<PAGE>   1

                                                                      EXHIBIT 13

ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Results of Operations
Fiscal 1998 to Fiscal 1997 (thousands of dollars)

<TABLE>
<CAPTION>
                                          Year Ended
                                            June 30,
                                      1998            1997            Change
                                  ------------    ------------     ------------
<S>                               <C>             <C>              <C>
REVENUES:
  Net product sales:
    Distributed................     $241,996        $195,734          $46,262
    Manufactured...............      104,642          61,702           42,940
                                  ------------    -------------     ------------
     Total net product sales...      346,638         257,436           89,202
    Proceeds from supply
     agreements................       30,666          27,050            3,616
                                  ------------    -------------     ------------
  Total revenues...............     $377,304        $284,486          $92,818
</TABLE>


Total revenues increased approximately 33% to $377,304 from $284,486. The
increase is the result of increased net product sales and proceeds from supply
agreements.

Net product sales increased 35% to $346,638 from $257,436. The increase is
attributable to an increase in both distributed products and manufactured
products. The distributed product sales increase was fueled by increases in
demand for Tamoxifen and sales of Minocycline, which the Company began
distributing in October 1997. Manufactured sales growth was primarily
attributable to sales of Warfarin Sodium, which was launched in July 1997.

Distributed sales increased 24% to $241,996 or 70% of net product sales from
$195,734 or 76% of net product sales. The increase is primarily attributable to
increased sales of Tamoxifen, the result of an expanding Tamoxifen market as
well as an increased market share for Barr's Tamoxifen. Increased demand for the
20mg strength of Tamoxifen, which the Company began distributing in December
1996, and sales of Minocycline, which the Company began distributing in October
1997, also contributed to the increase. Tamoxifen is a patent protected product
manufactured for the Company by the Innovator, and is distributed by the Company
under a non-exclusive license agreement with the Innovator. Currently, Tamoxifen
only competes against the Innovator's products, which are sold under the brand
name.

Sales of manufactured products increased 70%, primarily attributable to sales of
Warfarin Sodium, which the Company launched in July 1997. Manufactured sales
include revenues from eight new products in fiscal 1998 compared to four new
products in fiscal 1997. These products represented approximately 42% and 11% of
total manufactured sales in fiscal 1998 and 1997, respectively. Revenues from
these products more than offset price declines and higher discounts on certain
existing products. Warfarin Sodium accounted for approximately 11% of the
Company's net product sales in fiscal 1998. No other manufactured product
accounted for 10% or more of net product sales.


                                                                              22
<PAGE>   2

Proceeds from supply agreements increased 13% to $30,666 primarily as a result
of $4,500 received under a separate contingent supply agreement related to the
Ciprofloxacin patent challenge (See Note 2 to the Consolidated Financial
Statements).

Cost of sales increased to $266,002 from $217,196 primarily related to an
increase in net product sales. As a percentage of net product sales, cost of
sales declined from 84% to 77%. This percentage decline was attributable to a
more favorable mix of manufactured products to distributed products. This
improved mix was attributable to the launch of new manufactured products,
primarily, Warfarin Sodium, which have higher margins than distributed products
and other existing products.

As the product line matures and competition from other manufacturers
intensifies, selling prices and the related margins on those products typically
decline. The Company's future operating results are dependent on several factors
including its ability to introduce new products to its product line, customer
purchasing practices and changes in the amount of competition affecting the
Company's products. In addition, the ability to receive sufficient quantities of
raw materials to maintain its production is critical. While the Company has not
experienced any interruption in sales due to lack of raw materials, the Company
is continually identifying alternate raw material suppliers for many of its key
products in the event that raw material shortages were to occur.

Selling, general and administrative expenses increased to $38,990 from $23,391.
The largest components of the increase related to legal and government affairs
activities as well as higher expenses in promotions, advertising and clinical
trial costs associated with the launching of Warfarin Sodium. The increased
legal fees resulted primarily from lower reimbursements received from patent
challenge partners; the prior year reflected approximately $4,600 in
reimbursement of legal fees. Government affairs expenses were higher in the
current year due to the Company's activities directed at countering DuPont
Pharmaceutical Company's continuing anti-competitive efforts to restrict
substitution of Warfarin Sodium.

Research and development expenses increased to $18,955 from $13,536. The
increase is the result of increased personnel costs to support the number of
products in development; higher raw material and outside clinical study costs
including costs associated with the Company's proprietary drug program which was
not in place in the prior year; and a strategic investment of more than $600,
which was allocated to in-process research and development, for six Abbreviated
New Drug Applications and related technologies.

Interest income decreased by $222 in comparison to the prior year. The decrease
is due to the decrease in the average cash and cash equivalents balance as well
as a slight decrease in the market rates of the Company's short-term
investments. The Company expects its interest income to increase in fiscal 1999
due to higher average cash and cash equivalents balances.

Interest expense decreased $81 due to an increase in capitalized interest
associated with the facility expansion projects during the fiscal year. The
increase in capitalized interest was partially offset by higher fees paid on the
unsecured Tamoxifen balance (See Note 1 to the Consolidated Financial
Statements). The Company expects its interest expense to increase in fiscal 1999
due to a lower portion of the expense being capitalized and an increase in the
unsecured Tamoxifen balance associated with increased Tamoxifen purchases.


                                                                              23
<PAGE>   3

In fiscal 1998, the Company incurred an extraordinary loss of $790 on the early
extinguishment of debt (See Note 6 to the Consolidated Financial Statements).

Results of Operations
Fiscal 1997 to Fiscal 1996 (thousands of dollars)

<TABLE>
<CAPTION>
                                          Year Ended
                                            June 30,
                                      1997            1996            Change
                                  ------------    ------------     ------------
<S>                               <C>             <C>              <C>
REVENUES:
  Net product sales:
    Distributed................     $195,734        $171,401          $24,333
    Manufactured...............       61,702          60,823              879
                                  ------------    -------------     ------------
     Total net product sales...      257,436         232,224           25,212
    Proceeds from supply
     agreement ................       27,050              --           27,050
                                  ------------    -------------     ------------
  Total revenues...............     $284,486        $232,224          $52,262
</TABLE>

Total revenues increased approximately 23% to $284,486 from $232,224. The
increase was equally attributable to increasing net product sales and earnings
from the contingent non-exclusive Supply Agreement that resulted from the
successful settlement of the Ciprofloxacin patent challenge in January 1997 (See
Note 2 to the Consolidated Financial Statements).

Net product sales increased 11% to $257,436 from $232,224. The increase is
primarily attributable to a continued increase in demand for Tamoxifen as well
as increased sales for the balance of the Company's product line.

Net Tamoxifen sales increased 14% to $195,734 or 76% of net product sales from
$171,401 or 74% of net product sales. The growth is primarily attributable to
increases in the Company's market share and price.

Net sales of manufactured products increased approximately 2%. Manufactured net
sales include revenues from four new products in fiscal 1997 compared to two new
products in fiscal 1996. These products represented 11% and 4% of total
manufactured sales in 1997 and 1996, respectively. Revenues from these products
and volume increases on the Company's existing product line offset price
declines and higher discounts on certain existing products.

Cost of sales increased to $217,196 or 84% of net product sales from $189,394 or
82%. The increase in cost of sales as a percentage of net product sales is
primarily the result of two factors. First, an increase in Tamoxifen's share of
total Company revenues, and second, an increase in sales discounts and
allowances due to increased competition. The increase in Tamoxifen's portion of
net product sales negatively impacts margins because the profit margin the
Company earns as a distributor is generally below the margin it earns as a
manufacturer. Increased sales discounts and allowances reduce the Company's net
selling price and margins, but are offered by the Company to maintain market
share in light of increased competition.


                                                                              24
<PAGE>   4

New products such as Megestrol Acetate and Danazol, which were introduced in
November 1995 and August 1996, respectively, as well as Medroxyprogesterone and
Meperidine which were introduced in the quarter ended December 31, 1996, are
currently subject to less competition and therefore generate margins which help
to offset the declining margins on the Company's established products.

Selling, general and administrative expenses increased to $23,391 from $21,695,
yet decreased as a percentage of net product sales from 9.3% to 9.1%. This
percentage decrease was expected due to increased net product sales. The
majority of the dollar increase is attributable to increases in expenses in
preparation for the July launch of Warfarin Sodium and government affairs
expenses, offset by approximately $4,600 of reimbursed legal fees, primarily
related to the Ciprofloxacin patent challenge.

Research and development expenses increased to $13,536 from $11,274. The
increase is primarily the result of increased salaries and related costs
associated with the addition of scientists and higher outside consulting costs
necessary to support the number of products in development. These increases were
partially offset by a decrease in outside testing services.

Interest income decreased by $380 in comparison to the prior year. The decrease
is primarily the result of $485 in interest income included in the prior year's
amount in connection with interest earned on an income tax refund from the
Internal Revenue Service. The decrease was partially offset by an increased
return earned by the Company on its investments in the current fiscal year.

