscal 1999 increased
$9.8 million, to $24.2 million from $14.4 million in fiscal 1998. The provision
for income taxes recorded for fiscal 1999 reflects management's estimate of the
effective tax rate. The increase in income tax expense in fiscal 1999, as
compared to fiscal 1998, is primarily due to an increase in pre-tax income
offset by the special charge for in-process research and development in fiscal
1998 for which no tax benefit was realized. The decrease in the effective tax
rate in fiscal 1999, as compared to fiscal 1998, is primarily attributable to
the implementation of tax saving strategies, an increase in tax-exempt interest
income and the non-deductible in-process research and development recorded in
fiscal 1998.

NET INCOME (LOSS). Net income during fiscal 1999 increased approximately $53.8
million, to $41.4 million from a $12.4 million loss in fiscal 1998. Fiscal 1999
and 1998 included special charges to operations for in-process research and
development related to the LOPROX,(R) TOPICORT(R) and A/T/S(R) acquisition in
fiscal 1999 and the purchase of GenDerm in fiscal 1998. Net income in fiscal
1999 also included $17.7 million related to a gain on the sale of assets to
Bioglan Pharma Plc ("Bioglan"). Absent tax-effected special charges and
tax-effected gain on divested products in fiscal 1999, net income increased
approximately 59.4%, or $13.6 million, to $36.6 million from $23.0 million in
fiscal 1998. This increase was due primarily to an increase in sales volume, a
decrease in selling, general and administrative costs as a percentage of net
revenues and an increase in interest income offset by an increase in
depreciation and amortization and research and development expenses.

YEARS ENDED JUNE 30, 1998 AND 1997
NET SALES. Net sales for fiscal 1998 increased 88.5%, or $36.4 million, to $77.6
million from $41.2 million for fiscal 1997. The Company's net sales increased in
fiscal 1998 primarily as a result of both unit and dollar sales growth
associated with an increase in market share of the existing prescription
products, the launch of the Company's internally developed LUSTRA(R) product and
the acquisition of GenDerm in December 1997. The Company's prescription products
accounted for 77.0% of net sales in fiscal 1998 and 86.5% in fiscal 1997. Net
sales of the Company's prescription products grew 67.7%, or $24.1 million, to
$59.7 million in 1998 from $35.6 million in fiscal 1997, primarily due to the
continued growth of the TRIAZ(R) products, a full year of sales of the LIDEX(R)
and SYNALAR(R) products acquired in February 1997, the purchase of the
prescription products from GenDerm and the launch of the Company's LUSTRA(R)
product which was introduced in the third quarter of fiscal 1998. The Company's
OTC products and physician-dispensed division accounted for 23.0% of net sales
for fiscal 1998 and 13.5% in fiscal 1997. OTC sales increased approximately
222.2%, primarily due to the acquisition of the OTC products from GenDerm in the
second quarter of fiscal 1998.


                                       5
<PAGE>   6
GROSS PROFIT. Gross profit during fiscal 1998 increased 100.0%, or $31.8
million, to $63.6 million from $31.8 million in fiscal 1997. As a percentage of
net sales, gross profit grew to 82.0% in fiscal 1998 from 77.3% in fiscal 1997,
primarily as a result of a full year of sales of the LIDEX(R) and SYNALAR(R)
products, the increase in sales of TRIAZ(R) products, sales of NOVACET(R) and
ZONALON(R) products, which were acquired in the GenDerm acquisition, and sales
of LUSTRA,(R) which was launched by the Company in the third quarter of fiscal
1998, all of which enjoy margins in excess of the aggregate corporate gross
profit percentages.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses in fiscal 1998 increased 66.4%, or $10.9 million, to
$27.4 million from $16.5 million in fiscal 1997. This increase was primarily
attributable to an increase in promotional costs associated with the sampling
and advertising of the Company's products, promotional costs associated with the
launch of LUSTRA, (R) an internally developed prescription product, and variable
costs commensurate with increased sales volumes. The increase in personnel costs
is attributable to an increase in the number of employees to 125 in fiscal 1998
from 85 in fiscal 1997 and yearly salary escalation for existing employees.
Selling, general and administrative expenses as a percentage of net sales in
fiscal 1998 decreased 4.7 percentage points to 35.4% from 40.1% in fiscal 1997.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses in fiscal
1998 increased 99.0%, or $1.4 million, to $2.9 million from $1.5 million in
fiscal 1997, primarily due to development efforts relating to the Company's
LUSTRA(R) product and expenses associated with the clinical support of the
Company's existing products.

DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization expenses
in fiscal 1998 increased 190.6%, or $1.9 million, to $2.9 million from $1.0
million in fiscal 1997. This increase is primarily attributable to the
amortization of a full year of the purchase price of the LIDEX(R) and SYNALAR(R)
products purchased by the Company in February 1997. The Company is amortizing
this purchase price over a 25-year period. The Company's depreciation and
amortization also increased due to the amortization of the intangible assets
acquired in connection with the acquisition of GenDerm in December 1997.

IN-PROCESS RESEARCH AND DEVELOPMENT. The Company recorded $35.4 million as
in-process research and development during the second quarter of fiscal 1998 as
part of the allocated purchase price of GenDerm. The amount allocated to
in-process research and development was based upon an independent appraisal of
GenDerm's completed and in-process technologies. The in-process research and
development of $35.4 million was charged to operations as required under
generally accepted accounting principles with the recording of the purchase
price allocation. No such amount was recorded in fiscal 1997.

OPERATING (LOSS) INCOME. Operating income for fiscal 1998 decreased 139.0%, or
$17.9 million, to a $5.0 million operating loss from $12.9 million in income in
fiscal 1997. This decrease is a result of a $35.4 million in-process research
and development charge relating to the Company's purchase of GenDerm in December
1997. Absent this special charge, operating income in fiscal 1998 increased
136.2%, or $17.5 million to $30.4 million from $12.9 million in fiscal 1997 as a
result of higher sales volume, coupled with a 4.7 percentage points increase in
the Company's gross profit as a percentage of net sales and a decrease of 4.7
percentage points in selling, general and administrative expenses as a
percentage of sales offset by an increase in research and development and
depreciation and amortization expenses.

NET INTEREST INCOME (EXPENSE). Interest income in fiscal 1998 increased $3.2
million, to $7.0 million from $3.8 million in fiscal 1997, primarily due to
higher cash, cash equivalent and short-term investment balances during fiscal
1998, attributable to the Company's public offering of its common stock in
February 1998, which resulted in offering proceeds of $209.4 million before
related expenses or $197.9 million net of related expenses. Interest expense in
fiscal 1998 decreased 13.8%, or $3,800, to $23,600, from $27,400 in fiscal 1997.

INCOME TAX (EXPENSE) BENEFIT. Income tax expense during fiscal 1998 increased
$15.1 million, to an expense of $14.4 million from a benefit of $0.7 million in
fiscal 1997. The Company's tax provision is recorded at an effective tax rate of
39%. No income tax benefit is associated with the charge for in-process research
and development. The income tax benefit for fiscal 1997 is a result of
management reducing the valuation allowance required to reduce
<PAGE>   7
deferred tax assets in accordance with Statement of Financial Accounting
Standard No. 109, "Accounting for Income Taxes," to an amount the Company
believes appropriate.

NET (LOSS) INCOME. Net income during fiscal 1998 decreased approximately 171.5%,
or $29.7 million, to a $12.4 million loss from $17.3 million in income for
fiscal 1997. This decrease is the result of a special charge for in-process
research and development relating to the Company's purchase of GenDerm in
December 1997. Absent this special charge, net income for fiscal 1998 increased
32.6%, or $5.7 million, to $23.0 million from $17.3 million in fiscal 1997. This
increase was a result of an increase in sales volume, an increase in gross
profit as a percentage of net sales, a decrease in selling, general and
administrative costs as a percentage of net sales and an increase in interest
income offset by an increase in income taxes and research and development
expenses.

LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999 and June 30, 1998, the Company had cash equivalents and
short-term investments of approximately $237.3 million and $237.9 million,
respectively. The Company's working capital was $278.4 million and $263.0
million at June 30, 1999 and June 30, 1998, respectively.

      In fiscal 1999, the Company's cash position was affected by the
divestiture of nine dermatological products to Bioglan for a net cash payment of
$9.8 million in the third quarter. The variation between net income of $41.4
million and cash flow from operations of $25.4 million was primarily due to the
inclusion of the gain on the June 29, 1999 sale of assets to Bioglan in the
Company's net income which was in the form of a note paid in July 1999. The
generation of $25.4 million in cash flow from operations was offset by the
Company's payment of $22.0 million to enter into a licensing agreement with HMR
for the products LOPROX,(R) TOPICORT(R) and A/T/S(R) and $14.3 million for the
purchase of Ucyclyd Pharma, Inc. ("Ucyclyd"), a privately held pharmaceutical
company. The variation between the net loss of $12.4 million and cash flow from
operations of $14.7 million in fiscal 1998 was primarily attributable to a
non-cash in-process research and development charge of $35.4 million relating to
the acquisition of GenDerm. In fiscal 1998, the Company paid a net cash amount
of $55.0 million for the acquisition of GenDerm and raised net proceeds of
$197.9 million from the sale of common equity securities in a public offering.

