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UNITED STATESSECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K

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|x |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 2002.

Or

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|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____ to _____.

Commission file number 0-18443

MEDICIS PHARMACEUTICAL CORPORATION

(Exact name of registrant as specified in its charter)


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|Delaware

(State of other jurisdiction
of incorporation or organization)             |  | 52-1574808

(I.R.S. Employer Identification No.)
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|8125 North Hayden Road, Scottsdale, Arizona

(Address of principal executive office) |  | 85258-2463
(Zip Code)                           
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|Registrants telephone number, including area code:                                  |  | (602) 808-8800                                  

Securities registered pursuant to Section 12(b) of the Act: Class A common stock, $0.014 par value

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|                                                            |  | Preference Share Purchase Rights

(Title of each Class)
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|Securities registered pursuant to Section 12(g) of the Act: |  | NONE                                                   

Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No o

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

The aggregate market value of the voting stock held on September 18, 2002 by
non-affiliates of the registrant was $874,115,531 (calculated by excluding all
shares held by executive officers, directors and holders known to the
registrant of five percent or more of the voting power of the registrants
common stock, without conceding that such persons are affiliates of the
registrant for purposes of the federal securities laws). As of September 18,
2002, there were 27,055,788 outstanding shares of Class A common stock and
379,016 shares of Class B common stock.

Documents incorporated by reference:

Portions of the Proxy Statement for the registrants 2002 Annual Meeting of
Shareholders are incorporated herein by reference in Part III of this Form 10-K
to the extent stated herein.

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TABLE OF CONTENTS



|                                                |                                                                                               |  |  |  |  |  |  | 
|----------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                         
|                                                | ITEM 1: BUSINESS                                                                             
|                                                | ITEM 2: PROPERTIES                                                                           
|                                                | ITEM 3: LEGAL PROCEEDINGS                                                                    
|                                                | ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|PART II                                        
|                                                | ITEM 5: MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED SHAREHOLDER MATTERS                
|                                                | ITEM 6: SELECTED FINANCIAL DATA                                                              
|                                                | ITEM 7: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                                | ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                          
|                                                | ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 
|PART III                                       
|                                                | ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                  
|                                                | ITEM 11: EXECUTIVE COMPENSATION                                                              
|                                                | ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                      
|                                                | ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                      
|PART IV                                        
|                                                | ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                     
|SIGNATURES                                     
|SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS
|Exhibit Index                                  
|EX-10.20                                       
|EX-12                                          
|EX-21.1                                        
|EX-23.1                                        
|EX-99.1                                        



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PART I




ITEM 1: BUSINESS

Medicis Pharmaceutical Corporation and its wholly owned
subsidiaries (Medicis, the Company, or as used in the context of we, us
or our) is the leading independent specialty pharmaceutical company in the
United States focusing primarily on the treatment of dermatologic, pediatric and
podiatric conditions. We believe that annual United States pharmaceutical
sales in these markets exceed $10 billion. Medicis has leading prescription
products in a number of therapeutic categories, including acne, asthma, eczema,
fungal infections, head lice, hyperpigmentation, photoaging, psoriasis,
rosacea, seborrheic dermatitis, and skin and skin-structure infections.

We currently offer 18 branded products. Our eight core brands,
DYNACIN® (minocycline HCI), LOPROX® (ciclopirox), LUSTRA® (hydroquinone USP 4%),
OMNICEF® (cefdinir) capsules, ORAPRED® (prednisolone sodium phosphate), OVIDE®
(malathion), PLEXION® (sodium sulfacetamide/sulfur) and TRIAZ® (benzoyl
peroxide) account for substantially all of our revenue. Most of our core
brands enjoy market leadership in the markets in which they compete. Because
of the significance of these brands to our business, we concentrate our selling
and marketing efforts in promoting them to physicians in our target markets.
We also sell a number of other products, all of which are profitable, but which
are considered less critical to our business.

Our dedicated sales force, consisting of approximately 175 employees,
focuses on high prescribing dermatologists, pediatricians and podiatrists.
Since a relatively small number of physicians are responsible for writing a
majority of prescriptions, we believe that the size of our sales force is
currently appropriate to reach our target physicians. Our dermatology and
podiatric sales force consists of approximately 100 employees who regularly
call on approximately 4,500 dermatologists and 2,500 podiatrists. Our
pediatric sales force, which became part of Medicis following the merger with
Ascent Pediatrics, Inc. (Ascent) in November 2001, consists of approximately
75 employees who call on approximately 12,000 pediatricians.

We have built our business by successfully executing a four-part growth
strategy. This strategy consists of growing existing core brands, developing
new products and important product line extensions, entering into strategic
collaborations and acquiring complementary products, technologies and
businesses.

During the past five years, we have consummated a number of strategic
mergers and product acquisitions. In November 2001, we expanded into the
pediatric market through our merger with Ascent. Ascent markets products to
U.S.-based pediatricians, including an oral treatment for children with acute
asthma and other inflammatory respiratory conditions. Following our merger
with Ascent in November 2001, Medicis representatives began promoting several
core dermatologic products to pediatricians, specifically, LOPROX®, OVIDE® and
TRIAZ®, leading to significant acceptance of these brands in the pediatric
community.

During June 2002, we sold $400.0 million aggregate principal amount of our
2.5% Contingent Convertible Notes Due 2032 (the Notes) in a private
transaction. The Notes are convertible, at the holders option, prior to the
maturity date into shares of our Class A common stock if the market price of
our Class A common stock or the trading price of the Notes reach certain
thresholds, or if other specified circumstances occur. Approximately $142.5
million of the proceeds from this sale were used to repurchase shares of our
Class A common stock, and the remainder of the proceeds from the Notes are
expected to be used for repurchase of additional shares of our Class A common
stock, potential acquisitions and general corporate purposes.

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OUR PRODUCTS

We currently offer 18 branded products. Our selling and marketing efforts
are currently focused on our eight core brands, which account for substantially
all of our revenue. The following chart details certain important features of
our eight core brands:

|         |  |                                                                                             |  |                                                                                                                                                   
|-------- |  | ------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|Brand    |  | Treatment                                                                                   |  | U.S. Market Impact                                                                                                                                
|         |  |                                                                                             |  |                                                                                                                                                   
|DYNACIN® |  | Oral treatment for severe acne                                                              |  | The number one branded minocycline
product in the U.S., DYNACIN® capsules are
available in a range of strengths for moderate to
severe acne       
|        
|        
|        
|        
|LOPROX®  |  | Topical treatment for certain fungal and
yeast infections                                   |  | A leading antifungal agent, including the
only gel approved for seborrheic dermatitis                                                             
|        
|        
|        
|        
|LUSTRA®  |  | Topical patented treatments for ultraviolet-
induced skin discoloration                     |  | The leading branded prescription topical treatment
for skin discoloration                                                                         
|        
|        
|        
|        
|OMNICEF® |  | A patented oral treatment for skin and
skin-structure infections                            |  | Superior kill rate compared to most frequently
prescribed antibiotic for this indication                                                          
|        
|        
|        
|        
|ORAPRED® |  | Oral treatment for children with acute
asthma and other inflammatory respiratory
conditions |  | The leading branded oral liquid corticosteroid,
which utilizes a proprietary taste-masking system,
is also indicated for severe contact dermatitis
|        
|        
|        
|        
|OVIDE®   |  | Topical treatment for head lice and
their eggs                                              |  | Highly effective against drug resistant
head lice strains                                                                                         
|        
|        
|        
|        
|PLEXION® |  | Topical treatments for rosacea and
acne-related conditions                                  |  | The only prescription cleanser indicated
for the treatment of rosacea                                                                             
|        
|        
|        
|        
|TRIAZ®   |  | Topical patented gel and cleanser
treatments for acne                                       |  | The leading branded prescription benzoyl
peroxide product                                                                                         

PRESCRIPTION PHARMACEUTICALS

Our principal branded pharmaceutical products are described below:

DYNACIN® is an oral antibiotic, available in 50-mg., 75-mg. and 100-mg.
dosage forms, and is prescribed for the treatment of severe acne. The most
commonly prescribed systemic acne treatments are tetracycline and its
derivatives, minocycline and doxycycline. Minocycline, the active ingredient in
DYNACIN®, is widely prescribed for the treatment of acne for several reasons.
It has a more convenient dosing schedule, one or two doses per day, as compared
to other forms of tetracycline, which can require up to four doses per day.
Other forms of tetracycline, including doxycycline, require ingestion on an
empty stomach and have been reported to often cause gastric irritation.
Moreover, the other forms of tetracycline may increase patient sensitivity to
sunlight, creating a greater risk of sunburn. In addition, resistance to
several commonly used antibiotics, including erythromycin, clindamycin,
doxycycline and tetracycline, by the primary bacterial organism responsible for
acne has been documented. Studies suggest that bacterial resistance to
erythromycin, doxycycline and tetracycline exceeds 50%, while the bacteria
showed virtually no resistance to minocycline. DYNACIN® was launched in fiscal
1993 with 50-mg. and 100-mg. dosage forms available. We launched DYNACIN® in
75-mg. dosage form in fiscal 1999.

LOPROX® cream and topical suspension are both broad-spectrum prescription
antifungal agents indicated for the topical treatment of tinea pedis, tinea
corporis, tinea cruris, tinea versicolor and cutaneous candidiasis. LOPROX®
works with a unique mode of action that has been shown to have fungistatic and
fungicidal properties and enhanced penetration. We believe this unique mode of
action makes LOPROX® an appropriate choice for topical treatment alone, or as
concomitant treatment with an oral antifungal. For these reasons, we believe
LOPROX® is a highly effective product to manage the often-complicated mix of
organisms involved in tinea infections. In clinical trials, LOPROX® was shown
to produce clinical improvement of 82% to 93% of subjects after a single week
of treatment across the range of cutaneous mycoses. The most frequently
prescribed topical antifungal products in addition to LOPROX® include
Spectazole®, Nizoral®, Oxistat® and Lotrisone® (steroid/antifungal
combination). In addition to the cream and topical suspension formulations of
LOPROX®, we market LOPROX® Gel for the treatment

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of seborrheic dermatitis and fungal infections. Currently, LOPROX® Gel is
the only gel approved in the United States for seborrheic dermatitis.

LUSTRA®, LUSTRA-AF® and ALUSTRA® are internally developed, topical
therapies prescribed for the treatment of ultraviolet-induced skin
discolorations and hyperpigmentation usually associated with the use of oral
contraceptives, pregnancy, hormone replacement therapy, sun damage and
superficial trauma. LUSTRA®, LUSTRA-AF® and ALUSTRA® contain 4% hydroquinone in
patented vehicles containing glycolic acid in an anti-oxidant complex. LUSTRA®
is second in market share only to LUSTRA-AF®, the leading branded prescription
topical treatment for dyschromia and hyperpigmentation. LUSTRA® competes with
products such as Tri-Luma, a product launched in 2002 by Galderma. We launched
LUSTRA® in fiscal 1998. LUSTRA-AF® contains broad-spectrum UVA and UVB
sunscreen agents and was launched in fiscal 1999. ALUSTRA® contains retinol
and was launched in fiscal 2001.

OMNICEF®is promoted to dermatologists and podiatrists pursuant to an
exclusive license agreement with Abbott Laboratories (Abbott). OMNICEF® is
indicated for the treatment of skin and skin-structure infections. Studies
show that OMNICEF® has superior pathogen eradication rates versus cephalexin,
the most frequently prescribed antibiotic for uncomplicated skin and
skin-structure infections. Since May 2001, we have promoted OMNICEF® capsules
in the U.S. market to dermatologists and podiatrists. In return, we receive
commission revenue from Abbott based on prescriptions generated in these
categories. Our agreement with Abbott expires in 2013.

ORAPRED® is an oral solution for the treatment of acute asthma in
children. ORAPRED® offers proprietary taste-masking technology in a dosage
strength generally preferred by physicians. ORAPRED® was launched in January
2001 by Ascent. Studies show that a drugs unpleasant taste is a barrier to
compliance and lack of compliance interferes with positive treatment outcomes.
We believe the taste of ORAPRED® encourages patient compliance.

OVIDE®lotion is indicated for the treatment of head lice and their eggs.
A growing body of evidence indicates that significant levels of head lice are
frequently resistant to currently available over-the-counter treatments like
Nix® and Rid®. OVIDE® is a prescription alternative to the over-the-counter
treatments, offering both an excellent kill rate and ovicidal activity. In
addition, in controlled clinical studies, OVIDE® demonstrated residual activity
with 90.4% of patients still lice-free seven days after treatment. OVIDE® is
one of two prescription pediculicides available in the United States. The
other product, lindane, is approved only for patients who have either failed to
respond to adequate doses or are intolerant of other approved therapies. We
introduced OVIDE® in fiscal 1999.

PLEXION®, PLEXION TS® and PLEXION SCT® are internally developed cleanser
and topical therapies for the treatment of rosacea and acne-related conditions.
Rosacea is a chronic skin condition causing inflammation and redness of the
face. PLEXION® is designed to be used in conjunction with other prescription
rosacea therapies. The active ingredients in our PLEXION® products are sodium
sulfacetamide and sulfur. PLEXION®, the first and only prescription cleanser
indicated for the treatment of rosacea, was launched in fiscal 2000. The
topical acne rosacea market is comprised of products such as MetroGel®,
MetroCream® and MetroLotion®. PLEXION TS®,a gentle topical suspension
treatment for acne, was launched in fiscal 2001. In addition, during fiscal
2002 we launched PLEXION SCT®, a short contact therapy which includes a silicia
base that helps remove impurities from the hair follicles.

TRIAZ®, a patented, internally developed topical therapy prescribed for
the treatment of numerous forms and varying degrees of acne, is available
as a gel or cleanser in three concentrations. While other topical acne
treatments, including Cleocin-T®, Benzamycin®and BenzaClin®,are generally
effective, TRIAZ® offers advantages over each product, including improved
stability, greater convenience of use, reduced cost and fewer side effects.
TRIAZ® products are manufactured using the active ingredient benzoyl peroxide
in a patented vehicle containing glycolic acid and zinc lactate. Studies
conducted by third parties have shown that benzoyl peroxide is the most
efficacious agent available for eradicating the bacteria that cause acne with
no reported resistance. We believe glycolic acid enhances the effectiveness of
benzoyl peroxide by exfoliating the outer layer of the skin and that zinc

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lactate reduces the appearance of inflammation and irritation often
associated with acne. We introduced TRIAZ® in fiscal 1996.

PRODUCTS IN DEVELOPMENT

We have developed and obtained rights to pharmaceutical agents in various
stages of development. We have a variety of products under development, ranging
from new products to existing product line extensions and reformulations of
existing products. Our strategy involves the rapid evaluation and formulation
of new therapeutics by obtaining preclinical safety and efficacy data, when
possible, followed by rapid safety and efficacy testing in humans. Over the
next four years, our objective is to launch one new product annually through
our research and development efforts. As a result of our increasing financial
strength, we have begun adding long-term projects to our development pipeline
and may add longer-term projects with inherently greater risk in the future.
Historically, we have supplemented our research and development efforts by
entering into research and development agreements with other pharmaceutical and
biotechnology companies.

Our research and development costs for sponsored and unreimbursed
co-sponsored pharmaceutical projects for fiscal 2002, 2001 and 2000 were $15.1
million, $25.5 million, and $4.9 million, respectively. Research and
development costs for fiscal 2002 include $7.7 million paid to aaiPharma, Inc.
(aaiPharma) for the development, commercialization and license of a key
dermatologic product, under an agreement entered into in June 2002. In
addition to the initial payment of $7.7 million, the agreement includes
potential future payments due to aaiPharma upon the successful completion of
various development milestones. Successful completion of these development
milestones will result in future charges to research and development expense
which could total as much as $8.1 million. Research and development costs for
fiscal 2001 include $17.0 million paid to Corixa Corporation (Corixa) for a
development, commercialization and license agreement covering Corixas novel
psoriasis immunotherapeutic product, PVAC. Under the terms of the
agreement, there are additional potential development milestone payments of
$35.0 million and potential commercialization and cumulative net sales
threshold milestone payments of $55.0 million. Under the terms of the
agreement, Corixa is responsible for the development and approval of the
product and Medicis is responsible for post-approval sales and marketing.

On May 10, 2001, Abbott and Medicis entered into an exclusive agreement
for Medicis to promote OMNICEF® capsules. OMNICEF®, a cephalosporin antibiotic,
is for the treatment of uncomplicated skin and skin structure infections.
Medicis will promote OMNICEF® in the U.S. market to dermatologists and
podiatrists and will receive revenue generated in these categories on a per
prescription filled basis. Abbott will continue to promote OMNICEF® to primary
care physicians and pediatricians. The agreement expires in 2013.

SALES AND MARKETING

Our dedicated sales force, consisting of approximately 175 employees,
focuses on high prescribing dermatologists, pediatricians and podiatrists.
Since a relatively small number of physicians are responsible for writing a
majority of prescriptions, we believe that the size of our sales force is
currently appropriate to reach our target physicians. Our dermatology and
podiatric sales force consists of approximately 100 employees who regularly
call on approximately 4,500 dermatologists and 2,500 podiatrists. Our
pediatric sales force, which became part of Medicis following the merger with
Ascent, consists of approximately 75 employees who call on approximately 12,000
pediatricians. Since the merger, the Ascent sales force has introduced three
of our core dermatological brands to high prescribing pediatricians.

We cultivate relationships of trust and confidence with the high
prescribing dermatologists, pediatricians and podiatrists in the U.S. In
addition, we use a variety of marketing techniques to promote our products
including sampling, journal advertising, promotional materials, specialty
publications, coupons, money-back or product replacement guarantees,
educational conferences and informational websites.

We believe we have created an attractive incentive program for our sales
force that is based upon goals in prescription growth and market share
achievement.

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WAREHOUSING AND DISTRIBUTION

We utilize an independent national warehousing corporation to store and
distribute our products from primarily two regional warehouses in Nevada and
Georgia, as well as additional warehouses in New Jersey and Maryland. Upon the
receipt of a purchase order through electronic data input (EDI), phone, mail
or facsimile, the order is processed into our inventory systems. An inventory
picking sheet is then automatically placed via EDI to the most efficient
warehouse location for shipment, usually within 24 hours, to the customer
placing the order. Upon shipment, the warehouse sends back to us via EDI the
necessary information to automatically process the invoice in a timely manner.

CUSTOMERS

Our customers include certain of the nations leading wholesale
pharmaceutical distributors, such as Cardinal Health, Inc. (Cardinal),
McKesson Corporation (McKesson), Quality King Distributors (Quality King),
AmerisourceBergen Corporation (AmerisourceBergen) and other major drug
chains. During the last three fiscal years, these customers accounted for the
following portions of our net revenues:

|                  |  |             |      |             |  |             |      |   |  |  |      |  
|----------------- |  | ----------- | ---- | ----------- |  | ----------- | ---- | - |  |  | ---- | -
|                  |  | Fiscal 2002 |      | Fiscal 2001 |  | Fiscal 2000
|                  |  |             |      |             |  |            
|Quality King      |  |             | 26.7 | %           |  |             | 10.3 | % |  |  | 11.3 | %
|                 
|                 
|                 
|                 
|Cardinal          |  |             | 22.4 | %           |  |             | 22.2 | % |  |  | 21.0 | %
|                 
|                 
|                 
|                 
|McKesson          |  |             | 19.4 | %           |  |             | 18.0 | % |  |  | 18.1 | %
|                 
|                 
|                 
|                 
|AmerisourceBergen |  |             | 11.1 | %           |  |             | *    |   |  |  | 10.2 | %



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|* |  | less than 10.0%
|- |  | ---------------

MANUFACTURING

We currently outsource all of our manufacturing needs and we are required
by the FDA to contract only with manufacturers that comply with current Good
Manufacturing Practices (cGMP) regulations and other applicable laws and
regulations. Typically our manufacturing contracts are short-term. We review
our manufacturing arrangements on a regular basis and assess the viability of
alternative manufacturers if our current manufacturers are unable to fulfill
our needs.

Watson Pharmaceuticals, Inc. (Watson) manufactures our DYNACIN® branded
products in compliance with our specifications and quality standards pursuant
to a supply agreement. Under this agreement, Watson manufactures DYNACIN® for
sale in the branded market exclusively for us, but may manufacture and sell
minocycline for itself or others as a generic product. Watson currently
manufactures minocycline for the generic market under its own label. Our supply
agreement expires in December 2003.

Our LUSTRA®, PLEXION® and TRIAZ® branded products are manufactured by
Contract Pharmaceuticals Limited pursuant to a manufacturing agreement that
automatically renews on an annual basis.

Our LOPROX® cream and gel branded products are manufactured by Aventis
S.A. in accordance with a supply agreement that expires in December 2003. Our
LOPROX® topical suspension branded product is manufactured by DPT Lakewood on a
purchase order basis.

Our ORAPRED® branded product is manufactured by Lyne Laboratories in
accordance with a supply agreement that expires in 2006.

Our OVIDE® branded product is manufactured by DPT Lakewood on a purchase
order basis.

Our OMNICEF® branded product, which we promote through a license
agreement, is manufactured by Abbott. The license agreement expires in 2013.

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LICENSE AND ROYALTY AGREEMENTS

Pursuant to license agreements with third parties, we have acquired rights
to manufacture, use or market certain of our existing products, as well as many
of our proposed products and technologies. Such agreements typically contain
provisions requiring us to use our best efforts or otherwise exercise diligence
in pursuing market development for such products in order to maintain the
rights granted under the agreements and may be canceled upon our failure to
perform our payment or other obligations. In addition, we have licensed certain
rights to manufacture, use and sell certain of our technologies outside the
United States and Canada to various licensees.

TRADEMARKS, PATENTS, AND PROPRIETARY RIGHTS

We believe that trademark protection is an important part of establishing
product and brand recognition. We own a number of registered trademarks and
trademark applications and have acquired the rights to several trademarks by
license. U.S. federal registrations for trademarks remain in force for 10
years and may be renewed every 10 years after issuance, provided the mark is
still being used in commerce.

We have obtained a number of patents covering key aspects of certain of
our products, including a U.S. patent expiring in August 2004 covering
BUPHENYL®, a U.S. patent expiring in October 2015 covering various formulations
of TRIAZ® and a U.S. patent expiring in August 2017
covering our LUSTRA®
branded products. We are also pursuing several U.S. and foreign patent
applications.

We rely and expect to continue to rely upon unpatented proprietary
know-how and technological innovation in the development and manufacture of
many of our principal products. Our policy is to require all our employees,
consultants and advisors to enter into confidentiality agreements with us.

COMPETITION

The pharmaceutical industry is characterized by intense competition, rapid
product development and technological change. Competition is intense among
manufacturers of prescription pharmaceuticals, such as for our core brands.

Many of our competitors are large, well-established pharmaceutical,
chemical, cosmetic or health care companies with considerably greater
financial, marketing, sales and technical resources than those available to us.
Additionally, many of our present and potential competitors have research and
development capabilities that may allow them to develop new or improved
products that may compete with our product lines. Our products could be
rendered obsolete or made uneconomical by the development of new products to
treat the conditions addressed by our products, technological advances
affecting the cost of production, or marketing or pricing actions by one or
more of our competitors. Each of our products competes for a share of the
existing market with numerous products that have become standard treatments
recommended or prescribed by dermatologists, pediatricians and podiatrists.

Several of our core brands compete with generic (non-branded)
pharmaceuticals, which claim to offer equivalent therapeutic benefits at a
lower cost. In some cases, insurers and other third-party payors seek to
encourage the use of generic products, making branded products less attractive,
from a cost perspective, to buyers.

GOVERNMENT REGULATION

The manufacture and sale of cosmetics and drugs are subject to regulation
principally by the FDA and state and local authorities in the United States,
and by comparable agencies in certain foreign countries. The Federal Trade
Commission (FTC) and state and local authorities regulate the advertising of
over-the-counter drugs and cosmetics. The Food and Drug Act and the regulations
promulgated thereunder, and other federal and state statutes and regulations,
govern, among other things, the testing, manufacture, safety, effectiveness,
labeling, storage, record keeping, approval, advertising and promotion of our
products. In general, products falling within the FDAs definition of new
drugs require premarketing clearance by the FDA. Products falling within the
FDAs definition of cosmetics or of drugs that are not new drugs and that
are generally recognized as safe and effective do not require premarketing
clearance.

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The steps required before a new drug may be marketed in the United
States include (i) preclinical laboratory and animal testing, (ii) submission
to the FDA of an Investigational New Drug (or IND) application, which must
become effective before clinical trials may commence, (iii) adequate and
well-controlled clinical trials to establish the safety and efficacy of the
drug, (iv) submission to the FDA of a New Drug Application (or NDA) and (v)
FDA approval of the NDA prior to any commercial sale or shipment of the drug.
In addition to obtaining FDA approval for each product, each domestic
drug-manufacturing establishment must be registered with, and approved by, the
FDA. Drug product manufacturing establishments located in California also must
be licensed by the State of California in compliance with separate regulatory
requirements.