Interest expense decreased $828 due to an increase in capitalized interest
associated with an increase in capital improvements as compared to the prior
year. The increase in capitalized interest was partially offset by interest on
the Company's equipment financing agreement entered in April 1996 and the fee
paid on the unsecured Tamoxifen balance.

Liquidity and Capital Resources

The Company's cash and cash equivalents balance increased to $72,956 at June 30,
1998 from $31,923 at June 30, 1997. In connection with an Alternative Collateral
Agreement between the Company and the Innovator of Tamoxifen (see Note 1 to the
Consolidated Financial Statements), the Company has continued to increase the
cash held in its interest bearing cash collateral account from $11,239 at June
30, 1997 to $59,321 at June 30, 1998.

Cash provided by operating activities was $33,002 for the year ended June 30,
1998, as net earnings of $32,720 and higher depreciation offset increases in
working capital. The working capital increase was led by increases in inventory
and accounts receivable which were partially offset by increases in accounts
payable. The increase in accounts receivable was attributable to increased sales
and an increase in the receivable related to the proceeds from supply agreement.
The inventory increase was primarily the result of higher manufactured product
and Tamoxifen inventory to support increased sales. Accounts payable increased
as a result of higher Tamoxifen inventory levels.

In fiscal 1999, the Company anticipates increased working capital needs to
support an expected increase in sales of existing manufactured products and
Tamoxifen.


                                                                              25
<PAGE>   5

During fiscal 1998, the Company invested $20,431 in capital assets, primarily in
connection with the expansion of its manufacturing capacity in the Virginia and
New York facilities. This represents a decline from fiscal 1997 levels, as
expected, as the Company's Virginia facility came on-line. In fiscal 1999, the
Company estimates that it will invest an additional $17,000 in construction,
equipment and technology related items for its New York, New Jersey and Virginia
facilities. In addition, the Company had net purchases of marketable securities
of $11,360 that includes a strategic investment of $4,069 in Warner Chilcott
plc. Barr has the opportunity to increase its investment in Warner Chilcott
plc., through the exercise of warrants, which represents a potential use of cash
of $1,000 per year over the next three years (See Note 5 to the Consolidated
Financial Statements).

In November 1997, the Company refinanced its $14,400, 10.15% Senior Secured
Notes due June 28, 2001 with $30,000 of Senior Unsecured Notes with an average
interest rate of 6.88% per year. Annual principal payments under the Notes total
$1,429 through November 2002, $5,429 in 2003 and 2004 and $4,000 in 2005 through
2007 (See Note 6 to the Consolidated Financial Statements). Principal payments
on all outstanding long-term debt will be $1,967 in fiscal 1999. In addition,
the Company replaced its $10,000 Secured Revolving Credit facility with a
$20,000 Unsecured Revolving Credit facility. The Company currently maintains a
zero balance on the Revolver (at June 30, 1998, the outstanding balance was
$2,500).

In March 1998, the Company and its largest shareholder completed a combined
primary/secondary stock offering of 3,910,000 common shares. The Company sold
430,000 shares in this offering that provided funds of $14,521. The funds have
been used for general corporate purposes including expansion of working capital
and may be used for potential acquisitions of companies and/or selected products
that are complementary to the existing business.

The Company also continues to evaluate other growth opportunities including
additional strategic investments, acquisitions and joint ventures, which could
require significant capital resources.

The Company believes that cash flows from operations and existing borrowing
capacity under its Revolving Credit facility will be adequate to meet its
operational needs and to take advantage of strategic opportunities as they
occur. To the extent that additional capital resources are required, management
believes such capital may be raised by additional bank borrowings, equity
offerings or other means.

Environmental Matters

The Company has obligations for environmental safety and clean-up under various
state, local and federal laws, including the Comprehensive Environmental
Response, Compensation and Liability Act, commonly known as Superfund. Based on
information currently available, environmental expenditures have not had, and
are not anticipated to have, any material effect on the Company's consolidated
financial statements.

Effects on Inflation

Inflation has had only a minimal impact on the operations of the Company in
recent years.


                                                                              26
<PAGE>   6

Year 2000

During 1998, the Company established a project team to assess the impact of the
Year 2000 issue on the Company's operations. The project team has developed a
multi-phase approach to assessing and resolving any Year 2000 issues. These
phases include:

         1.       Company-wide awareness of Year 2000 implications;

         2.       Assessment of the Company's information technology ("IT") and
                  non-IT systems, as well as, evaluation of third parties with
                  which the Company has a material relationship;

         3.       Implementation of compliant IT and non-IT systems including
                  contingency plans related to third parties which the Company
                  has a material relationship;

         4.       Testing/Validation of new and/or updated systems.

The Company's Year 2000 readiness program has identified several third parties
with which it has a material relationship. These third parties include certain
raw material suppliers, software providers and customers. The Company's Year
2000 project includes identifying these third parties and determining, based on
obtaining written verification, reviewing publicly available financial statement
disclosures and other means, that such third parties are either in compliance or
expect to be in compliance prior to January 1, 2000. However, there can be no
guarantee that the systems of these or other companies on which the Company
relies will be timely converted or that any such failure to convert by another
company would not have an adverse effect on the Company's systems and
operations.

All costs associated with the Year 2000 project to date have been expensed as
incurred. The Company will incur costs that include internal resources, external
consulting, software and certain equipment upgrades. All of the Company's
critical IT systems are Year 2000 compliant, including the financial,
manufacturing and laboratory information systems which were recently
implemented. The cost of the new hardware and software for the recent
implementations is not included in the Year 2000 costs, as the Company had
already planned to replace these systems and did not accelerate the replacement
due to Year 2000 issues. The Company is currently in the process of evaluating
the non-IT systems for compliance and will make modifications to these systems
as necessary. To date the Company has spent less than $100 in remediation
efforts and believes that the cost to gain company-wide compliance will not be
material.

To date the Company has not completed a formal contingency plan for
non-compliance, but continues to develop such plans based on the information
obtained from the third parties with which it has a material relationship and
the completion of the evaluation of its IT and non-IT systems.

The foregoing discussion regarding the Year 2000 project's timing,
effectiveness, implementation, and cost, contains forward-looking statements,
which are based on management's best estimates, derived utilizing numerous
assumptions of future events including the continued availability of certain
resources, third party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved, and actual results could
differ materially from those contemplated estimates. Specific factors that might
cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes and similar uncertainties and
remediation success of the Company's customers and suppliers.


                                                                              27
<PAGE>   7

New Accounting Pronouncement

In June 1997 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting
Comprehensive Income" and SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information."  Both standards for the Company are
effective in fiscal 1999.  SFAS No. 130 will require the Company to add the
reporting of comprehensive income to its financial statements.  The Company
is currently evaluating the impact of SFAS No. 131 on its segment disclosures.

Forward Looking Statements

Except for the historical information contained herein, this Form 10-K,
including Management's Discussion and Analysis of Financial Condition and
Results of Operations, contains forward-looking statements that involve a number
of risks and uncertainties including the timing and outcome of legal
proceedings, fluctuations in operating results, capital spending and other risks
detailed from time-to-time in the Company's filings with the Commission.


                                                                              28
<PAGE>   8
BARR LABORATORIES, INC.
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                                     JUNE 30,         JUNE 30,
                                                                                                      1998              1997
                                                                                                    ---------         ---------
                                     ASSETS
<S>                                                                                                 <C>               <C> 
Current assets:
   Cash and cash equivalents                                                                        $  72,956         $  31,923
   Marketable securities                                                                                7,320              --
   Accounts receivable (including receivables from related parties of $1,015 in 1998
     and $1,358 in 1997) less allowances of $2,738 and $1,620 in 1998 and 1997, respectively           46,760            32,732
   Supply agreement receivable                                                                         14,667             2,500
   Inventories                                                                                         74,377            56,216
   Deferred income taxes                                                                                 --               2,203
   Prepaid expenses                                                                                       806               568
                                                                                                    ---------         ---------
     Total current assets                                                                             216,886           126,142

Property, plant and equipment, net                                                                     90,649            75,928
Other assets                                                                                            3,316               775
                                                                                                    ---------         ---------

     Total assets                                                                                   $ 310,851         $ 202,845
                                                                                                    =========         =========

                   LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Accounts payable (including payables to a related party of $656 in 1998)                         $ 103,321         $  72,685
   Accrued liabilities                                                                                  9,460             5,117
   Deferred income taxes                                                                                1,000              --
   Current portion of long-term debt                                                                    4,467             4,139
   Income taxes payable                                                                                 3,357             2,394
                                                                                                    ---------         ---------
     Total current liabilities                                                                        121,605            84,335

Long-term debt                                                                                         32,174            14,941
Other liabilities                                                                                         162               201
Deferred income taxes                                                                                     981             1,230

Commitments & Contingencies

Shareholders' equity
   Preferred stock, $1 par value per share; authorized 2,000,000 shares; none
     issued
   Common stock $.01 par value per share; authorized 100,000,000;
     issued 22,424,645 and 21,446,053, respectively                                                       224               214
   Additional paid-in capital                                                                          68,064            46,061
   Retained earnings                                                                                   88,596            55,876
   Unrealized loss on investments                                                                        (942)             --
                                                                                                    ---------         ---------
                                                                                                      155,942           102,151
   Treasury stock at cost: 117,955 shares                                                                 (13)              (13)
                                                                                                    ---------         ---------
     Total shareholders' equity                                                                       155,929           102,138
                                                                                                    ---------         ---------

     Total liabilities and shareholders' equity                                                     $ 310,851         $ 202,845
                                                                                                    =========         =========
</TABLE>




        SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.