      At June 30, 1999 and June 30, 1998, the Company had net accounts
receivable of $31.6 million and $18.9 million, respectively. The increase in the
Company's accounts receivable balances is related primarily to a 40.0% increase
in sales volume in the fourth quarter of fiscal 1999 as compared to the quarter
ended June 30, 1998.

      At June 30, 1999 and June 30, 1998, the Company had inventories of $7.3
million and $9.2 million, respectively. The decrease in the Company's inventory
balances is related primarily to the divestiture of 13 products and the license
of three products in fiscal 1999.


OTHER MATTERS

On June 29, 1999, the Company sold the OTC products ZOSTRIX,(R) EXOREX(TM) and
THERAPLEX(R) and the prescription product ZONALON.(R) Medicis received cash of
$900,000 and issued a note receivable for $39.1 million, which was collected in
July 1999. Under terms of the agreement, the Company paid IMX $3.6 million
subsequent to fiscal 1999 for the sale of their interest in the EXOREX(TM) joint
venture.

      On April 19, 1999, the Company acquired 100% of the common stock of
Ucyclyd for net cash of approximately $14.3 million. Ucyclyd's primary product,
the orphan drug BUPHENYL,(TM) is indicated in the treatment of Urea Cycle
Disorders. Under terms of the agreement, the Company paid $15.1 million at the
close of the transaction and may be required to pay an additional contingent
consideration of $5.7 million on the first anniversary of the closing date,
subject to certain manufacturing conditions, and $2.7 million upon regulatory
approval of a product line extension.

      On March 17, 1999, the Company sold nine dermatological products for a net
cash payment of $9.8 million. The products included in the sale were: A-FIL,(TM)
AFIRM,(R) BENZASHAVE,(R) BETA-LIFTx,(R) METED,(R) PRAMEGEL,(R) PACKER'S TAR
SOAP,(R) THERAMYCIN Z(R) and TEXACORT.(R) Under a separate agreement, the
Company licensed three additional products for a period of three years with a
buyout option of $15.5 million at the end of the term. Under this agreement, the
Company will receive quarterly license revenues. The products included in this
license agreement were: OCCLUSAL-HP,(R) PENTRAX(R) and SALAC.(R)

      In November 1998, the Company agreed to license, with an option to
purchase, the LOPROX,(R) TOPICORT(R) and A/T/S(R) products from HMR. The
Company, using cash reserves, paid $22.0 million and will make two additional
annual payments of $22.0 million. The Company then has the option to purchase
the products for $16.5 million after three years. The $22.0 million due on the
first anniversary of the transaction is recorded as a short-term


                                       7
<PAGE>   8
obligation and the remaining balance is recorded at its discounted value as a
long-term obligation. The discount is being recorded as an interest expense over
the related period. For accounting purposes, the Company has recorded the
transaction as an acquisition. In conjunction with this acquisition, the Company
recorded a charge to operations of $9.5 million, based upon an independent
valuation relating to acquired in-process research and development for projects
that are in various stages of development, have not reached technological
feasibility and have no known alternative future uses.

      Inflation did not have a significant impact upon the results of the
Company during fiscal 1999, 1998 or 1997.


YEAR 2000

The Year 2000 issue results from the inability of some computer programs to
identify the year 2000 properly, potentially leading to errors or system
failure. A company's business may be adversely affected if it, or any of its
suppliers and customers or others with whom it transacts business (including its
banks and governmental agencies), have not timely resolved the Year 2000 issue.
In response to its rapid growth, the Company selected a new management
information system in fiscal 1997, which was implemented in fiscal 1998, that is
expected to meet its presently anticipated needs. In selecting a system, Year
2000 compliance was one of the criteria. The Company has completed its analysis
and testing of its information systems hardware and software and believes all of
its existing systems are Year 2000 compliant in all material respects.

      To date, the Company has not incurred any material costs in identifying or
evaluating Year 2000 compliance issues. The total costs of the Year 2000 systems
assessments and conversions are currently funded through cash flows from
operating activities, and these costs are expensed as they are incurred. Most of
the Company's expenses have related to, and are expected to continue to relate
to, the operating costs associated with time spent by employees in the
evaluation process and Year 2000 compliance matters in general. Most of these
costs have already been incurred, and the Company does not anticipate
significant future costs with respect to the remaining efforts. To date, the
Company has not deferred any information technology initiatives as a result of
its Year 2000 project.

      The Company continues to work with critical third parties including
customers, vendors and suppliers, who account for a significant portion of the
Company's business, to determine the impact of Year 2000 issues on their
business and operations and potential collateral impact on the business and
operations of the Company and to determine such third parties' plans to
remediate Year 2000 issues where their systems interface with the Company's
systems. The Company believes approximately 90% of its Year 2000 compliance work
is complete with the remaining work scheduled for completion by the end of the
first quarter of fiscal 2000. The Company's continuing efforts relating to Year
2000 compliance are focused on testing new hardware, software and equipment and
following up with significant vendors, suppliers and customers to ensure
continued compliance. To date, the Company has not discovered any significant
negative third-party Year 2000 compliance issues.

      The Company believes that its most significant risk with respect to Year
2000 issues relates to the performance and readiness status of third parties. A
reasonable worst case Year 2000 scenario would be the result of failures of
third parties, including without limitation, governmental entities, utilities
and financial and telecommunications systems, or a general infrastructure
collapse, that negatively impacts the Company's ability, or the ability of its
critical third parties, to provide products and services to its customers, or
the ability of its customers to purchase products, or events affecting regional,
national or global economies generally. The impact of these failures cannot be
estimated at this time; however, the Company is considering contingency plans to
limit, to the extent possible, the financial impact of these failures on its
results of operations.


MARKET RISK AND RISK MANAGEMENT POLICIES

The Company has minimal operations outside of the United States and therefore
has no significant risk to changes in foreign currencies. In addition, the
Company has only one form of debt, that is in the form of a discounted contract
obligation, which, in effect, is a fixed rate debt not subject to market rate
fluctuations.

      The Company is exposed to interest rate fluctuations on its short-term
investments, that are comprised of U.S. corporate securities and other debt
securities, which it holds on an available-for-sale basis. A 100 basis point
change in the prime rate or other indicative base rates would not materially
change the interest income the Company expects to receive.


FACTORS THAT MAY AFFECT FUTURE RESULTS

This Annual Report contains forward-looking statements that anticipate results
based upon Management's plans that are subject to uncertainties. Forward-looking
statements are based upon current expectations of future results. These


                                       8
<PAGE>   9
statements may be identified by use of the words "expects," "plans,"
"anticipates," "believes" and similar words used in conjunction with discussions
of future operations or financial performance. The Company cannot ensure that
any forward-looking statements will be accurate. Actual results could differ
materially if underlying assumptions prove inaccurate or unknown risks or
uncertainties develop. The Company assumes no obligation to update
forward-looking statements as a result of future events or developments.

      In Item 1 of the Company's Annual Report on Form 10-K for the year ended
June 30, 1999, as well as in the Company's filings on Form 10-Q, the Company
discusses in more detail various factors that could cause actual results to vary
from expectations. The Company notes these factors as permitted by the Private
Securities Litigation Reform Act of 1995. Investors should understand that it is
not possible to predict or identify all such factors and should not consider
such factors to be a complete statement of all potential risks and uncertainties
that may affect the Company's business.


                                       9
<PAGE>   10
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS


THE BOARD OF DIRECTORS AND STOCKHOLDERS OF MEDICIS PHARMACEUTICAL CORPORATION

We have audited the accompanying consolidated balance sheets of Medicis
Pharmaceutical Corporation and subsidiaries as of June 30, 1999 and 1998, and
the related consolidated statements of income (loss), stockholders' equity, and
cash flows for each of the three years in the period ended June 30, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based upon
our audits.

      We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial condition of Medicis
Pharmaceutical Corporation and subsidiaries at June 30, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 1999, in conformity with generally
accepted accounting principles.