Preclinical testing is generally conducted on laboratory animals to
evaluate the potential safety and the efficacy of a drug. The results of these
studies are submitted to the FDA as a part of an IND application, which must be
approved before clinical trials in humans can begin. Typically, clinical
evaluation involves a time consuming and costly three-phase process. In Phase
I, clinical trials are conducted with a small number of subjects to determine
the early safety profile, the pattern of drug distribution and metabolism. In
Phase II, clinical trials are conducted with groups of patients afflicted with
a specific disease to determine preliminary efficacy, optimal dosages and
expanded evidence of safety. In Phase III, large-scale, multi-center,
comparative trials are conducted with patients afflicted with a target disease
to provide sufficient data to demonstrate the efficacy and safety required by
the FDA. The FDA closely monitors the progress of each of the three phases of
clinical trials and may, at its discretion, re-evaluate, alter, suspend or
terminate the testing based upon the data that have been accumulated to that
point and its assessment of the risk/benefit ratio to the patient.

In general, FDA approval is required before a new drug product may be
marketed in the United States. However, most over-the-counter drugs are exempt
from the FDAs premarketing approval requirements. In 1972, the FDA instituted
the ongoing over-the-counter Drug Review to evaluate the safety and
effectiveness of over-the-counter drug ingredients then in the market. Through
this process, the FDA issues monographs that set forth the specific active
ingredients, dosages, indications and labeling statements for over-the-counter
drug ingredients that the FDA will consider generally recognized as safe and
effective and therefore not subject to premarket approval. Over-the-counter
drug ingredients are classified by the FDA in one of three categories: Category
I ingredients which are deemed safe and effective for over-the-counter use;
Category II ingredients which are deemed not generally recognized as safe and
effective for over-the-counter use; and Category III ingredients which are
deemed possibly safe and effective with studies ongoing. Based upon the
results of these ongoing studies, the FDA may reclassify all Category III
ingredients as Category I or Category II ingredients. For certain categories of
over-the-counter drugs not yet subject to a final monograph, the FDA usually
permits such drugs to continue to be marketed until a final monograph becomes
effective, unless the drug will pose a potential health hazard to consumers.
Drugs subject to final monographs, as well as drugs that are subject only to
proposed monographs, are subject to various FDA regulations concerning, for
example, cGMP, general and specific over-the-counter labeling requirements and
prohibitions against promotion for conditions other than those stated in the
labeling. Over-the-counter drug manufacturing facilities are subject to FDA
inspection, and failure to comply with applicable regulatory requirements may
lead to administrative or judicially imposed penalties.

The active ingredients in LOPROX® and OVIDE® have been approved
by the FDA under an NDA. The active ingredients in
DYNACIN® and ORAPRED® have been approved by
the FDA under an ANDA. The active ingredient in the TRIAZ® products has been
classified as a Category III ingredient under a tentative final FDA monograph
for over-the-counter use in treatment of labeled conditions. The FDA has
requested, and a task force of the Non-Prescription Drug Manufacturers
Association (or NDMA), a trade association of over-the-counter drug
manufacturers, has undertaken further studies to confirm that benzoyl peroxide,
an active ingredient in the TRIAZ® products, is not a tumor promoter when
tested in conjunction with UV light exposure. The TRIAZ® products, which we
sell on a prescription basis, have the same ingredients at the same dosage
levels as the over-the-counter products. When the FDA issues the final
monograph, we may be required by the FDA to sell TRIAZ® as an over-the-counter
drug unless we file an NDA covering such product. There can be no assurance as
to the results of these studies or any FDA action to reclassify benzoyl
peroxide. In addition, there can be no assurance that adverse test results
would not result in withdrawal of TRIAZ® from marketing. An adverse decision by
the FDA with respect to the safety of benzoyl peroxide could result in the
assertion of product liability claims against us and could have a material
adverse effect on our business, financial condition and results of operations.

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Our LUSTRA® branded products contain the active ingredient hydroquinone at
a 4% concentration. Independent expert dermatologists have formally expressed
the view that hydroquinone is generally recognized as safe and effective for
its intended use. In 1992, with the concurrence of the FDA, the industry
initiated dermatological metabolism and toxicity studies to fully support
hydroquinones continued Category I status. Notwithstanding the pendency or
results of these tests, the FDA may elect to classify hydroquinone as a
Category III ingredient. If hydroquinone is not maintained as a Category I or
Category III ingredient, we would be required to cease marketing the LUSTRA®
branded products and could be subject to product liability claims. An adverse
decision by the FDA on the safety of hydroquinone could harm our business,
financial condition and results of operations.

Our TRIAZ® and LUSTRA® branded products must meet the composition and
labeling requirements established by the FDA for products containing their
respective basic ingredients. We believe that compliance with those established
standards avoids the requirement for premarketing clearance of these products.
There can be no assurance that the FDA will not take a contrary position. Our
PLEXION® branded products, which contain the active ingredients sodium
sulfacetamide and sulfur, are marketed under the FDA compliance policy entitled
Marketed New Drugs without Approved NDAs or ANDAs.

We believe that certain of our products, as they are promoted and intended
by us for use, are exempt from being considered new drugs based upon the
introduction date of their active ingredients and therefore do not require
premarketing clearance. There can be no assurance that the FDA will not take a
contrary position. If the FDA were to do so, we may be required to seek FDA
approval for these products, market these products as over-the-counter products
or withdraw such products from the market. We believe that these products are
subject to regulations governing product safety, use of ingredients, labeling,
promotion and manufacturing methods.

We also will be subject to foreign regulatory authorities governing
clinical trials and pharmaceutical sales if we seek to market our products
outside the United States. Whether or not FDA approval has been obtained,
approval of a product by the comparable regulatory authorities of foreign
countries must be obtained prior to the commencement of marketing the product
in those countries. The approval process varies from country to country and the
time required may be longer or shorter than that required for FDA approval.
There can be no assurance that any foreign regulatory agency will approve any
product we submit for review.

EMPLOYEES

At June 30, 2002, we had 279 full-time employees. We believe our
relationship with our employees is good.

RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

Our discussion and analysis in this report, in other reports that we file
with the Securities and Exchange Commission, in our press releases and in
public statements of our officers and corporate spokespersons contain
forward-looking statements. Forward-looking statements give our current
expectations or forecasts of future events. You can identify these statements
by the fact that they do not relate strictly to historical or current events.
They use words such as anticipate, estimate, expect, intend, will,
plan, believe and other words of similar meaning in connection with
discussion of future operating or financial performance. These include
statements relating to future actions, prospective products or product
approvals, future performance or results of current and anticipated products,
sales efforts, expenses, the outcome of contingencies such as legal proceedings
and financial results.

Forward-looking statements may turn out to be wrong. They can be affected
by inaccurate assumptions or by known or unknown risks and uncertainties. Many
factors mentioned in this report  for example, governmental regulation and
competition in our industry  will be important in determining future results.
No forward-looking statement can be guaranteed, and actual results may vary
materially from those anticipated in any forward-looking statement.

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Medicis undertakes no obligation to update any forward-looking statement.
We provide the following discussion of risks and uncertainties relevant to our
business. These are factors that we think could cause our actual results to
differ materially from expected and historical results. Medicis could also be
adversely affected by other factors besides those listed here.

RISKS RELATED TO OUR BUSINESS

We Derive A Majority Of Our Prescription Volume From Our Core Branded Products,
And Any Factor Adversely Affecting The Prescription Volume Related To These
Products Could Harm Our Business, Financial Condition And Results Of Operations

We derive a majority of our prescription volume from our core branded
products. We believe that the prescription volume of our core branded products
will constitute the majority of our prescription volume for the foreseeable
future. Accordingly, any factor adversely affecting our prescription volume
related to our core products, individually or collectively, could harm our
business, financial condition and results of operations. Many of our core
branded products are subject to generic competition currently or may be in the
near future. Each of our core branded products could be rendered obsolete or
uneconomical by regulatory or competitive changes. Prescription volume related
to our core branded products could also be adversely affected by other factors,
including:



| |  |  | manufacturing or supply interruptions;                                                                                                       
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the development of new competitive pharmaceuticals and
technological advances to treat the conditions addressed by our core
branded products;
|
| |  |  | marketing or pricing actions by one or more of our competitors;                                                                              
|
| |  |  | legal or regulatory action by the FDA and other government regulatory agencies;                                                              
|
| |  |  | changes in the prescribing practices of dermatologists, pediatricians and / or podiatrists;                                                  
|
| |  |  | restrictions on travel affecting the ability of our sales
force to market to prescribing physicians in person;                               
|
| |  |  | changes in the reimbursement or substitution policies of third-party payors or retail pharmacies;                                            
|
| |  |  | product liability claims; and                                                                                                                
|
| |  |  | the outcome of disputes relating to trademarks, patents, license agreements and other rights.                                                

Our Operating Results And Financial Condition May Fluctuate

Our operating results and financial condition may fluctuate from quarter
to quarter and year to year depending upon the relative timing of events or
uncertainties which may arise. The following events or occurrences, among
others, could cause fluctuations in our financial performance from period to
period:



| |  |  | changes in the amount we spend to develop, acquire or license
new products, technologies or businesses;                                                                     
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | changes in the amount we spend to promote our products;                                                                                                                     
|
| |  |  | delays between our expenditures to acquire new products,
technologies or businesses and the generation of revenues from those
acquired products, technologies or businesses;
|
| |  |  | changes in treatment practices of physicians that currently
prescribe our products;                                                                                         
|
| |  |  | changes in reimbursement policies of health plans and other
similar health insurers, including changes that affect newly
developed or newly acquired products;              
|
| |  |  | increases in the cost of raw materials used to manufacture
our products;                                                                                                    
|
| |  |  | manufacturing and supply interruptions, including failure to
comply with manufacturing specifications;                                                                      
|
| |  |  | development of new competitive products by others;                                                                                                                          
|
| |  |  | the mix of products that we sell during any time period;                                                                                                                    
|
| |  |  | our responses to price competition;                                                                                                                                         
|
| |  |  | expenditures as a result of legal actions;                                                                                                                                  
|
| |  |  | market acceptance of our products;                                                                                                                                          

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| |  |  | the impairment and write-down of goodwill or other intangible assets;                                                                                         
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | implementation of new or revised accounting, securities, tax,
or corporate responsibility rules, policies, regulations or laws;                               
|
| |  |  | disposition of non-core products, technologies and other
rights;                                                                                              
|
| |  |  | termination or expiration of, or the outcome of disputes
relating to, trademarks, patents, license agreements and other
rights;                               
|
| |  |  | increases in insurance rates for existing products and the
cost of insurance for new products;                                                                
|
| |  |  | general economic and industry conditions, including changes
in interest rates affecting returns on cash balances and
investments, that affect customer demand;
|
| |  |  | seasonality of demand for our products; and                                                                                                                   
|
| |  |  | our level of research and development activities.                                                                                                             

We Depend Upon Our Key Personnel And Our Ability To Attract, Train, And Retain
Employees

Our success depends significantly on the continued individual and
collective contributions of our senior management team. We have not entered
into employment agreements with any of our key managers, with the exception of
our Chairman and Chief Executive Officer. The loss of the services of any
member of our senior management or the inability to hire and retain experienced
management personnel could harm our operating results. In addition, our future
success depends on our ability to hire, train and retain skilled employees.
Competition for these employees is intense.

We May Not Be Able To Identify And Acquire Products, Technologies And
Businesses On Acceptable Terms, If At All, Which May Constrain Our Growth

Our strategy for continued growth includes the acquisition of products,
technologies and businesses. These acquisitions could involve acquiring other
pharmaceutical companies assets, products or technologies. In addition, we
may seek to obtain licenses or other rights to develop, manufacture and
distribute products. We cannot be certain that we will be able to identify
suitable acquisition or licensing candidates or if any will be available on
acceptable terms. Other pharmaceutical companies, with greater financial,
marketing and sales resources than we have, have also tried to grow through
similar acquisition and licensing strategies. Because of their greater
resources, our competitors may be able to offer better terms for an acquisition
or license than we can offer, or they may be able to demonstrate a greater
ability to market licensed products.

We May Not Be Able To Achieve The Anticipated Benefits Of Our Recent Merger
With Ascent

In November 2001, we completed our merger with Ascent for consideration of
approximately $60.0 million in cash plus up to an additional $10.0 million per
year for each of the first five years following closing based upon reaching
certain sales threshold milestones on Ascents products. We market, through
the Ascent sales force, a leading pediatric product for the treatment of acute
asthma as well as other core dermatological products.

We expect that the transaction will result in opportunities for economies
of scale and operating efficiencies. We will not be able to achieve the
benefits of the Ascent merger unless we are able to continue to integrate the
operations of Ascent. We cannot assure you that this will occur. In addition,
the consolidation of operations requires substantial attention from management.
Any diversion of managements attention and any difficulties encountered in
the transition and integration process could prevent us from achieving the cost
savings and other benefits anticipated to result from the Ascent transaction.

Our Continued Growth Depends Upon Our Ability To Develop New Products

We have internally developed potential pharmaceutical compounds and
agents. We also have acquired the rights to certain potential compounds and
agents in various stages of development. We currently have a variety of new
products in various stages of research and development and are working on
possible improvements, extensions and reformulations of some existing products.
These research and development activities, as well as the clinical testing and
regulatory approval process, which must be completed before commercial
quantities of these

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developments can be sold, will require significant
commitments of personnel and financial resources. Due to the
limited financial resources available for research and development, we cannot
assure you that we will be able to develop a product or technology in a timely
matter, or at all. Delays in the research, development, testing or approval
processes will cause a corresponding delay in revenue generation from those
products. Regardless of whether they are ever released to the market, the
expense of such processes will have already been incurred.

We reevaluate our research and development efforts regularly to assess
whether our efforts to develop a particular product or technology are
progressing at a rate that justifies our continued expenditures. On the basis
of these reevaluations, we have abandoned in the past, and may abandon in the
future, our efforts on a particular product or technology. We cannot assure you
that any product we are researching or developing will ever be successfully
released to the market. If we fail to take a product or technology from the
development stage to market on a timely basis, we may incur significant
expenses without a near-term financial return.

We have in the past, and may in the future, supplement our internal
research and development by entering into research and development agreements
with other pharmaceutical companies. We may, upon entering into such
agreements, be required to make significant up-front payments to fund the
project. We cannot be sure, however, that we will be able to locate adequate
research partners or that supplemental research will be available on terms
acceptable to us in the future. If we are unable to enter into additional
research partnership arrangements, we may incur additional costs to continue
research and development internally or abandon certain projects. Even if we
are able to enter into collaborations, we cannot assure you that these
arrangements will result in successful product development or
commercialization.

We Depend On Licenses From Others, And Any Loss Of Such Licenses Could Harm Our
Business, Market Share And Profitability

We have acquired the right to manufacture, use and / or market certain
products, including certain of our core products. We also expect to continue to
obtain licenses for other products and technologies in the future. Our license
agreements generally require us to develop a market for the licensed products.
If we do not develop these markets, the licensors may be entitled to terminate
these license agreements.

We cannot be certain that we will fulfill all of our obligations under any
particular license agreement for any variety of reasons, including insufficient
resources to adequately develop and market a product, and lack of market
development despite our diligence and lack of product acceptance. Our failure
to fulfill our obligations could result in the loss of our rights under a
license agreement.

Our inability to continue the distribution of any particular licensed
product could harm our business, market share and profitability. Also, certain
products we license are used in connection with other products we own or
license. A loss of a license in such circumstances could materially harm our
ability to market and distribute these other products.

Our growth and acquisition strategy depends upon the successful
integration of licensed products with our existing products. Therefore, any
loss, limitation or flaw in a licensed product could impair our ability to
market and sell our products, delay new product development and introduction,
and / or harm our reputation. These problems, individually or together, could
harm our business and results of operation.

We Depend On A Limited Number Of Customers, And If We Lose Any Of Them, Our
Business Could Be Harmed

Our customers include some of the nations leading wholesale
pharmaceutical distributors, such as Quality King, Cardinal, McKesson,
AmerisourceBergen, and major drug chains. During fiscal 2002, Quality King,
Cardinal, McKesson and AmerisourceBergen accounted for 26.7%, 22.4%, 19.4% and
11.1%, respectively, of our net revenues. The loss of any of these customers
accounts or a reduction in their purchases could harm our business, financial
condition or results of operations. In addition, we may face pricing pressure
from our larger customers.

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The distribution network for pharmaceutical products has, in recent years,
been subject to increasing consolidation. As a result, a few large wholesale
distributors control a significant share of the market. In addition,
the number of independent drug stores and small chains has decreased as retail
consolidation has occurred. Further consolidation among, or any financial
difficulties of, distributors or retailers could result in the combination or
elimination of warehouses which may result in product returns to our company,
cause a reduction in the inventory levels of distributors and retailers, or
otherwise result in reductions in purchases of our products, any of which could
harm our business, financial condition and results of operations.

We Rely On Others To Manufacture Our Products

Currently, we outsource all of our product manufacturing needs and do not
manufacture any of our products. Typically, our manufacturing contracts are
short-term. We are dependent upon renewing agreements with our existing
manufacturers or finding replacement manufacturers to satisfy our requirements.
As a result, we cannot be certain that manufacturing sources will continue to
be available or that we can continue to outsource the manufacturing of our
products on reasonable or acceptable terms. In addition to our manufacturing
agreements, we outsource the manufacture of OVIDE® on a purchase order basis.

The underlying cost to us for manufacturing our products is established in
our agreements with these outside manufacturers. Because of the short-term
nature of these agreements, our expenses for manufacturing are not fixed and
could change from contract to contract. If the cost of production increases,
our gross margins could be negatively affected.

In addition, we rely on outside manufacturers to provide us an adequate
and reliable supply of our products on a timely basis. Any loss of a supplier
or any difficulties that arise in the supply chain could significantly affect
our inventories and supply of products available for sale. In some cases, we do
not have alternative sources of supply for our products. In the event our
primary suppliers are unable to fulfill our requirements for any reason, it
could reduce our sales, margins and market share, as well as harm our overall
business and financial results. If we are unable to supply sufficient amounts
of our products on a timely basis, our revenues and market share could decrease
and, correspondingly, our profitability could decrease.

Under our supply agreements, with certain exceptions, we must purchase
most of our product supply from specific manufacturers. If any of these
exclusive manufacturer or supplier relationships were terminated, we would be
forced to find a replacement manufacturer or supplier. The FDA requires that
all manufacturers used by pharmaceutical companies comply with the FDAs
regulations, including the cGMP regulations applicable to manufacturing
processes. The cGMP validation of a new facility and the approval of that
manufacturer for a new drug product may take a year or more before manufacture
can begin at the facility. Delays in obtaining FDA validation of a replacement
manufacturing facility could cause an interruption in the supply of our
products. Although we have business interruption insurance covering the loss of
income for up to 12 months, which may mitigate the harm to us from the
interruption of the manufacturing of our largest selling products caused by
certain events, the loss of a manufacturer could still cause a reduction in our
sales, margins and market share, as well as harm our overall business and
financial results.

Our Reliance On Third-Party Manufacturers And Suppliers Can Be Disruptive To
Our Inventory Supply

We and the manufacturers of our products rely on suppliers of raw
materials used in the production of our products. Some of these materials are
available from only one source and others may become available from only one
source. Any disruption in the supply of raw materials or an increase in the
cost of raw materials to our manufacturers could have a significant effect on
their ability to supply us with our products.

We try to maintain inventory levels that are no greater than necessary to
meet our current projections. Any interruption in the supply of finished
products could hinder our ability to timely distribute finished products. If we
are unable to obtain adequate product supplies to satisfy our customers
orders, we may lose those orders and our customers may cancel other orders and
stock and sell competing products. This in turn could cause a loss of our
market share and reduce our revenues.

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We cannot be certain that supply interruptions will not occur or that our
inventory will always be adequate. Numerous factors could cause interruptions
in the supply of our finished products including:



| |  |  | timing, scheduling and prioritization of production by our current manufacturers;          
| | - |  | -------------------------------------------------------------------------------------------
|
| |  |  | labor interruptions;                                                                       
|
| |  |  | changes in our sources for manufacturing;                                                  
|
| |  |  | the timing and delivery of domestic and international shipments;                           
|
| |  |  | our failure to locate and obtain replacement manufacturers as needed on a timely basis; and
|
| |  |  | conditions affecting the cost and availability of raw materials.                           

We estimate customer demand for our products primarily through use of
third party syndicated data sources which track prescriptions written by health
care providers and dispensed by licensed pharmacies. These data are
extrapolations from information provided only by certain pharmacies, and are
estimates of historical demand levels. We observe trends from these data, and,
coupled with certain proprietary information, prepare demand forecasts that are
the basis for purchase orders for finished and component inventory from our
third party manufacturers and suppliers. Our forecasts may fail to accurately
anticipate ultimate customer demand for products. Overestimates of demand may
result in excessive inventory production; underestimates may result in
inadequate supply of our products in channels of distribution.

We sell our products primarily to major wholesalers and retail pharmacy
chains. Consistent with pharmaceutical industry patterns, approximately 80% of
our revenues are derived from four major drug wholesale concerns. While we
attempt to estimate inventory levels of our products at our major wholesale
customers, using historical prescription information and historical purchase
patterns, this process is inherently imprecise. Rarely do wholesale customers
provide us complete inventory levels at regional distribution centers, or
within their national distribution systems. We rely wholly upon our wholesale
and drug chain customers to effect the distribution allocation of our products.
There can be no assurance that these customers will adequately manage their
local and regional inventories to avoid spot outages. Based upon historically
consistent purchasing patterns of our major wholesale customers, we believe our
estimates of trade inventory levels of our products are reasonable. We further
believe that inventories of our products among wholesale customers, taken as a
whole, are similar to those of other specialty pharmaceutical companies, and
that our trade practices, which periodically involve volume discounts and early
payment discounts, are typical of the industry.

We periodically offer promotions to wholesale and chain drugstore
customers to encourage dispensing of our products, consistent with a health
care providers prescription. Because many of the our products compete in
multi-source markets, it is important for us to ensure the licensed health care
providers dispensing instructions are fulfilled with our branded products and
are not substituted with a generic product or another therapeutic alternative
product which may be contrary to the licensed health care providers
recommended prescribed Medicis brand. We believe that a critical component of
our brand protection program is maintenance of full product availability at
drugstore and wholesale customers. Such availability strongly reduces the
probability of local and regional product substitutions, shortages and
backorders, which could result in lost sales. We expect to continue providing
favorable terms to wholesale and retail drug chain customers as may be
necessary to ensure the fullest possible distribution of our branded products
within the pharmaceutical chain of commerce.

We cannot control or influence greatly the purchasing patterns of
wholesale and retail drug chain customers. These are highly sophisticated
customers that purchase our products in a manner consistent with their industry
practices and perceived business interests. Our sales are subject to the
purchase requirements of our major customers, which, presumably, are based upon
their projected demand levels. Purchases by any given customer, during any
given measurement period, may be above or below actual prescription volumes of
one or more of our products during the same measurement period, resulting in
increases or decreases in product inventory existing in the distribution
channel, which are managed presumably in accordance with such customers
business practices.

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Fluctuations In Demand For Our Products Create Inventory Maintenance
Uncertainties

We typically experience greater revenues and, correspondingly, greater
income during the last month of each fiscal quarter. We attempt to match our
expenditures for inventory with these historical fluctuations in demand.
However, if these demand patterns change or we experience even a short delay in
delivery of inventory, revenue
could be deferred or even lost if products are unavailable to meet peak
demand. A deferral of revenue to a later period, or the loss of revenue
completely, could cause significant period-to-period fluctuations in our
operating results, as a significant portion of our operating expenses are fixed
in the short term. These fluctuations could result in our not meeting earnings
expectations or result in operating losses for a particular period.

Our Success Depends On The Management Of Recent And Future Growth

We recently experienced a period of rapid growth from both acquisitions
and internal expansion of our operations. This growth has placed significant
demands on our human and financial resources. We must continue to improve our
operational, financial and management information controls and systems and
effectively motivate, train and manage our employees to properly manage this
growth. Even if these steps are taken, we cannot be sure that our recent
acquisitions will be assimilated successfully into our business operations. If
we do not manage this growth effectively, maintain the quality of our products
despite the demands on our resources and retain key personnel, our business
could be harmed.

If We Are Unable To Protect Our Intellectual Property and Proprietary Rights,
Our Business Could Suffer

We believe that the protection of our trademarks and service marks is an
important factor in product recognition and in our ability to maintain or
increase market share. If we do not adequately protect our rights in our
various trademarks and service marks from infringement, their value to us could
be lost or diminished. If the marks we use are found to infringe upon the
trademark or service mark of another company, we could be forced to stop using
those marks and, as a result, we could lose the value of those marks and could
be liable for damages caused by an infringement.

The patents and patent applications in which we have an interest may be
challenged as to their validity or enforceability. Challenges may result in
potentially significant harm to our business. The cost of responding to these
challenges and the inherent costs to defend the validity of our patents,
including the prosecution of infringements and the related litigation, could be
substantial. Such litigation also could require a substantial commitment of our
managements time.

We are pursuing several U. S. patent applications, although we cannot be
sure that any of these patents will ever be issued. We also have acquired
rights under certain patents and patent applications in connection with our
licenses to distribute products and by assignment of rights to patents and
patent applications from certain of our consultants and officers. These patents
and patent applications may be subject to claims of rights by third parties. If
there are conflicting claims to the same patent or patent application, we may
not prevail and, even if we do have some rights in a patent or application,
those rights may not be sufficient for the marketing and distribution of
products covered by the patent or application.