                                                                              29
<PAGE>   9
BARR LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                             1998               1997             1996
                                                                           ---------         ---------         ---------
<S>                                                                        <C>               <C>               <C> 
Revenues:
   Net product sales (including sales 
    to related parties of $7,537, $4,971, and
    $4,296 in 1998, 1997 and 1996, respectively)                           $ 346,638         $ 257,436         $ 232,224
   Proceeds from supply agreements                                            30,666            27,050              --
                                                                           ---------         ---------         ---------
Total revenues                                                               377,304           284,486           232,224

Costs and expenses:
  Cost of sales                                                              266,002           217,196           189,394
  Selling, general and administrative                                         38,990            23,391            21,695
  Research and development                                                    18,955            13,536            11,274
                                                                           ---------         ---------         ---------

Earnings from operations                                                      53,357            30,363             9,861

Interest income                                                                2,176             2,398             2,778
Interest expense                                                                (858)             (939)           (1,767)
Other (expense) income                                                           (17)              228               637
                                                                           ---------         ---------         ---------

Earnings before income taxes and extraordinary loss                           54,658            32,050            11,509

Income tax expense                                                            21,148            12,603             4,368
                                                                           ---------         ---------         ---------

Earnings before extraordinary loss                                            33,510            19,447             7,141

Extraordinary loss on early extinguishment of debt, net of taxes                (790)             --                (125)
                                                                           ---------         ---------         ---------

Net earnings                                                               $  32,720         $  19,447         $   7,016
                                                                           =========         =========         =========

               EARNINGS PER COMMON SHARE:

Earnings before extraordinary loss                                         $    1.54         $    0.92         $    0.34
Net earnings                                                               $    1.50         $    0.92         $    0.33
                                                                           =========         =========         =========

       EARNINGS PER COMMON SHARE-ASSUMING DILUTION:

Earnings before extraordinary loss                                         $    1.45         $    0.87         $    0.33
Net earnings                                                               $    1.41         $    0.87         $    0.32
                                                                           =========         =========         =========

Weighted average shares                                                       21,811            21,133            20,968
                                                                           =========         =========         =========

Weighted average shares-assuming dilution                                     23,190            22,430            21,757
                                                                           =========         =========         =========
</TABLE>




        SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.



                                                                              30
<PAGE>   10
BARR  LABORATORIES,  INC.
CONSOLIDATED STATEMENTS  OF SHAREHOLDERS'  EQUITY
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(THOUSANDS OF DOLLARS,  EXCEPT SHARE AMOUNTS)


<TABLE>
<CAPTION>
                                          Common Stock                Additional                        Unrealized loss
                                  ----------------------------         paid-in         Retained          on marketable  
                                     Shares            Amount          capital         Earnings           securities    
                                  --------------------------------------------------------------------------------------

<S>                               <C>              <C>              <C>              <C>              <C>               
BALANCE, JUNE 30, 1995              9,334,852      $        93      $    42,230      $    29,543      $      --         
Net earnings                                                                               7,016         
Issuance of common stock
 for exercised stock options
 and employees' stock
 purchase plans                        80,757                1            1,310         
Stock split (3-for-2)               4,700,055               47              (14)             (52)          
                                  --------------------------------------------------------------------------------------  

BALANCE, JUNE 30, 1996             14,115,664              141           43,526           36,507             --         
Net earnings                                                                              19,447             
Issuance of common stock
 for exercised stock options
 and employees' stock
 purchase plans                       220,526                2            2,549             --             
Stock split (3-for-2)               7,109,863               71              (14)             (78)            
                                  --------------------------------------------------------------------------------------     

BALANCE, JUNE 30, 1997             21,446,053              214           46,061           55,876             --         
Net earnings                                                                              32,720          
Issuance of common
 stock for stock offering             430,000                4           14,517           
Stock issuance costs                                                       (353)
Issuance of common stock
 for exercised stock options
 and employees' stock
 purchase plans                       548,592                6            7,839           
Unrealized loss on marketable
 securities                                                                                                  (942)      
                                                                                                                        
                                  --------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1998             22,424,645      $       224      $    68,064      $    88,596      $      (942)      
                                  --------------------------------------------------------------------------------------          
</TABLE>


<TABLE>
<CAPTION>
                                          Common stock
                                           in treasury                Total
                                      ----------------------       Shareholders'      
                                       Shares        Amount           Equity          
-----------------------------------------------------------------------------
                                                                                      
<S>                               <C>            <C>              <C>                 
BALANCE, JUNE 30, 1995                52,425     $       (13)     $    71,853         
Net earnings                                                            7,016             
Issuance of common stock                                                              
 for exercised stock options                                                           
 and employees' stock                                                                  
 purchase plans                                                         1,311                    
Stock split (3-for-2)                 26,212              --              (19)                         
-----------------------------------------------------------------------------
                                                                                      
BALANCE, JUNE 30, 1996                78,637             (13)          80,161         
Net earnings                                                           19,447                   
Issuance of common stock                                                                                                         
 for exercised stock options                                                           
 and employees' stock                                                                  
 purchase plans                                                         2,551                 
Stock split (3-for-2)                 39,318              --              (21)  
-----------------------------------------------------------------------------
                                                                                      
BALANCE, JUNE 30, 1997               117,955             (13)         102,138         
Net earnings                                                           32,720                
Issuance of common                                                                    
 stock for stock offering                                              14,521  
Stock issuance costs                                                     (353) 
Issuance of common stock                                                              
 for exercised stock options                                                           
 and employees' stock                                                                  
 purchase plans                                                         7,845                
Unrealized loss on marketable                                                         
securities                                                               (942)              
-----------------------------------------------------------------------------
                                                                                      
BALANCE, JUNE 30, 1998               117,955     $       (13)     $   155,929         
-----------------------------------------------------------------------------
</TABLE>

                                  

        SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.




                                                                              31
<PAGE>   11
BARR  LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(THOUSANDS OF DOLLARS, EXCEPT SHARE INFORMATION)

<TABLE>
<CAPTION>
                                                                                     1998             1997             1996
                                                                                   --------         --------         --------

CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
<S>                                                                                <C>              <C>              <C>
Net earnings                                                                       $ 32,720         $ 19,447         $  7,016
Adjustments to reconcile net earnings to  net  cash  provided  by operating
 activities:
  Depreciation and amortization                                                       5,521            4,989            4,920
  Deferred income tax expense                                                         3,585              474              777
  Write-off of deferred financing fees associated  with  early
   extinguishment of debt                                                               195             --                 31
  Loss  (gain) on disposal of property, plant and equipment                              63             (203)              63
  Gain on sale of marketable securities                                                  (2)            --               --

Changes in assets and liabilities:
 (Increase) decrease in:
  Accounts receivable and supply agreement receivable, net                          (26,195)          (3,167)          (4,758)
  Inventories                                                                       (18,161)         (13,820)          (6,506)
  Prepaid expenses                                                                     (238)              80               30
  Other assets                                                                         (389)            (194)            (107)
 Increase (decrease) in:
  Accounts payable, accrued liabilities and other                                    34,940           12,896            4,047
  Income taxes payable                                                                  963            1,290             (145)
                                                                                   --------         --------         --------
Net cash provided by operating activities                                            33,002           21,792            5,368
                                                                                   --------         --------         --------

CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Purchases of property, plant and equipment                                          (20,431)         (35,087)         (16,048)
Proceeds from sale of property, plant and equipment                                     248              239              184
Purchases of marketable securities                                                  (11,960)            --               --
Proceeds from sale of marketable securities                                             600             --               --

                                                                                   --------         --------         --------
 Net cash used in investing activities                                              (31,543)         (34,848)         (15,864)
                                                                                   --------         --------         --------


CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Principal payments on long-term debt                                                (14,939)          (4,081)          (2,043)
Proceeds from loans                                                                  30,000            1,637            3,153
Proceeds from revolving line of credit                                               16,800             --               --
Payments on revolving line of credit                                                (14,300)            --               --
Stock issuance costs                                                                   (353)            --               --
Proceeds from stock offering                                                         14,521             --               --
Fees associated with stock split                                                       --                (21)             (19)
Proceeds from exercise of stock options and employee stock purchases                  7,845            2,551            1,311

                                                                                   --------         --------         --------
 Net cash provided by financing activities                                           39,574               86            2,402
                                                                                   --------         --------         --------
 Increase (decrease) in cash and cash equivalents                                    41,033          (12,970)          (8,094)
Cash and cash equivalents, beginning of year                                         31,923           44,893           52,987

                                                                                   --------         --------         --------
Cash and cash equivalents, end of year                                             $ 72,956         $ 31,923         $ 44,893
                                                                                   ========         ========         ========

Supplemental cash flow data-Cash paid during the year:
 Interest, net of portion capitalized                                              $    855         $    930         $  1,727
 Income taxes                                                                        13,254           10,830            3,930
</TABLE>


        SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.