                                                           /s/ Ernst & Young LLP


Phoenix, Arizona
August 6, 1999


                                       10
<PAGE>   11
CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                                             June 30,
                                                                          ---------------------------------------------
   ASSETS                                                                           1999                    1998
-----------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>                     <C>
   Current assets:
      Cash and cash equivalents                                               $  87,718,718           $ 147,411,127
      Short-term investments                                                    149,585,195              90,510,029
      Accounts receivable, less allowances:
      1999: $3,815,000; 1998: $2,826,000                                         31,582,935              18,899,868
      Inventories                                                                 7,273,142               9,208,384
      Deferred tax assets                                                         4,525,085               3,300,000
      Note receivable                                                            39,100,000                     ---
      Other current assets                                                       15,635,164               8,800,434
                                                                          ---------------------------------------------
   Total current assets                                                         335,420,239             278,129,842

   Property and equipment, net                                                    1,704,663               1,343,603

   Intangible assets:
      Intangible assets related to acquisitions                                 137,508,154              70,386,665
      Other intangible assets                                                       973,414               6,874,626
                                                                          ---------------------------------------------
                                                                                138,481,568              77,261,291
      Less: accumulated amortization                                              9,505,319               5,977,399
                                                                          ---------------------------------------------
         Net intangible assets                                                  128,976,249              71,283,892

   Other non-current assets                                                       1,237,195               1,592,907
                                                                          ---------------------------------------------
                                                                              $ 467,338,346           $ 352,350,244
-----------------------------------------------------------------------------------------------------------------------
</TABLE>


See accompanying notes.


                                       11
<PAGE>   12
CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                                               June 30,
                                                                               ------------------------------------
   LIABILITIES                                                                          1999               1998
-------------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>                <C>
   Current liabilities:
      Accounts payable                                                            $   9,346,244      $   5,496,526
      Notes payable                                                                     100,000             11,364
      Short-term contract obligation                                                 22,000,000                ---
      Income taxes payable                                                           10,659,944            597,189
      Other accrued liabilities                                                      14,873,736          9,068,593
                                                                               ------------------------------------
      Total current liabilities                                                      56,979,924         15,173,672

   Long-term liabilities:
         Notes payable                                                                      ---             94,556
         Other non-current liabilities                                                  130,278            124,115
         Long-term contract obligation                                               34,716,456                ---
         Deferred tax liability                                                       1,935,272         10,502,416

   COMMITMENTS AND CONTINGENCIES

   MINORITY INTEREST                                                                        ---          1,960,000

   STOCKHOLDERS' EQUITY
   Preferred Stock, $0.01 par value;
         shares authorized:  5,000,000; no shares issued                                    ---                ---
   Class A Common Stock, $0.014 par value;
         shares authorized: 50,000,000; issued and outstanding:
         28,239,269 and 27,712,837 at June 30, 1999 and 1998,
         respectively                                                                   395,350            387,980
   Class B Common Stock, $0.014 par value;
         shares authorized:  1,000,000; issued and outstanding:
         422,962 at June 30, 1999 and 1998                                                5,921              5,921
   Additional paid-in capital                                                       352,155,845        343,976,037
   Accumulated other comprehensive (loss) income                                       (465,784)            77,689
   Accumulated earnings (deficit)                                                    21,485,084        (19,952,142)
                                                                               ------------------------------------
         Total stockholders' equity                                                 373,576,416        324,495,485
                                                                               ------------------------------------
                                                                                  $ 467,338,346      $ 352,350,244
-------------------------------------------------------------------------------------------------------------------
</TABLE>


See accompanying notes.


                                       12
<PAGE>   13
CONSOLIDATED STATEMENTS OF INCOME (LOSS)


<TABLE>
<CAPTION>
                                                                                            June 30,
                                                                  -----------------------------------------------------------
                                                                          1999                 1998                 1997
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>                  <C>                  <C>
   Net revenues                                                     $ 116,870,540        $  77,571,419        $  41,158,860
   Operating costs and expenses:
      Cost of sales                                                    21,633,902           13,979,793            9,361,383
      Selling, general and administrative                              38,219,119           27,423,574           16,484,329
      Research and development                                          3,396,393            2,884,479            1,449,620
      In-process research and development                               9,500,000           35,400,000                   --
      Depreciation and amortization                                     5,810,288            2,903,423              999,113
                                                                  -----------------------------------------------------------
         Operating costs and expenses                                  78,559,702           82,591,269           28,294,445
                                                                  -----------------------------------------------------------
   Operating income (loss)                                             38,310,838           (5,019,850)          12,864,415
   Interest income                                                     11,503,256            7,060,354            3,814,435
   Interest expense                                                    (1,825,200)             (23,635)             (27,403)
   Gain on sale of assets                                              17,650,903                   --                   --
                                                                  -----------------------------------------------------------
   Income before taxes                                                 65,639,797            2,016,869           16,651,447
   Income tax (expense) benefit                                       (24,202,571)         (14,424,045)             693,467
                                                                  -----------------------------------------------------------
   NET INCOME (LOSS)                                                $  41,437,226        $ (12,407,176)       $  17,344,914
                                                                  -----------------------------------------------------------

   Basic net income (loss) per common share                         $        1.46        $       (0.51)       $        0.88
   Diluted net income (loss) per common share                       $        1.41        $       (0.51)       $        0.83
   Shares used in computing basic net income (loss) per
      common share                                                     28,413,608           24,101,658           19,787,785
   Shares used in computing diluted net income (loss) per
      common share                                                     29,462,311           24,101,658           20,890,570
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>


See accompanying notes.


                                       13
<PAGE>   14
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY


<TABLE>
<CAPTION>

                                                   Class A                          Class B               Additional
                                                 Common Stock                    Common Stock               Paid-In
                                           Shares            Amount         Shares           Amount         Capital
----------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1996                   15,370,008    $     215,180         422,962   $       5,921   $  44,128,431
----------------------------------------------------------------------------------------------------------------------
<S>                                     <C>              <C>             <C>             <C>             <C>
Comprehensive income (loss):
  Net income                                       --               --              --              --              --

  Net unrealized losses on
      available-for-sale                           --               --              --              --              --
      securities

              Comprehensive income
  Exercise of stock options                   813,681           11,392              --              --       3,479,265
  Tax effect of stock
    options exercised                              --               --              --              --       1,165,000
  Options issued in lieu of
    payment for services
    rendered                                       --               --              --              --          59,500
  Public offering                           4,785,834           67,002              --              --      90,041,167
----------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1997                   20,969,523          293,574         422,962           5,921     138,873,363
----------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss):
  Net loss                                         --               --              --              --              --
  Net unrealized gains on
    available-for-sale
    securities                                     --               --              --              --              --

              Comprehensive loss
  Exercise of stock options                   233,314            3,266              --              --         954,296
  Tax effect of stock
    options exercised                              --               --              --              --       6,305,311
  Options issued in lieu of
    payment for services
    rendered                                       --               --              --              --          57,500
  Public offering                           6,510,000           91,140              --              --     197,785,567
----------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998                   27,712,837          387,980         422,962           5,921     343,976,037
----------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss):
  Net income                                       --               --              --              --              --
  Net unrealized losses on
    available-for-sale
    securities                                     --               --              --              --              --
  Net unrealized gain on
    foreign currency
    translation                                    --               --              --              --              --

              Comprehensive income
  Exercise of stock options                   526,432            7,370              --              --       3,834,839
  Tax effect of stock
    options exercised                              --               --              --              --       4,329,969
  Options issued in lieu of
    payment for services
    rendered                                       --               --              --              --          15,000
----------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999                   28,239,269    $     395,350         422,962   $       5,921   $ 352,155,845
----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
                                         Accumulated
                                           Other          Accumulated
                                        Comprehensive      (Deficit)
                                        (Loss) Income       Earnings          Total
---------------------------------------------------------------------------------------
<S>                                     <C>              <C>              <C>
Balance at June 30, 1996                $          --    $ (24,889,880)   $  19,459,652
---------------------------------------------------------------------------------------
Comprehensive income (loss):
  Net income                                       --       17,344,914       17,344,914
  Net unrealized losses on
      available-for-sale
      securities                              (63,075)              --          (63,075)
                                                                          -------------
              Comprehensive income                                           17,281,839
  Exercise of stock options                        --               --        3,490,657
  Tax effect of stock
    options exercised                              --               --        1,165,000
  Options issued in lieu of
    payment for services
    rendered                                       --               --           59,500
  Public offering                                  --               --       90,108,169
---------------------------------------------------------------------------------------
Balance at June 30, 1997                      (63,075)      (7,544,966)     131,564,817
---------------------------------------------------------------------------------------
Comprehensive income (loss):
  Net loss                                         --      (12,407,176)     (12,407,176)
  Net unrealized gains on
    available-for-sale
    securities                                140,764               --          140,764
                                                                          -------------
              Comprehensive loss                                            (12,266,412)
  Exercise of stock options                        --               --          957,562
  Tax effect of stock
    options exercised                              --               --        6,305,311
  Options issued in lieu of
    payment for services
    rendered                                       --               --           57,500
  Public offering                                  --               --      197,876,707
---------------------------------------------------------------------------------------
Balance at June 30, 1998                       77,689      (19,952,142)     324,495,485
---------------------------------------------------------------------------------------
Comprehensive income (loss):
  Net income                                       --       41,437,226       41,437,226
  Net unrealized losses on
    available-for-sale
    securities                               (543,619)              --         (543,619)
  Net unrealized gain on
    foreign currency
    translation                                   146               --              146
                                                                          -------------
              Comprehensive income                                           40,893,753
  Exercise of stock options                        --               --        3,842,209
  Tax effect of stock
    options exercised                              --               --        4,329,969
  Options issued in lieu of
    payment for services
    rendered                                       --               --           15,000
---------------------------------------------------------------------------------------
Balance at June 30, 1999                $    (465,784)   $  21,485,084    $ 373,576,416
---------------------------------------------------------------------------------------
</TABLE>


See accompanying notes.