The ownership of a patent or an interest in a patent does not always
provide significant protection. Others may independently develop similar
technologies or design around the patented aspects of our technology. We only
conduct patent searches to determine whether our products infringe upon any
existing patents when we think such searches are appropriate. As a result, the
products and technologies we currently market, and those we may market in the
future, may infringe on patents and other rights owned by others. If we are
unsuccessful in any challenge to the marketing and sale of our products or
technologies, we may be required to license the disputed rights, if the holder
of those rights is willing, or to cease marketing the challenged products, or
to modify our products to avoid infringing upon those rights. A claim or
finding of infringement regarding one of our products could harm our business,
financial condition and results of operations. The costs of responding to
infringement claims could be substantial and could require a substantial
commitment of our managements time.

The expiration of patents may expose our products to additional
competition. For example, our patent covering BUPHENYL® expires in 2004.

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We also rely upon trade secrets, unpatented proprietary know-how and
continuing technological innovation in developing and manufacturing many of our
core products. We require all of our employees, consultants and advisors to
enter into confidentiality agreements prohibiting them from taking or
disclosing our proprietary
information and technology. Nevertheless, these agreements may not provide
meaningful protection for our trade secrets and proprietary know-how if they
are used or disclosed. Despite all of the precautions we may take, people who
are not parties to confidentiality agreements may obtain access to our trade
secrets or know-how. In addition, others may independently develop similar or
equivalent trade secrets or know-how.

If We Become Subject To Product Liability Claims, Our Earnings And Financial
Condition Could Suffer

We are exposed to risks of product liability claims from allegations that
our products resulted in adverse effects to the patient or others. These risks
exist even with respect to those products that are approved for commercial sale
by the FDA and manufactured in facilities licensed and regulated by the FDA.

In addition to our desire to reduce the scope of our potential exposure to
these types of claims, many of our customers require us to maintain product
liability insurance as a condition of conducting business with us. We currently
carry product liability insurance in the amount of $50.0 million per claim and
$50.0 million in the aggregate on a claims-made basis. Nevertheless, this
insurance may not be sufficient to cover all claims made against us. We also
cannot be certain that our current coverage will continue to be available in
the future on reasonable terms, if at all. If we are liable for any product
liability claims in excess of our coverage or outside of our coverage, the cost
and expense of such liability could cause our earnings and financial condition
to suffer.

We Selectively Outsource Certain Non-Sales And Non-Marketing Services, And
Cannot Assure You That We Will Be Able To Obtain Adequate Supplies Of Such
Services On Acceptable Terms

To enable us to focus on our core marketing and sales activities, we
selectively outsource certain non-sales and non-marketing functions, such as
laboratory research, manufacturing and warehousing. As we expand our
activities in these areas, additional financial resources are expected to be
utilized. We typically do not enter into long-term manufacturing contracts
with third party manufacturers. Whether or not such contracts exist, we cannot
assure you that we will be able to obtain adequate supplies of such services or
products in a timely fashion, on acceptable terms, or at all.

Our Reported Earnings Per Share May Be More Volatile Because Of The Conversion
Contingency Provision In Our Recent Offering of Notes

In June 2002 we sold Contingent Convertible Senior Notes, due in 2032 (the
Notes), in the amount of $400.0 million. Included in the terms of the Notes
is a provision that allows the holders of the Notes to convert the Notes into
our Class A common stock during any quarter commencing after June 30, 2002, if
the closing sale price of our Class A common stock reaches certain milestone
thresholds. Until this contingency is met, the shares underlying the Notes are
not included in the calculation of basic or fully diluted earnings per share.
Should this contingency be met, earnings per share would be expected to
decrease as a result of the inclusion of the underlying shares in the earnings
per share calculation. Volatility in our stock price could cause this
condition to be met in one quarter and not in a subsequent quarter, increasing
the volatility of fully diluted earnings per share.

We May Not Be Able To Repurchase The Notes When Required To

On June 4, 2007, 2012 and 2017 and upon the occurrence of a change in
control, holders of the Notes may require us to offer to repurchase their Notes
for cash. We may not have sufficient funds at the time of any such events to
make the required repurchases.

The source of funds for any repurchase required as a result of any such
events will be our available cash or cash generated from operating activities
or other sources, including borrowings, sales of assets, sales of equity or
funds provided by a new controlling entity. We cannot assure you, however,
that sufficient funds will be available at the time of any such events to make
any required repurchases of the Notes tendered. Furthermore, the use of
available cash to fund the repurchase of the Notes may impair our ability to
obtain additional financing in the future.

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RISKS RELATED TO OUR INDUSTRY

The Growth Of Managed Care Organizations, Other Third-Party Reimbursement
Policies, State Regulatory Agencies And Retailer Fulfillment Policies May Harm
Our Pricing, Which May Reduce Our Market Share And Margins

Our operating results and business success depend in large part on the
availability of adequate third-party payor reimbursement to patients for our
prescription-brand products. These third-party payors include governmental
entities such as Medicaid, private health insurers and managed care
organizations. Because of the size of the patient population covered by
managed care organizations, marketing of prescription drugs to them and the
pharmacy benefit managers that serve many of these organizations has become
important to our business.

Managed care organizations and other third party payors try to negotiate
the pricing of medical services and products to control their costs. Managed
care organizations and pharmacy benefit managers typically develop formularies
to reduce their cost for medications. Formularies can be based on the prices
and therapeutic benefits of the available products. Due to their lower costs,
generic products are often favored. The breadth of the products covered by
formularies varies considerably from one managed care organization to another,
and many formularies include alternative and competitive products for treatment
of particular medical conditions. Exclusion of a product from a formulary can
lead to its sharply reduced usage in the managed care organization patient
population. Payment or reimbursement of only a portion of the cost of our
prescription products could make our products less attractive, from a net-cost
perspective, to patients, suppliers and prescribing physicians. We cannot be
certain that the reimbursement policies of these entities will be adequate for
our branded pharmaceutical products to compete on a price basis. If our
products are not included within an adequate number of formularies or adequate
reimbursement levels are not provided, or if those policies increasingly favor
generic products, our market share and gross margins could be harmed, as could
our overall business and financial condition.

Some of our products are not of a type generally eligible for
reimbursement. It is possible that products manufactured by others could
address the same effects as our products and be subject to reimbursement. If
this were the case, some of our products may be unable to compete on a price
basis. In addition, decisions by state regulatory agencies, including state
pharmacy boards, and / or retail pharmacies may require substitution of generic
for branded products, may prefer competitors products over our own, and may
impair our pricing and thereby constrain our market share and growth.

Managed care initiatives to control costs have influenced primary-care
physicians to refer fewer patients to dermatologists and other specialists.
Further reductions in these referrals could reduce the size of our potential
market, and harm our business, financial condition and results of operation.

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Obtaining FDA And Other Regulatory Approvals Is Time Consuming And Expensive

The process of obtaining FDA and other regulatory approvals is time
consuming and expensive. Clinical trials are required and the marketing and
manufacturing of pharmaceutical products are subject to rigorous testing
procedures. We may not be able to obtain FDA approval to conduct clinical
trials or to manufacture and market any of the products we develop, acquire or
license. Moreover, the costs to obtain approvals could be considerable and the
failure to obtain or delays in obtaining an approval could significantly harm
our business performance and financial results. Even if pre-marketing approval
from the FDA is received, the FDA is authorized to impose post-marketing
requirements such as:



| |  |  | testing and surveillance to monitor the product and its
continued compliance with regulatory requirements;                                                             
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | submitting products for inspection and, if any inspection
reveals that the product is not in compliance, the prohibiting of
the sale of all products from the same lot;
|
| |  |  | suspending manufacturing;                                                                                                                                              
|
| |  |  | switching status from prescription to over-the-counter drug;                                                                                                           
|
| |  |  | recalling products; and                                                                                                                                                
|
| |  |  | withdrawing marketing clearance                                                                                                                                        

In their regulation of advertising, the FDA and FTC from time to time
issue correspondence to pharmaceutical companies alleging that some advertising
or promotional practices are false, misleading or deceptive. The FDA has the
power to impose a wide array of sanctions on companies for such advertising
practices, and the receipt of correspondence from the FDA alleging these
practices could result in the following:



| |  |  | incurring substantial expenses, including fines, penalties,
legal fees and costs to comply with the FDAs requirements;                                              
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | changes in the methods of marketing and selling products;                                                                                                            
|
| |  |  | taking FDA-mandated corrective action, which may include
placing advertisements or sending letters to physicians rescinding
previous advertisements or promotion; and
|
| |  |  | disruption in the distribution of products and loss of sales
until compliance with the FDAs position is obtained.                                                   

We Are Subject To Extensive Governmental Regulation

Pharmaceutical companies are subject to significant regulation by a number
of national, state and local agencies. The FDA has jurisdiction over all of our
business and administers requirements covering testing, manufacturing, safety,
effectiveness, labeling, storage, record keeping, approval, advertising and
promotion of our products. In addition, the FTC and state and local authorities
regulate the advertising of over-the-counter drugs and cosmetics. Failure to
comply with applicable regulatory requirements could, among other things,
result in:



| |  |  | fines;                                                 
| | - |  | -------------------------------------------------------
|
| |  |  | changes to advertising;                                
|
| |  |  | suspensions of regulatory approvals of products;       
|
| |  |  | product recalls;                                       
|
| |  |  | delays in product distribution, marketing and sale; and
|
| |  |  | civil or criminal sanctions.                           

Our prescription and over-the-counter products receive FDA review
regarding their safety and effectiveness. However, the FDA is permitted to
revisit and change its prior determinations. We cannot be sure that the FDA
will not change its position with regard to the safety or effectiveness of our
products. If the FDAs position changes, we may be required to change our
labeling or formulations, or cease to manufacture and market the

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challenged
products. Even prior to any formal regulatory action, we could voluntarily
decide to cease distribution and sale or recall any of our products if concerns
about the safety or effectiveness develop.

Before marketing any drug that is considered a new drug by the FDA, the
FDA must provide its pre-marketing approval of the product. All products which
are considered drugs which are not new drugs and that generally are
recognized by the FDA as safe and effective for use do not require the FDAs
pre-marketing approval. We believe that some of our products, as they are
promoted and intended for use, are exempt from treatment as new drugs and are
not subject to pre-marketing approval by the FDA. The FDA, however, could take
a contrary position and we could be required to seek FDA approval of those
products and the marketing of those products. We could also be required to
withdraw those products from the market.

In recent years, various legislative proposals have been offered in
Congress and in some state legislatures that include major changes in the
health care system. These proposals have included price or patient
reimbursement constraints on medicines, restrictions on access to certain
products and mandatory substitution of generic for branded products. We cannot
predict the outcome of such initiatives, and it is difficult to predict the
future impact of the broad and expanding legislative and regulatory
requirements affecting us.

We Face Significant Competition Within Our Industry

The pharmaceutical industry is highly competitive. Competition in our
industry occurs on a variety of fronts, including:



| |  |  | developing and bringing new products to market before others;                              
| | - |  | -------------------------------------------------------------------------------------------
|
| |  |  | developing new technologies to improve existing products;                                  
|
| |  |  | developing new products to provide the same benefits as existing products at less cost; and
|
| |  |  | developing new products to provide benefits superior to those of existing products.        

Many of our competitors are large, well-established companies in the
fields of pharmaceuticals, chemicals, cosmetics and health care. Our
competitors include Aventis, Bristol-Myers Squibb, Galderma, GlaxoSmithKline,
ICN Pharmaceuticals, Johnson & Johnson, Pfizer, Pharmacia, Schering-Plough,
Wyeth and others. Many of these companies have greater resources than we do to
devote to marketing, sales, research and development and acquisitions. As a
result, they have a greater ability to undertake more extensive research and
development, marketing and pricing policy programs. It is possible that our
competitors may develop new or improved products to treat the same conditions
as our products or make technological advances reducing their cost of
production so that they may engage in price competition through aggressive
pricing policies to secure a greater market share to our detriment. These
competitors also may develop products which make our current or future products
obsolete. Any of these events could significantly harm our business and
financial results, including reducing our market share and gross margins.

We sell and distribute both prescription brands and over-the-counter
products. Each of these products competes with products produced by others to
treat the same conditions. Several of our prescription products, compete with
generic pharmaceuticals, which claim to offer equivalent benefit at a lower
cost. In some cases, insurers and other health care payment organizations try
to encourage the use of these less expensive generic brands through their
prescription benefits coverages and reimbursement policies. These organizations
may make the generic alternative more attractive to the patient by providing
different amounts of reimbursement so that the net cost of the generic product
to the patient is less than the net cost of our prescription brand product.
Aggressive pricing policies by our generic product competitors and the
prescription benefits policies of insurers could cause us to lose market share
or force us to reduce our gross margins in response.

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ITEM 2: PROPERTIES

We presently occupy approximately 49,000 square feet of office space in
Scottsdale, Arizona, at an average annual expense of $1.3 million, under a
lease agreement that expires in February 2010. The lease contains certain rent
escalation clauses and, upon expiration, can be renewed for two additional
periods of five years each. Rent expense was approximately $1.4 million, $1.4
million and $1.0 million for fiscal 2002, 2001 and 2000, respectively. We
intend to obtain additional office space within the next two years.

Medicis Canada, Inc., a wholly owned subsidiary, presently leases
approximately 7,500 square feet of office and warehouse space in St-Laurent,
Quebec, Canada, under a lease agreement that expires in April 2005.




ITEM 3: LEGAL PROCEEDINGS

On November 9, 2001, Ascent received notice that Triumph-Connecticut
Limited Partnership and related parties had brought a civil action against it
in Massachusetts. In the action, the Triumph group claims that the execution
by Ascent of the merger agreement and the consummation of the merger without
the consent of the Triumph group or the payment to the Triumph group of a
specified amount breaches the terms of a January 1997 securities purchase
agreement, the terms of warrants issued to the Triumph group, an implied
covenant of good faith and fair dealing, and certain deceptive trade laws. The
Triumph group is seeking damages in an amount not less than $22.1 million, plus
treble damages. We believe that the claims of the Triumph group are without
merit and we intend to vigorously contest and defend this suit.

We and certain of our subsidiaries are parties to other actions and
proceedings incident to their businesses, including litigation regarding our
intellectual property, challenges to the enforceability or validity of our
intellectual property and claims that our products infringe on the intellectual
property rights of others.

We believe that the ultimate outcome based on the information available to
the Company with respect to any of these matters is either covered by insurance
and/or established reserves, or in some cases rights of offset, and in the
aggregate, should not have a material adverse effect on our business, financial
position or results of operations. There can be no assurance, however, that an
adverse determination on any action or proceeding will not have a material
adverse effect on our business, financial condition and results of operations,
or that we will be able to realize the full amount of any indemnification
obligation that any person may have to us or that any such indemnification will
adequately cover any liability.




ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the security holders of the Company
during the fourth quarter of fiscal 2002.




PART II




ITEM 5: MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

Dividend Policy

Medicis has never declared a cash dividend. Medicis intends to retain any
earnings to fund future growth and the operation of its business and,
therefore, does not anticipate paying any cash dividends in the foreseeable
future.

20



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Price Range of Common Stock

Medicis Class A common stock trades on the New York Stock Exchange under
the symbol MRX. The following table sets forth, for the fiscal periods
indicated, the range of high and low sales prices for the Class A common stock
of the Company on the New York Stock Exchange:

|                                |  |                |  |       |       |     |  |       |       | 
|------------------------------- |  | -------------- |  | ----- | ----- | --- |  | ----- | ----- | 
|                                |  |                |  | HIGH  |       | LOW
|                                |  |                |  |       |       |    
|FISCAL YEAR ENDED JUNE 30, 2002 |  |                |  |       |       |     |  |      
|                               
|                               
|                               
|                               
|                                |  | First Quarter  |  | $     | 54.95 |     |  | $     | 41.80 | 
|                               
|                               
|                               
|                               
|                                |  | Second Quarter |  | 64.60 |       |     |  | 48.60 |      
|                               
|                               
|                               
|                               
|                                |  | Third Quarter  |  |       | 64.59 |     |  |       | 52.40 | 
|                               
|                               
|                               
|                               
|                                |  | Fourth Quarter |  | 55.75 |       |     |  | 40.27 |      
|                               
|                               
|                               
|                               
|FISCAL YEAR ENDED JUNE 30, 2001 |  |                |  |       |       |     |  |      
|                               
|                               
|                               
|                               
|                                |  | First Quarter  |  | $     | 67.75 |     |  | $     | 50.13 | 
|                               
|                               
|                               
|                               
|                                |  | Second Quarter |  | 74.75 |       |     |  | 45.63 |      
|                               
|                               
|                               
|                               
|                                |  | Third Quarter  |  |       | 62.75 |     |  |       | 31.00 | 
|                               
|                               
|                               
|                               
|                                |  | Fourth Quarter |  | 58.35 |       |     |  | 42.75 |      

On September 18, 2002, the last reported sale price on the New York Stock
Exchange for Medicis Class A common stock was $41.13 per share. As of such
date, there were approximately 240 holders of record of Class A common stock.

Recent Sales of Unregistered Securities

On July 26, 2002, we filed a registration statement on Form S-3 with the
Securities and Exchange Commission under the Securities Act relating to (i) the
Notes and (ii) 6,844,681 shares of our Class A common stock issuable upon the
conversion of the Notes.

On June 4, 2002 and June 10, 2002, we sold $400.0 million aggregate
principal amount of our 2.5% Contingent Convertible Notes Due 2032 in private
transactions to persons reasonably believed to be qualified institutional
buyers as defined by Rule 144A under the Securities Act. The Notes bear
interest at a rate of 2.5% per annum, which is payable on June 4 and December 4
of each year, beginning on December 4, 2002. We accrued approximately one
month of interest expense as of June 30, 2002. We also will pay contingent
interest at a rate equal to 0.5% per annum during any six-month period, with
the initial six-month period commencing June 4, 2007, if the average trading
price of the Notes reaches certain thresholds. The Notes will mature on June
4, 2032.

We may redeem some or all of the Notes at any time on or after June 11,
2007, at a redemption price, payable in cash, of 100% of the principal amount
of the Notes, plus accrued and unpaid interest. Holders of the Notes may
require us to repurchase all or a portion of their Notes due June 4, 2007, 2012
and 2017, and upon a change in control, as defined in the indenture governing
the Notes, at 100% of the principal amount of the Notes, plus accrued and
unpaid interest to the date of the repurchase, payable in cash.

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The Notes are convertible, at the holders option, prior to the maturity
dates into shares of our Class A common stock in the following circumstances:



| |  |  | during any quarter commencing after June 30, 2002, if
the closing price of our Class A common stock over a specified
number of trading days during the previous quarter is more than
110% of the conversion price of the Notes on the last trading day
of the previous quarter. The Notes are initially convertible at
a conversion price of $58.10 per share, which is equal to a
conversion rate of approximately 17.217 shares per $1,000
principal amount of Notes, subject to adjustment;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | if we have called the Notes for redemption;                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  |  | during the five trading day period immediately
following any nine consecutive day trading period in which the
trading price of the Notes per $1,000 principal amount for each
day of such period was less than 95% of the product of the
closing sale price of our Class A common stock on that day
multiplied by the number of shares of our Class A common stock
issuable upon conversion of $1,000 principal amount of the Notes;
or                                                       
|
| |  |  | upon the occurrence of specified corporate
transactions.                                                                                                                                                                                                                                                                                                                                                                                                                                      

The Notes, which are unsecured, do not contain any restrictions on the
payment of dividends, the incurrence of additional indebtedness or the
repurchase of our securities and do not contain any financial covenants.

These private transactions were completed in reliance on the Section 4 (2)
exemptions of the Securities Act of 1933, as amended, for transactions not
involving a public offering and pursuant to Rule 144A promulgated under the
Securities Act. In each of the transactions for which Medicis asserts
exemption from registration, the purchaser executed some form of written
subscription offer or agreement that contained representations concerning the
unregistered nature of the securities, its access to full information regarding
Medicis and the Notes and its understanding regarding the restrictions on
transfer of the Notes.

In February 2002, we issued 43,946 shares of Class A common stock upon the
conversion of 43,946 shares of Class B common stock by a shareholder who was
not an officer, director or 5% or greater shareholder of Medicis. The
conversion was pursuant to the terms of the Class B common stock and did not
result in the receipt of additional cash consideration by Medicis. The shares
of Class B common stock converted in the transaction were originally issued to
the shareholder in October 1988. As a consequence of this conversion, the
number of outstanding shares of Class B common stock decreased from 422,962
shares to 379,016 shares at June 30, 2002.

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ITEM 6: SELECTED FINANCIAL DATA

The following selected financial data has been derived from the
consolidated financial statements of Medicis for the fiscal years 2002, 2001,
2000, 1999 and 1998. The comparability of the years presented is impacted by
certain product rights and business acquisitions. All business acquisitions
were accounted for under the purchase method and accordingly, the results of
operations reflect the financial results of each business acquisition from the
date of the acquisition. Certain business acquisitions resulted in the
write-off of in-process research and development resulting from a valuation.
Gross profit does not include amortization of the related intangibles.

|                                               |                                     |   |         |          |     |      |         |                                          |     |      |         |         |   |   |         |         |     |   |         |         |   | 
|---------------------------------------------- | ----------------------------------- | - | ------- | -------- | --- | ---- | ------- | ---------------------------------------- | --- | ---- | ------- | ------- | - | - | ------- | ------- | --- | - | ------- | ------- | - | 
|                                               |                                     |   |         | JUNE 30,
|                                               |                                     |   |         |         
|                                               |                                     |   |         | 2002     |     | 2001 |         | 2000                                     |     | 1999 |         | 1998   
|                                               |                                     |   |         |          |     |      |         |                                          |     |      |         |        
|                                               |                                     |   |         |          |     |      |         | (in thousands, except per share amounts) |     |      |         |        
|Statements of Operations Data:                 |                                     |   |         |          |     |      |         |                                          |     |      |         |         |   |   |         |         |     |   |         |        
|                                              
|                                              
|                                              
|                                              
|Net revenues                                   |                                     | $ | 212,807 |          |     | $    | 167,802 |                                          |     | $    | 139,099 |         |   | $ | 116,871 |         |     | $ | 77,571  |        
|                                              
|                                              
|                                              
|                                              
|Gross profit                                   |                                     |   | 177,042 |          |     |      | 137,105 |                                          |     |      | 113,187 |         |   |   | 95,236  |         |     |   | 63,592  |        
|                                              
|                                              
|                                              
|                                              
|Operating expenses:                            |                                     |   |         |          |     |      |         |                                          |     |      |         |         |   |   |         |         |     |   |         |        
|                                              
|                                              
|                                              
|                                              
|                                               | Selling, general and administrative |   |         | 77,314   |     |      |         | 59,508                                   |     |      |         | 45,404  |   |   |         | 38,219  |     |   |         | 27,424  |  
|                                              
|                                              
|                                              
|                                              
|                                               | Research and development            |   |         | 15,132   | (a) |      |         | 25,515                                   | (b) |      |         | 4,903   |   |   |         | 3,396   |     |   |         | 2,885   |  
|                                              
|                                              
|                                              
|                                              
|                                               | In-process research and development |   |         | 6,217    |     |      |         |                                         |     |      |         |        |   |   |         | 9,500   |     |   |         | 35,400  |  
|                                              
|                                              
|                                              
|                                              
|                                               | Depreciation and amortization       |   |         | 7,928    |     |      |         | 8,261                                    |     |      |         | 7,374   |   |   |         | 5,810   |     |   |         | 2,903   |  
|                                               |                                     |   |         |          |     |      |         |                                          |     |      |         |         |   |   |         |         |     |   |         |        
|Total operating expenses                       |                                     |   | 106,591 |          |     |      | 93,284  |                                          |     |      | 57,681  |         |   |   | 56,925  |         |     |   | 68,612  |        
|                                               |                                     |   |         |          |     |      |         |                                          |     |      |         |         |   |   |         |         |     |   |         |        
|Operating income (loss)                        |                                     |   | 70,451  |          |     |      | 43,821  |                                          |     |      | 55,506  |         |   |   | 38,311  |         |     |   | (5,020  | )      
|                                              
|                                              
|                                              
|                                              
|Other:                                         |                                     |   |         |          |     |      |         |                                          |     |      |         |         |   |   |         |         |     |   |         |        
|                                              
|                                              
|                                              
|                                              
|                                               | Gain on sale of assets              |   |         |         |     |      |         |                                         |     |      |         |        |   |   |         | 17,650  | (c) |   |         |        |  
|                                              
|                                              
|                                              
|                                              
|                                               | Net interest income                 |   |         | 8,533    |     |      |         | 15,504                                   |     |      |         | 11,876  |   |   |         | 9,678   |     |   |         | 7,037   |  
|                                              
|                                              
|                                              
|                                              
|                                               | Income tax expense                  |   |         | (28,960  | )   |      |         | (18,905                                  | )   |      |         | (24,388 | ) |   |         | (24,202 | )   |   |         | (14,424 | )
|                                               |                                     |   |         |          |     |      |         |                                          |     |      |         |         |   |   |         |         |     |   |         |        
|Net income (loss)                              |                                     | $ | 50,024  |          |     | $    | 40,420  |                                          |     | $    | 42,994  |         |   | $ | 41,437  |         |     | $ | (12,407 | )      
|                                               |                                     |   |         |          |     |      |         |                                          |     |      |         |         |   |   |         |         |     |   |         |        
|Basic net income (loss) per common share       |                                     | $ | 1.65    |          |     | $    | 1.34    |                                          |     | $    | 1.48    |         |   | $ | 1.46    |         |     | $ | (0.51   | )      
|                                               |                                     |   |         |          |     |      |         |                                          |     |      |         |         |   |   |         |         |     |   |         |        
|Diluted net income (loss) per common share     |                                     | $ | 1.59    |          |     | $    | 1.28    |                                          |     | $    | 1.41    |         |   | $ | 1.41    |         |     | $ | (0.51   | )      
|                                               |                                     |   |         |          |     |      |         |                                          |     |      |         |         |   |   |         |         |     |   |         |        
|Number of shares used in computing basic net   |                                     |   |         |          |     |      |         |                                          |     |      |         |         |   |   |         |         |     |   |         |        
|                                              
|                                              
|                                              
|                                              
|income (loss) per common share                 |                                     |   | 30,268  |          |     |      | 30,134  |                                          |     |      | 29,029  |         |   |   | 28,414  |         |     |   | 24,102  |        
|                                               |                                     |   |         |          |     |      |         |                                          |     |      |         |         |   |   |         |         |     |   |         |        
|Number of shares used in computing diluted net |                                     |   |         |          |     |      |         |                                          |     |      |         |         |   |   |         |         |     |   |         |        
|                                              
|                                              
|                                              
|                                              
|income (loss) per common share                 |                                     |   | 31,405  |          |     |      | 31,694  |                                          |     |      | 30,499  |         |   |   | 29,462  |         |     |   | 24,102  |        
|                                               |                                     |   |         |          |     |      |         |                                          |     |      |         |         |   |   |         |         |     |   |         |        