                                                                              32
<PAGE>   12
                             BARR LABORATORIES, INC.

                 Notes to the Consolidated Financial Statements
               (in thousands of dollars, except per share amounts)

(1)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         (a)      Principles of Consolidation and Other Matters

                  The consolidated financial statements include the accounts of
                  Barr Laboratories, Inc. (the "Company") and its wholly-owned
                  subsidiaries. All significant intercompany balances and
                  transactions have been eliminated in consolidation.

                  Sherman Delaware, Inc. owned 44.2% of the common stock of the
                  Company at June 30, 1998. Dr. Bernard C. Sherman is a
                  principal stockholder of Sherman Delaware, Inc. and a Director
                  of Barr Laboratories, Inc.

         (b)      Credit and Market Risk

                  The Company operates in one industry segment; it manufactures,
                  markets and distributes a wide range of generic pharmaceutical
                  products. The Company also distributes a patented breast
                  cancer agent, Tamoxifen Citrate, under an agreement with the
                  Innovator. The Company's manufacturing plants are located in
                  New Jersey, New York and Virginia and its products are sold
                  throughout the United States and Puerto Rico, primarily to
                  wholesale and retail distributors. In addition, the Company
                  manufactures and sells certain products to other companies
                  that resell these pharmaceuticals under their own (private)
                  label. In fiscal 1998, 1997 and 1996, McKesson Drug Company
                  accounted for approximately 12%, 13% and 10% of net product
                  sales, respectively. No other customer accounted for greater
                  than 10% of sales in any of the last three fiscal years. The
                  Company performs ongoing credit evaluations of its customers'
                  financial condition and generally requires no collateral from
                  its customers.

         (c)      Cash and Cash Equivalents

                  Cash equivalents consist of short-term, highly liquid
                  investments (primarily market auction securities with interest
                  rates that are re-set in intervals of 7 to 49 days) which are
                  readily convertible into cash at par value (cost). As of June
                  30, 1998 and 1997, $59,321 and $11,239, respectively, of the
                  Company's cash was held in an interest bearing escrow account.
                  Such amounts represent the portion of the Company's payable
                  balance with the Innovator of Tamoxifen, which the Company has
                  decided to secure in connection with its cash management
                  policy.

                  In December 1995, the Company and the Innovator of Tamoxifen
                  entered into an Alternative Collateral Agreement ("Collateral
                  Agreement") which suspends certain sections of the Supply and
                  Distribution Agreement ("Distribution Agreement") entered into
                  by both parties in March 1993. Under the Collateral Agreement,
                  extensions of credit to the Company are no longer required to
                  be secured by a letter of credit or cash collateral. However,
                  the Company may at its



                                                                              33
<PAGE>   13
                  discretion maintain a balance in the escrow account based on
                  its short-term cash requirements. All remaining terms of the
                  Distribution Agreement remain in place. In return for the
                  elimination of the cash collateral requirement and in lieu of
                  issuing letters of credit, the Company has agreed to pay the
                  Innovator monthly interest based on the average unsecured
                  monthly Tamoxifen payable balance, as defined in the
                  Collateral Agreement, and maintain compliance with certain
                  financial covenants. The Company was in compliance with such
                  covenants at June 30, 1998.

         (d)      Inventories

                  Inventories are stated at the lower of cost, determined on a
                  first-in, first-out (FIFO) basis, or market.

         (e)      Property, Plant and Equipment

                  Property, plant and equipment is recorded at cost.
                  Depreciation is provided for on a straight-line basis over the
                  estimated useful lives of the related assets. Leasehold
                  improvements are amortized on a straight-line basis over the
                  shorter of their useful lives or the terms of the respective
                  leases.

                  The estimated useful lives of the major classification of
                  depreciable assets are:

<TABLE>
<CAPTION>
                                                             Years
                                                             -----
<S>                                                          <C>
                       Buildings                                45
                       Building Improvements                    10
                       Machinery and Equipment                3-10
                       Leasehold Improvements                 3-10
                       Automobiles and Trucks                  3-5
</TABLE>


                  Maintenance and repairs are charged to operations as incurred;
                  renewals and betterments are capitalized.

         (f)      Research and Development

                  Research and development costs, which consist principally of
                  product development costs, are charged to operations as
                  incurred.

         (g)      Earnings Per Share

                  On April 11, 1997, the Company's Board of Directors declared a
                  3-for-2 stock split effected in the form of a 50% stock
                  dividend. Approximately 7.1 million additional shares of
                  common stock were distributed on May 7, 1997 to shareholder's
                  of record as of April 24, 1997. On February 21, 1996, the
                  Company's Board of Directors declared a 3-for-2 stock split
                  effected in the form of a 50% stock dividend. Approximately
                  4.7 million additional shares of common stock were distributed
                  on March 25, 1996 to shareholder's of record as of March 4,
                  1996. All prior year share and per share amounts have been
                  adjusted for the stock splits.


                                                                              34
<PAGE>   14
                  In February 1997, the Financial Accounting Standards Board
                  issued Statement of Financial Accounting Standards ("SFAS")
                  No. 128, "Earnings per Share." SFAS No. 128 specifies the
                  computation, presentation and disclosure requirements for
                  earnings per share ("EPS") and became effective for both
                  interim and annual periods ending after December 15, 1997. All
                  prior period EPS data has been restated to conform with the
                  provisions of SFAS No. 128. The following is a reconciliation
                  of the numerators and denominators used to calculate Earnings
                  per common share before extraordinary loss on the Consolidated
                  Statements of Operations:


<TABLE>
<CAPTION>
                                                                  1998           1997           1996
                                                                  ----           ----           ----

<S>                                                              <C>            <C>            <C>
Earnings per common share:
Earnings before extraordinary loss (numerator)                   $33,510        $19,447        $ 7,141

Weighted average shares (denominator)                             21,811         21,133         20,968

Earnings before extraordinary loss                               $  1.54        $  0.92        $  0.34
                                                                 =======        =======        =======


Earnings per common share - assuming dilution:
Earnings before extraordinary loss (numerator)                   $33,510        $19,447        $ 7,141

Weighted average shares                                           21,811         21,133         20,968
Effect of dilutive options                                         1,379          1,297            789
                                                                 -------        -------        -------

Weighted averages shares - assuming dilution (denominator)        23,190         22,430         21,757

Earnings before extraordinary loss                               $  1.45        $  0.87        $  0.33
                                                                 =======        =======        =======
</TABLE>

(share amounts in thousands)

         (h)      Deferred Financing Fees

                  All costs associated with the issuance of debt are being
                  amortized on a straight-line basis over the life of the
                  related debt, which matures in 2002, 2004 and 2007. The
                  unamortized amounts of $398 and $492 at June 30, 1998 and
                  1997, respectively, are included in Other Assets in the
                  Consolidated Balance Sheets.

                  In connection with the November 1997 early extinguishment of
                  the remaining $14,400 of the 10.15% Senior Secured Notes, the
                  Company wrote off $195 in deferred financing fees in the year
                  ended June 30, 1998 (See Note 6 to the Consolidated Financial
                  Statements).

         (i)      Fair Value of Financial Instruments

                  Cash, Accounts Receivable and Accounts Payable - The carrying
                  amounts of these items are a reasonable estimate of their fair
                  value.


                                                                              35
<PAGE>   15
                  Marketable Securities - Marketable securities are recorded at
                  their fair value (See Note 5 to the Consolidated Financial
                  Statements).

                  Long-Term Debt - The fair value at June 30, 1998 and 1997 is
                  estimated at $34 million and $20 million, respectively.
                  Estimates were determined by discounting the future cash flows
                  using rates currently available to the Company.

                  The fair value estimates presented herein are based on
                  pertinent information available to management as of June 30,
                  1998. Although management is not aware of any factors that
                  would significantly affect the estimated fair value amounts,
                  such amounts have not been comprehensively revalued for
                  purposes of these financial statements since that date, and
                  current estimates of fair value may differ significantly from
                  the amounts presented herein.

         (j)      Use of Estimates in the Preparation of Financial Statements

                  The preparation of financial statements in conformity with
                  generally accepted accounting principles requires management
                  to make estimates and use assumptions that affect certain
                  reported amounts and disclosures; actual results may differ.

         (k)      Revenue Recognition

                  The Company recognizes revenue when goods are shipped.