                                       14
<PAGE>   15
CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                June 30,
                                                            -----------------------------------------------
                                                                  1999             1998             1997
-----------------------------------------------------------------------------------------------------------
<S>                                                         <C>              <C>              <C>
OPERATING ACTIVITIES:
Net income (loss)                                           $  41,437,226    $ (12,407,176)   $  17,344,914
 Adjustments to reconcile net income (loss) to net
         cash provided by operating activities:
    In-process research and development                         9,500,000       35,400,000               --
    Gain on sale of assets                                    (17,650,903)              --               --
    Depreciation and amortization                               5,810,288        2,903,423          999,113
    (Gain) loss on sale of available-for-sale investments          14,658          (50,931)         (37,591)
    Other non-cash expenses                                        15,000           57,500           59,500
    Deferred income tax (benefit) expense                      (9,792,229)      13,787,173       (2,092,000)
    Provision for doubtful accounts and returns                   897,000          460,000          470,000
    Accretion of premium (discount) on investments                179,649         (344,454)        (422,032)
    Accretion of discount on contract obligation                1,801,885               --               --
  Changes in operating assets and liabilities (net of
         acquired amounts):
      Accounts receivable                                     (13,285,268)     (10,944,095)      (1,612,136)
      Inventories                                               2,390,397       (4,772,069)        (901,863)
      Other current assets                                     (4,134,323)      (5,353,132)      (1,579,594)
      Accounts payable                                          2,975,103           35,575          757,186
      Income taxes payable                                     10,062,755          597,189               --
      Other accrued liabilities                                (4,796,891)      (4,623,987)         801,681
                                                            -----------------------------------------------
         Net cash provided by operating activities             25,424,347       14,745,016       13,787,178
-----------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
 Purchase of property and equipment                              (725,165)        (833,111)        (430,691)
 Proceeds from sale of product rights                          10,712,402               --               --
 Acquisition of businesses, net of cash acquired              (14,278,840)     (54,982,386)              --
 Payments for purchase of product rights                      (25,110,371)      (5,012,483)     (28,636,227)
 Purchase of available-for-sale investments                  (202,169,056)    (147,656,185)     (75,297,924)
 Sale of available-for-sale investments                        52,644,964       74,690,916        9,685,861
 Maturity of available-for-sale investments                    89,711,000       34,500,000       14,500,000
 Change in other assets                                           355,712         (490,000)      (1,500,000)
                                                            -----------------------------------------------
         Net cash used in investing activities                (88,859,354)     (99,783,249)     (81,678,981)
-----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
 Proceeds from the sale of common equity securities, net               --      197,876,707       90,108,169
 Payment of notes payable                                        (105,920)         (10,660)         (10,000)
 Change in other non-current liabilities                            6,163            2,354          (29,676)
 Proceeds from the exercise of options                          3,842,209          957,562        3,490,657
                                                            -----------------------------------------------
         Net cash provided by financing activities              3,742,452      198,825,963       93,559,150
-----------------------------------------------------------------------------------------------------------
 Effect of foreign currency exchange rate on cash and
         cash equivalents                                             146               --               --
 Net (decrease) increase in cash and cash equivalents         (59,692,409)     113,787,730       25,667,347
 Cash and cash equivalents at beginning of year               147,411,127       33,623,397        7,956,050
                                                            -----------------------------------------------
 Cash and cash equivalents at end of year                   $  87,718,718    $ 147,411,127    $  33,623,397
-----------------------------------------------------------------------------------------------------------
</TABLE>


See accompanying notes.


                                       15
<PAGE>   16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999


NOTE 1. FORMATION AND DEVELOPMENT OF THE COMPANY

Medicis Pharmaceutical Corporation and its wholly owned subsidiaries ("Medicis"
or the "Company") is the leading independent pharmaceutical company in the
United States offering prescription products and an over-the-counter ("OTC")
product primarily for the treatment of dermatological conditions. The Company
has built its business by successfully introducing new prescription products as
well as acquiring rights to manufacture and sell certain dermatological products
pursuant to several license and asset purchase agreements. The Company sells
these products for use in various segments of the skin care market, including
acne, acne-related conditions, fungal infections, psoriatic conditions,
inflammatory skin conditions and pigmentation disorders.


NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION. The accompanying consolidated financial statements
include the accounts of Medicis and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Certain prior period amounts have been reclassified to conform to the current
period presentation. The Company records minority interest to the extent the
subsidiary is not wholly owned.

CASH AND CASH EQUIVALENTS. At June 30, 1999, cash and cash equivalents included
highly liquid investments invested in money market accounts consisting of
government securities and high-grade commercial paper. These investments are
stated at cost, which approximates fair value. The Company considers all highly
liquid investments purchased with a remaining maturity of three months or less
to be cash equivalents.

INVESTMENTS. The Company accounts for investments under Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." The Company's debt securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value with
the unrealized gains and losses reported in stockholders' equity. The amortized
cost of debt securities in this category is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization is included
in interest income. Realized gains and losses and interest and dividends on
securities are included in interest income. The cost of securities sold is based
upon the specific identification method.

INVENTORIES. The Company utilizes third parties to manufacture and package
inventories held for sale, takes title to certain inventories once manufactured,
and warehouses such goods until packaged for final distribution and sale.
Inventories consist of salable products held at the Company's warehouses, as
well as at the manufacturers' facilities, and are valued at the lower of cost or
market using the first-in, first-out method.
      Inventories are as follows:


<TABLE>
<CAPTION>
                                              June 30,
                                     ---------------------------
                                        1999             1998
----------------------------------------------------------------
<S>                                  <C>              <C>
Raw materials                        $1,799,082       $1,086,585
Finished goods                        5,474,060        8,121,799
                                     ---------------------------
       Total inventories             $7,273,142       $9,208,384
----------------------------------------------------------------
</TABLE>

PROPERTY AND EQUIPMENT. Property and equipment are stated at cost. Depreciation
is calculated on a straight-line basis over the estimated useful lives of
property and equipment (three to five years). Leasehold improvements are
amortized over the shorter of their estimated useful lives or the remaining
lease term.

INTANGIBLE ASSETS. Intangible assets resulting from acquisitions of products and
businesses principally consist of the excess of the fair value attributed to the
related developed products and are being amortized on a straight-line basis over
a 10-to 25-year period. The Company assesses the recoverability of intangible
assets resulting from these acquisitions based upon expected future undiscounted
cash flows on a product-line basis along with other relevant information.


                                       16
<PAGE>   17
OTHER CURRENT LIABILITIES. Other current liabilities are as follows:


<TABLE>
<CAPTION>
                                                  June 30,
                                        -----------------------------
                                            1999              1998
---------------------------------------------------------------------
<S>                                     <C>               <C>
Accrued incentives                      $ 2,739,245       $ 1,786,392
Accrued royalties                         1,697,439         1,040,993
Payable to affiliate                             --         1,366,846
Marketing allowance                         774,056         1,141,000
Payable to IMX                            3,600,000                --
Other accrued expenses                    6,062,996         3,733,362
                                        -----------------------------
                                        $14,873,736       $ 9,068,593
---------------------------------------------------------------------
</TABLE>

REVENUE RECOGNITION. Revenue from product sales is recognized upon shipment, net
of discounts, rebates and estimated allowances for chargebacks and returns. The
Company principally authorizes returns for damaged products and exchanges for
expired products in accordance with its "Return Goods Policy and Procedures,"
and establishes reserves for such amounts at the time of sale. The Company has
not experienced significant returns of damaged or expired products.

ADVERTISING. The Company expenses advertising as incurred. Advertising expenses
for the fiscal years ended June 30, 1999 ("fiscal 1999"), June 30, 1998 ("fiscal
1998") and June 30, 1997 ("fiscal 1997") were approximately $11,922,000,
$8,347,000 and $3,806,000, respectively.

STOCK-BASED COMPENSATION. The Company grants stock options for a fixed number of
shares to employees with an exercise price equal to the fair value of the shares
at the date of grant. The Company accounts for stock option grants to employees
in accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB No. 25") and, accordingly, recognizes no
compensation expense for employee stock option grants.

RESEARCH AND DEVELOPMENT COSTS. All research and development costs, including
payments related to products under development and research consulting
agreements, are expensed as incurred.

INCOME TAXES. Income taxes have been provided using the liability method in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes."

EARNINGS (LOSS) PER SHARE. Basic and diluted earnings (loss) per common share
are calculated in accordance with the requirements of Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"). All
earnings (loss) per common share amounts for all periods have been presented,
and where appropriate, restated to conform to the requirements of SFAS No. 128.