---

|(a) |  | Includes $7.7 million paid to aaiPharma for a research and development collaboration                     
|--- |  | ---------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(b) |  | Includes $17.0 million paid to Corixa for a development,
commercialization and licensing agreement       
|   
|   
|   
|   
|(c) |  | Gain on sale of assets of
$17.7 million was recognized on the sale of four products to
Bioglan Pharma plc

23



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##### Table of Contents



|                           |                        |  |          |         |      |  |         |         |      |  |                |         |  |  |         |         |  |  |         |         | 
|-------------------------- | ---------------------- |  | -------- | ------- | ---- |  | ------- | ------- | ---- |  | -------------- | ------- |  |  | ------- | ------- |  |  | ------- | ------- | 
|                           |                        |  | JUNE 30,
|                           |                        |  |         
|                           |                        |  | 2002     |         | 2001 |  | 2000    |         | 1999 |  | 1998          
|                           |                        |  |          |         |      |  |         |         |      |  |               
|                           |                        |  |          |         |      |  |         |         |      |  | (in thousands) |         |  |  |         |         |  |  |        
|Balance Sheet Data:        |                        |  |          |         |      |  |         |         |      |  |                |         |  |  |         |         |  |  |         |        
|                          
|                          
|                          
|                          
|Cash, cash equivalents and |                        |  |          |         |      |  |         |         |      |  |                |         |  |  |         |         |  |  |         |        
|                          
|                          
|                          
|                          
|                           | short-term investments |  | $        | 577,576 |      |  | $       | 334,157 |      |  | $              | 285,737 |  |  | $       | 237,304 |  |  | $       | 237,921 | 
|                          
|                          
|                          
|                          
|Working capital            |                        |  | 611,259  |         |      |  | 358,468 |         |      |  | 312,302        |         |  |  | 278,612 |         |  |  | 262,956 |        
|                          
|                          
|                          
|                          
|Total assets               |                        |  | 876,273  |         |      |  | 550,007 |         |      |  | 496,113        |         |  |  | 467,680 |         |  |  | 352,350 |        
|                          
|                          
|                          
|                          
|Long-term obligations      |                        |  |         |         |      |  |        |         |      |  | 14,914         |         |  |  | 34,716  |         |  |  | 95      |        
|                          
|                          
|                          
|                          
|Long-term debt             |                        |  | 400,000  |         |      |  |        |         |      |  |               |         |  |  |        |         |  |  |        |        
|                          
|                          
|                          
|                          
|Stockholders equity       |                        |  | 429,059  |         |      |  | 503,453 |         |      |  | 437,439        |         |  |  | 373,748 |         |  |  | 324,495 |        

|                                          |  |                |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|----------------------------------------- |  | -------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                          |  | JUNE 30,      
|                                          |  |               
|                                          |  | 2002           |        | 2001 |  | 2000 |        | 1999 |  | 1998
|                                          |  |                |        |      |  |      |        |      |  |     
|                                          |  | (in thousands)
|Cash Flow Data:                           |  |                |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|                                         
|                                         
|                                         
|                                         
|Net cash provided by operating activities |  | $              | 73,542 |      |  | $    | 71,120 |      |  | $    | 41,238 |  |  | $ | 25,424 |  |  | $ | 14,745 | 

24



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ITEM 7:   MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
                  CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis together with our
consolidated financial statements, including the related notes, which are
included in this report on Form 10-K. Certain information contained in the
discussion and analysis set forth below and elsewhere in this report, including
information with respect to our plans and strategy for our business and related
financing, includes forward-looking statements that involve risk and
uncertainties. See Risk Factors that May Affect Future Results in Item 1 in
this Form 10-K for a discussion of important factors that could cause actual
results to differ materially from the results described in or implied by the
forward-looking statements in this report.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in conformity with accounting principals generally accepted in
the United States. The preparation of the consolidated financial statements
requires us to make estimates and assumptions that affect the amounts reported
in the consolidated financial statements and accompanying notes. On an ongoing
basis, we evaluate our estimates related to sales allowances, chargebacks,
rebates, returns and other pricing adjustments, depreciation and amortization and other contingencies and litigation. We base
our estimates on historical experience and various other factors related to
each circumstance. Actual results could differ from those estimates based upon
future events, which could include, among other risks, changes in the
regulations governing the manner in which we sell our products, changes in the
health care environment and managed care consumption patterns. Our significant
accounting policies are described in Note 1 to the consolidated financial
statements included in this report. We believe the following critical
accounting policies affect our most significant estimates and assumptions used
in the preparation of our consolidated financial statements and are important
in understanding our financial condition and results of operations.

Revenue Recognition

Revenue from product sales is recognized when the merchandise is shipped
to an unrelated third party pursuant to Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements. Accordingly, revenue is
recognized when all four of the following criteria are met: (i) persuasive
evidence that an arrangement exists; (ii) delivery of the products has
occurred; (iii) the selling price is both fixed and determinable and; (iv)
collectibility is reasonably probable. Our customers consist primarily of large
pharmaceutical wholesalers who sell directly into the retail channel.
Provisions for sales discounts, and estimates for chargebacks, rebates, damaged
product returns, exchanges for expired product are established as a reduction
of product sales revenues at the time such revenues are recognized. These
revenue reductions are established by us as our best estimate at the time of
sale based on historical experience adjusted to reflect known changes in the
factors that impact such reserves. These revenue reductions are generally
reflected either as a direct reduction to accounts receivable through an
allowance, or as an addition to accrued expenses if the payment is due to a
party other than the wholesale or retail customer.

We do not provide any forms of price protection to our wholesale customers
and permit product returns only if the product is damaged or if it is returned
within six to 12 months of expiration and the customer is committed to accepting
replacement product in exchange. Our customers consist principally of
financially viable wholesalers so revenue is recorded upon sale to the
wholesaler, net of estimated provisions.

Goodwill and Other Identifiable Intangible Assets

We have in the past made acquisitions of products and businesses that
include goodwill, license agreements, product rights, and other identifiable
intangible assets. We assess the impairment of goodwill and other identifiable
intangibles whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Some factors we consider important
which could trigger an impairment review include the following, (i) significant
underperformance relative to expected historical or projected future operating
results; (ii) significant changes in the

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manner of our use of the acquired assets or the strategy for our overall
business; and (iii) significant negative industry or economic trends.

When we determine that the carrying value of goodwill and other
identifiable intangibles may not be recoverable based upon the existence of one
or more of the above indicators of impairment, we first will perform an
assessment of the assets recoverability based on expected undiscounted future
net cash flow, and if the amount is less than the assets value, we measure any
impairment based on a projected discounted cash flow method using a discount
rate determined by our management to be commensurate with the risk inherent in
our current business model. In accordance with SFAS No. 142, Goodwill and
Other Intangible Assets, on July 1, 2002 we ceased to amortize goodwill
arising from acquisitions completed prior to July 1, 2001. This change did not
have a material affect on our financial statements. In lieu of amortization,
we are required to perform an initial impairment review of our goodwill in
fiscal 2003 and an annual impairment review thereafter. If we determine
through the impairment process that goodwill has been impaired, we would record
the impairment charge in our statement of income.

Income Taxes

Deferred income tax assets and liabilities are established for temporary
differences between the financial and income tax basis of our assets and
liabilities at enacted tax rates expected to be in effect when the assets and
liabilities are realized or settled. A valuation allowance is established as a
reduction of deferred income tax assets when we determine that it is more
likely than not that the asset will not be realized. During fiscal 2002, a net
deferred tax asset was recorded on our consolidated balance sheet related to
certain net operating loss carryforwards attributable to our merger with
Ascent. The annual utilization of the Ascent net operating loss carryforwards
is limited for tax purposes, and we have only recorded the amount expected to
be recovered through 2021.

Managed Care and Medicaid Reserves

We establish and maintain reserves for amounts payable to Managed Care
Organizations and state Medicaid programs for the reimbursement of portions of
the retail price of prescriptions filled that are covered by the respective
programs. The amounts estimated to be paid relating to products sold are
recognized as revenue reductions and as additions to accrued expenses at the
time of sale based on our best estimate of the expected prescription fill rate
to these Manage Care patients using historical experience adjusted to reflect
known changes in the factors that impact such reserves.

Research and Development Costs and Accounting for Strategic Collaborations

All research and development costs, including payments related to products
under development, and research consulting agreements, are expensed as
incurred. We may continue to make up-front, non-refundable payments to third
parties for new technologies and for research and development work which has
been completed. These up-front payments may be expensed at the time of payment
depending on the nature of the payment made.

Our policy on accounting for costs of strategic collaborations determines
the timing of our recognition of certain development costs. In addition, this
policy determines whether the cost is classified as development expense or
capitalized as an asset. We are required to form judgments with respect to the
commercial status of such products in determining whether development costs
meet the criteria for immediate expense or capitalization. For example, when
we acquire certain products in which there is already an ANDA or NDA available
and there is net realizable value based on projected sales for these products
we capitalize the amount paid as an intangible asset. In addition, if we
acquire product rights, which are in the development phase and there is no
assurance that the third party is required to perform additional research
efforts, we expense such payments.

One of our collaborations includes an
advance to a foreign public company that provides for the return of
the funds in certain situations, which we believe has occurred with respect to
a $3.0 million amount paid to them. In this situation, we assessed
the contractual status of the arrangement with outside legal counsel, and
evaluated the ability of this party to repay such amounts at June 30, 2002
to determine that no valuation allowance is required for the
$3.0 million. Should the financial condition of this party change in the
future, or should the legal status of the arrangement be assessed ultimately in
a different manner, future reserves may be required with respect to the

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recoverability of the amounts, and result in future charges. The $3.0 million
amount is recorded in other current assets in our financial statements as of
June 30, 2002.

OVERVIEW

We are a leading specialty pharmaceutical company focusing primarily on
developing and marketing drugs in the United States for the treatment of
dermatological, pediatric and podiatric conditions. We believe that annual
U.S. pharmaceutical sales in these markets exceed $10 billion. We offer a
broad range of products addressing various conditions including acne, fungal
infections, asthma, rosacea, hyperpigmentation, photoaging, psoriasis, eczema,
skin and skin-structure infections, seborrheic dermatitis, head lice and
cosmesis (improvement in the texture and appearance of skin).

We derive a majority of our prescription volume from our core products.
We believe that the prescription volume of our core products will constitute
the majority of the prescription volume for the foreseeable future.
Accordingly, any factor adversely affecting the prescription volume related to
our core products, individually or collectively, could harm our business,
financial condition and results of operations. Several of our core products
are subject to generic competition currently or may be in the future. Each of
our core products could be rendered obsolete or uneconomical by regulatory or
competitive changes.

As a result of customer buying patterns, a substantial portion of our
revenues has been recognized in the last month of each quarter. We schedule
our inventory purchases to meet anticipated customer demand. As a result,
relatively small delays in the receipt of manufactured products by us could
result in revenues being deferred or lost. Our operating expenses are based
upon anticipated sales levels, and a high percentage of our operating expenses
are relatively fixed in the short term. Consequently, variations in the timing
of revenue recognition could cause significant fluctuations in operating
results from period to period and may result in unanticipated periodic earnings
shortfalls or losses. There can be no assurance that we will maintain or
increase revenues or profitability or avoid losses in any future period.

We estimate customer demand for our products primarily through use of
third party syndicated data sources which track prescriptions written by health
care providers and dispensed by licensed pharmacies. These data are
extrapolations from information provided only by certain pharmacies, and are
estimates of historical demand levels. We observe trends from these data, and,
coupled with certain proprietary information, prepare demand forecasts that are
the basis for purchase orders for finished and component inventory from our
third party manufacturers and suppliers. Our forecasts may fail to accurately
anticipate ultimate customer demand for products. Overestimates of demand may
result in excessive inventory production; underestimates may result in
inadequate supply of our products in channels of distribution.

We sell our products primarily to major wholesalers and retail pharmacy
chains. Consistent with pharmaceutical industry patterns, approximately 80% of
our revenues are derived from four major drug wholesale concerns. While we
attempt to estimate inventory levels of our products at our major wholesale
customers, using historical prescription information and historical purchase
patterns, this process is inherently imprecise. Rarely do wholesale customers
provide us complete inventory levels at regional distribution centers, or
within their national distribution systems. We rely wholly upon our wholesale
and drug chain customers to effect the distribution allocation of our products.
There can be no assurance that these customers will adequately manage their
local and regional inventories to avoid spot outages. Based upon historically
consistent purchasing patterns of our major wholesale customers, we believe our
estimates of trade inventory levels of our products are reasonable. We further
believe that inventories of our products among wholesale customers, taken as a
whole, are similar to those of other specialty pharmaceutical companies, and
that our trade practices, which periodically involve volume discounts and early
payment discounts, are typical of the industry.

We periodically offer promotions to wholesale and chain drugstore
customers to encourage dispensing of our products, consistent with a health
care providers prescription. Because many of the our products compete in
multi-source markets, it is important for us to ensure the licensed health care
providers dispensing instructions are fulfilled with our branded products and
are not substituted with a generic product or another therapeutic alternative
product which may be contrary to the licensed health care providers
recommended prescribed Medicis brand. We

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believe that a critical component of our brand protection program is
maintenance of full product availability at drugstore and wholesale customers.
Such availability strongly reduces the probability of local and regional
product substitutions, shortages and backorders, which could result in lost
sales. We expect to continue providing favorable terms to wholesale and retail
drug chain customers as may be necessary to ensure the fullest possible
distribution of our branded products within the pharmaceutical chain of
commerce.

We cannot control or influence greatly the purchasing patterns of
wholesale and retail drug chain customers. These are highly sophisticated
customers that purchase products in a manner consistent with their industry
practices and perceived business interests. Our sales are subject to the
purchase requirements of our major customers, which, presumably, are based upon
their projected demand levels. Purchases by any given customer, during any
given measurement period, may be above or below actual prescription volumes of
one or more of our products during the same measurement period, resulting in
increases or decreases in product inventory existing in the distribution
channel, which are managed presumably in accordance with such customers
business practices.

We plan to spend substantial amounts of capital to continue the
acquisition and research and development of pharmaceutical products. Actual
expenditures will depend upon our financial condition, as well as the results
of clinical testing, delays or changes in government-required testing and
approval procedures, technological and competitive developments, and strategic
marketing decisions. We may increase total expenditures for research and
development and expect that research and development expenditures as a
percentage of net revenues will fluctuate from period to period. We
periodically make up-front, non-refundable payments to third parties for
research and development work which has been completed. If there is no recourse
provision against the third party for their failure to perform future services
to earn such amounts paid, these up-front payments are expensed at the time of
payment. Payments made for product rights whereby the product has received
regulatory approval for sale are capitalized and amortized over the expected
revenue-producing period.

To enable us to focus on our core selling and marketing activities, we
selectively outsource certain non-sales and non-marketing functions, such as
laboratory research, manufacturing, warehousing and distributing. As we expand
our activities in these areas, additional financial resources are expected to
be utilized. The duration of our manufacturing contracts vary in length.

CERTAIN TRANSACTIONS IN FISCAL 2002

The following transactions that occurred during fiscal 2002 were
significant events that affected our results of operations, our cash flows, and
our financial condition:

Sale of $400.0 Million Contingent Convertible Notes

On June 4, 2002 and June 10, 2002, we sold $400.0 million aggregate
principal amount of our 2.5% Contingent Convertible Notes Due 2032 in private
transactions. Approximately $142.5 million of the proceeds from the sale of
these Notes was used to repurchase 3.1 million shares of our Class A common
stock, with the remainder to be used for repurchase of additional shares of our
Class A common stock, potential acquisitions and general corporate purposes.
The Notes bear interest at a rate of 2.5% per annum, which is payable on June 4
and December 4 of each year, beginning on December 4, 2002. We also will pay
contingent interest at a rate equal to 0.5% per annum during any six-month
period, with the initial six-month period commencing June 4, 2007, if the
average trading price of the Notes reaches certain thresholds. The Notes will
mature on June 4, 2032.

We may redeem some or all of the Notes at any time on or after June 11,
2007, at a redemption price, payable in cash, of 100% of the principal amount
of the Notes, plus accrued and unpaid interest, plus contingent interest, if
any. Holders of the Notes may require us to repurchase all or a portion of
their Notes on June 4, 2007, 2012 and 2017, and upon a change in control, as
defined in the indenture governing the Notes, at 100% of the principal amount
of the Notes, plus accrued and unpaid interest to the date of the repurchase,
plus contingent interest, if any, payable in cash.

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The Notes are convertible, at the holders option, prior to the maturity
date into shares of our Class A common stock in the following circumstances:



| |  |  | during any quarter commencing after June 30, 2002, if
the closing price of our Class A common stock over a specified
number of trading days during the previous quarter is more than
110% of the conversion price of the Notes on the last trading day
of the previous quarter. The Notes are initially convertible at
a conversion price of $58.10 per share, which is equal to a
conversion rate of approximately 17.217 shares per $1,000
principal amount of Notes, subject to adjustment;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | if we have called the Notes for redemption;                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  |  | during the five trading day period immediately
following any nine consecutive day trading period in which the
trading price of the Notes per $1,000 principal amount for each
day of such period was less than 95% of the product of the
closing sale price of our Class A common stock on that day
multiplied by the number of shares of our Class A common stock
issuable upon conversion of $1,000 principal amount of the Notes;
or                                                       
|
| |  |  | upon the occurrence of specified corporate
transactions.                                                                                                                                                                                                                                                                                                                                                                                                                                      

The Notes, which are unsecured, do not contain any restrictions on the
payment of dividends, the incurrence of additional indebtedness or the
repurchase of our securities, and do not contain any financial covenants.

We incurred $12.6 million of fees and other origination costs related to
the issuance of the Notes. We are amortizing these costs over a five year
period.

Merger With Ascent Pediatrics, Inc.

On November 15, 2001, we completed our merger with Ascent, purchasing all
of the outstanding capital stock and retiring the indebtedness of Ascent for
consideration of approximately $60.0 million in cash plus up to an additional
$10.0 million per year for each of the first five years following closing based
upon reaching certain sales threshold milestones on the Ascent products for
each twelve month period ending November 15, 2006. The fixed purchase price of
$60.0 million was allocated among Ascents assets, including trademarks, core
technology, in-process research and development and goodwill, based on an
independent valuation analysis performed by a firm other than our independent
auditors. The contingent portions of the purchase price will be added to
goodwill when and if threshold milestones have been achieved or at such time
that a payment is deemed to be probable. As of June 30, 2002, the first-year
threshold had been deemed to be probable, and $10.0 million was recorded as
additional goodwill. We additionally incurred approximately $6.7 million of
costs related to the transaction, consisting of approximately $3.4 million of
professional services, including finder fees, $0.9 million of severance costs and $2.4 million of other
costs. These costs were treated as additional direct costs of acquisition and
capitalized.

After being assimilated into Medicis, Ascent focuses on the marketing and
selling of prescription products to U.S. based pediatricians. Ascents
portfolio of pediatric specialty pharmaceutical products currently includes
ORAPRED® (prednisolone sodium phosphate), an oral liquid steroid for children
with asthma and other respiratory inflammatory conditions; PRIMSOL®
(trimethoprim HCI), an antibiotic oral solution for children with acute otitis
media, or middle ear infections; and PEDIAMIST®, an over-the-counter saline
nasal mist, as well as certain products that are under development. Sales of
ORAPRED® comprise the majority of the Ascent product sales. Ascent currently
supports these products with a dedicated sales force, numbering approximately
75 sales representatives and sales management. The sales force now also
markets other core dermatology products to pediatric physicians.

The merger was accounted for as a purchase business combination in
accordance with SFAS No. 141, and accordingly, the results of Ascents
operations are included in our consolidated results from the date of the
merger.

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##### Table of Contents



RESULTS OF OPERATIONS

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

Percentage of Net Revenues

|                     |  |          |       |       |  |      |       |   |  |  |       |  
|-------------------- |  | -------- | ----- | ----- |  | ---- | ----- | - |  |  | ----- | -
|                     |  | JUNE 30,
|                     |  |         
|                     |  | 2002**   |       | 2001* |  | 2000
|                     |  |          |       |       |  |     
|Net revenues         |  |          | 100.0 | %     |  |      | 100.0 | % |  |  | 100.0 | %
|                    
|                    
|                    
|                    
|Gross profit         |  |          | 83.2  |       |  |      | 81.7  |   |  |  | 81.4  |  
|                    
|                    
|                    
|                    
|Operating expenses   |  |          | 50.1  |       |  |      | 55.6  |   |  |  | 41.5  |  
|                    
|                    
|                    
|                    
|Operating income     |  |          | 33.1  |       |  |      | 26.1  |   |  |  | 39.9  |  
|                    
|                    
|                    
|                    
|Interest income, net |  |          | 4.0   |       |  |      | 9.2   |   |  |  | 8.5   |  
|                    
|                    
|                    
|                    
|Income tax expense   |  |          | (13.6 | )     |  |      | (11.2 | ) |  |  | (17.5 | )
|                     |  |          |       |       |  |      |       |   |  |  |       |  
|Net income           |  |          | 23.5  | %     |  |      | 24.1  | % |  |  | 30.9  | %
|                     |  |          |       |       |  |      |       |   |  |  |       |  



---

|*  |  | Included in operating expenses
is a $17.0 million payment (10.1% of net revenues) to Corixa for
a research and development collaboration                                                                                                                            
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|  
|  
|  
|** |  | Included in operating expenses
is a $6.2 million charge (2.9% of net revenues) for in-process research and development
related to the merger with Ascent and a $7.7 million payment
(3.6% of net revenues) to aaiPharma for a research and development
collaboration

The following table reflects our certain selected unaudited quarterly
operating results for each of the last eight quarters through the quarter ended
June 30, 2002. We believe that all necessary adjustments have been included to
fairly present the quarterly information. The operating results for any quarter
are not necessarily indicative of the results for any future period. Gross
profit does not include amortization of the related intangibles.