         (l)      Stock-Based Compensation

                  Effective January 1, 1996, the Financial Accounting Standards
                  Board issued SFAS No. 123 "Accounting for Stock-Based
                  Compensation." SFAS No. 123 requires the Company to either
                  record compensation expense or provide additional disclosures
                  with respect to stock awards and stock option grants made
                  after December 31, 1994. These Notes to the Consolidated
                  Financial Statements include the disclosures required by SFAS
                  No. 123 (See Note 9). No compensation expense is recognized
                  pursuant to the Company's stock option plans under SFAS No.
                  123 which is consistent with prior treatment under Accounting
                  Principles Board Opinion No. 25 ("APB No. 25") "Accounting for
                  Stock Issued to Employees."

(2)      PROCEEDS FROM SUPPLY AGREEMENTS

         In January 1997, Bayer AG and Bayer Corporation ("Bayer") and the
         Company reached an agreement to settle the then pending litigation
         regarding Bayer's patent protecting Ciprofloxacin hydrochloride
         ("Settlement Agreement"). In connection with the Settlement Agreement,
         the Company acknowledged the validity and enforceability of Bayer's
         world-wide Ciprofloxacin patent, received an initial cash payment of
         $24,550, and signed a contingent, non-exclusive Supply Agreement
         ("Supply Agreement") which ends at patent expiry in December 2003. For
         the year ended June 30, 1997 the Company recognized revenue of $27,050
         from this Supply Agreement including the initial cash payment of
         $24,550.


                                                                              36
<PAGE>   16
         In accordance with the Supply Agreement, the Company recognizes income
         and a related receivable on a monthly basis, as certain contingencies
         are met. Collection of certain of these receivables occurs quarterly.
         The Company recognized revenue of $26,166 for the year ended June 30,
         1998. The Company received payments of $7,500 and $6,500 in March and
         June 1998, respectively, for amounts earned for June through November
         1997.

         Also included in Proceeds from supply agreements is $4,500 received
         under a separate contingent supply agreement with an unrelated party
         relating to the Ciprofloxacin patent challenge.

(3)      INVENTORIES

         A summary of inventories is as follows:

<TABLE>
<CAPTION>
                                         June 30,
                                    -------------------
                                    1998           1997
                                    ----           ----
<S>                               <C>            <C>
Raw Materials and Supplies        $17,459        $21,403
Work-in-Process                     4,132          3,340
Finished Goods                     52,786         31,473
                                  -------        -------
                                  $74,377        $56,216
                                  =======        =======
</TABLE>


         Tamoxifen Citrate, purchased as a finished product, accounted for
         $40,777 and $23,155 of finished goods inventory at June 30, 1998 and
         1997, respectively.

(4)      PROPERTY, PLANT AND EQUIPMENT

         A summary of property, plant and equipment is as follows:

<TABLE>
<CAPTION>
                                                         June 30,
                                                   -------------------
                                                   1998           1997
                                                   ----           ----
<S>                                            <C>             <C>
Land                                           $  3,257        $  2,338

Buildings and Improvements                       48,950          23,653
Machinery and Equipment                          56,550          40,209
Leasehold Improvements                            1,858           1,841
Automobiles and Trucks                               68              68
Construction in Progress                         18,380          41,686
                                               --------        -------- 
                                                129,063         109,795
Less: Accumulated
 Depreciation & Amortization                     38,414          33,867
                                               --------        --------
                                               $ 90,649        $ 75,928
                                               ========        ========
</TABLE>


         For the years ended June 30, 1998, 1997 and 1996, $2,047, $1,801 and
         $526 of interest was capitalized, respectively.


                                                                              37
<PAGE>   17
(5)      MARKETABLE SECURITIES & OTHER ASSETS

         The Company accounts for investments in marketable securities in
         accordance with SFAS No. 115, "Accounting for Certain Investments in
         Debt and Equity Securities." The Company's investments are classified
         as "available for sale" and, accordingly, are recorded at current
         market value with offsetting adjustments to shareholders' equity, net
         of income taxes.

         Marketable securities include investments in a short duration portfolio
         of corporate and government debt. The debt securities will be held for
         less than one year and are therefore, recorded as a Current Asset in
         the Consolidated Balance Sheets.

         On August 13, 1997 Barr made a strategic investment in Warner Chilcott
         plc. ("Warner Chilcott"), a developer, marketer, and distributor of
         specialty pharmaceutical products. In connection with Warner Chilcott's
         Initial Public Offering ("Offering"), the Company acquired 250,000
         Ordinary Shares represented by 250,000 American Depository Shares
         ("ADSs") at a price equal to the initial public offering price less
         underwriting discounts and commissions. The initial investment totaled
         $4,069. In addition, the Company was granted warrants to purchase an
         additional 250,000 shares in the form of ADSs. Beginning on the first
         anniversary of the Offering and annually thereafter for the next three
         years, one-fourth of the warrants will be exercisable by Barr. If Barr
         does not exercise in full the portion of the warrant exercisable during
         any one year, such portion of the warrant will terminate. The Company
         elected not to exercise the first portion of the warrants, and as a
         result, such portion of the warrants terminated on August 13, 1998.
         Finally, in connection with two product agreements tentatively agreed
         to with Warner Chilcott, the Company has the opportunity to receive an
         additional 425,000 shares upon receipt of certain product approvals by
         Barr. The equity investment in Warner Chilcott is recorded in Other
         Assets in the Consolidated Balance Sheets.

         The amortized cost and estimated market values of the securities at
         June 30, 1998 are as follows:

<TABLE>
<CAPTION>
                                                 Gross           Gross
                                  Amortized    Unrealized      Unrealized       Market
                                    Cost         Gains          Losses          Value
                                    ----         -----          ------          -----
Debt securities:
<S>                               <C>            <C>            <C>            <C>
 U.S. Government Securities       $ 4,930        $    35        $     6        $ 4,959
 Corporate Bonds                    2,363           --                2          2,361
                                  -------        -------        -------        -------
Total debt securities               7,293             35              8          7,320
Equity securities                   4,069           --            1,600          2,469
                                  -------        -------        -------        -------
Total securities                  $11,362        $    35        $ 1,608        $ 9,789
                                  =======        =======        =======        =======
</TABLE>


         Proceeds of $600, which include a gain of $2, were received on the
         sales of marketable securities in 1998. The cost of investments sold is
         determined by the specific identification method.


                                                                              38
<PAGE>   18
(6)      LONG-TERM DEBT

         A summary of long-term debt is as follows:

<TABLE>
<CAPTION>
                                                        June 30,
                                                   -------------------

                                                   1998           1997
                                                   ----           ----
<S>                                             <C>            <C>
New Jersey Economic Development
  Authority Bond (a)                            $   285        $   328
10.15% Senior Secured Notes Due
  June 28, 2001(b)                                   --         14,400
Senior Unsecured Notes (b)                       30,000             --
Equipment Financing (c)                           3,856          4,352
Unsecured Revolving Credit Facility (d)           2,500             --
                                                 ------        --------
                                                 36,641         19,080
Less:  Current Installments of Long-Term
  Debt                                            4,467          4,139
                                                -------        -------
Total Long-Term Debt                            $32,174        $14,941
                                                =======        =======
</TABLE>

         (a)      The New Jersey Economic Development Authority Bond is payable
                  to a bank. Such loan is secured by a first mortgage on land,
                  building and improvements on the facility located at 265
                  Livingston Street. Interest is charged at 75% of the bank's
                  prime rate. The prime rate was 8.5% at June 30, 1998 and 1997.
                  Monthly installments are $3.6 plus interest, through December
                  1999. Upon maturity in January 2000, there will be a final
                  installment equal to the then remaining principal balance of
                  $220.

         (b)      In June 1991, the Company entered into a note purchase
                  agreement and issued $20,000 of Senior Secured Notes bearing
                  interest at a rate of 10.15%, payable semiannually. In March
                  1996, the Company negotiated the prepayment of $2,000 of these
                  Notes. The cash payment of $2,213 included a prepayment
                  penalty of $169 and accrued interest through March 15, 1996 of
                  $44. The prepayment penalty of $169 and the related write-off
                  of approximately $31 in previously deferred financing costs
                  resulted in an extraordinary loss, which net of taxes of $76,
                  was $125 or $0.01 per share. The Company began making annual
                  principal payments of $3,600 in June 1997. These notes were
                  collateralized by a first mortgage on the Pomona, New York
                  facility and all machinery and equipment other than machinery
                  and equipment in the Forest, Virginia facility.

                  In November 1997, the Company refinanced the outstanding
                  $14,400 Senior Secured Notes with $30,000 of Senior Unsecured
                  Notes with an average interest rate of 6.88% per year. The
                  cash payment of $16,055 included the outstanding principal of
                  $14,400, a prepayment penalty of $1,087 and accrued interest
                  through November 18, 1997 of $568. The prepayment penalty of
                  $1,087 and the related write-off of approximately $195 in
                  previously deferred financing costs resulted in an
                  extraordinary loss. This extraordinary loss from early
                  extinguishment of debt, net of taxes of $492, was $790 or
                  $0.04 per share. The new Senior Unsecured Notes of $30,000
                  include a $20,000, 7.01% Note due November 18, 2007 and
                  $10,000, 6.61% Notes due November 18, 2004. Annual principal
                  payments under the Notes total $1,429 through November 2002,
                  $5,429 in 2003 and 2004 and $4,000 in 2005 through 2007.