STATEMENTS OF CASH FLOWS. Non-cash investing and financing activities were as
follows:


<TABLE>
<CAPTION>
                                                                                          June 30,
                                                                      -------------------------------------------------
                                                                          1999                1998              1997
-----------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>               <C>                 <C>
Tax benefit of stock options exercised                                $ 4,329,969       $   6,305,311       $ 1,165,000
Intangibles acquired under accrued contract costs                              --                  --           600,000
Note receivable from the sale of assets                                39,100,000                  --                --
-----------------------------------------------------------------------------------------------------------------------
</TABLE>

USE OF ESTIMATES. The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results could
differ from those estimates based upon future events, which could include, among
other risks, changes in the regulations governing the manner


                                       17
<PAGE>   18
in which the Company sells its products, changes in the health care environment
and the reliance on contract manufacturing services.

FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying amount of cash and cash
equivalents, short-term investments, accounts receivable, accounts payable and
accrued liabilities reported in the consolidated balance sheets approximates
fair value because of the immediate or short-term maturity of these financial
instruments.

COMPREHENSIVE INCOME. The Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No.
130 established standards for the reporting and display of comprehensive income
and its components. SFAS No. 130 requires certain items, such as foreign
currency translation adjustments and unrealized gains or losses on the Company's
available-for-sale securities, to be included in other comprehensive income.

SEGMENT INFORMATION. The Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"). SFAS No. 131 established standards for reporting
information regarding operating segments in annual financial statements and
requires selected information to be presented in interim financial reports
issued to stockholders. SFAS No. 131 also established standards for related
disclosures about products and services, geographic areas and major customers
(see Note 11). The adoption of SFAS No. 131 did not affect the Company's
consolidated financial position, results of operations or financial statement
disclosures, as the Company operates only one business segment.

NOTE 3. ACQUISITIONS AND DIVESTITURES

On June 29, 1999, the Company sold the OTC products ZOSTRIX,(R) EXOREX(TM) and
THERAPLEX(R) and the prescription product ZONALON(R) to Bioglan Pharma Plc
("Bioglan"). Bioglan paid cash of $900,000 and issued a note receivable for
$39.1 million, which was collected in July 1999. Under terms of the agreement,
the Company purchased IMX Pharmaceutical Inc.'s ("IMX") 49.0% interest in the
EXOREX(TM) joint venture for $3.6 million. On June 25, 1998, the Company paid
$4.0 million for its 51.0% interest in the EXOREX(TM) joint venture.

      On April 19, 1999, the Company acquired 100% of the common stock of
Ucyclyd Pharma, Inc. ("Ucyclyd"), a privately held pharmaceutical company based
in Baltimore, Maryland, for net cash of approximately $14.3 million. Ucyclyd's
primary product, the orphan drug BUPHENYL,(TM) is indicated in the treatment of
Urea Cycle Disorders. Under terms of the agreement, the Company paid $15.1
million at the close of the transaction and may be required to pay an additional
contingent consideration of $5.7 million on the first anniversary of the closing
date, subject to certain manufacturing conditions, and $2.7 million upon
regulatory approval of a product line extension.

      On March 17, 1999, the Company sold nine dermatological products to
Bioglan for a net cash payment of $9.8 million. The products included in the
transaction were: A-FIL,(TM) AFIRM,(R) BENZASHAVE,(R) BETA-LIFTx,(R) METED,(R)
PRAMEGEL,(R) PACKER'S TAR SOAP,(R) THERAMYCIN Z(R) and TEXACORT.(R) Under a
separate agreement, the Company licensed three additional products to Bioglan
for a period of three years with a buyout option of $15.5 million at the end of
the term. Under this agreement, the Company will receive quarterly license
revenues. The products included in this license agreement were: OCCLUSAL-HP,(R)
PENTRAX(R) and SALAC.(R)

      On November 29, 1998, the Company agreed to license, with an option to
purchase, the LOPROX,(R) TOPICORT(R) and A/T/S(R) products from Hoechst Marion
Roussel ("HMR"). The Company, using cash reserves, paid $22.0 million and plans
to make two additional annual payments of $22.0 million. The Company then has
the option to purchase the products for $16.5 million after three years. The
$22.0 million due on the first anniversary of the transaction is recorded as a
short-term obligation, and the remaining balance is recorded at its discounted
value as a long-term obligation. The discount is being recorded as an interest
expense over the related period. For accounting purposes, the Company recorded
the transaction as an acquisition. In conjunction with this acquisition, the
Company recorded a charge to operations of $9.5 million, based upon an
independent valuation relating to acquired in-process research and development
for projects that are in various stages of development, have not reached
technological feasibility and have no known alternative future uses.

      The nature and efforts required to develop the acquired in-process
research and development into commercially viable products include completion of
the development stages of the commercially viable products, clinical trial
testing and FDA approval and commercialization. Due to the nature of the
pharmaceutical development process, the Company anticipates incurring additional
costs to develop the products. However, there is no certainty that any of these
development efforts will result in commercially viable products.


                                       18
<PAGE>   19
      On December 3, 1997, the Company acquired 100% of the common stock of
GenDerm Corporation and subsidiary ("GenDerm") for net cash of approximately
$55.0 million. The Company could pay an additional sum not to exceed $20.0
million if sales of GenDerm products, as defined in the acquisition agreement,
are in excess of $31.0 million during calendar 1999 and certain other conditions
are met. GenDerm marketed the prescription brands NOVACET(R) and ZONALON,(R) as
well as the OTC brands ZOSTRIX,(R) OCCLUSAL-HP,(R) PENTRAX(R) and SALAC.(R) In
conjunction with the acquisition, the Company recorded a charge to operations of
$35.4 million, based upon an independent valuation, relating to acquired
in-process research and development for projects that are in various stages of
development, have not reached technological feasibility and have no known
alternative future uses. The $35.4 million charge is not deductible for tax
purposes.

      The Ucyclyd and GenDerm acquisitions were accounted for using the purchase
method of accounting in accordance with Accounting Principles Board Opinion No.
16, "Business Combinations" ("APB No. 16"). Under APB No. 16, purchase price
allocations were made to the assets acquired and the liabilities assumed based
upon their respective fair values. The operations of Ucyclyd and GenDerm have
been included in the consolidated statements of income (loss), as of the
acquisition date.

      Unaudited pro forma operating results for the Company, assuming the
acquisitions occurred at the beginning of the year in which they were acquired
and the immediately preceding fiscal year, are as follows:


<TABLE>
<CAPTION>
                                                                        June 30,
                                                  ---------------------------------------------------
                                                       1999               1998                1997
-----------------------------------------------------------------------------------------------------
<S>                                               <C>                <C>                 <C>
Net revenues                                      $120,653,854       $ 95,263,143        $ 69,625,259
Net income (loss)                                   42,529,400        (11,293,208)         12,698,944
Basic net income (loss) per common share          $       1.50       $      (0.47)       $       0.64
Diluted net income (loss)  per common share       $       1.44       $      (0.47)       $       0.61
-----------------------------------------------------------------------------------------------------
</TABLE>

      For purposes of these pro forma operating results, the charges for
in-process research and development are presented in the year the charge was
incurred. The pro forma information does not necessarily represent the actual
results that would have occurred had the acquisitions taken place at the
beginning of each fiscal year, given the manner that the Company assimilated the
acquisitions into its business.

      On February 25, 1997, the Company acquired the LIDEX(R) and SYNALAR(R)
products from a third party for $28.0 million, with the option to pay an
additional $3.0 million, in $1.0 million installments, on the anniversary of the
purchase for each of the next three years if certain market conditions are met.
The Company paid the first installment of $1.0 million in February 1998 and the
second installment of $1.0 million in February 1999.


NOTE 4. DEBT

The Company has a revolving line of credit facility of up to $25.0 million from
Norwest Bank Arizona, N.A. The facility may be drawn upon by the Company, at its
discretion, and is collateralized by principal assets of the Company. The
outstanding balance of the credit facility bears interest at a floating rate of
150 basis points in excess of the 30-day London Interbank Offered Rate and
expires in November 2000. The agreement requires the Company to comply with
certain covenants, including covenants relating to the Company's financial
condition and results of operation. The Company has not drawn on this credit
facility.


NOTE 5. SHORT-TERM INVESTMENTS

The Company's short-term investments are intended to establish a high-quality
portfolio that preserves principal, meets liquidity needs, avoids inappropriate
concentrations and delivers an appropriate yield in relationship to the
Company's investment guidelines and market conditions.