FISCAL 2002 AND FISCAL 2001 ANALYSIS

(in thousands, except per share amounts, and certain amounts do not total the annual amounts due to rounding)


|                                                      |  |   |        |             |  |             |        |       |  |         |        |        |  |      |        |       |  |      |        |   |  |   |        |  |  |   |        |  |  |   |        |  |  | 
|----------------------------------------------------- |  | - | ------ | ----------- |  | ----------- | ------ | ----- |  | ------- | ------ | ------ |  | ---- | ------ | ----- |  | ---- | ------ | - |  | - | ------ |  |  | - | ------ |  |  | - | ------ |  |  | 
|                                                      |  |   |        | Fiscal 2002 |  | Fiscal 2001
|                                                      |  |   |        |             |  |            
|                                                      |  |   |        | Sept.       |  | Dec.**      |        | March |  | June*** |        | Sept.* |  | Dec. |        | March |  | June
|                                                      |  |   |        |             |  |             |        |       |  |         |        |        |  |      |        |       |  |     
|Net revenues                                          |  | $ | 45,515 |             |  | $           | 53,042 |       |  | $       | 56,623 |        |  | $    | 57,628 |       |  | $    | 40,254 |   |  | $ | 41,367 |  |  | $ | 42,346 |  |  | $ | 43,834 | 
|                                                     
|                                                     
|                                                     
|                                                     
|Gross profit                                          |  |   | 37,874 |             |  |             | 44,015 |       |  |         | 47,225 |        |  |      | 47,928 |       |  |      | 32,775 |   |  |   | 33,575 |  |  |   | 34,876 |  |  |   | 35,879 | 
|                                                     
|                                                     
|                                                     
|                                                     
|Operating expenses                                    |  |   | 19,636 |             |  |             | 29,735 |       |  |         | 25,446 |        |  |      | 31,774 |       |  |      | 36,330 |   |  |   | 17,826 |  |  |   | 18,587 |  |  |   | 20,541 | 
|                                                     
|                                                     
|                                                     
|                                                     
|Operating
income (loss)                               |  |   | 18,238 |             |  |             | 14,280 |       |  |         | 21,779 |        |  |      | 16,154 |       |  |      | (3,555 | ) |  |   | 15,749 |  |  |   | 16,289 |  |  |   | 15,338 | 
|                                                     
|                                                     
|                                                     
|                                                     
|Net income                                            |  |   | 13,781 |             |  |             | 8,631  |       |  |         | 15,875 |        |  |      | 11,737 |       |  |      | 517    |   |  |   | 12,737 |  |  |   | 13,302 |  |  |   | 13,863 | 
|                                                     
|                                                     
|                                                     
|                                                     
|Net income per common share:                          |  |   |        |             |  |             |        |       |  |         |        |        |  |      |        |       |  |      |        |   |  |   |        |  |  |   |        |  |  |   |        | 
|                                                     
|                                                     
|                                                     
|                                                     
|Basic                                                 |  | $ | 0.46   |             |  | $           | 0.28   |       |  | $       | 0.52   |        |  | $    | 0.39   |       |  | $    | 0.02   |   |  | $ | 0.42   |  |  | $ | 0.44   |  |  | $ | 0.46   | 
|                                                     
|                                                     
|                                                     
|                                                     
|Diluted                                               |  | $ | 0.44   |             |  | $           | 0.27   |       |  | $       | 0.50   |        |  | $    | 0.38   |       |  | $    | 0.02   |   |  | $ | 0.40   |  |  | $ | 0.42   |  |  | $ | 0.44   | 
|                                                     
|                                                     
|                                                     
|                                                     
|Shares
used in computing net income per common share: |  |   |        |             |  |             |        |       |  |         |        |        |  |      |        |       |  |      |        |   |  |   |        |  |  |   |        |  |  |   |        | 
|                                                     
|                                                     
|                                                     
|                                                     
|Basic                                                 |  |   | 30,253 |             |  |             | 30,374 |       |  |         | 30,647 |        |  |      | 29,798 |       |  |      | 29,645 |   |  |   | 30,274 |  |  |   | 30,414 |  |  |   | 30,209 | 
|                                                     
|                                                     
|                                                     
|                                                     
|Diluted                                               |  |   | 31,442 |             |  |             | 31,744 |       |  |         | 31,858 |        |  |      | 30,734 |       |  |      | 31,624 |   |  |   | 32,083 |  |  |   | 31,787 |  |  |   | 31,493 | 



---

|*   |  | Included in operating expenses
is a $17.0 million payment to Corixa for
a research and development collaboration                 
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|**  |  | Included in operating expenses
is a $6.2 million charge for in-process research and development
related to the merger with Ascent
|   
|   
|   
|   
|*** |  | Included in operating expenses
is a $7.7 million payment to aaiPharma for a research and development
collaboration               

Our fiscal year begins on July 1 and ends on June 30. Quarterly results
may vary from period to period due to a variety of factors, including:
fluctuations in demand, expenditures incurred to acquire, license and promote
pharmaceutical products; expenditures and timing relating to the acquisition
and integration of products or businesses; changes in the prescribing practices
of physicians; the introduction of new products by us or our

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##### Table of Contents



competitors; cost increases from third-party manufacturers; supply
interruptions; the availability and cost of raw materials; the mix of products
sold by us; changes in marketing and sales expenditures; market acceptance of
our products; competitive pricing pressures; the outcome of disputes relating
to trademarks, patents and other rights; general economic and industry
conditions that affect customer demand; and our level of research and
development activities. There can be no assurance that we will maintain or
increase revenues or profitability or avoid losses in any future period.

Fiscal Year Ended June 30, 2002 Compared To Fiscal Year Ended June 30, 2001

Net Revenues

Net revenues during fiscal 2002 increased 26.8%, or $45.0 million, to
$212.8 million from $167.8 million during fiscal 2001. Our net revenues
increased during fiscal 2002 primarily as a result of growth in sales of the
LOPROX®, OMNICEF®, ORAPRED®, PLEXION®, TRIAZ® and BUPHENYL® products. Fiscal
2001 did not include revenue for OMNICEF® and ORAPRED®. Non-dermatological
products increased from 11% of total net revenues in fiscal 2001 to 23% of
total net revenues in fiscal 2002. This increase was due to the addition of
ORAPRED® during fiscal 2002 from the merger with Ascent.

Gross Profit

Gross profit during fiscal 2002 increased 29.1%, or $39.9 million, to
$177.0 million from $137.1 million during fiscal 2001. As a percentage of net
revenues, gross profit increased to 83.2% during fiscal 2002 compared to 81.7%
during fiscal 2001, respectively. This increase was primarily due to sales of
the LOPROX®, OMNICEF®, ORAPRED® and PLEXION® products, which have higher gross
profit percentages than some of our other products.

Selling, General and Administrative Expenses

Selling, general and administrative expenses during fiscal 2002 increased
29.9%, or $17.8 million, to $77.3 million from $59.5 million during fiscal
2001. This increase was primarily attributable to costs associated with the
Ascent sales force, increases in personnel costs related to the hiring or
additional full-time equivalent employees, primarily performing selling and
marketing functions, and yearly salary escalations for existing employees.
This increase was also due to promotional costs associated with the sampling
and advertising of our products, including ORAPRED® which was added to our line
of products as a result of the Ascent merger. As a percentage of net revenues,
selling, general and administrative expenses increased 0.8 percentage points,
to 36.3% from 35.5% during fiscal 2002, primarily due to the assimilation and
ramp-up of the Ascent sales force.

Research and Development Expenses

Research and development expenses during fiscal 2002 decreased 40.7%, or
$10.4 million, to $15.1 million from $25.5 million during fiscal 2001. This
decrease was primarily due to $17.0 million paid during fiscal 2001 to Corixa
for a development, commercialization and license agreement for a novel
psoriasis immunotherapeutic product as compared to $7.7 million paid to aaiPharma in June 2002 for the
development, commercialization and license of a key dermatologic product.
We expect research and development expenses to fluctuate from
quarter to quarter based on the timing of development projects and the funds
available to support these projects.

In-Process Research and Development Expense

We recorded a $6.2 million charge to operations for in-process research
and development during fiscal 2002 as part of the allocated purchase price
related to the Ascent merger. The amount allocated to in-process research and
development was based on an independent valuation of Ascents completed and
in-process technologies performed by a firm other than our independent auditors
and was charged to current operations in conformity with generally accepted
accounting principles. The $6.2 million charge is non-deductible for tax
purposes. We did not

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record any charge to operations for in-process research and development during
fiscal 2001. During fiscal 2002 we incurred minimal expenditures with respect
to the acquired product rights as a development plan was formalized. Future
expenditures with respect to the development project are estimated to be up to
$1.0 million.

Depreciation and Amortization Expenses

Depreciation and amortization expenses during fiscal 2002 decreased 0.4%,
or $0.4 million, to $7.9 million from $8.3 million in fiscal 2001. Included in
amortization expense during fiscal 2002 was the amortization of intangible
assets related to the OMNICEF® licensing agreement that we entered into with
Abbott Laboratories in May 2001. This increase in amortization was offset by a
$958,000 decrease in amortization expense related to certain intangible assets whose
useful lives were reviewed in the first quarter of fiscal 2002 and extended
from 20-25 years to 40 years. These changes in useful lives were based on
managements belief that the products related to these intangible assets have
longer useful lives than originally estimated.

Operating Income

Operating income during fiscal 2002 increased $26.7 million, to $70.5
million from $43.8 million during fiscal 2001. Operating income
during fiscal 2002 included a charge to operations of
$6.2 million for in-process research and development relating to
the Ascent merger and a $7.7 million payment to aaiPharma for a
research and development collaboration. Operating income during
fiscal 2001 included a $17.0 million payment to Corixa for a
research and development collaboration.

Interest Income

Interest income during fiscal 2002 decreased 40.9%, or $6.9 million, to
$9.9 million from $16.8 million during fiscal 2001, primarily due to the
overall decrease in interest rates and a change in our investment mix to
non-taxable securities. The increase in our cash available for investment due
to the issuance of our Contingent Convertible Senior Notes occurred near the
end of our fiscal year and therefore did not have a significant effect on
fiscal 2002s interest income.

Interest Expense

Interest expense during fiscal 2002 increased $0.1 million, to $1.4
million from $1.3 million during fiscal 2001. This increase was primarily due
to one month of interest expense related to our Contingent Convertible Senior
Notes that were issued in June 2002, offset by a $0.6 million reduction related
to a product line acquisition obligation that was fully paid during the year.
Going forward, we will accrue interest expense related to the Notes of
approximately $2.5 million in each quarter (exclusive of any contingent
interest that may become payable beginning in 2007).

Income Tax Expense

Income tax expense during fiscal 2002 increased $10.1 million, to $29.0
million from $18.9 million during fiscal 2001. The effective tax rate during
fiscal 2002 was 36.7%, as compared to 31.9% during fiscal 2001. This increase
was primarily due to the $6.2 million charge that we recorded for in-process
research and development related to the Ascent merger, which is non-deductible
for tax purposes. The effective rate is lower than expected federal and state
income tax rates due to approximately $5.7 million of tax-exempt interest
income in both 2002 and 2001, and contributions to charitable programs that
receive favorable tax treatment.

Net Income

Net income during fiscal 2002 increased approximately $9.6 million, to
$50.0 million from $40.4 million during fiscal 2001.

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This increase was primarily attributable to an increase in
sales volumes and gross profit, offset by an increase in operating expenses and
a decrease in interest income.

Fiscal Year Ended June 30, 2001 Compared to Fiscal Year Ended June 30, 2000

Net Revenues

Net revenues during fiscal 2001 increased 20.6%, or $28.7 million, to
$167.8 million from $139.1 million during fiscal 2000. Our net revenues
increased in fiscal 2001 primarily due to the addition of sales of our
PLEXION® and PLEXION TS® product lines, increases in sales of the LUSTRA®
products, as well as the addition of sales in the fourth quarter of fiscal 2001
of our new ALUSTRA® product and increases in sales of our LOPROX® and TRIAZ®
products.

Gross Profit

Gross profit during fiscal 2001 increased 21.1%, or $23.9 million, to
$137.1 million from $113.2 million during fiscal 2000. As a percentage of net
revenues, gross profit was 81.7% and 81.4% during fiscal 2001 and fiscal 2000,
respectively. Gross profit increased during fiscal 2001 primarily as a result
of revenue associated with the LOPROX®, LUSTRA®, PLEXION®, PLEXION TS® and
BUPHENYL® products, which have higher gross profit percentages than our other
products. Amortization of related intangible assets is not included in gross
profit.

Selling, General and Administrative Expenses

Selling, general and administrative expenses during fiscal 2001 increased
31.1%, or $14.1 million, to $59.5 million from $45.4 million during fiscal
2000. As a percentage of net revenues, selling, general and administrative
expenses increased 2.9 percentage points, to 35.5% from 32.6%. This increase
was primarily attributable to an increase in personnel costs, which resulted
from an increase in the number of employees to 188 in fiscal 2001 from 172 in
fiscal 2000, and yearly salary escalations for existing employees. The increase
was also due to variable costs commensurate with increased sales volumes.

Research and Development Expenses

Research and development expenses during fiscal 2001 increased $20.6
million, to $25.5 million from $4.9 million during fiscal 2000. This increase
was primarily due to $17.0 million paid to Corixa for a development,
commercialization and license agreement for a novel psoriasis immunotherapeutic
product.

Depreciation and Amortization Expenses

Depreciation and amortization expenses during fiscal 2001 increased 12.0%,
or $0.9 million, to $8.3 million from $7.4 million during fiscal 2000. This
increase was primarily attributable to the amortization of the intangible
assets related to the minocycline ANDA that we acquired in September 1999.

Operating Income

Operating income during fiscal 2001 decreased $11.7 million, to $43.8
million from $55.5 million during fiscal 2000 primarily due to
the $17.0 million payment to Corixa for a research and
development collaboration.

33



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##### Table of Contents



Interest Income

Interest income during fiscal 2001 increased $2.7 million, to $16.8
million from $14.1 million during fiscal 2000, primarily due to higher average
cash, cash equivalents and short-term investment balances during fiscal 2001.
Our higher average cash, cash equivalents and short-term investment balances
were primarily due to cash generated from operations, offset by the third
payment of $22.0 million paid in November 2000 to Aventis, as
successor-in-interest to HMR, relating to the license of the LOPROX®, TOPICORT®
and A/T/S® products.

Interest Expense

Interest expense during fiscal 2001 decreased $1.0 million, to $1.2
million from $2.2 million during fiscal 2000. This decrease was primarily due
to a decrease in the contract obligation recorded in connection with the
license of the LOPROX®, TOPICORT® and A/T/S® products.

Income Tax Expense

Income tax expense during fiscal 2001 decreased $5.5 million, to $18.9
million from $24.4 million during fiscal 2000. The decrease in income tax
expense was due to a decrease in pre-tax income, which resulted from the
$17.0 million paid to Corixa for a research and development
collaboration. The decrease in our effective tax rate to 31.9% in fiscal 2001,
as compared to 36.2% during fiscal 2000, was primarily attributable to a change
in investment mix to non-taxable securities, contributions to charitable
programs that receive favorable tax treatment and an increase in our research
and development credits. The effective rate is also lower than expected
federal and state income tax rates due to approximately $5.7 million and $4.2
million of tax exempt interest in 2001 and 2000, respectively.

Net Income

Net income during fiscal 2001 decreased approximately $2.6 million, to
$40.4 million from $43.0 million in fiscal 2000.
This decrease was due primarily to an increase in strategic operating
expenses and research and development expenses, offset by an increase
in sales volume and interest income.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities during fiscal 2002 increased
$2.4 million, to $73.5 million from $71.1 million during fiscal 2001. The
increase was primarily attributable to the increase of our net income, offset
by changes in operating assets and liabilities and a decrease in the tax
benefit from the exercise of stock options due to a decrease in exercise
activity during fiscal 2002 as compared to fiscal 2001.

Net cash used in investing activities during fiscal 2002 increased $99.8
million, to $182.4 million from $82.6 million during fiscal 2001. This increase
was primarily due to the purchase of available-for-sale investments during
fiscal 2002, net of a payment of $60.0 million made in connection with the
Ascent merger and the final $16.2 million payment under the contract for the
acquisition of the LOPROX®, TOPICORT® and A/T/S® products.

Net cash provided by financing activities increased $242.4 million, to
$254.9 million from $12.5 million during fiscal 2001. The increase is primarily
attributable to proceeds received from the issuance of our $400.0 million
Contingent Convertible Senior Notes, offset by the purchase of $146.8 million
of treasury stock.

We had cash, cash equivalents and short-term investments of $577.6 million
and working capital of $611.3 million at June 30, 2002, as compared to $334.2
million and $358.5 million, respectively, at June 30, 2001. These increases
were primarily due to the proceeds received from the issuance of our $400.0
million Contingent Convertible Senior Notes, offset by the $146.8 million of
treasury stock purchased throughout the fiscal year.

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In accordance with various manufacturing agreements, we are required to
provide manufacturers with pro forma estimated production requirements by
product and in accordance with minimum production runs. From time to time, we
may not take possession of all merchandise that has been produced by the
manufacturer. However, we record our obligations to the manufacturer at the
time that finished inventory is produced.

Inflation did not have a significant impact on our results for fiscal
2002, 2001 or 2000.

EFFECTS OF RECENTLY ISSUED ACCOUNTING STANDARDS

In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141, Business Combinations
(SFAS No. 141), and No. 142, Goodwill and Other Intangible Assets (SFAS
No. 142). Under the new rules, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized, but will be subject to annual
impairment tests in accordance with the statements. Other intangible assets
will continue to be amortized over their useful lives. We adopted SFAS No. 141
on July 1, 2001 and we are required to adopt SFAS No. 142 on July 1, 2002. We
are currently reviewing the impact of SFAS No. 142 and will be performing a
fair-value analysis at a later date in connection with the adoption of SFAS No.
142 on July 1, 2002. During the quarter ended December 31, 2002, we will
complete the transitional goodwill impairment test. We have not yet determined
the date of the annual goodwill impairment test. We do not expect to record an
impairment charge upon completion of the transitional goodwill impairment test
or next annual impairment test, but there can be no assurance that at the time
the tests are completed an impairment charge will not be recorded.

In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. This statement establishes a
single accounting model for long-lived assets to be disposed of by sale and
resolves significant implementation issues related to SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of. SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001 with earlier adoption encouraged. We are currently
evaluating the impact of adopting SFAS No. 144 and have not yet determined the
effect, if any, such adoption would have on our results of operations or our
financial position.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs incurred in a Restructuring) and must be applied beginning January 1,
2003. SFAS No. 146 requires that a liability for a cost associated with an
exit or disposal plan be recognized when the liability is incurred rather than
when the exit or disposal plan is approved. We are currently evaluating the
impact of this adoption.

MARKET RISK AND RISK MANAGEMENT POLICIES

We are exposed to interest rate fluctuations on our short-term investments
that are comprised of U.S. corporate securities and other debt securities which we hold on an
available-for-sale basis. Changes in interest rates do not affect interest
expense incurred on our Contingent Convertible Senior Notes as the interest
rate is fixed. We have not entered into derivative financial
instruments.

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##### Table of Contents



The following tables provide information about our financial instruments
that are sensitive to changes in interest rates. For our investment portfolio,
the tables present principal cash flows and related weighted-average yield
rates by expected maturity dates. Additionally, we have assumed our
available-for-sale securities are similar enough to aggregate for presentation
purposes.

Interest Rate Sensitivity
Principal Amount by Expected Maturity as of June 30, 2002
(amounts in thousands)

|                                    |  |   |                                                                |   |      |   |         |   |      |   |        |   |            |   |   |  |  |   |   |  |  |   |         |   | 
|----------------------------------- |  | - | -------------------------------------------------------------- | - | ---- | - | ------- | - | ---- | - | ------ | - | ---------- | - | - |  |  | - | - |  |  | - | ------- | - | 
|                                    |  |   | Financial instruments mature during fiscal year ended June 30,
|                                    |  |   |                                                               
|                                    |  |   | 2003                                                           |   | 2004 |   | 2005    |   | 2006 |   | 2007   |   | Thereafter
|                                    |  |   |                                                                |   |      |   |         |   |      |   |        |   |           
|Available-for-sale securities       |  | $ | 128,335                                                        |   |      | $ | 119,172 |   |      | $ | 30,860 |   |            | $ |  |  |  | $ |  |  |  | $ |        |  
|                                   
|                                   
|                                   
|                                   
|Weighted-average yield rate         |  |   | 3.0                                                            | % |      |   | 2.9     | % |      |   | 3.4    | % |            |   |  |  |  |   |  |  |  |   |        |  
|                                   
|                                   
|                                   
|                                   
|Contingent convertible senior notes |  |   |                                                               |   |      |   |        |   |      |   |       |   |            |   |  |  |  |   |  |  |  |   | 400,000 |  
|                                   
|                                   
|                                   
|                                   
|Interest rate                       |  |   |                                                               |   |      |   |        |   |      |   |       |   |            |   |  |  |  |   |  |  |  |   | 2.5     | %

Interest Rate Sensitivity
Principal Amount by Expected Maturity as of June 30, 2001
(amounts in thousands)

|                              |  |                                                                |         |      |  |      |        |      |  |      |       |            |  |   |   |  |  |   |   |  |  |   |   | 
|----------------------------- |  | -------------------------------------------------------------- | ------- | ---- |  | ---- | ------ | ---- |  | ---- | ----- | ---------- |  | - | - |  |  | - | - |  |  | - | - | 
|                              |  | Financial instruments mature during fiscal year ended June 30,
|                              |  |                                                               
|                              |  | 2002                                                           |         | 2003 |  | 2004 |        | 2005 |  | 2006 |       | Thereafter
|                              |  |                                                                |         |      |  |      |        |      |  |      |       |           
|Available-for-sale securities |  | $                                                              | 134,844 |      |  | $    | 44,470 |      |  | $    | 1,585 |            |  | $ |  |  |  | $ |  |  |  | $ |  | 
|                             
|                             
|                             
|                             
|Weighted-average yield rate   |  |                                                                | 4.1     | %    |  |      | 4.6    | %    |  |      | 4.1   | %          |  |   |  |  |  |   |  |  |  |   |  | 

We have minimal operations outside of the United States and, accordingly,
are not susceptible to significant risk from changes in foreign currencies.




ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our financial statements and related financial statement schedule at June
30, 2002 and 2001 and for each of the three years in the period ended June 30,
2002 and the Independent Auditors Report thereon are contained on pages F-1
through F-26 and S-1 of this report on Form 10-K.




ITEM 9:   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND                  FINANCIAL DISCLOSURE

None.

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##### Table of Contents






PART III




ITEM 10:   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT




ITEM 11:   EXECUTIVE COMPENSATION




ITEM 12:   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT




ITEM 13:   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information called for by each of Items 10, 11, 12 and 13 is
incorporated by reference to Medicis definitive proxy statement for the 2002
Annual Meeting of Shareholders to be filed pursuant to Regulation 14A.