                                                                              39
<PAGE>   19
                  The Senior Unsecured Notes contain certain financial covenants
                  including restrictions on dividend payments not to exceed $10
                  million plus 75% of consolidated net income subsequent to June
                  30, 1997. The Company was in compliance with all such
                  covenants as of June 30, 1998.

         (c)      In April 1996, the Company signed a Loan and Security
                  Agreement with BankAmerica Leasing and Capital Group that
                  provided the Company up to $18,750 in financing for equipment
                  to be purchased through October 1997. Notes entered into under
                  this agreement require no principal payment for the first two
                  quarters; bear interest quarterly at a rate equal to the
                  London Interbank Offer Rate (LIBOR) plus 125 basis points; and
                  have a term of 72 months. LIBOR was 5.719% and 5.813% at June
                  30, 1998 and June 30, 1997, respectively. In November 1997,
                  the Company opted not to renew this facility.

         (d)      In November 1997, the Company replaced its $10,000 Secured
                  Revolving Credit Facility with Bank of America National Trust
                  and Savings Association with a $20,000 Unsecured Revolving
                  Credit Facility ("Revolver"). In addition, the term of the
                  Revolver was extended one year to July 31, 2000. Borrowings
                  under this facility bear interest at either prime or LIBOR
                  plus 0.75%. In addition, the Company is required to pay a
                  commitment fee equal to .25% of the difference between the
                  outstanding borrowings and $20,000.

         Principal maturities of existing long-term debt for the next five years
         and thereafter are as follows:

<TABLE>
<CAPTION>
                                   Year Ending
                                    June 30,
                                    --------
<S>                                                          <C>
                                       1999                  $4,467
                                       2000                   2,166
                                       2001                   1,924
                                       2002                   3,184
                                       2003                   2,043
                                    Thereafter               22,857
</TABLE>


(7)      RELATED-PARTY TRANSACTIONS

         The Company's related party transactions were with affiliated companies
         of Dr. Bernard C. Sherman. During the years ended June 30, 1998, 1997,
         and 1996, the Company purchased $1,799, $1,800 and $1,800,
         respectively, of bulk pharmaceutical material from such companies. In
         addition, the Company sold certain of its pharmaceutical products and
         bulk pharmaceutical materials to five other companies owned by Dr.
         Bernard Sherman. During fiscal 1996, the Company also entered into a
         multi-year agreement with a Company owned by Dr. Sherman to share
         litigation costs in connection with one of its patent challenges. For
         the years ended June 30, 1998, 1997 and 1996, the Company received
         $1,170, $987 and $570, respectively, in connection with such agreement
         which was recorded as a reduction to selling, general and
         administrative expenses.


                                                                              40
<PAGE>   20
         During the years ended June 30, 1998, 1997 and 1996, the Company's
         founder and Vice Chairman, Edwin A. Cohen, earned $250, $250 and $213,
         respectively, under a consulting agreement.

(8)      Income Taxes

         A summary of the components of income tax expense is as follows:

<TABLE>
<CAPTION>
                            Year Ended June 30,
                 -------------------------------------
                   1998           1997           1996
                 -------        -------        -------
<S>              <C>            <C>            <C>
Current:
  Federal        $15,504        $10,757        $ 3,110
  State            1,567          1,372            405
                 -------        -------        -------
                  17,071         12,129          3,515
                 -------        -------        -------

Deferred:
  Federal          3,103            294            617
  State              482            180            160
                 -------        -------        -------
                   3,585            474            777
                 =======        =======        =======
Total            $20,656        $12,603        $ 4,292
                 =======        =======        =======
</TABLE>


         Income tax expense for the years ended June 30, 1998, 1997 and 1996 is
         included in the financial statements as follows:



<TABLE>
<CAPTION>
                                             Year Ended June 30,
                                   -----------------------------------------
                                     1998             1997            1996
                                   --------         --------        --------
<S>                                <C>              <C>             <C>
Continuing operations              $ 21,148         $ 12,603        $  4,368
Extraordinary loss on early
  extinguishment of debt               (492)            --               (76)
                                   --------         --------        --------
                                   $ 20,656         $ 12,603        $  4,292
                                   ========         ========        ========
</TABLE>


         The provision for income taxes differs from amounts computed by
         applying the statutory federal income tax rate to income before taxes
         due to the following:

<TABLE>
<CAPTION>
                                                       Year Ended June 30,
                                               ---------------------------------------
                                                 1998           1997            1996
                                               --------        --------        -------
<S>                                            <C>             <C>             <C>
Federal Income Taxes at Statutory
  Rate                                         $ 18,681        $ 11,214        $ 3,958
State Income Taxes,
  Net of Federal Income Tax Effect                1,332           1,070            360
Other, net                                          643             319            (26)
                                               --------        --------        -------
                                               $ 20,656        $ 12,603        $ 4,292
                                               ========        ========        =======
</TABLE>


                                                                              41
<PAGE>   21
The temporary differences that give rise to deferred tax assets and liabilities
as of June 30, 1998 and 1997 are as follows;




<TABLE>
<CAPTION>
                                            1998            1997
                                          -------         -------
<S>                                       <C>             <C>
Deferred Tax Assets:
  Receivable Reserves                     $ 1,152         $   561
  Inventory Reserves                        1,589             990
  Inventory Capitalization                    208             706
  Investments                                 631              --
  Other Operating Reserves                  1,934             903
                                          -------         -------
Total Deferred Tax Assets                   5,514           3,160

Deferred Tax Liabilities:
  Plant and Equipment                      (1,612)         (1,230)
  Proceeds from Supply
    Agreement                              (5,883)           (957)
                                          -------         -------
Total Deferred Tax
  Liabilities                              (7,495)         (2,187)
                                          -------         -------

Net Deferred Tax (Liability)/Asset        $(1,981)        $   973
                                          =======         =======
</TABLE>

         Internal Revenue Service ("IRS")

         As of June 30, 1998, the U.S. Internal Revenue Service has completed
         its examination of the Company's tax returns for all years through 1992
         and there are no unresolved issues outstanding for those years.

(9)      SHAREHOLDERS' EQUITY

         Employee Stock Option Plans

         The Company has stock option plans, which were approved by the
         shareholders and which authorize the granting of options to officers
         and certain key employees to purchase the Company's common stock at a
         price equal to the market price on the date of grant.

         During fiscal 1994, the shareholders ratified the adoption by the Board
         of Directors of the 1993 Stock Incentive Plan ("the 1993 Option Plan").
         In December 1996, the shareholders ratified an amendment to the 1993
         Option Plan which increased the number of shares of common stock which
         may be granted by 1,125,000 to a total of 2,812,500 (after giving
         effect to the May 1997 3-for-2 stock split).

         The Company's other option plan was approved by the shareholders in
         1986 ("the 1986 Option Plan"). Effective June 30, 1996, options are no
         longer granted under this Plan. For fiscal 1998 and 1997, there were no
         options that expired under this plan. In fiscal 1996, 64,165 options
         expired.

         All options granted prior to June 30, 1996, under the 1993 Option Plan
         and 1986 Option Plan, are exercisable between one and two years from
         the date of grant and expire ten


                                                                              42
<PAGE>   22
         years after the date of grant except in cases of death or termination
         of employment as defined in each Plan. Options issued after June 30,
         1996 are exercisable between one and three years from the date of
         grant. To date, no option has been granted under either the 1993 Option
         Plan or the 1986 Option Plan at a price below the current market price
         of the Company's common stock on the date of grant.

         A summary of the activity resulting from all plans, adjusted for the
         March 1996 and May 1997 3-for-2 stock splits, is as follows:

<TABLE>
<CAPTION>
                                                               NO. OF SHARES         OPTION PRICE
                                                               -------------         ------------
<S>                                                              <C>                <C>
Outstanding at 6/30/95                                             1,424,806          $1.94-11.24

Granted                                                              573,741          10.52-10.64

Canceled                                                             (50,062)          2.83-10.52

Exercised                                                           (110,437)          2.44-10.83
                                                                  ----------
Outstanding at 6/30/96                                             1,838,048           1.94-11.24

Granted                                                              330,406          17.54-37.38

Canceled                                                              (1,125)               10.52

Exercised                                                           (181,938)          1.94-10.94
                                                                  ----------

Outstanding at 6/30/97                                             1,985,391           1.94-37.38

Granted                                                              195,500          34.66-39.66

Canceled                                                             (38,992)          19.29-39.66

Exercised                                                           (467,411)           1.94-19.29
                                                                  ----------

Outstanding at 6/30/98                                             1,674,488         $1.94-39.66
                                                                  ----------

Exercised to date through 6/30/98                                  1,331,806

Available for Grant (4,162,500 authorized)                         1,092,041

Exercisable at 6/30/98                                             1,276,627         $1.94-22.12
</TABLE>


         Non-Employee Directors' Stock Option Plan

         During fiscal year 1994, the shareholders ratified the adoption by the
         Board of Directors of the 1993 Stock Option Plan for Non-Employee
         Directors (the "Directors' Plan"). An aggregate of 337,500 shares of
         common stock were authorized to be granted under the Directors' Plan.
         In December 1996, the shareholders ratified an amendment to the

                                                                              43
<PAGE>   23
         Directors' Plan that increased the number of shares of common stock
         that may be granted by 225,000 to a total of 562,500. This formula
         plan, among other things, enhances the Company's ability to attract and
         retain experienced directors. In December 1995, the number of shares
         which each non-employee director is optioned was increased from 6,750
         to 11,250 shares on the grant date, except in the case of the first
         grant date (which was the date of the 1993 Annual Meeting) where each
         eligible director was optioned 27,000 shares.