      The following is a summary of available-for-sale securities:


                                       19
<PAGE>   20
<TABLE>
<CAPTION>
                                                                    June 30, 1999
                                             ---------------------------------------------------------
                                                                   Gross          Gross          Gross
                                                              Unrealized     Unrealized           Fair
Available-for-Sale Securities                        Cost          Gains         Losses          Value
------------------------------------------------------------------------------------------------------
<S>                                          <C>            <C>            <C>            <C>
U.S. corporate securities                    $ 27,757,402   $     10,003   $    542,000   $ 27,225,405
Other debt securities                         122,293,723        155,512         89,445    122,359,790
                                             ---------------------------------------------------------
      Total securities                       $150,051,125   $    165,515   $    631,445   $149,585,195
------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
                                                                    June 30, 1998
                                             ---------------------------------------------------------
                                                                   Gross          Gross          Gross
                                                              Unrealized     Unrealized           Fair
Available-for-Sale Securities                        Cost          Gains         Losses          Value
------------------------------------------------------------------------------------------------------
<S>                                          <C>            <C>            <C>            <C>
U.S. corporate securities                    $ 46,070,979   $     42,348   $     10,209   $ 46,103,118
Other debt securities                          44,298,286        109,686          1,061     44,406,911
                                             ---------------------------------------------------------
      Total securities                       $ 90,369,265   $    152,034   $     11,270   $ 90,510,029
------------------------------------------------------------------------------------------------------
</TABLE>

      During the years ended June 30, 1999 and 1998, the gross realized gains on
sales of available-for-sale securities totaled $22,800 and $63,602,
respectively, and the gross realized losses totaled $37,458 and $12,671,
respectively. The net adjustment to unrealized gains (losses) during fiscal 1999
and fiscal 1998 on available-for-sale securities included in stockholders'
equity totaled $(543,619) and $140,764, respectively. The amortized cost and
estimated fair value of the available-for-sale securities at June 30, 1999, by
maturity, are shown below. Expected maturities will differ from contractual
maturities because the issuers of the securities may have the right to prepay
obligations without prepayment penalties, and the Company views its
available-for-sale securities as available for current operations.


<TABLE>
<CAPTION>
                                                            June 30, 1999
                                                 -----------------------------------
                                                     Cost       Estimated Fair Value
------------------------------------------------------------------------------------
<S>                                              <C>            <C>
Available-for-sale
     Due in one year or less                     $ 19,831,930       $ 19,816,312
     Due after one year through two years         113,938,386        113,474,878
     Due after two years                           16,280,809         16,294,005
                                                 -----------------------------------
                                                 $150,051,125       $149,585,195
------------------------------------------------------------------------------------
</TABLE>


NOTE 6. COMMITMENTS AND CONTINGENCIES

OCCUPANCY ARRANGEMENTS. The Company presently occupies approximately 29,000
square feet of office space, at an average annual expense of $433,000, under a
lease agreement that expires in May 2005. The lease contains certain rent
escalation clauses and, upon expiration, can be renewed for a period of five
years. Rent expense was approximately $564,000, $350,000 and $203,000 for fiscal
1999, 1998 and 1997, respectively. The Company is currently evaluating its
present office space in conjunction with its estimated personnel growth and is
considering acquiring additional space, either at its existing location or, if
not available, in another building within the Phoenix metropolitan area.

      Medicis Canada, Inc., a wholly owned subsidiary, presently leases
approximately 7,500 square feet of office and warehouse space in St-Laurent,
Quebec, Canada, under a lease agreement, that expires in April 2000.

RESEARCH AND DEVELOPMENT AND CONSULTING CONTRACTS. The Company has, in the past,
and may in the future enter into agreements with various research organizations
and individuals under which the Company acquires certain patent and marketing
rights for therapeutics developed under such agreements in exchange for
providing funding for collaborative research. It is also anticipated that,
before any commercial marketing can be commenced, the Company will be required
to secure certain regulatory approvals on the technological processes involved.
The Company has various consulting agreements with certain scientists in
exchange for the assignment of certain rights and consulting services. In
addition, the Company has granted options to purchase shares of Class A Common
Stock that are included in the stock option plan described in Note 9. These
options vest annually over the commitment periods. At June 30, 1999, the Company
had approximately $843,000 of commitments (solely attributable to the


                                       20
<PAGE>   21
Chairman of the Central Research Committee of the Company) payable over the
remaining five years under an agreement, that is cancelable by either party
under certain conditions.

LICENSING, MARKETING AND MANUFACTURING AGREEMENTS. The Company has entered into
licensing and marketing agreements under which it has obtained rights to market
certain existing and future pharmaceutical products. Generally, the terms of
such agreements vary, but range from 10 to 20 years from the date of the first
sale of the related product or until the expiration of the patent applicable to
the product. The agreements provide for varying royalties with certain stated
minimum annual amounts, which vary by agreement from $35,000 to $50,000. Total
minimum royalties required to be paid on products currently being sold are
approximately $85,000 per year.

      In July 1997, the Company entered into a joint product development and
distribution agreement with an unrelated third party whereby the Company will
pay certain costs with respect to certain product approvals estimated to be
approximately $1.0 million.

      The Company purchases its inventory from third party manufacturers, many
of whom are the sole source of products for the Company. The failure of such
manufacturers to provide an uninterrupted supply of products would adversely
impact the Company's ability to sell such products.

OTHER. The Company and certain of its subsidiaries are parties to other actions
and proceedings incident to their business. Liability in the event of final
adverse determinations in any of these matters is either covered by insurance
and/or established reserves, or, in the current opinion of management, after
consultation with counsel, should not, in the aggregate, have a material adverse
effect on the consolidated financial condition or results of operations of the
Company.


NOTE 7. INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:


<TABLE>
<CAPTION>
                                                                                 June 30,
                                                 ------------------------------------------------------------------------
                                                              1999                                   1998
                                                 ------------------------------------------------------------------------
                                                    CURRENT           LONG-TERM            Current            Long-term
-------------------------------------------------------------------------------------------------------------------------
<S>                                              <C>                <C>                 <C>                 <C>
Deferred tax assets:
  Net operating loss carry forwards              $         --       $    416,000        $         --        $    599,000
  Reserves and liabilities                          4,525,000                 --           3,300,000                  --
  Research and development credits                         --             94,000                  --           1,137,000
  Alternative minimum tax credits                          --                 --                  --             129,584
                                                 ------------------------------------------------------------------------
                                                    4,525,000             510,000           3,300,000           1,865,584
Excess of net book value over tax basis of
  intangible assets                                        --         (2,445,000)                 --         (12,368,000)
                                                 ------------------------------------------------------------------------
Deferred tax assets (liabilities)                $  4,525,000       $ (1,935,000)       $  3,300,000        $(10,502,416)
-------------------------------------------------------------------------------------------------------------------------
</TABLE>

      During fiscal 1998, the Company acquired all of the outstanding stock of
GenDerm in a taxable stock acquisition. As a result of the GenDerm acquisition,
net deferred tax liabilities and current taxes payable were recorded. The
deferred tax liability related to acquired intangible assets that have no tax
basis. The deferred tax assets acquired related to reserves, acquired net
operating loss carry forwards, research and development credits and other tax
credits. All of the net operating losses and tax credits acquired in the GenDerm
acquisition are limited for tax purposes under both the separate return
limitation year rules and Internal Revenue Code sections 382 and 383, which
limit the annual utilization of net operating losses and tax credits.

      At June 30, 1999, the Company had net operating loss carry forwards for
federal income tax purposes of approximately $1,100,000 and research and
development credits of approximately $94,000, which begin expiring in varying
amounts in the years 2003 through 2012 if not previously utilized. All of the
net operating loss and tax credit carry forwards are attributable to the
Company's acquisition of GenDerm. As such, they are limited for tax purposes
under both the separate return limitation year rules and Internal Revenue Code
sections 382 and 383, which limit the annual utilization of net operating
losses.


                                       21
<PAGE>   22
      During fiscal 1999, 1998 and 1997, the Company made tax payments of
$19,837,000, $1,874,000 and $1,133,000, respectively.

      Components of the provision for income taxes (benefit) are as follows:


<TABLE>
<CAPTION>
                                                      June 30,
                                ----------------------------------------------------
                                     1999                1998                1997
------------------------------------------------------------------------------------
<S>                             <C>                 <C>                 <C>
Current
    Federal                     $ 30,562,000        $  3,221,629        $    272,000
    State                          3,415,000           1,570,000           1,126,533
    Foreign                           19,000                  --                  --
                                ----------------------------------------------------
                                  33,996,000           4,791,629           1,398,533
------------------------------------------------------------------------------------
Deferred
    Federal                       (9,049,000)          8,644,416          (1,830,000)
    State                           (744,000)            988,000            (262,000)
                                ----------------------------------------------------
                                  (9,793,000)          9,632,416          (2,092,000)
------------------------------------------------------------------------------------
  Total                         $ 24,203,000        $ 14,424,045        $   (693,467)
------------------------------------------------------------------------------------
</TABLE>

      Income tax expense (benefit) for the three years ended June 30, 1999, 1998
and 1997 differs from the amount computed applying the federal statutory rates
as follows:


<TABLE>
<CAPTION>
                                                                    June 30,
                                                      ----------------------------------
                                                      1999          1998          1997
----------------------------------------------------------------------------------------
<S>                                                   <C>           <C>          <C>
Statutory federal income tax rate                      35.0%         35.0%        35.0%
State tax rate, net of federal benefit                  2.5           4.0          5.0
Change in valuation allowance                          --            --          (44.2)
Tax exempt interest                                    (2.0)        (14.4)        --
In-process research and development                    --           684.5         --
Other                                                   1.4           6.0         --
                                                      ----------------------------------
                                                       36.9%        715.1%        (4.2%)
----------------------------------------------------------------------------------------
</TABLE>


NOTE 8. STOCK TRANSACTIONS

Class A Common Stock has one vote per share, and Class B Common Stock has 10
votes per share. Each share of Class B Common Stock may be converted into one
share of Class A Common Stock at the option of the holder or, in some
circumstances, may automatically be converted upon a vote of the Board of
Directors and the majority of the Class B Common Stock shareholders.