37



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##### Table of Contents






PART IV




ITEM 14:   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

|                                             |                                            |                                                                                                  |                                                                                                                                                                                                                                                                                                                               |  |      |  | 
|-------------------------------------------- | ------------------------------------------ | ------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- |  | 
|                                             |                                            |                                                                                                  |                                                                                                                                                                                                                                                                                                                               |  | Page
|                                             |                                            |                                                                                                  |                                                                                                                                                                                                                                                                                                                               |  |     
|(a) Documents filed as a part of this Report |                                            |                                                                                                  |                                                                                                                                                                                                                                                                                                                               | 
|                                            
|                                            
|                                            
|                                            
|                                             | (1) Financial Statements:                  |                                                                                                  |                                                                                                                                                                                                                                                                                                                               |  |     
|                                            
|                                            
|                                            
|                                            
|                                             |                                            | Index to consolidated financial statements                                                       |                                                                                                                                                                                                                                                                                                                               |  | F-1  | 
|                                            
|                                            
|                                            
|                                            
|                                             |                                            | Report of Ernst & Young LLP, Independent Auditors                                                |                                                                                                                                                                                                                                                                                                                               |  | F-2  | 
|                                            
|                                            
|                                            
|                                            
|                                             |                                            | Consolidated balance sheets at June 30, 2002 and 2001                                            |                                                                                                                                                                                                                                                                                                                               |  | F-3  | 
|                                            
|                                            
|                                            
|                                            
|                                             |                                            | Consolidated statements of income for the years ended
June 30, 2002, 2001 and 2000               |                                                                                                                                                                                                                                                                                                                               |  | F-5  | 
|                                            
|                                            
|                                            
|                                            
|                                             |                                            | Consolidated statements of stockholders equity for the years
ended June 30, 2002, 2001 and 2000 |                                                                                                                                                                                                                                                                                                                               |  | F-6  | 
|                                            
|                                            
|                                            
|                                            
|                                             |                                            | Consolidated statements of cash flows for the years ended June 30,
2002, 2001 and 2000           |                                                                                                                                                                                                                                                                                                                               |  | F-8  | 
|                                            
|                                            
|                                            
|                                            
|                                             |                                            | Notes to consolidated financial statements                                                       |                                                                                                                                                                                                                                                                                                                               |  | F-9  | 
|                                            
|                                            
|                                            
|                                            
|                                             | (2) Financial Statement Schedule:          |                                                                                                  |                                                                                                                                                                                                                                                                                                                               |  |     
|                                            
|                                            
|                                            
|                                            
|                                             |                                            | Schedule II  Valuation and Qualifying Accounts                                                  |                                                                                                                                                                                                                                                                                                                               |  | S-1  | 
|                                            
|                                            
|                                            
|                                            
|                                             |                                            |                                                                                                  | This financial statement schedule should be read in conjunction with
the consolidated financial statements. Financial statement schedules
not included in this Annual Report on Form 10-K have been omitted
because they are not applicable or the required information is shown
in the financial statements or notes thereto |  |      |  | 
|                                            
|                                            
|                                            
|                                            
|                                             | (3) Exhibits filed as part of this Report: |                                                                                                  |                                                                                                                                                                                                                                                                                                                               |  |     

|            |  |   |  |                                                                                                                                                                                                                                      
|----------- |  | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |   |  | Description                                                                                                                                                                                                                          
|            |  |   |  |                                                                                                                                                                                                                                      
|2.1         |  | - |  | Agreement of Merger by and between Medicis Pharmaceutical Corporation, a Delaware
corporation, Medicis Acquisition Corporation, a Delaware corporation, and GenDerm
Corporation, a Delaware corporation, dated November 28, 1997 (13)
|           
|           
|           
|           
|2.1 (a)     |  | - |  | Agreement of Plan of Merger, dated as of October 1, 2001, by and among Medicis
Pharmaceutical Corporation, MPC Merger Corp. and Ascent Pediatrics, Inc. (19)                                                                         
|           
|           
|           
|           
|3.1         |  | - |  | Certificate of Incorporation of the Company, as amended (6)                                                                                                                                                                          
|           
|           
|           
|           
|3.3 (a)     |  | - |  | Amended and Restated By-Laws of the Company (15)                                                                                                                                                                                     
|           
|           
|           
|           
|4.1         |  | - |  | Rights Agreement, dated August 17, 1995, between the Company and American
Stock Transfer & Trust Company, as Rights Agent (6)                                                                                                        
|           
|           
|           
|           
|4.1 (b)     |  | - |  | Amendment No. 2 to Rights Agreement, dated March 17, 1997, between the
Company and Norwest Bank Minnesota, N.A. (11)                                                                                                                 
|           
|           
|           
|           
|4.1 (c)     |  | - |  | Indenture, dated as of June 4, 2002, by and between Medicis Pharmaceutical Corporation,
as issuer, and Deutsche Bank Trust Company Americas, as trustee. (20)                                                                        
|           
|           
|           
|           
|4.2         |  | - |  | Registration Rights Agreement, dated as of June 4, 2002, by and between Medicis
Pharmaceutical Corporation and Deutsche Bank Securities Inc. (20)                                                                                    
|           
|           
|           
|           
|4.3         |  | - |  | Form of specimen certificate representing Class A common stock (1)                                                                                                                                                                   
|           
|           
|           
|           
|10.8        |  | - |  | Medicis Pharmaceutical Corporation 1995 Stock Option Plan (incorporated by
reference to Exhibit C to the definitive Proxy Statement for the 1995 Annual
Meeting of Shareholders previously filed with the SEC, File No. 0-18443)     
|           
|           
|           
|           
|10.9        |  | - |  | Employment Agreement between the Company and Jonah Shacknai, dated
July 24, 1996 (10)                                                                                                                                                
|           
|           
|           
|           
|10.9 (a)    |  | - |  | Amendment to Employment Agreement by and between the Company and
Jonah Shacknai, dated April 1, 1999 (17)                                                                                                                            
|           
|           
|           
|           
|10.9 (b)    |  | - |  | Amendment to Employment Agreement by and between the Company and
Jonah Shacknai, dated February 21, 2001 (17)                                                                                                                        
|           
|           
|           
|           
|10.10       |  | - |  | Medicis Pharmaceutical Corporation 1988 Stock Option Plan, as amended (2)                                                                                                                                                            
|           
|           
|           
|           
|10.18       |  | - |  | Medicis Pharmaceutical Corporation 1990 Stock Option Plan, as amended (2)                                                                                                                                                            
|           
|           
|           
|           
|10.20       |  | - |  | Medicis Pharmaceutical Corporation 2002 Stock Option Plan (filed herewith)                                                                                                                                                           

38



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##### Table of Contents



|            |  |   |  |                                                                                                                                                                                                                                                       
|----------- |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |   |  | Description                                                                                                                                                                                                                                           
|            |  |   |  |                                                                                                                                                                                                                                                       
|           
|           
|           
|           
|10.58       |  | - |  | Medicis Pharmaceutical Corporation 1992 Stock Option Plan (4)                                                                                                                                                                                         
|           
|           
|           
|           
|10.59       |  | - |  | Supply Agreement, dated October 21, 1992, between Schein and the Company (3)                                                                                                                                                                          
|           
|           
|           
|           
|10.70       |  | - |  | Amendment to Manufacturing and Supply Agreement, dated March 2, 1993, between
Schein and the Company (5)                                                                                                                                              
|           
|           
|           
|           
|10.72(a)    |  | - |  | Credit and Security Agreement, dated August 3, 1995, between the Company and
Norwest Business Credit, Inc. (7)                                                                                                                                        
|           
|           
|           
|           
|10.72(b)    |  | - |  | First Amendment to Credit and Security Agreement, dated May 29, 1996,
between the Company and Norwest Bank Arizona, N.A. (10)                                                                                                                         
|           
|           
|           
|           
|10.72(c)    |  | - |  | Second Amendment to Credit and Security Agreement, dated November 22, 1996,
by and between the Company and Norwest Bank Arizona, N.A. as successor-in-interest
to Norwest Business Credit, Inc. (12)                                                  
|           
|           
|           
|           
|10.72(d)    |  | - |  | Third Amendment to Credit and Security Agreement, dated November 22, 1998 by
and between the Company and Norwest Bank Arizona, N.A., as successor-in-interest
to Norwest Business Credit, Inc. (14)                                                   
|           
|           
|           
|           
|10.72(e)    |  |   |  | Fourth amendment to Credit and Security Agreement, dated November 22, 2000
by and between the Company and Wells Fargo Bank Arizona, N.A., formerly
known as Norwest Bank Arizona, N.A., as successor-in-interest to Norwest Business
Credit, Inc. (18)
|           
|           
|           
|           
|10.73(a)    |  | - |  | Patent Collateral Assignment and Security Agreement, dated August 3, 1995 by
the Company to Norwest Business Credit, Inc. (8)                                                                                                                         
|           
|           
|           
|           
|10.73(b)    |  | - |  | First Amendment to Patent Collateral Assignment and Security Agreement, dated
May 29, 1996, by the Company to Norwest Bank Arizona, N.A. (10)                                                                                                         
|           
|           
|           
|           
|10.73(c)    |  | - |  | Amended and Restated Patent Collateral Assignment and Security Agreement, dated
November 22, 1998, by the Company to Norwest Bank Arizona, N.A. (14)                                                                                                  
|           
|           
|           
|           
|10.74(a)    |  | - |  | Trademark Collateral Assignment and Security Agreement, dated August 3, 1995,
by the Company to Norwest Business Credit, Inc. (9)                                                                                                                     
|           
|           
|           
|           
|10.74(b)    |  | - |  | First Amendment to Trademark Collateral Assignment and Security Agreement, dated
May 29, 1996, by the Company to Norwest Bank Arizona, N.A. (10)                                                                                                      
|           
|           
|           
|           
|10.74(c)    |  | - |  | Amended and Restated Trademark, Tradename, and Service Mark Collateral
Assignment and Security Agreement, dated November 22, 1998, by the Company
to Norwest Bank Arizona, N.A. (14)                                                                  
|           
|           
|           
|           
|10.75       |  | - |  | Assignment and Assumption of Loan Documents, dated May 29, 1996, from
Norwest Business Credit, Inc., to and by Norwest Bank Arizona, N.A. (10)                                                                                                        
|           
|           
|           
|           
|10.76       |  | - |  | Multiple Advance Note, dated May 29, 1996, from the Company to Norwest Bank
Arizona, N.A. (10)                                                                                                                                                        
|           
|           
|           
|           
|10.89       |  | - |  | Asset Purchase Agreement dated November 15, 1998, by and among the Company and
Hoechst Marion Roussel, Inc., Hoechst Marion Roussel Deutschland GMHB and
Hoechst Marion Roussel, S.A. (14)                                                            
|           
|           
|           
|           
|10.90       |  | - |  | License and Option Agreement dated November 15, 1998, by and among the Company
and Hoechst Marion Roussel, Inc., Hoechst Marion Roussel Deutschland GMBH and
Hoechst Marion Roussel, S.A. (14)                                                        
|           
|           
|           
|           
|10.91       |  | - |  | Loprox Lotion Supply Agreement dated November 15, 1998, by and between the
Company and Hoechst Marion Roussel, Inc. (14)                                                                                                                              
|           
|           
|           
|           
|10.92       |  | - |  | Supply Agreement dated November 15, 1998, by and between the Company and
Hoechst Marion Roussel Deutschland GMBH (14)                                                                                                                                 
|           
|           
|           
|           
|10.93       |  | - |  | Asset Purchase Agreement effective January 31, 1999, between the Company and
Bioglan Pharma Plc (16)                                                                                                                                                  
|           
|           
|           
|           
|10.94       |  | - |  | Stock Purchase Agreement by and among the Company, Ucyclyd Pharma, Inc. and
Syed E. Abidi, William Brusilow, Susan E. Brusilow and Norbert L. Wiech, dated
April 19, 1999 (16)                                                                        
|           
|           
|           
|           
|10.95       |  | - |  | Asset Purchase Agreement by and between the Company and Bioglan Pharma Plc
dated June 29, 1999 (16)                                                                                                                                                   
|           
|           
|           
|           
|10.96       |  | - |  | Asset Purchase Agreement by and among The Exorex Company, LLC, Bioglan
Pharma Plc, the Company and IMX Pharmaceuticals, Inc. dated June 29, 1999 (16)                                                                                                 
|           
|           
|           
|           
|10.97       |  | - |  | Medicis Pharmaceutical Corporation Executive Retention Plan (16)                                                                                                                                                                                      
|           
|           
|           
|           
|10.98       |  |   |  | Asset Purchase Agreement between Warner Chilcott, plc and the Company, dated
September 14, 1999 (16)                                                                                                                                                  
|           
|           
|           
|           
|12          |  | - |  | Computation of Ratios of Earnings to Fixed Charges (filed herewith)                                                                                                                                                                                   

39



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##### Table of Contents



|            |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                    
|----------- |  | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |   |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                    
|           
|           
|           
|           
|21.1        |  | - |  | Subsidiaries (filed herewith)                                                                                                                                                                                                                                                                                                                                                                                                      
|           
|           
|           
|           
|23.1        |  | - |  | Consent of Ernst & Young LLP, Independent Auditors (filed herewith)                                                                                                                                                                                                                                                                                                                                                                
|           
|           
|           
|           
|24.1        |  | - |  | Power of Attorney See signature page(s)                                                                                                                                                                                                                                                                                                                                                                                            
|           
|           
|           
|           
|99.1        |  | - |  | Certification of Periodic Financial Reports by the Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350 (filed herewith)                                                                                                                                                                                                                                                                         
|           
|           
|           
|           
|99.1(a)     |  | - |  | Exclusive Remedy Agreement, dated as of October 1, 2001, by and among Medicis
Pharmaceutical Corporation, Ascent Pediatrics, Inc., FS Private Investments LLC, Furman
Selz Investors II L.P., FS Employee Investors LLC, FS Ascent Investments LLC and FS
Parallel Fund L.P., BancBoston Ventures Inc., Flynn Partners, Raymond F. Baddour,
Sc.D., Robert E. Baldini, Medical Science Partners L.P. and Emmett Clemente, Ph.D. (19)
|           
|           
|           
|           
|99.2        |  | - |  | Note Agreement, dated as of October 1, 2001, by and among Ascent Pediatics, Inc.,
Medicis Pharmaceutical Corporation, Furman Selz Investors II L.P., FS Employee
Investors LLC, FS Ascent Investments LLC, FS Parallel Fund L.P., BancBoston Ventures
Inc. and Flynn Partners (19)                                                                                                                                                 
|           
|           
|           
|           
|99.3        |  | - |  | Voting Agreement, dated as of October 1, 2001, by and among Medicis Pharmaceutical
Corporation, MPC Merger Corp., FS Private Investments LLC, Furman Selz Investors II
L.P., FS Employee Investors LLC, FS Ascent Investments LLC and FS Parallel Fund L.P.
(19)                                                                                                                                                                   



---

|(1)  |  | Incorporated by reference to the exhibit with the same number in the
Registration Statement on Form S-1 of the Registrant, File No. 33-32918,
filed with the SEC on January 16, 1990                                     
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|    
|    
|    
|(2)  |  | Incorporated by reference to the exhibit with the same number in the
Companys Annual Report on Form 10-K for the fiscal year ended June 30,
1992, as amended, File No. 0-18443, previously filed with the SEC           
|    
|    
|    
|    
|(3)  |  | Incorporated by reference to the exhibit with the same number in
Registration Statement on Form S-1 of the Company, File No. 33-54276,
filed with the SEC on June 11, 1993                                               
|    
|    
|    
|    
|(4)  |  | Incorporated by reference to Exhibit B to the Companys definitive
Proxy Statement for its 1992 Annual Meeting of Shareholders, File No.
0-18443, previously filed with the SEC                                          
|    
|    
|    
|    
|(5)  |  | Incorporated by reference to the exhibit with the same number in the
Companys Annual Report on Form 10-K for the fiscal year ended June 30,
1993, File No. 0-18443, filed with the SEC on October 13, 1993              
|    
|    
|    
|    
|(6)  |  | Incorporated by reference to the exhibit with the same number in the
Companys Annual Report on Form 10-K for the fiscal year ended June 30,
1995, File No. 0-18443, previously filed with the SEC (the 1994 Form
10-K)
|    
|    
|    
|    
|(7)  |  | Incorporated by reference to exhibit number 4.2 in the 1995 Form 10-K                                                                                                                                                    
|    
|    
|    
|    
|(8)  |  | Incorporated by reference to exhibit number 4.4 in the 1995 Form 10-K                                                                                                                                                    
|    
|    
|    
|    
|(9)  |  | Incorporated by reference to exhibit number 4.5 in the 1995 Form 10-K                                                                                                                                                    
|    
|    
|    
|    
|(10) |  | Incorporated by reference to the exhibit with the same number in the
Companys Annual Report on Form 10-K for the fiscal year ended June 30,
1996, File No. 0-18443, previously filed with the SEC                       
|    
|    
|    
|    
|(11) |  | Incorporated by reference to the exhibit with the same number in the
Companys Quarterly Report on Form 10-Q for the quarter ended March 31,
1997, File No. 0-18443, previously filed with the SEC                       
|    
|    
|    
|    
|(12) |  | Incorporated by reference to the exhibit with the same number in the
Companys Quarterly Report on Form 10-Q for the quarter ended December
31, 1996, File No. 0-18443, previously filed with the SEC                    
|    
|    
|    
|    
|(13) |  | Incorporated by reference to the exhibit with the same number in the
Companys Current Report on Form 8-K filed with the SEC on December 15, 1997                                                                        

40



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##### Table of Contents



|(14) |  | Incorporated by reference to the exhibit with the same number in the
Companys Quarterly Report on Form 10-Q for the quarter
ended December 31, 1998, File No. 0-18443, previously filed with the SEC
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|    
|    
|    
|(15) |  | Incorporated by reference to the exhibit with the same number in the
Companys Quarterly Report on Form
10-Q for the quarter ended March 31, 1999, File No. 0-18443, previously
filed with the SEC   
|    
|    
|    
|    
|(16) |  | Incorporated by reference to the exhibit with the same number in the
Companys Annual Report on Form 10-K for the fiscal year ended June 30,
1999, File No. 0-18443, previously filed with the SEC   
|    
|    
|    
|    
|(17) |  | Incorporated by reference to the exhibit with the same number in the
Companys Quarterly Report on Form 10-Q for the quarter ended March 31,
2001, File No. 0-18443, previously filed with the SEC   
|    
|    
|    
|    
|(18) |  | Incorporated by reference to the exhibit with the same number in the
Companys Annual Report on Form 10-K for the fiscal year ended June 30,
2001, File No. 0-18443, previously filed with the SEC   
|    
|    
|    
|    
|(19) |  | Incorporated by reference to the exhibit with the same number in the
Companys Current Report on Form 8-K filed with the SEC on October 2, 2001                                                      
|    
|    
|    
|    
|(20) |  | Incorporated by reference to the exhibit with the same number in the
Companys Current Report on Form 8-K filed with the SEC on June 6, 2002                                                         



|(b) |  | During the quarter ended June 30, 2002, the Company filed the following
reports on Form 8-K with the SEC:
|--- |  | ---------------------------------------------------------------------------------------------------------



| | (i)  |  | Current Report on Form 8-K dated May 28, 2002, which announced
the Companys intention to raise up to $350 million in aggregate
principal of its Contingent Convertible Senior Notes due 2032 in a
private placement pursuant to Rule 144A promulgated under the
Securities Act of 1933, as amended.
| | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (ii) |  | Current Report on Form 8-K dated June 4, 2002, which announced
the consummation of the sale of the $350 million Contingent
Convertible Senior Notes                                                                                                                                                 



|(c) |  | The exhibits to this Form 10-K follow the Companys Financial Statement
Schedule included in this Form 10-K.
|--- |  | ------------------------------------------------------------------------------------------------------------
|   
|(d) |  | The Financial Statement Schedule to this Form 10-K appears on page S-1 of
this Form 10-K.                   

41



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##### Table of Contents



POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jonah Shacknai and Mark A. Prygocki, Sr., or
either of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to this Annual
Report on Form 10-K and any documents related to this report and filed pursuant
to the Securities and Exchange Act of 1934, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or their substitute or
substitutes may lawfully do or cause to be done by virtue hereof.




SIGNATURES

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

|                         |  |                                    |  |                                                                 
|------------------------ |  | ---------------------------------- |  | ----------------------------------------------------------------
|Date: September 26, 2002 |  |                                    |  |                                                                 
|                        
|                        
|                        
|                        
|                         |  |                                    |  |                                                                 
|                        
|                        
|                        
|                        
|                         |  | MEDICIS PHARMACEUTICAL CORPORATION
|                        
|                        
|                        
|                        
|                         |  |                                    |  |                                                                 
|                        
|                        
|                        
|                        
|                         |  | By:                                |  | /s/ JONAH SHACKNAI                                              
|                         |  |                                    |  |                                                                 
|                         |  |                                    |  | Jonah Shacknai
Chairman of the Board and Chief Executive Officer

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

|                                                   |  |                                                                                                                                   |  |                   
|-------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------- |  | ------------------
|SIGNATURE                                          |  | TITLE                                                                                                                             |  | DATE              
|                                                   |  |                                                                                                                                   |  |                   
|/s/ JONAH SHACKNAIJonah Shacknai                   |  | Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)                                      |  | September 26, 2002
|                                                  
|/s/ MARK A. PRYGOCKI, SR.Mark A. Prygocki, Sr.     |  | Executive Vice President, Chief Financial
Officer,
Corporate Secretary and Treasurer
(Principal Financial and Accounting Officer) |  | September 26, 2002
|                                                  
|/s/ ARTHUR G. ALTSCHUL, JR.Arthur G. Altschul, Jr. |  | Director                                                                                                                          |  | September 26, 2002
|                                                  
|/s/ SPENCER DAVIDSONSpencer Davidson               |  | Director                                                                                                                          |  | September 26, 2002
|                                                  
|/s/ PETER S. KNIGHT, ESQ.Peter S. Knight, Esq      |  | Director                                                                                                                          |  | September 26, 2002
|                                                  
|/s/ MICHAEL A. PIETRANGELOMichael A. Pietrangelo   |  | Director                                                                                                                          |  | September 26, 2002
|                                                  
|/s/ PHILIP S. SCHEIN, M.D.Philip S. Schein, M.D.   |  | Director                                                                                                                          |  | September 26, 2002
|                                                  
|/s/ LOTTIE SHACKELFORDLottie Shackelford           |  | Director                                                                                                                          |  | September 26, 2002

42



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##### Table of Contents



CERTIFICATIONS

I, Jonah Shacknai, certify that:



| | 1. |  | I have reviewed this annual report on Form 10-K of Medicis
Pharmaceutical Corporation;                                                                                                                                                                                                                                    
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this annual report does not contain
any untrue statement of material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this annual report; and
|
| | 3. |  | Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report.                     

Date: September 26, 2002

JONAH SHACKNAI

|                                                                                       |  | 
|-------------------------------------------------------------------------------------- |  | 
|/s/ JONAH SHACKNAI

(Jonah Shacknai)
Chairman of the Board and
Chief Executive Officer |  | 

I, Mark A. Prygocki, Sr., certify that:



| | 1. |  | I have reviewed this annual report on Form 10-K of Medicis
Pharmaceutical Corporation;                                                                                                                                                                                                                                    
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this annual report does not contain
any untrue statement of material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this annual report; and
|
| | 3. |  | Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report.                     

Date: September 26, 2002

MARK A. PRYGOCKI, SR.

|                                                                                                                                        |  | 
|--------------------------------------------------------------------------------------------------------------------------------------- |  | 
|/s/ MARK A. PRYGOCKI, SR.

(Mark A. Prygocki, Sr.)
Executive Vice President, Chief Financial Officer,
Corporate Secretary and Treasurer |  | 

43



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##### Table of Contents



MEDICIS PHARMACEUTICAL CORPORATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                                        |  |      |     | 
|------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                        |  | PAGE
|                                                                                                        |  |     
|Report of Ernst & Young LLP, Independent Auditors                                                       |  |      | F-2 | 
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|Consolidated Balance Sheets as of June 30, 2002 and 2001                                                |  |      | F-3 | 
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|Consolidated Statements of Income for the fiscal years
ended June 30, 2002, 2001 and 2000               |  |      | F-5 | 
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|Consolidated Statements of Stockholders Equity for the
fiscal years ended June 30, 2002, 2001 and 2000 |  |      | F-6 | 
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|Consolidated Statements of Cash Flows for the fiscal years
ended June 30, 2002, 2001 and 2000           |  |      | F-8 | 
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|Notes to Consolidated Financial Statements                                                              |  |      | F-9 | 
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|Schedule II  Valuation and Qualifying Accounts                                                         |  |      | S-1 | 

F-1



---



##### Table of Contents



Report of Ernst & Young LLP, Independent Auditors

The Board of Directors and Stockholders of Medicis Pharmaceutical Corporation

We have audited the accompanying consolidated balance sheets of Medicis
Pharmaceutical Corporation and subsidiaries as of June 30, 2002 and 2001, and
the related consolidated statements of income, stockholders equity, and cash
flows for each of the three years in the period ended June 30, 2002. Our audits
also included the financial statement schedule listed in Item 14(a)(2). These
financial statements and schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial
statements and schedule based upon our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Medicis
Pharmaceutical Corporation and subsidiaries at June 30, 2002 and 2001, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 2002, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.



| | /s/ Ernst & Young LLP
| | ---------------------

Phoenix, Arizona
August 9, 2002

F-2



---



##### Table of Contents



MEDICIS PHARMACEUTICAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

|                              |                                                                                  |                            |         |                       |        |          |         |         |        |  |         | 
|----------------------------- | -------------------------------------------------------------------------------- | -------------------------- | ------- | --------------------- | ------ | -------- | ------- | ------- | ------ |  | ------- | 
|                              |                                                                                  |                            |         |                       |        | JUNE 30,
|                              |                                                                                  |                            |         |                       |        |         
|                              |                                                                                  |                            |         |                       |        | 2002     |         | 2001   
|                              |                                                                                  |                            |         |                       |        |          |         |        
|Assets                        |                                                                                  |                            |         |                       |        |          |         |        
|                             
|                             
|                             
|                             
|Current assets:               |                                                                                  |                            |         |                       |        |          |         |        
|                             
|                             
|                             
|                             
|                              | Cash and cash equivalents                                                        |                            | $       | 299,209               |        |          | $       | 153,258 |       
|                             
|                             
|                             
|                             
|                              | Short-term investments                                                           |                            |         | 278,367               |        |          |         | 180,899 |       
|                             
|                             
|                             
|                             
|                              | Accounts receivable, less allowances:                                            |                            |         |                       |        |          |         |         |       
|                             
|                             
|                             
|                             
|                              |                                                                                  | 2002: $7,395; 2001: $5,050 |         |                       | 45,054 |          |         |         | 38,153 | 
|                             
|                             
|                             
|                             
|                              | Inventories, net                                                                 |                            |         | 11,955                |        |          |         | 8,750   |       
|                             
|                             
|                             
|                             
|                              | Deferred tax assets                                                              |                            |         | 7,388                 |        |          |         | 4,805   |       
|                             
|                             
|                             
|                             
|                              | Other current assets                                                             |                            |         | 16,500                |        |          |         | 14,325  |       
|                              |                                                                                  |                            |         |                       |        |          |         |        
|                              |                                                                                  |                            |         | Total current assets  |        |          | 658,473 |         |        |  | 400,190 | 
|                             
|                             
|                             
|                             
|Property and equipment, net   |                                                                                  |                            | 2,605   |                       |        |          | 1,964   |        
|                             
|                             
|                             
|                             
|Intangible assets:            |                                                                                  |                            |         |                       |        |          |         |        
|                             
|                             
|                             
|                             
|                              | Intangible assets related to product line acquisitions and
business combinations |                            |         | 165,084               |        |          |         | 159,986 |       
|                             
|                             
|                             
|                             
|                              | Other intangible assets                                                          |                            |         | 11,727                |        |          |         | 10,876  |       
|                              |                                                                                  |                            |         |                       |        |          |         |        
|                              |                                                                                  |                            | 176,811 |                       |        |          | 170,862 |        
|                             
|                             
|                             
|                             
|                              | Less: accumulated amortization                                                   |                            |         | 31,007                |        |          |         | 23,874  |       
|                              |                                                                                  |                            |         |                       |        |          |         |        
|                              |                                                                                  |                            |         | Net intangible assets |        |          | 145,804 |         |        |  | 146,988 | 
|                             
|                             
|                             
|                             
|Goodwill                      |                                                                                  |                            | 39,389  |                       |        |          | 288     |        
|                             
|                             
|                             
|                             
|Deferred tax assets           |                                                                                  |                            | 17,570  |                       |        |          |        |        
|                             
|                             
|                             
|                             
|Deferred financing costs, net |                                                                                  |                            | 12,390  |                       |        |          |        |        
|                             
|                             
|                             
|                             
|Other non-current assets      |                                                                                  |                            | 42      |                       |        |          | 577     |        
|                              |                                                                                  |                            |         |                       |        |          |         |        
|                              |                                                                                  | $                          | 876,273 |                       |        | $        | 550,007 |        
|                              |                                                                                  |                            |         |                       |        |          |         |        

See accompanying notes to consolidated financial statements.