         All options granted under the Directors' Plan have ten-year terms and
         are exercisable at an option exercise price equal to the market price
         of common stock on the date of grant. Each option is exercisable on the
         date of the first annual shareholders' meeting immediately following
         the date of grant of the option, provided there has been no
         interruption of the optionee's service on the Board before that date.
         The following is a summary of activity, adjusted for the March 1996 and
         May 1997 3-for-2 stock splits, for the three fiscal years ended June
         30, 1998:

<TABLE>
<CAPTION>
                                          No. of Shares                Option Price
                                          -------------                ------------

<S>                                       <C>                          <C>
Outstanding at 6/30/95                             148,500               $9.16-11.38

Granted                                             67,500                     10.33
                                           ---------------
Outstanding at 6/30/96                             216,000                9.16-11.38

Granted                                             67,500                     17.25

Exercised                                         (40,000)                      9.16
                                           ---------------
Outstanding at 6/30/97                             243,500                9.16-17.25

Granted                                             67,500                     36.00

Canceled                                          (11,250)                     36.00

Exercised                                         (38,000)                9.16-11.38
                                           ---------------

Outstanding at 6/30/98                             261,750                9.16-36.00
                                           ---------------

Available for Grant
   (562,500 authorized)                            222,750
                                           ---------------

Exercisable at 6/30/98                             205,500               $9.16-17.25
                                           ---------------
</TABLE>

         Employee Stock Purchase Plan

         During fiscal 1994, the shareholders ratified the adoption by the Board
         of Directors of the 1993 Employee Stock Purchase Plan (the "Purchase
         Plan") to offer employees an inducement to acquire an ownership
         interest in the Company. The Purchase Plan permits eligible


                                                                              44
<PAGE>   24
         employees to purchase, through regular payroll deductions, an aggregate
         of 450,000 shares of common stock at approximately 85% of the fair
         market value of such shares. Under the Plan, purchases were 43,181,
         50,916 and 59,977 for the years ended June 30, 1998, 1997 and 1996,
         respectively.

         The Company applies APB No. 25 and related Interpretations in
         accounting for its stock-based compensation plans. Accordingly, no
         compensation cost has been recognized for its stock option plans and
         its stock purchase plan. Had compensation cost for the Company's
         stock-based compensation plans been determined based on the fair value
         at the grant dates for awards under those plans consistent with the
         method of SFAS No. 123, the Company's net income and earnings per share
         would have been reduced to the pro forma amounts indicated below:


<TABLE>
<CAPTION>
                                                                  1998            1997            1996
                                                              -------------   -------------   -------------
<S>                                       <C>                 <C>             <C>              <C>
Net income                                As reported             $ 32,720        $ 19,447         $ 7,016
                                          Pro forma               $ 31,539        $ 18,120         $ 6,637

Net earnings per share                    As reported             $ 1.50          $ 0.92          $ 0.33
                                          Pro forma               $ 1.45          $ 0.86          $ 0.32

Net earnings per share-                   As reported             $ 1.41          $ 0.87          $ 0.32
  assuming dilution                       Pro forma               $ 1.36          $ 0.81          $ 0.31
</TABLE>


         The fair value of each option grant was estimated on the date of grant
         using the Black-Scholes option-pricing model with the following
         assumptions for 1996, 1997 and 1998, respectively: dividend yield of
         0%; expected volatility of 38.5%, 42.6% and 42.1%; weighted-average
         risk-free interest rates of 5.8%, 6.3% and 5.9%; and expected option
         life of 3 years for the 1993 Option Plan and 4 years for the Directors'
         Plan.

         The following table summarizes information about stock options
         outstanding at June 30, 1998:

<TABLE>
<CAPTION>
                                      Options Outstanding                               Options Exercisable
                   ----------------------------------------------------------    ----------------------------------
                                          Weighted
     Range of           Number             Average             Weighted              Number          Weighted
     Exercise        Outstanding          Remaining            Average            Exercisable        Average
      Prices          at 6/30/98      Contractual Life      Exercise Price         at 6/30/98     Exercise Price
      ------          ----------      ----------------      --------------         ----------     --------------

<S>                  <C>              <C>                   <C>                    <C>             <C>
   $1.94 - 6.00             372,981       4.4 years              $4.56                  353,856        $4.53
   7.55 - 11.38             968,250       6.3 years               9.90                  968,250         9.90
  17.25 - 19.29             346,757       8.3 years              18.77                  158,521        18.33
  22.12 - 39.66             248,250       9.3 years              38.45                    1,500        22.12
                       ------------                                                  ----------
                          1,936,238                                                   1,482,127
                       ============                                                  ==========
</TABLE>



(10)     SAVINGS AND RETIREMENT PLAN

         The Company has a savings and retirement plan (the "401(k) Plan") which
         is intended to qualify under Section 401(k) of the Internal Revenue
         Code. Employees are eligible to participate in the 401(k) Plan in the
         first month following the month of hire. Participating



                                                                              45
<PAGE>   25
         employees may contribute up to a maximum of 12% of their earnings
         before or after taxes. The Company is required, pursuant to the terms
         of its union contract, to contribute to each union employee's account
         an amount equal to the 2% minimum contribution made by such employee.
         The Company may, at its discretion, contribute a percentage of the
         amount contributed by an employee to the 401(k) Plan up to a maximum of
         10% of such employee's compensation. Participants are always fully
         vested with respect to their own salary and cash contributions and any
         profits arising therefrom. Participants become vested with respect to
         20% of the Company's contributions to their accounts and any profits
         arising therefrom for each full year of employment with the Company and
         thus become fully vested after five full years of employment.

         The Company's contributions to the 401(k) Plan were $2,194, $1,745 and
         $1,488, for the years ended June 30, 1998, 1997 and 1996, respectively.

(11)     OTHER (EXPENSE) INCOME



A summary of other (expense) income is as follows:


<TABLE>
<CAPTION>
                                                  Year Ended June 30,
                                            --------------------------------

                                            1998          1997         1996
                                            -----         -----        -----
<S>                                         <C>           <C>          <C>
Net (Loss) Gain on Sale of Property,
  Plant and Equipment                       $ (63)        $ 203        $ (63)
Joint Venture Litigation (a)                   --            --          694
Other                                          46            25            6
                                            -----         -----        -----
Other (Expense) Income                      $ (17)        $ 228        $ 637
                                            =====         =====        =====
</TABLE>


         (a)      In May 1996, the Company and an affiliated company reached an
                  agreement with a former partner in a joint venture and
                  received on June 10, 1996, $694 of a $1,000 deposit which was
                  paid in escrow in furtherance of the possible joint venture.
                  The Company had previously written off the $1,000 investment
                  in the fourth quarter of fiscal 1992.

(12)     COMMITMENTS AND CONTINGENCIES

         The Company is party to various operating leases which relate to the
         rental of office and plant facilities and of equipment. The Company is
         satisfied with its ability to extend such leases, if necessary. Rent
         expense charged to operations was $1,493, $1,314 and $1,126 in 1998,
         1997 and 1996, respectively. Future minimum rental payments, exclusive
         of taxes, insurance and other costs under noncancellable long-term
         operating lease commitments, are as follows:

<TABLE>
<CAPTION>
                                                      Minimum
                       Year Ending                     Rental
                        June 30,                      Payments
                        --------                      --------
<S>                     <C>                           <C>
                          1999                          $942
                          2000                           199
                          2001                            83
</TABLE>

                                                                              46
<PAGE>   26
         Product Liability

         The Company maintains product liability insurance coverage in the
         amount of $20,000. No significant product liability suit has ever been
         filed against the Company, however, if one were filed and such a case
         were successful against the Company, it could have a material adverse
         effect upon the business and financial condition of the Company to the
         extent such judgment was not covered by insurance or exceeded the
         policy limits.

         Invamed, Inc. Lawsuit

         On February 25, 1998, Invamed, Inc. ("Invamed") named the Company and
         several others as defendants in a lawsuit filed in the United States
         District Court for the Southern District of New York, charging that the
         Company unlawfully blocked access to the raw material source for
         Warfarin Sodium. The Company believes that the suit filed against it by
         Invamed is without merit and intends to defend its position vigorously.
         This action is currently in discovery stage. It is anticipated that
         this matter will take several years to be resolved but an adverse
         judgement could have a material adverse impact on the Company's
         consolidated financial statements.