      On January 12, 1999, the Board of Directors declared a 3-for-2 stock split
effected in the form of a 50% stock dividend payable February 16, 1999, to
common shareholders of record at the close of business on January 29, 1999. Per
share amounts and the weighted average number of shares outstanding have been
retroactively revised for all periods presented.

      In February 1998, the Company completed a public offering for 6,000,000
primary shares of the Company's Class A Common Stock at a price of $32.17 per
share. The underwriters also exercised the over-allotment option of 510,000
primary shares at a price of $32.17 per share. Gross proceeds from the offering
before related expenses totaled $209,405,000.

      On March 7, 1997, the Board of Directors declared a 3-for-2 stock split
effected in the form of a 50% stock dividend payable March 28, 1997, to common
shareholders of record at the close of business on March 17, 1997. Per share
amounts and the weighted average number of shares outstanding have been
retroactively revised for all periods presented.

      On October 2, 1996, the Company completed a public offering for
approximately 4,200,000 primary shares of the Company's Class A Common Stock at
a price of $20.00 per share. The underwriters also exercised the over-allotment
option of approximately 600,000 primary shares at a price of $20.00 per share.
Gross proceeds from the offering before related expenses totaled approximately
$95.7 million.


                                       22
<PAGE>   23
      On July 23, 1996, the Board of Directors declared a 3-for-2 stock split
effected in the form of a 50% stock dividend payable August 2, 1996, to common
shareholders of record at the close of business on July 22, 1996. Per share
amounts and the weighted average number of shares have been retroactively
revised for all periods presented.


NOTE 9. STOCK OPTION PLANS

The Company has six Stock Option Plans (the 1998, 1996, 1995, 1992, 1990 and
1988 Plans or, collectively, the "Plans"). The 1998, 1996, 1995, 1992, 1990 and
1988 Plans have the following options outstanding: 0; 2,299,591; 424,011;
345,456; 45,942; and 133,847, respectively. The Plans allow the Company to
designate options as qualified incentive or non-qualified on an as-needed basis.
Qualified and non-qualified stock options vest over a period determined at the
time the options are granted ranging from one to five years. Options are granted
at the fair market value on the grant date. Options outstanding at June 30,
1999, vary in price from $1.03 to $44.67, with a weighted average of $20.76
outlined in the following chart:


<TABLE>
<CAPTION>
Range of Exercise    Weighted Number    Weighted Average    Average Exercise    Weighted Number    Average Exercise
           Prices        Outstanding    Contractual Life               Price        Exercisable               Price
-------------------------------------------------------------------------------------------------------------------
<S>                    <C>                <C>                 <C>                 <C>                <C>
      $1.03-$1.83            241,867                 .62              $ 1.53            190,482              $ 1.53
      $1.95-$8.44            316,669                1.74              $ 2.57            307,256              $ 2.44
    $12.11-$23.33            510,881                7.33              $14.82            172,187              $15.84
    $23.83-$26.42          1,166,944                9.08              $24.03             11,058              $24.24
    $26.44-$30.29            759,668                8.26              $28.72            148,394              $28.81
    $30.33-$33.29            128,780                8.27              $30.78             52,095              $30.67
    $33.33-$38.29             35,125                9.08              $35.12              2,385              $34.20
    $39.38-$44.67             88,913                9.53              $40.80                  0              $ 0.00
-------------------------------------------------------------------------------------------------------------------
</TABLE>

      A summary of stock options granted within the Plans and related
information for the years ended June 30, 1999, 1998 and 1997 is as follows:


<TABLE>
<CAPTION>
                                                                               Weighted
                                                                                Average
                                    Qualified   Nonqualified         Total        Price
---------------------------------------------------------------------------------------
<S>                                 <C>         <C>              <C>          <C>
Balance at June 30, 1996              739,952      1,209,642     1,949,594    $    2.92
---------------------------------------------------------------------------------------

Granted                               426,890        252,641       679,531    $   14.71
Exercised                            (236,433)      (512,411)     (748,844)   $    3.79
Terminated/expired                    (61,461)        (7,232)      (68,693)   $    7.32
                                   ----------------------------------------------------
Balance at June 30, 1997              868,948        942,640     1,811,588    $    6.79
---------------------------------------------------------------------------------------

Granted                               566,630        495,554     1,062,184    $   29.18
Exercised                             (87,434)      (145,880)     (233,314)   $    4.11
Terminated/expired                    (83,645)        (2,781)      (86,426)   $   18.26
                                   ----------------------------------------------------
Balance at June 30, 1998            1,264,499      1,289,533     2,554,032    $   15.70
---------------------------------------------------------------------------------------

Granted                               718,023        703,103     1,421,126    $   25.47
Exercised                            (296,708)      (222,224)     (518,932)   $    7.36
Terminated/expired                   (191,854)       (15,525)     (207,379)   $   25.63
                                   ----------------------------------------------------
Balance at June 30, 1999            1,493,960      1,754,887     3,248,847    $   20.76
---------------------------------------------------------------------------------------
</TABLE>

      Options exercisable under the Plans at June 30, 1999 were 883,857 with an
average exercisable price of $11.30. During fiscal 1999, 7,500 non-qualified
stock options not subject to the Plans were exercised at a price of $6.47. An
additional 1,875 non-qualified stock options not subject to the Plans were
issued and outstanding to outside parties at June 30, 1999, with an exercise
price of $6.47.


                                       23
<PAGE>   24
      The Company elected the adoption of the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123") in fiscal 1998. In accordance with the provisions
of SFAS No. 123, the Company applies APB No. 25 and related interpretations in
accounting for option grants to employees under its stock option plans. If the
Company had elected to recognize compensation costs based upon the fair value of
the options granted at grant date as prescribed by SFAS No. 123, operating
results would have changed to the pro forma amounts indicated in the table
below:


<TABLE>
<CAPTION>
                                               1999             1998              1997
-----------------------------------------------------------------------------------------
<S>                                      <C>              <C>               <C>
Net income (loss) - as reported          $  41,437,226    $ (12,407,176)    $  17,344,914
Net income (loss) - pro forma            $  36,930,216    $ (15,346,543)    $  15,742,000
Diluted earnings (loss)
         Per common share as reported    $        1.41    $       (0.51)    $        0.83
         Per common share pro forma      $        1.25    $       (0.64)    $        0.75
-----------------------------------------------------------------------------------------
</TABLE>

      The weighted average fair value of options granted during fiscal 1999,
1998 and 1997 was $12.03, $16.27 and $9.19, respectively.

      Pro forma results disclosed are based upon the provisions of SFAS No. 123
using the Black-Scholes option pricing model and are not likely to be
representative of the effect on pro forma net income for future years. The
Black-Scholes option pricing model was developed for use in estimating the fair
value of traded options, which, unlike options granted by the Company, have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including the
expected stock price volatility. Because the Company's stock options have
characteristics significantly different from options traded on an exchange, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its stock
options.

      The fair value of these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following assumptions:


<TABLE>
<CAPTION>
                                          1999      1998      1997
--------------------------------------------------------------------
<S>                                      <C>       <C>       <C>
Expected dividend yield                    0.0%      0.0%      0.0%
Expected stock price volatility           0.50      0.50      0.70
Risk-free interest rate                    5.5%      5.5%      5.7%
Expected life options                    5 YEARS   5 Years   5 Years
--------------------------------------------------------------------
</TABLE>


NOTE 10. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per
common share:


<TABLE>
<CAPTION>
                                                                                   June 30,
                                                                  -------------------------------------------
                                                                       1999           1998            1997
-------------------------------------------------------------------------------------------------------------
<S>                                                               <C>            <C>             <C>
Numerator
    Net income (loss)                                             $ 41,437,226   $(12,407,176)   $ 17,344,914
Denominator for basic net income (loss) per common share            28,413,608     24,101,658      19,787,785
    Effect of dilutive securities:
    Stock options                                                    1,048,703             --       1,102,785
Denominator for dilutive net income (loss) per common share         29,462,311     24,101,658      20,890,570
Basic net income (loss) per common share                          $       1.46   $      (0.51)   $       0.88
Diluted net income (loss) per common share                        $       1.41   $      (0.51)   $       0.83
-------------------------------------------------------------------------------------------------------------
</TABLE>

      Options that are anti-dilutive because the exercise price was greater than
the average market price of the common shares are not included in the
computation of diluted earnings per share. There were no dilutive securities in
1998 given that the Company had a net loss.