F-3



---



##### Table of Contents



MEDICIS PHARMACEUTICAL CORPORATION

CONSOLIDATED BALANCE SHEETS, Continued

(in thousands, except share amounts)

|                                                                                                                                                                 |                                     |   |                            |         |          |         |         |        |  |         | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------- | - | -------------------------- | ------- | -------- | ------- | ------- | ------ |  | ------- | 
|                                                                                                                                                                 |                                     |   |                            |         | JUNE 30,
|                                                                                                                                                                 |                                     |   |                            |         |         
|                                                                                                                                                                 |                                     |   |                            |         | 2002     |         | 2001   
|                                                                                                                                                                 |                                     |   |                            |         |          |         |        
|Liabilities                                                                                                                                                      |                                     |   |                            |         |          |         |         |       
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|Current liabilities:                                                                                                                                             |                                     |   |                            |         |          |         |         |       
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                 | Accounts payable                    |   | $                          | 14,037  |          |         | $       | 12,531 | 
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                 | Short-term contract obligation      |   |                            | 10,000  |          |         |         | 16,160 | 
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                 | Income taxes payable                |   |                            | 1,460   |          |         |         | 263    | 
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                 | Other current liabilities           |   |                            | 21,717  |          |         |         | 12,768 | 
|                                                                                                                                                                 |                                     |   |                            |         |          |         |         |       
|                                                                                                                                                                 |                                     |   | Total current liabilities  |         |          | 47,214  |         |        |  | 41,722  | 
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|Long-term liabilities:                                                                                                                                           |                                     |   |                            |         |          |         |         |       
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                 | Contingent convertible senior notes |   |                            | 400,000 |          |         |         |       | 
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                 | Deferred
tax liabilities            |   |                            |        |          |         |         | 4,832  | 
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|Commitments and Contingencies                                                                                                                                    |                                     |   |                            |         |          |         |         |       
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|Stockholders Equity                                                                                                                                             |                                     |   |                            |         |          |         |         |       
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|Preferred
Stock, $0.01 par value; shares authorized: 5,000,000;
no shares issued                                                                                 |                                     |   |                           |         |          |         |        |       
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|Class A common stock, $0.014 par value; shares authorized: 50,000,000;
issued and outstanding: 30,776,276 and 30,120,095 at June 30, 2002
and
2001, respectively |                                     |   | 431                        |         |          |         | 422     |       
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|Class B common stock, $0.014 par value; shares authorized: 1,000,000;
issued and outstanding: 379,016 and 422,962 at June 30, 2002 and
2001, respectively        |                                     |   | 5                          |         |          |         | 6       |       
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|Additional paid-in capital                                                                                                                                       |                                     |   | 429,951                    |         |          |         | 407,442 |       
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|Accumulated other comprehensive income                                                                                                                           |                                     |   | 790                        |         |          |         | 611     |       
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|Deferred compensation                                                                                                                                            |                                     |   | (2,094                     | )       |          |         |        |       
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|Accumulated earnings                                                                                                                                             |                                     |   | 154,923                    |         |          |         | 104,899 |       
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|Less:
Treasury stock, 3,412,434 and 299,600 shares at cost at June 30,
2002 and 2001, respectively                                                               |                                     |   | (154,947                   | )       |          |         | (9,927  | )     
|                                                                                                                                                                 |                                     |   |                            |         |          |         |         |       
|                                                                                                                                                                 |                                     |   | Total stockholders equity |         |          | 429,059 |         |        |  | 503,453 | 
|                                                                                                                                                                 |                                     |   |                            |         |          |         |         |       
|                                                                                                                                                                 |                                     | $ | 876,273                    |         |          | $       | 550,007 |       
|                                                                                                                                                                 |                                     |   |                            |         |          |         |         |       

See accompanying notes to consolidated financial statements.

F-4



---



##### Table of Contents



MEDICIS PHARMACEUTICAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

|                                                             |                                     |                              |         |                     |         |      |         |        |         |   |         |        |        | 
|------------------------------------------------------------ | ----------------------------------- | ---------------------------- | ------- | ------------------- | ------- | ---- | ------- | ------ | ------- | - | ------- | ------ | ------ | 
|                                                             |                                     |                              |         | YEAR ENDED JUNE 30,
|                                                             |                                     |                              |         |                    
|                                                             |                                     |                              |         | 2002                |         | 2001 |         | 2000  
|                                                             |                                     |                              |         |                     |         |      |         |       
|Net revenues                                                 |                                     | $                            | 212,807 |                     |         | $    | 167,802 |        |         | $ | 139,099 |       
|                                                            
|                                                            
|                                                            
|                                                            
|Operating costs and expenses:                                |                                     |                              |         |                     |         |      |         |        |         |   |         |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Cost of product revenue             |                              |         | 35,765              |         |      |         | 30,697 |         |   |         | 25,912 |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Selling, general and administrative |                              |         | 77,314              |         |      |         | 59,508 |         |   |         | 45,404 |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Research and development            |                              |         | 15,132              |         |      |         | 25,515 |         |   |         | 4,903  |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | In-process research and development |                              |         | 6,217               |         |      |         |       |         |   |         |       |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Depreciation and amortization       |                              |         | 7,928               |         |      |         | 8,261  |         |   |         | 7,374  |       
|                                                             |                                     |                              |         |                     |         |      |         |        |         |   |         |       
|                                                             |                                     | Operating costs and expenses |         |                     | 142,356 |      |         |        | 123,981 |   |         |        | 83,593 | 
|                                                             |                                     |                              |         |                     |         |      |         |        |         |   |         |       
|Operating income                                             |                                     |                              | 70,451  |                     |         |      | 43,821  |        |         |   | 55,506  |       
|                                                            
|                                                            
|                                                            
|                                                            
|Interest income                                              |                                     |                              | 9,909   |                     |         |      | 16,767  |        |         |   | 14,121  |       
|                                                            
|                                                            
|                                                            
|                                                            
|Interest expense                                             |                                     |                              | (1,376  | )                   |         |      | (1,263  | )      |         |   | (2,245  | )     
|                                                             |                                     |                              |         |                     |         |      |         |        |         |   |         |       
|Income before income tax expense                             |                                     |                              | 78,984  |                     |         |      | 59,325  |        |         |   | 67,382  |       
|                                                            
|                                                            
|                                                            
|                                                            
|Income tax expense                                           |                                     |                              | (28,960 | )                   |         |      | (18,905 | )      |         |   | (24,388 | )     
|                                                             |                                     |                              |         |                     |         |      |         |        |         |   |         |       
|Net income                                                   |                                     | $                            | 50,024  |                     |         | $    | 40,420  |        |         | $ | 42,994  |       
|                                                             |                                     |                              |         |                     |         |      |         |        |         |   |         |       
|Basic net income per common share                            |                                     | $                            | 1.65    |                     |         | $    | 1.34    |        |         | $ | 1.48    |       
|                                                             |                                     |                              |         |                     |         |      |         |        |         |   |         |       
|Diluted net income per common share                          |                                     | $                            | 1.59    |                     |         | $    | 1.28    |        |         | $ | 1.41    |       
|                                                             |                                     |                              |         |                     |         |      |         |        |         |   |         |       
|Shares used in computing basic net income per
common share   |                                     |                              | 30,268  |                     |         |      | 30,134  |        |         |   | 29,029  |       
|                                                             |                                     |                              |         |                     |         |      |         |        |         |   |         |       
|Shares used in computing diluted net income per
common share |                                     |                              | 31,405  |                     |         |      | 31,694  |        |         |   | 30,499  |       
|                                                             |                                     |                              |         |                     |         |      |         |        |         |   |         |       

See accompanying notes to consolidated financial statements.

F-5



---



##### Table of Contents



MEDICIS PHARMACEUTICAL CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(in thousands)

|                         |                                                            |  |                      |       |  |              |     |              |  |        |     |        |   |   |   |    |   |  |  | 
|------------------------ | ---------------------------------------------------------- |  | -------------------- | ----- |  | ------------ | --- | ------------ |  | ------ | --- | ------ | - | - | - | -- | - |  |  | 
|                         |                                                            |  |                      |       |  | Class A      |     | Class B     
|                         |                                                            |  |                      |       |  | Common Stock |     | Common Stock
|                         |                                                            |  |                      |       |  |              |     |             
|                         |                                                            |  |                      |       |  | Shares       |     | Amount       |  | Shares |     | Amount
|                         |                                                            |  |                      |       |  |              |     |              |  |        |     |       
|Balance at June 30, 1999 |                                                            |  | 28,239               |       |  | $            | 395 |              |  |        | 423 |        |   | $ | 6 |   
|                        
|                        
|                        
|                        
|Comprehensive income:    |                                                            |  |                      |       |  |              |     |              |  |        |     |        |   |   |   |   
|                        
|                        
|                        
|                        
|                         | Net income                                                 |  |                      |      |  |              |     |             |  |        |     |       |   |   |   |   |  
|                        
|                        
|                        
|                        
|                         | Net unrealized gains on available-for-sale
securities      |  |                      |      |  |              |     |             |  |        |     |       |   |   |   |   |  
|                        
|                        
|                        
|                        
|                         | Net unrealized losses on foreign currency
translation      |  |                      |      |  |              |     |             |  |        |     |       |   |   |   |   |  
|                        
|                        
|                        
|                        
|                         |                                                            |  | Comprehensive income |       |  |              |     |              |  |        |     |        |   |   |   |    |   |  | 
|                        
|                        
|                        
|                        
|                         | Exercise of stock options                                  |  |                      | 830   |  |              |     | 12           |  |        |     |       |   |   |   |   |  
|                        
|                        
|                        
|                        
|                         | Tax effect of stock options exercised                      |  |                      |      |  |              |     |             |  |        |     |       |   |   |   |   |  
|                        
|                        
|                        
|                        
|                         | Options issued in lieu of payment
for services rendered    |  |                      |      |  |              |     |             |  |        |     |       |   |   |   |   |  
|                         |                                                            |  |                      |       |  |              |     |              |  |        |     |        |   |   |   |   
|Balance at June 30, 2000 |                                                            |  | 29,069               |       |  |              | 407 |              |  |        | 423 |        |   |   | 6 |   
|                        
|                        
|                        
|                        
|Comprehensive income:    |                                                            |  |                      |       |  |              |     |              |  |        |     |        |   |   |   |   
|                        
|                        
|                        
|                        
|                         | Net income                                                 |  |                      |      |  |              |     |             |  |        |     |       |   |   |   |   |  
|                        
|                        
|                        
|                        
|                         | Net unrealized gains on available-for-sale
securities      |  |                      |      |  |              |     |             |  |        |     |       |   |   |   |   |  
|                        
|                        
|                        
|                        
|                         | Net unrealized losses on foreign currency
translation      |  |                      |      |  |              |     |             |  |        |     |       |   |   |   |   |  
|                        
|                        
|                        
|                        
|                         |                                                            |  | Comprehensive income |       |  |              |     |              |  |        |     |        |   |   |   |    |   |  | 
|                        
|                        
|                        
|                        
|                         | Exercise of stock options                                  |  |                      | 1,051 |  |              |     | 15           |  |        |     |       |   |   |   |   |  
|                        
|                        
|                        
|                        
|                         | Tax effect of stock options exercised                      |  |                      |      |  |              |     |             |  |        |     |       |   |   |   |   |  
|                        
|                        
|                        
|                        
|                         | Options issued in lieu of payment for services
rendered    |  |                      |      |  |              |     |             |  |        |     |       |   |   |   |   |  
|                        
|                        
|                        
|                        
|                         | Purchase
of treasury stock                                 |  |                      |      |  |              |     |             |  |        |     |       |   |   |   |   |  
|                         |                                                            |  |                      |       |  |              |     |              |  |        |     |        |   |   |   |   
|Balance at June 30, 2001 |                                                            |  | 30,120               |       |  |              | 422 |              |  |        | 423 |        |   |   | 6 |   
|                        
|                        
|                        
|                        
|Comprehensive income:    |                                                            |  |                      |       |  |              |     |              |  |        |     |        |   |   |   |   
|                        
|                        
|                        
|                        
|                         | Net income                                                 |  |                      |      |  |              |     |             |  |        |     |       |   |   |   |   |  
|                        
|                        
|                        
|                        
|                         | Net unrealized gains on available-for-sale
securities      |  |                      |      |  |              |     |             |  |        |     |       |   |   |   |   |  
|                        
|                        
|                        
|                        
|                         | Net unrealized losses on foreign currency
translation      |  |                      |      |  |              |     |             |  |        |     |       |   |   |   |   |  
|                        
|                        
|                        
|                        
|                         |                                                            |  | Comprehensive income |       |  |              |     |              |  |        |     |        |   |   |   |    |   |  | 
|                        
|                        
|                        
|                        
|                         | Conversion of Class B common stock to
Class A common stock |  |                      | 44    |  |              |     | 1            |  |        |     | (44    | ) |   |   | (1 | )
|                        
|                        
|                        
|                        
|                         | Restricted
shares issued for deferred compensation         |  |                      |      |  |              |     |             |  |        |     |       |   |   |   |   |  
|                        
|                        
|                        
|                        
|                         | Amortization of deferred compensation                      |  |                      |      |  |              |     |             |  |        |     |       |   |   |   |   |  
|                        
|                        
|                        
|                        
|                         | Exercise of stock options                                  |  |                      | 612   |  |              |     | 8            |  |        |     |       |   |   |   |   |  
|                        
|                        
|                        
|                        
|                         | Tax effect of stock options exercised                      |  |                      |      |  |              |     |             |  |        |     |       |   |   |   |   |  
|                        
|                        
|                        
|                        
|                         | Purchase of treasury stock                                 |  |                      |      |  |              |     |             |  |        |     |       |   |   |   |   |  
|                         |                                                            |  |                      |       |  |              |     |              |  |        |     |        |   |   |   |   
|Balance at June 30, 2002 |                                                            |  | 30,776               |       |  | $            | 431 |              |  |        | 379 |        |   | $ | 5 |   
|                         |                                                            |  |                      |       |  |              |     |              |  |        |     |        |   |   |   |   

See accompanying notes to consolidated financial statements.

F-6



---



##### Table of Contents



|                         |                                                            |                            |                      |        |   |            |      |               |   |              |        |             |   |        |         |        |   |          |        |      |        |   |          |        |          |   |         |        |          |        |        | 
|------------------------ | ---------------------------------------------------------- | -------------------------- | -------------------- | ------ | - | ---------- | ---- | ------------- | - | ------------ | ------ | ----------- | - | ------ | ------- | ------ | - | -------- | ------ | ---- | ------ | - | -------- | ------ | -------- | - | ------- | ------ | -------- | ------ | ------ | 
|                         |                                                            |                            |                      |        |   |            |      |               |   | Accumulated  |        |             |   |        |         |        |   |          |        |      |        |   |          |        |          |   |         |        |          |       
|                         |                                                            |                            |                      |        |   | Additional |      | Other         |   |              |        |             |   |        |         |        |   | Treasury |        |      |        |  
|                         |                                                            |                            |                      |        |   | Paid-In    |      | Comprehensive |   | Deferred     |        | Accumulated |   | Stock  |         |        |   |         
|                         |                                                            |                            |                      |        |   | Capital    |      | Income (Loss) |   | Compensation |        | Earnings    |   | Shares |         | Amount |   | Total   
|                         |                                                            |                            |                      |        |   |            |      |               |   |              |        |             |   |        |         |        |   |         
|Balance at June 30, 1999 |                                                            | $                          | 352,156              |        |   | $          | (294 | )             |   | $            |       |             |   | $      | 21,485  |        |   |          |       |      |        | $ |         |        |          | $ | 373,748 |       
|                        
|                        
|                        
|                        
|Comprehensive income:    |                                                            |                            |                      |        |   |            |      |               |   |              |        |             |   |        |         |        |   |          |        |      |        |   |          |        |          |   |         |       
|                        
|                        
|                        
|                        
|                         | Net income                                                 |                            |                      |       |   |            |      |              |   |              |        |            |   |        |         | 42,994 |   |          |        |     |        |   |          |       |          |   |         | 42,994 |         
|                        
|                        
|                        
|                        
|                         | Net unrealized gains on available-for-sale
securities      |                            |                      |       |   |            |      | 790           |   |              |        |            |   |        |         |       |   |          |        |     |        |   |          |       |          |   |         | 790    |         
|                        
|                        
|                        
|                        
|                         | Net unrealized losses on foreign currency
translation      |                            |                      |       |   |            |      | (17           | ) |              |        |            |   |        |         |       |   |          |        |     |        |   |          |       |          |   |         | (17    | )       
|                         |                                                            |                            |                      |        |   |            |      |               |   |              |        |             |   |        |         |        |   |          |        |      |        |   |          |        |          |   |         |       
|                         |                                                            |                            | Comprehensive income |        |   |            |      |               |   |              |        |             |   |        |         |        |   |          |        |      |        |   |          |        |          |   |         |        |          | 43,767 |       
|                        
|                        
|                        
|                        
|                         | Exercise of stock options                                  |                            |                      | 10,162 |   |            |      |              |   |              |        |            |   |        |         |       |   |          |        |     |        |   |          |       |          |   |         | 10,174 |         
|                        
|                        
|                        
|                        
|                         | Tax effect of stock options exercised                      |                            |                      | 9,729  |   |            |      |              |   |              |        |            |   |        |         |       |   |          |        |     |        |   |          |       |          |   |         | 9,729  |         
|                        
|                        
|                        
|                        
|                         | Options issued in lieu of payment
for services rendered    |                            |                      | 21     |   |            |      |              |   |              |        |            |   |        |         |       |   |          |        |     |        |   |          |       |          |   |         | 21     |         
|                         |                                                            |                            |                      |        |   |            |      |               |   |              |        |             |   |        |         |        |   |          |        |      |        |   |          |        |          |   |         |       
|Balance at June 30, 2000 |                                                            |                            | 372,068              |        |   |            | 479  |               |   |              |       |             |   |        | 64,479  |        |   |          |       |      |        |   |         |        |          |   | 437,439 |       
|                        
|                        
|                        
|                        
|Comprehensive income:    |                                                            |                            |                      |        |   |            |      |               |   |              |        |             |   |        |         |        |   |          |        |      |        |   |          |        |          |   |         |       
|                        
|                        
|                        
|                        
|                         | Net income                                                 |                            |                      |       |   |            |      |              |   |              |        |            |   |        |         | 40,420 |   |          |        |     |        |   |          |       |          |   |         | 40,420 |         
|                        
|                        
|                        
|                        
|                         | Net unrealized gains on available-for-sale
securities      |                            |                      |       |   |            |      | 261           |   |              |        |            |   |        |         |       |   |          |        |     |        |   |          |       |          |   |         | 261    |         
|                        
|                        
|                        
|                        
|                         | Net unrealized losses on foreign currency
translation      |                            |                      |       |   |            |      | (129          | ) |              |        |            |   |        |         |       |   |          |        |     |        |   |          |       |          |   |         | (129   | )       
|                         |                                                            |                            |                      |        |   |            |      |               |   |              |        |             |   |        |         |        |   |          |        |      |        |   |          |        |          |   |         |       
|                         |                                                            |                            | Comprehensive income |        |   |            |      |               |   |              |        |             |   |        |         |        |   |          |        |      |        |   |          |        |          |   |         |        |          |        | 40,552 | 
|                        
|                        
|                        
|                        
|                         | Exercise of stock options                                  |                            |                      | 22,460 |   |            |      |              |   |              |        |            |   |        |         |       |   |          |        |     |        |   |          |       |          |   |         | 22,475 |         
|                        
|                        
|                        
|                        
|                         | Tax effect of stock options exercised                      |                            |                      | 12,886 |   |            |      |              |   |              |        |            |   |        |         |       |   |          |        |     |        |   |          |       |          |   |         | 12,886 |         
|                        
|                        
|                        
|                        
|                         | Options issued in lieu of payment for services
rendered    |                            |                      | 28     |   |            |      |              |   |              |        |            |   |        |         |       |   |          |        |     |        |   |          |       |          |   |         | 28     |         
|                        
|                        
|                        
|                        
|                         | Purchase
of treasury stock                                 |                            |                      |       |   |            |      |              |   |              |        |            |   |        |         |       |   |          |        | (300 | )      |   |          | (9,927 | )        |   |         | (9,927 | )       
|                         |                                                            |                            |                      |        |   |            |      |               |   |              |        |             |   |        |         |        |   |          |        |      |        |   |          |        |          |   |         |       
|Balance at June 30, 2001 |                                                            |                            | 407,442              |        |   |            | 611  |               |   |              |       |             |   |        | 104,899 |        |   |          | (300   | )    |        |   | (9,927   | )      |          |   | 503,453 |       
|                        
|                        
|                        
|                        
|Comprehensive income:    |                                                            |                            |                      |        |   |            |      |               |   |              |        |             |   |        |         |        |   |          |        |      |        |   |          |        |          |   |         |       
|                        
|                        
|                        
|                        
|                         | Net income                                                 |                            |                      |       |   |            |      |              |   |              |        |            |   |        |         | 50,024 |   |          |        |     |        |   |          |       |          |   |         | 50,024 |         
|                        
|                        
|                        
|                        
|                         | Net unrealized gains on available-for-sale
securities      |                            |                      |       |   |            |      | 354           |   |              |        |            |   |        |         |       |   |          |        |     |        |   |          |       |          |   |         | 354    |         
|                        
|                        
|                        
|                        
|                         | Net unrealized losses on foreign currency
translation      |                            |                      |       |   |            |      | (175          | ) |              |        |            |   |        |         |       |   |          |        |     |        |   |          |       |          |   |         | (175   | )       
|                         |                                                            |                            |                      |        |   |            |      |               |   |              |        |             |   |        |         |        |   |          |        |      |        |   |          |        |          |   |         |       
|                         |                                                            |                            | Comprehensive income |        |   |            |      |               |   |              |        |             |   |        |         |        |   |          |        |      |        |   |          |        |          |   |         |        |          |        | 50,203 | 
|                        
|                        
|                        
|                        
|                         | Conversion of Class B common stock to
Class A common stock |                            |                      |       |   |            |      |              |   |              |        |            |   |        |         |       |   |          |        |     |        |   |          |       |          |   |         |       |         
|                        
|                        
|                        
|                        
|                         | Restricted
shares issued for deferred compensation         |                            |                      | 756    |   |            |      |              |   |              |        | (2,578      | ) |        |         |       |   |          |        | 55   |        |   |          | 1,822  |          |   |         |       |         
|                        
|                        
|                        
|                        
|                         | Amortization of deferred compensation                      |                            |                      |       |   |            |      |              |   |              |        | 484         |   |        |         |       |   |          |        |     |        |   |          |       |          |   |         | 484    |         
|                        
|                        
|                        
|                        
|                         | Exercise of stock options                                  |                            |                      | 14,372 |   |            |      |              |   |              |        |            |   |        |         |       |   |          |        |     |        |   |          |       |          |   |         | 14,380 |         
|                        
|                        
|                        
|                        
|                         | Tax effect of stock options exercised                      |                            |                      | 7,381  |   |            |      |              |   |              |        |            |   |        |         |       |   |          |        |     |        |   |          |       |          |   |         | 7,381  |         
|                        
|                        
|                        
|                        
|                         |                                                            | Purchase of treasury stock |                      |        |  |            |      |               |  |              |        |             |  |        |         |        |  |          |        |      | (3,167 | ) |          |        | (146,842 | ) |         |        | (146,842 | )     
|                         |                                                            |                            |                      |        |   |            |      |               |   |              |        |             |   |        |         |        |   |          |        |      |        |   |          |        |          |   |         |       
|Balance at June 30, 2002 |                                                            | $                          | 429,951              |        |   | $          | 790  |               |   | $            | (2,094 | )           |   | $      | 154,923 |        |   |          | (3,412 | )    |        | $ | (154,947 | )      |          | $ | 429,059 |       
|                         |                                                            |                            |                      |        |   |            |      |               |   |              |        |             |   |        |         |        |   |          |        |      |        |   |          |        |          |   |         |       