         DuPont Anti-Trust Suit

         On March 9, 1998, the Company filed an anti-trust suit against DuPont
         Merck Pharmaceutical Company ("DuPont Merck") in the United States
         District Court for the Southern District of New York, charging that
         DuPont Merck has acted unlawfully to impede the marketplace acceptance
         of Barr's generic version of the anti-coagulant Coumadin. The Company's
         suit charges that DuPont Merck's actions violated federal anti-trust
         laws, as well as the Lanham Act and the New York Deceptive Acts and
         Practices Act. The Company intends to prosecute this case vigorously.

         Other Litigation

         As of June 1998, the Company was involved with other lawsuits
         incidental to its business, including patent infringement actions.
         Management of the Company, based on the advice of legal counsel,
         believes that the ultimate disposition of such other lawsuits will not
         have any significant adverse effect on the Company's consolidated
         financial statements.

(13)     FOURTH QUARTER CHARGE

         During the quarter ended June 30, 1998, the Company recorded a $1.2
         million restructuring charge which is included in Selling, General and
         Administrative Expenses in the Consolidated Statements of Operations.
         Approximately half of this charge relates to the write-off of equipment
         and leasehold improvements in connection with the closing of a leased
         New Jersey packaging facility, for which the operations have been
         relocated to other company facilities. The remainder relates to
         severance related expenses for certain operations employees, primarily
         those affiliated with the facility to be closed. As of June 30, 1998,
         none of the charge has been utilized and it is anticipated that the
         liability will be expended during the quarter ending September 30,
         1998.


                                                                              47
<PAGE>   27
(14)     QUARTERLY DATA (UNAUDITED)

A summary of the quarterly results of operations is as follows:

<TABLE>
<CAPTION>
                                                         (in thousands of dollars, except per share amounts)
                                                                       Three Month Period Ended
                                                                       ------------------------
                                                        Sept. 30          Dec. 31           Mar. 31           June 30
---------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>               <C>               <C>               <C>
Fiscal Year 1998:
Total revenues (1)                                   $   96,267        $   92,328        $   96,387        $   92,322
Cost of sales                                            65,226            68,769            70,042            61,965

Earnings before extraordinary loss on early
  extinguishment of debt                                 10,397             7,115             7,151             8,847

Net earnings                                             10,397             6,325             7,151             8,847

Earnings per common share - assuming dilution
Earnings before extraordinary loss on early
  extinguishment of debt (2)                         $     0.45        $     0.31        $     0.31        $     0.38
                                                    ===========        ==========       ===========        ==========

Net earnings (2)                                     $     0.45        $     0.27        $     0.31        $     0.38
                                                    ===========        ==========       ===========        ==========

Price Range of Common Stock (3)
High                                                 $    49.00        $    40.13        $    41.75        $    46.94
Low                                                       37.00             32.50             33.25             37.81

Fiscal Year 1997:
Total revenues (4)                                   $   64,231        $   67,335        $   84,714        $   68,206
Cost of sales                                            53,476            57,685            50,959            55,076

Net earnings                                              1,767             2,228            14,925               527

Earnings per common share - assuming dilution
Net earnings (2)                                     $     0.08        $     0.10        $     0.66        $     0.02
                                                    ===========       ===========        ==========        ==========

Price Range of Common Stock
High                                                 $    20.00        $    19.33        $    28.00        $    49.75
Low                                                       14.75             16.83             16.42             24.38
</TABLE>



(1)      Amounts include Proceeds from supply agreements of $7,166, $6,417,
         $8,750 and $8,333 for the quarters ended September 30, 1997, December
         31, 1997, March 31, 1998 and June 30, 1998, respectively.

(2)      The sum of the individual quarters may not equal the full year amounts
         due to the effects of the market prices in the application of the
         treasury stock method. During its two most recent fiscal years, the
         Company paid no cash dividend.

(3)      The Company's common stock is listed and traded on the New York Stock
         Exchange (BRL). At June 30, 1998, there were approximately 665 record
         shareholders of common stock. The Company believes that a significant
         number of beneficial owners hold their shares in street names.

(4)      Amounts include Proceeds from supply agreement of $24,550 and $2,500
         for the quarters ended March 31, 1997 and June 30, 1997, respectively.


                                                                              48
<PAGE>   28
INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders of
    Barr Laboratories, Inc.:

We have audited the accompanying consolidated balance sheets of Barr
Laboratories, Inc. and subsidiaries (the "Company") as of June 30, 1998 and
1997, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended June 30,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of Barr Laboratories, Inc. and
subsidiaries at June 30, 1998 and 1997, and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 1998
in conformity with generally accepted accounting principles.

/s/ DELOITTE & TOUCHE LLP

Parsippany, New Jersey
August 19, 1998


                                                                              49
<PAGE>   29
RESPONSIBILITY FOR FINANCIAL REPORTING

Management is responsible for the preparation and accuracy of the consolidated
financial statements and other information included in this report. The
consolidated financial statements have been prepared in conformity with
generally accepted accounting principles using, where appropriate, management's
best estimates and judgments.

In meeting its responsibility for the reliability of the financial statements,
management has developed and relies on the Company's system of internal
accounting control. The system is designed to provide reasonable assurance that
assets are safeguarded and that transactions are executed as authorized and are
properly recorded.

The Board of Directors reviews the financial statements and reporting practices
of the Company through its Audit Committee, which is composed entirely of
directors who are not officers or employees of the Company. The committee meets
with the independent auditors and management to discuss audit scope and results
and also to consider internal control and financial reporting matters. The
independent auditors have direct unrestricted access to the Audit Committee. The
entire Board of Directors reviews the Company's financial performance and
financial plan.

/s/ Bruce L. Downey
Chairman of the Board, Chief Executive Officer and President

                                                                              50
<PAGE>   30
ITEM 6.  SELECTED FINANCIAL DATA
(in thousands of dollars, except per share amounts)

<TABLE>
<CAPTION>
                                                                              YEAR ENDED JUNE 30,
                                             --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS                     1998              1997             1996                   1995             1994
-----------------------------------------------------------------------------------------------------------------------------
<S>                                       <C>              <C>               <C>                    <C>              <C>
Total revenues                            $ 377,304(1)     $ 284,486(3)      $ 232,224              $ 199,720        $ 109,133
Earnings before income taxes,                           
extraordinary loss and                                  
  cumulative effect of accounting                         
  change                                     54,658           32,050            11,509                 10,222            3,745
                                                        
Income tax expense                           21,148           12,603             4,368                  3,852            1,461
                                                        
Earnings before extraordinary loss                      
  and cumulative effect of                                
  accounting change                          33,510           19,447             7,141                  6,370            2,284
                                                        
Net earnings                                 32,720(2)        19,447             7,016(4)               6,225(6)         2,658(7)
                                                        
Earnings per common share:                              
Earnings before extraordinary                           
  loss and cumulative effect of                           
  accounting change                            1.54             0.92              0.34(5)                0.32(5)          0.12(5)
                                                        
Earnings per common share-                              
  assuming dilution:                                      
Earnings before extraordinary                           
  loss and cumulative effect of                           
  accounting change                            1.45             0.87              0.33(5)                0.31(5)          0.11(5)
                                                        
Net earnings                                   1.41(2)          0.87              0.32(4)(5)             0.30(5)(6)       0.13(5)(7)
                                                        
                                                        
BALANCE SHEET DATA                           1998              1997              1996                   1995             1994
                                             ----              ----              ----                   ----             ----
                                                        
Working capital                           $  95,281        $  41,807         $  52,985              $  58,364        $  53,227
Total Assets                                310,851          202,845           169,220                155,953          125,907
Long-term Debt(8)                            32,174           14,941            17,709                 20,371           30,433
Shareholders' Equity(9)                     155,929          102,138            80,161                 71,853           54,984
</TABLE>


(1)      Includes $30,666 in Proceeds from supply agreements.
(2)      Fiscal 1998 includes the effect of a $790 ($0.04 per share)
         extraordinary loss (net of tax of $492) on early extinguishment of debt
         (See Note 6 to the Consolidated Financial Statements).
(3)      Includes $27,050 in Proceeds from supply agreement.
(4)      Fiscal 1996 includes the effect of a $125 ($0.01 per share)
         extraordinary loss (net of tax of $76) on early extinguishment of debt
         (See Note 6 to the Consolidated Financial Statements).
(5)      Amounts have been adjusted for the March 1996 and May 1997 3-for-2
         stock splits effected in the form of 50% stock dividends.
(6)      Fiscal 1995 includes the effect of a $145 ($0.01 per share)
         extraordinary loss (net of tax of $92) on early extinguishment of debt.
(7)      Includes the effect of a $374 ($0.02 per share) gain from the
         cumulative effect of an accounting change.
(8)      Excludes current installments (See Note 6 to the Consolidated Financial
         Statements).
(9)      The Company has not paid a cash dividend in any of the above years.



                                                                              51