                                       24
<PAGE>   25
NOTE 11. SIGNIFICANT CUSTOMERS

For fiscal 1999, two customers accounted for approximately 18.0% and 14.1% of
sales. For fiscal 1998, three customers accounted for approximately 16.9%, 13.2%
and 12.6% of sales. For fiscal 1997, three customers accounted for approximately
20.6%, 16.3% and 10.9% of sales.


NOTE 12. FINANCIAL INSTRUMENTS - CONCENTRATIONS OF CREDIT RISK

Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, cash equivalents,
short-term investments and accounts receivable.

      The Company maintains cash, cash equivalents and short-term investments
primarily with two financial institutions that invest funds in short-term,
interest-bearing, investment-grade, marketable securities. The Company performs
periodic evaluations of the relative credit standing of these financial
institutions.

      At June 30, 1999 and 1998, three customers comprised approximately 58.1%
and 46.9%, respectively, of accounts receivable. The Company does not require
collateral from its customers, but performs periodic credit evaluations of its
customers' financial condition. Management does not believe a significant credit
risk existed at June 30, 1999.


NOTE 13. DEFINED CONTRIBUTION PLAN

The Company has a defined contribution plan (the "Contribution Plan") that is
intended to qualify under Section 401(k) of the Internal Revenue Code. All
employees, except those who have not attained the age of 21, are eligible to
participate in the Contribution Plan. Participants may contribute, through
payroll deductions, up to 20.0% of their basic compensation, not to exceed
Internal Revenue Code limitations. Although the Contribution Plan provides for
profit sharing contributions by the Company, the Company has not made any such
contributions since its inception.


NOTE 14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The table below lists the quarterly financial information for fiscal 1999 and
1998. All figures are in thousands, except per share data, and certain amounts
do not total to the annual amounts due to rounding.


<TABLE>
<CAPTION>
                                                     Fiscal Year Ended June 30, 1999
                                 -----------------------------------------------------------------------
(For the Quarters Ended)         September 30, 1998   December 31, 1998   March 31, 1999   June 30, 1999
--------------------------------------------------------------------------------------------------------
<S>                              <C>                  <C>                 <C>              <C>
Net revenues                          $ 24,780             $ 28,016          $ 30,183         $ 33,892
Gross profit                            20,073               22,700            25,158           27,305
Net income                               8,089                3,181            13,975           16,192
Basic net income
     per common share                 $   0.29             $   0.11          $   0.49         $   0.57
Diluted net income
     per common share                 $   0.28             $   0.11          $   0.47         $   0.55
--------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
                                                      Fiscal Year Ended June 30, 1998
                                 -----------------------------------------------------------------------
(For the Quarters Ended)         September 30, 1997   December 31, 1997   March 31, 1998   June 30, 1998
--------------------------------------------------------------------------------------------------------
<S>                              <C>                  <C>                 <C>              <C>
Net revenues                          $ 13,911             $ 16,928          $ 22,527         $ 24,205
Gross profit                            11,365               13,924            18,535           19,768
Net income (loss)                        3,751              (31,051)            6,434            8,459
Basic net income (loss)
     per common share                 $  0.17              $  (1.44)         $   0.25         $   0.30
Diluted net income (loss)
     per common share                 $  0.17              $  (1.44)         $   0.24         $   0.29
--------------------------------------------------------------------------------------------------------
</TABLE>

      The quarterly net income per share data disclosed above does not agree
with the amounts reported in the Company's Quarterly Reports on Form 10-Q filed
with the Securities and Exchange Commission, as the amounts have been revised to
reflect the stock splits discussed in Note 8, and the effect of SFAS No. 128
related to basic and diluted earnings per share. Gross profit does not include
amortization of the related intangibles.


                                       25
<PAGE>   26
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS' MATTERS
DIVIDEND POLICY. The Company declared a 3-for-2 stock split in the form of a 50%
stock dividend paid on February 16, 1999 to holders of record on January 29,
1999. The Company has never declared a cash dividend. The Company intends to
retain any earnings to fund future growth and the operation of its business and,
therefore, does not anticipate paying any cash dividends in the foreseeable
future.

PRICE RANGE OF COMMON STOCK. The Company's Class A Common Stock during fiscal
1999 was traded on the Nasdaq National Market under the symbol "MDRX" through
September 23, 1998. At market open on September 24, 1998, the Company's Class A
Common Stock began trading on the New York Stock Exchange under the symbol
"MRX." The following table sets forth for the fiscal periods indicated, the
range of high and low sales prices for the Class A Common Stock of the Company
on the Nasdaq National Market and the New York Stock Exchange, as adjusted to
reflect (i) the 3-for-2 stock split in the form of a 50% stock dividend paid on
February 16, 1999 to holders of record as of January 29, 1999, as adjusted to
the nearest 1/16.


<TABLE>
<CAPTION>
                                                                High            Low
---------------------------------------------------------------------------------------
<S>                                                          <C>             <C>
Fiscal year ended June 30, 1999
      First Quarter                                          $ 29-15/16      $ 19-7/8
      Second Quarter                                           43-3/16         25-5/8
      Third Quarter                                            47-3/4          25-7/8
      Fourth Quarter                                           31              23-1/4
---------------------------------------------------------------------------------------
Fiscal year ended June 30, 1998
      First Quarter                                          $ 37            $ 25
      Second Quarter                                           37-5/16         26-11/16
      Third Quarter                                            34-1/16         25-11/16
      Fourth Quarter                                           32-1/4          22-3/16
---------------------------------------------------------------------------------------
</TABLE>

On September 2, 1999, the last reported sale price on the New York Stock
Exchange for the Company's Class A Common Stock was $27.06 per share. As of such
date, there were approximately 323 holders of record of Class A Common Stock.


                                       26
<PAGE>   27
SELECTED FINANCIAL DATA

The following selected financial data has been derived from the consolidated
financial statements of Medicis Pharmaceutical Corporation for the fiscal years
1999, 1998, 1997, 1996 and 1995. Gross profit does not include amortization of
the related intangibles.


STATEMENT OF OPERATIONS DATA:


<TABLE>
<CAPTION>
                                                                                    June 30,
                                                  ---------------------------------------------------------------------------
(in thousands, except per share data)                1999             1998             1997            1996            1995
-----------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>              <C>              <C>             <C>             <C>
Net revenues                                      $ 116,871        $  77,571        $  41,159       $  25,310       $  19,132
Gross profit                                         95,236           63,592           31,797          18,354          13,282
Operating expenses:
      Selling, general and administrative            38,219           27,424           16,484          10,868          10,330
         Research and development expenses            3,396            2,885            1,450             952             770
      In-process research and development             9,500           35,400               --              --              --
      Depreciation and amortization                   5,810            2,903              999             559             522
                                                  ---------------------------------------------------------------------------
      Total operating expenses                       56,925           68,612           18,933          12,379          11,622
      Operating income (loss)                        38,311           (5,020)          12,864           5,975           1,660
Other:
      Gain on sale of assets                         17,650               --               --              --             107
      Net interest income (expense)                   9,678            7,037            3,787              79             (94)
      Income tax (expense) benefit                  (24,202)         (14,424)             694           1,826             (60)
                                                  ---------------------------------------------------------------------------
Net income (loss)                                 $  41,437        $ (12,407)       $  17,345       $   7,880       $   1,613
-----------------------------------------------------------------------------------------------------------------------------
Basic net income (loss) per common share          $    1.46        $   (0.51)       $    0.88       $    0.52       $    0.11
Diluted net income (loss) per common share        $    1.41        $   (0.51)       $    0.83       $    0.50       $    0.11
Number of shares used in computing basic net
  income (loss) per common share                     28,414           24,102           19,788          15,195          14,836
Number of shares used in computing diluted
net income (loss) per common share                   29,462           24,102           20,891          15,882          14,836
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>

BALANCE SHEET DATA:


<TABLE>
<CAPTION>
                                                                                       June 30,
                                                       --------------------------------------------------------------------
(in thousands)                                           1999           1998           1997           1996           1995
---------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>            <C>            <C>            <C>            <C>
Cash, cash equivalents and short-term
       investments                                     $237,304       $237,921       $ 85,132       $  7,956       $    953
Working capital                                         278,440        262,956         94,803         12,401            619
Total assets                                            467,338        352,350        140,537         26,313         13,850
Long-term obligations                                    34,716             95            111            117            694
Stockholders' equity                                    373,576        324,495        131,565         19,460          7,387
---------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       27