F-7



---



##### Table of Contents



;MEDICIS PHARMACEUTICAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

|                                                                                  |                                                |                                       |                                                     |        |                     |          |          |       |        |         |          |       |         |        | 
|--------------------------------------------------------------------------------- | ---------------------------------------------- | ------------------------------------- | --------------------------------------------------- | ------ | ------------------- | -------- | -------- | ----- | ------ | ------- | -------- | ----- | ------- | ------ | 
|                                                                                  |                                                |                                       |                                                     |        | YEAR ENDED JUNE 30,
|                                                                                  |                                                |                                       |                                                     |        |                    
|                                                                                  |                                                |                                       |                                                     |        | 2002                |          | 2001     |       | 2000  
|                                                                                  |                                                |                                       |                                                     |        |                     |          |          |       |       
|Operating Activities:                                                             |                                                |                                       |                                                     |        |                     |          |          |       |        |         |          |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Net income                                                                        |                                                | $                                     | 50,024                                              |        |                     | $        | 40,420   |       |        | $       | 42,994   |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Adjustments to reconcile net income to net cash
provided by operating activities: |                                                |                                       |                                                     |        |                     |          |          |       |        |         |          |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | In-process research and development            |                                       |                                                     | 6,217  |                     |          |          |      |        |         |          |      |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Depreciation and amortization                  |                                       |                                                     | 8,138  |                     |          |          | 8,261 |        |         |          | 7,374 |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Gain on sale of available-for-sale investments |                                       |                                                     | (1,141 | )                   |          |          | (825  | )      |         |          | (483  | )      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Amortization of deferred compensation          |                                       |                                                     | 484    |                     |          |          |      |        |         |          |      |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Deferred income tax expense (benefit)          |                                       |                                                     | 679    |                     |          |          | (607  | )      |         |          | 2,948 |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Provision for doubtful accounts and returns    |                                       |                                                     | 2,345  |                     |          |          | 860   |        |         |          | 375   |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Accretion of premium on investments            |                                       |                                                     | 3,200  |                     |          |          | 179   |        |         |          | 508   |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Accretion of discount on contract obligation   |                                       |                                                     | 340    |                     |          |          | 1,246 |        |         |          | 2,197 |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Other non-cash expenses                        |                                       |                                                     |       |                     |          |          | 28    |        |         |          | 21    |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Changes in operating assets and liabilities (net of
acquired amounts):            |                                                |                                       |                                                     |        |                     |          |          |       |        |         |          |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                | Accounts receivable                   |                                                     |        | (6,604              | )        |          |       | (4,760 | )       |          |       | (2,559  | )     
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                | Inventories                           |                                                     |        | (2,246              | )        |          |       | 1,251  |         |          |       | (1,339  | )     
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                | Other current assets                  |                                                     |        | (1,707              | )        |          |       | 4,378  |         |          |       | (2,503  | )     
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                | Accounts payable                      |                                                     |        | (256                | )        |          |       | 1,976  |         |          |       | 1,209   |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                | Income taxes payable                  |                                                     |        | 1,197               |          |          |       | 263    |         |          |       | (10,660 | )     
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                | Tax benefit of stock option exercises |                                                     |        | 7,381               |          |          |       | 12,886 |         |          |       | 9,729   |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                | Other current liabilities             |                                                     |        | 5,491               |          |          |       | 5,564  |         |          |       | (8,573  | )     
|                                                                                  |                                                |                                       |                                                     |        |                     |          |          |       |        |         |          |      
|                                                                                  |                                                |                                       | Net cash provided by operating activities           |        |                     | 73,542   |          |       |        | 71,120  |          |       |         | 41,238 | 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Investing Activities:                                                             |                                                |                                       |                                                     |        |                     |          |          |       |        |         |          |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Purchase of property and equipment                                                |                                                |                                       | (1,299                                              | )      |                     |          | (849     | )     |        |         | (629     | )    
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Ascent merger, net of cash acquired                                               |                                                |                                       | (62,437                                             | )      |                     |          |         |       |        |         |         |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Payment of direct merger costs                                                    |                                                |                                       | (1,794                                              | )      |                     |          |         |       |        |         |         |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Proceeds from sale of product rights                                              |                                                |                                       |                                                    |        |                     |          |         |       |        |         | 39,100   |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Acquisition of businesses, net of cash acquired                                   |                                                |                                       |                                                    |        |                     |          |         |       |        |         | (5,975   | )    
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Payment for purchase of product rights                                            |                                                |                                       | (18,184                                             | )      |                     |          | (35,711  | )     |        |         | (36,723  | )    
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Purchase of available-for-sale investments                                        |                                                |                                       | (309,392                                            | )      |                     |          | (200,515 | )     |        |         | (159,777 | )    
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Sale of available-for-sale investments                                            |                                                |                                       | 96,597                                              |        |                     |          | 50,307   |       |        |         | 29,938   |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Maturity of available-for-sale investments                                        |                                                |                                       | 114,122                                             |        |                     |          | 104,183  |       |        |         | 147,171  |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Change in other assets                                                            |                                                |                                       | 33                                                  |        |                     |          | 33       |       |        |         | 282      |      
|                                                                                  |                                                |                                       |                                                     |        |                     |          |          |       |        |         |          |      
|                                                                                  |                                                |                                       | Net cash (used in) provided by investing
activities |        |                     | (182,354 | )        |       |        | (82,552 | )        |       |         | 13,387 | 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Financing Activities:                                                             |                                                |                                       |                                                     |        |                     |          |          |       |        |         |          |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Payment of notes payable                                                          |                                                |                                       |                                                    |        |                     |          |         |       |        |         | (100     | )    
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Proceeds from issuance of Contingent Convertible
Senior Notes                     |                                                |                                       | 400,000                                             |        |                     |          |         |       |        |         |         |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Payment of deferred financing costs                                               |                                                |                                       | (12,600                                             | )      |                     |          |         |       |        |         |         |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Change in other non-current liabilities                                           |                                                |                                       |                                                    |        |                     |          |         |       |        |         | (130     | )    
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Purchase of treasury stock                                                        |                                                |                                       | (146,842                                            | )      |                     |          | (9,927   | )     |        |         |         |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Proceeds from the exercise of stock options                                       |                                                |                                       | 14,380                                              |        |                     |          | 22,475   |       |        |         | 10,174   |      
|                                                                                  |                                                |                                       |                                                     |        |                     |          |          |       |        |         |          |      
|                                                                                  |                                                |                                       | Net cash provided by financing activities           |        |                     | 254,938  |          |       |        | 12,548  |          |       |         | 9,944  | 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Effect of foreign currency exchange rate on cash and
cash equivalents             |                                                |                                       | (175                                                | )      |                     |          | (129     | )     |        |         | (17      | )    
|                                                                                  |                                                |                                       |                                                     |        |                     |          |          |       |        |         |          |      
|Net increase in cash and cash equivalents                                         |                                                |                                       | 145,951                                             |        |                     |          | 987      |       |        |         | 64,552   |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Cash and cash equivalents at beginning of year                                    |                                                |                                       | 153,258                                             |        |                     |          | 152,271  |       |        |         | 87,719   |      
|                                                                                  |                                                |                                       |                                                     |        |                     |          |          |       |        |         |          |      
|Cash and cash equivalents at end of year                                          |                                                | $                                     | 299,209                                             |        |                     | $        | 153,258  |       |        | $       | 152,271  |      
|                                                                                  |                                                |                                       |                                                     |        |                     |          |          |       |        |         |          |      

See accompanying notes to consolidated financial statements.

F-8



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##### Table of Contents



MEDICIS PHARMACEUTICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2002

NOTE 1. FORMATION AND DEVELOPMENT OF THE COMPANY

Medicis Pharmaceutical Corporation and its wholly owned subsidiaries
(Medicis, or the Company) is a leading specialty pharmaceutical company
focusing primarily on developing and marketing drugs in the United States for
the treatment of dermatological, pediatric and podiatric conditions. The
Company offers a broad range of drugs addressing various conditions including
acne, fungal infections, asthma, rosacea, hyperpigmentation, photoaging,
psoriasis, eczema, skin and skin-structure infections, seborrheic dermatitis,
head lice and cosmesis (improvement in the texture and appearance of skin). In
November 2001, Medicis expanded into pediatrics through its merger with Ascent
Pediatrics, Inc. (Ascent). Ascent markets products to U.S.-based
pediatricians, including an oral treatment for children with asthma and other
inflammatory respiratory conditions and subsequent to merging with Medicis now
markets dermatological products to pediatricians.

Medicis has built its business by successfully executing a four-part
growth strategy. This strategy consists of growing existing core brands,
developing new products and important product line extensions, entering into
strategic collaborations and acquiring complementary products, technologies and
businesses.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
Medicis and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. Certain prior period
amounts have been reclassified to conform with current period presentation.

Cash and Cash Equivalents

At June 30, 2002, cash and cash equivalents included highly liquid
investments invested in money market accounts consisting of government
securities and high-grade commercial paper. These investments are stated at
cost, which approximates fair value. The Company considers all highly liquid
investments purchased with a remaining maturity of three months or less to be
cash equivalents.

Investments

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

Inventories

The Company utilizes third parties to manufacture and package inventories
held for sale, takes title to certain inventories once manufactured, and
warehouses such goods until packaged for final distribution and sale.
Inventories consist of salable products held at the Companys warehouses, as
well as raw materials and components at the manufacturers facilities, and are
valued at the lower of cost or market using the first-in, first-out method.
The Company provides valuation reserves for estimated obsolescence or
unmarketable inventory in an amount equal to

F-9



---



##### Table of Contents



the difference between the cost of inventory and the estimated market value
based upon assumptions about future demand and market conditions.

Inventories are as follows (amounts in thousands):

|                  |  |          |        |      |  |   |       |  
|----------------- |  | -------- | ------ | ---- |  | - | ----- | -
|                  |  | JUNE 30,
|                  |  |         
|                  |  | 2002     |        | 2001
|                  |  |          |        |     
|Raw materials     |  | $        | 5,430  |      |  | $ | 3,066 |  
|                 
|                 
|                 
|                 
|Finished goods    |  |          | 7,276  |      |  |   | 6,382 |  
|                 
|                 
|                 
|                 
|Valuation reserve |  |          | (751   | )    |  |   | (698  | )
|                  |  |          |        |      |  |   |       |  
|Total inventories |  | $        | 11,955 |      |  | $ | 8,750 |  
|                  |  |          |        |      |  |   |       |  

Property and Equipment

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

|                                  |  |          |        |      |  |   |        |  
|--------------------------------- |  | -------- | ------ | ---- |  | - | ------ | -
|                                  |  | JUNE 30,
|                                  |  |         
|                                  |  | 2002     |        | 2001
|                                  |  |          |        |     
|Furniture, fixtures and equipment |  | $        | 4,354  |      |  | $ | 2,896  |  
|                                 
|                                 
|                                 
|                                 
|Leasehold improvements            |  |          | 506    |      |  |   | 503    |  
|                                  |  |          |        |      |  |   |        |  
|                                  |  |          | 4,860  |      |  |   | 3,399  |  
|                                 
|                                 
|                                 
|                                 
|Less: accumulated depreciation    |  |          | (2,255 | )    |  |   | (1,435 | )
|                                  |  |          |        |      |  |   |        |  
|                                  |  | $        | 2,605  |      |  | $ | 1,964  |  
|                                  |  |          |        |      |  |   |        |  

Goodwill and Other Indentifiable Intangible Assets

The Company has in the past made acquisitions of products and businesses
that include goodwill, license agreements, product rights, and other
identifiable intangible assets. The Company assesses the impairment of
goodwill and other identifiable intangibles whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Some
factors the Company considers important which could trigger an impairment
review include the following; (i) significant underperformance relative to
expected historical or projected future operating results; (ii) significant
changes in the manner of our use of the acquired assets or the strategy for our
overall business; and (iii) significant negative industry or economic trends.

When the Company determines that the carrying value of goodwill and other
identifiable intangibles may not be recoverable based upon the existence of one
or more of the above indicators of impairment, the Company first will perform
an assessment of the assets recoverability based on expected undiscounted
future net cash flow, and if the amount is less than the assets value, the
Company will measure any impairment based on a projected discounted cash flow
method using a discount rate determined by our management to be commesurate
with the risk inherent in our current business model. In accordance with SFAS
No. 142, Goodwill and Other Intangible Assets, on July 1, 2002 the Company
ceased to amortize goodwill arising from acquisitions completed prior to July
1, 2001. This change did not have a material affect on the financial
statements. In lieu of amortization, the Company is required to perform an
initial impairment review of our goodwill in fiscal 2003 and an annual
impairment review thereafter. If the Company determines through the impairment
process that goodwill has been impaired, the Company will record the impairment
charge in the statement of income.

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Deferred Financing Costs

Deferred financing costs represents fees and other costs incurred in
connection with the June 2002 issuance of the 2.5% Contingent Convertible
Senior Notes Due 2032. These costs are being amortized on a basis that
approximates the interest method over the five-year period that ends on the
initial put date of the Notes. Accumulated amortization amounted to
approximately $210,000 as of June 30, 2002.

Managed Care and Medicaid Reserves

The Company establishes and maintains reserves for amounts payable to
Managed Care Organizations and state Medicaid programs for the reimbursement of
a portion of the retail price of prescriptions filled that are covered by the
respective plans. The amounts estimated to be paid relating to products sold
are recognized as revenue reductions and as additions to accrued expenses at
the time of sale based on the Companys best estimate of the expected
prescription fill rate to these Managed Care patients using historical
experience adjusted to reflect known changes in the factors that impact such
reserves.

Other Current Liabilities

Other current liabilities are as follows (amounts in thousands):

|                                   |  |          |        |      |  |   |        | 
|---------------------------------- |  | -------- | ------ | ---- |  | - | ------ | 
|                                   |  | JUNE 30,
|                                   |  |         
|                                   |  | 2002     |        | 2001
|                                   |  |          |        |     
|Accrued incentives                 |  | $        | 5,207  |      |  | $ | 4,133  | 
|                                  
|                                  
|                                  
|                                  
|Managed care and medicaid
reserves |  |          | 5,921  |      |  |   | 1,311  | 
|                                  
|                                  
|                                  
|                                  
|Other accrued expenses             |  |          | 10,589 |      |  |   | 7,324  | 
|                                   |  |          |        |      |  |   |        | 
|                                   |  | $        | 21,717 |      |  | $ | 12,768 | 
|                                   |  |          |        |      |  |   |        | 

Revenue Recognition

Revenue from product sales is recognized when the merchandise is shipped
to an unrelated third party pursuant to Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements. Accordingly, revenue is
recognized when all four of the following criteria are met: (i) persuasive
evidence that an arrangement exists; (ii) delivery of the products has
occurred; (iii) the selling price is both fixed and determinable and; (iv)
collectibility is reasonably probable. The Companys customers consist of
primarily of large pharmaceutical wholesalers who sell directly into the retail
channel. Provisions for sales discounts, and estimates for chargebacks,
rebates, damaged product returns, exchanges for expired product are established
as a reduction of product sales revenues at the time such revenues are
recognized. These revenue reductions are established by the Companys
management as its best estimate at the time of sale based on historical
experience adjusted to reflect known changes in the factors that impact such
reserves. These revenue reductions are generally reflected either as a direct
reduction to accounts receivable through an allowance, or as an addition to
accrued expenses if the provision is due to a party other than the wholesale or
retail customer.

The Company does not provide any forms of price protection to its
wholesale customers and permits product returns only if the product is damaged
or if it is returned with 6-12 months of expiration and the customer is
committed to accept replacement product in exchange. The Companys customers
consist principally of financially viable wholesalers so revenue is recorded
upon sale to the wholesaler, net of estimated provisions.

Advertising

The Company expenses advertising as incurred. Advertising expenses for the
fiscal years ended June 30, 2002 (fiscal 2002), June 30, 2001 (fiscal 2001)
and June 30, 2000 (fiscal 2000) were approximately
$17.4 million, $15.0 million,
and $11.5 million respectively. Advertising expenses include samples of the
Companys products given to physicians for marketing to their patients.

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Stock-Based Compensation

The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants to employees in accordance
with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees and, accordingly, recognizes no compensation expense for employee
stock option grants. All stock-based awards to non-employees are accounted for
at their fair value in accordance with Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123)
and Emerging Issues Task Force Issue No. 96-18, Accounting for Equity
Instruments that are Issued to Other than Employees.

Shipping and Handling Costs

Substantially all costs of shipping and handling of products to customers
are included in selling, general and administrative expense. Shipping and
handling costs for fiscal 2002, 2001 and 2000 were approximately $3.7
million,
$2.8 million and $2.5 million, respectively.

Research and Development Costs and Accounting for Strategic Collaborations

All research and development costs, including payments related to products
under development, and research consulting agreements, are expensed as
incurred. The Company makes up-front, non-refundable payments to third parties
for new technologies and for research and development work which has been
completed. These up-front payments may be expensed at the time of payment
depending on the nature of the payment made.

The Companys policy on accounting for costs of strategic collaborations
determines the timing of the recognition of certain development costs. In
addition, this policy determines whether the cost is classified as development
expense or capitalized as an asset. Management is required to form judgments
with respect to the commercial status of such products in determining whether
development costs meet the criteria for immediate expense or capitalization.

Income Taxes

Deferred income tax assets and liabilities are established for temporary
differences between the financial and income tax basis of our assets and
liabilities at enacted tax rates expected to be in effect when the assets and
liabilities are realized or settled. A valuation allowance is established as a
reduction of deferred income tax assets when it is concluded that it is more
likely than not that the asset will not be realized. During fiscal 2002, a net
deferred tax asset was recorded on the consolidated balance sheet related to
certain net operating loss carryforwards attributable to the Companys merger
with Ascent. The annual utilization of the Ascent net operating loss
carryforwards is limited for tax purposes, and the Company has only recorded
the amount expected to be recovered through 2021.

Earnings Per Share

Basic and diluted earnings per common share are calculated in accordance
with the requirements of Statement of Financial Accounting Standards No. 128,
Earnings Per Share. The contingently convertible debt has no impact on
diluted earnings per share until all conditions necessary for issuance have
been satisfied.

Use of Estimates and Risks and Uncertainties

The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles in the United States requires
management to make estimates and assumptions that affect the amounts reported
in the consolidated financial statements and accompanying notes. Actual results
could differ from those estimates based upon future events, which could
include, among other risks, changes in the regulations governing the manner in
which the Company sells its products, changes in the health care environment
and the reliance on contract manufacturing services.

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

Fair Value of Financial Instruments

The carrying amount of cash and cash equivalents, short-term investments,
accounts receivable, accounts payable and accrued liabilities reported in the
consolidated balance sheets approximates fair value because of the immediate or
short-term maturity of these financial instruments. The fair market value of
the Companys long-term debt is estimated based on market quotations at year
end. The fair market value approximates $388.8 million at June 30, 2002.

Recently Issued Accounting Standards

In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141, Business Combinations
(SFAS No. 141), and No. 142, Goodwill and Other Intangible Assets (SFAS
No. 142). Under the new rules, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized, but will be subject to annual
impairment tests in accordance with the statements. Other intangible assets
will continue to be amortized over their useful lives. The Company adopted
SFAS No. 141 on July 1, 2001, and is required to adopt SFAS No. 142 on July 1,
2002. The Company is currently reviewing the impact of SFAS No. 142 and will be
performing a fair-value analysis at a later date in connection with the
adoption of SFAS No. 142 on July 1, 2002. During the quarter ended December
31, 2002, the Company will complete the transitional goodwill impairment test.
The Company has not yet determined the date of the annual goodwill impairment
test. The Company does not expect to record an impairment charge upon
completion of the transitional goodwill impairment test or next annual
impairment test, but there can be no assurance that at the time the tests are
completed an impairment charge may not be recorded.

In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. This statement establishes a
single accounting model for long-lived assets to be disposed of by sale and
resolves significant implementation issues related to SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of. SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001 with earlier adoption encouraged. The Company is currently
evaluating the impact of adopting SFAS No. 144 and have not yet determined the
effect, if any, such adoption would have on the results of operations or our
financial position.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs incurred in a Restructuring) and must be applied beginning January 1,
2003. SFAS No. 146 requires that a liability for a cost associated with an
exit or disposal plan be recognized when the liability is incurred rather than
when the exit or disposal plan is approved. The Company is currently
evaluating the impact of this adoption.

NOTE 3. CHANGE IN ESTIMATE

In the first quarter of fiscal 2002, the Company changed the estimated
useful life for certain intangible assets from 20-25 years to 40 years. These
changes in estimate are based on managements determination that the products
related to these intangible assets appear to have longer useful lives than
originally estimated. There is no cumulative effect for this change. The
effect of this change on net income for fiscal 2002 was to increase net income
by approximately $958,000 or $0.03 per diluted common share.

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NOTE 4. SEGMENT AND PRODUCT INFORMATION

The Company operates in one significant business segment:
Pharmaceuticals. The Companys current pharmaceutical franchises are divided
between the Dermatological and Non-Dermatological fields. The Dermatological
field represents products for the treatment of Acne and Acne-related
dermatological conditions and Non-acne dermatological conditions. The
Non-Dermatological field represents products for the treatment of Asthma and
Urea Cycle Disorder. The Acne and Acne-related dermatological product lines
include DYNACIN®, PLEXION® and TRIAZ®. The Non-acne dermatological product
lines include ESOTERICA®, LIDEX®, LOPROX®, LUSTRA®, OMNICEF®, OVIDE®, SYNALAR®
and TOPICORT®. The Non-Dermatological product lines include BUPHENYL® and
ORAPRED®.

The Companys pharmaceutical products, with the exception of BUPHENYL®,
are promoted to dermatologists, podiatrists and pediatricians. Such products
are often prescribed by physicians outside these three specialties; including
family practitioners, general practitioners, primary-care physicians, plastic
surgeons and OB/GYNs, as well as hospitals, government agencies and others.
All products, with the exception of BUPHENYL®, are sold primarily to
wholesalers and retail chain drug stores. BUPHENYL® is primarily sold directly
to hospitals and pharmacies. During the last three fiscal years, four
wholesalers accounted for the following portions of the Companys net revenues:

|                  |  |             |      |             |  |             |      |   |  |  |      |  
|----------------- |  | ----------- | ---- | ----------- |  | ----------- | ---- | - |  |  | ---- | -
|                  |  | Fiscal 2002 |      | Fiscal 2001 |  | Fiscal 2000
|                  |  |             |      |             |  |            
|Quality King      |  |             | 26.7 | %           |  |             | 10.3 | % |  |  | 11.3 | %
|                 
|                 
|                 
|                 
|Cardinal          |  |             | 22.4 | %           |  |             | 22.2 | % |  |  | 21.0 | %
|                 
|                 
|                 
|                 
|McKesson          |  |             | 19.4 | %           |  |             | 18.0 | % |  |  | 18.1 | %
|                 
|                 
|                 
|                 
|AmerisourceBergen |  |             | 11.1 | %           |  |             | *    |   |  |  | 10.2 | %



---

|* |  | less than 10.0%
|- |  | ---------------

The percentage of net revenues for each of the product categories is as
follows:

|                                              |                    |  |                            |     |      |  |      |     |   |  |    |     |  
|--------------------------------------------- | ------------------ |  | -------------------------- | --- | ---- |  | ---- | --- | - |  | -- | --- | -
|                                              |                    |  | FISCAL YEAR ENDED JUNE 30,
|                                              |                    |  |                           
|                                              |                    |  | 2002                       |     | 2001 |  | 2000
|                                              |                    |  |                            |     |      |  |     
|Acne and acne-related dermatological products |                    |  | 43                         | %   |      |  | 48   | %   |   |  | 51 | %  
|                                             
|                                             
|                                             
|                                             
|Non-acne dermatological products              |                    |  | 34                         |     |      |  | 41   |     |   |  | 37 |    
|                                             
|                                             
|                                             
|                                             
|Non-dermatological products                   |                    |  | 23                         |     |      |  | 11   |     |   |  | 12 |    
|                                              |                    |  |                            |     |      |  |      |     |   |  |    |    
|                                              | Total net revenues |  |                            | 100 | %    |  |      | 100 | % |  |    | 100 | %
|                                              |                    |  |                            |     |      |  |      |     |   |  |    |    

NOTE 5. STRATEGIC COLLABORATIONS

On June 26, 2002, Medicis entered into an exclusive strategic alliance
with aaiPharma, Inc. (aaiPharma) for the development, commercialization and
license of a key dermatologic product. Medicis made an initial payment of $7.7
million to aaiPharma and has
potential additional payments to be made upon the successful completion of various
development milestones. Successful completion of these developmental
milestones will result in future charges to research and development expense
which could total as much as $8.1 million. The $7.7 million
payment was recorded as a charge to research and development expense during
the fourth quarter of fiscal 2002.

In January 2001, the Company entered into an arrangement with a foreign
public company to develop certain potential products for future
sale. Under terms of the arrangement the Company paid $3.0 million and had the
right to terminate the arrangement and receive its $3.0 million back subject to
certain conditions. During 2002, the Company notified this party that it
had elected to discontinue the arrangement. Under the terms of the original
contract this party is to return the funds within 180 days of the
notification. Such amounts are included in other current assets and are due in
October 2002. The Company has not received any indication from this

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party that such return of funds will not be forthcoming. The Company has
also reviewed the terms of the arrangements with legal counsel and based on
that review believes the funds will be returned to the Company.
Should the financial condition of this party change in the future, or
should the legal status of the arrangement be assessed ultimately in a
different manner, future reserves may be required with respect to the
recoverability of the amounts, and result in future charges.

On May 10, 2001, Abbott Laboratories, Inc. (Abbott) and Medicis entered
into an exclusive agreement for Medicis to promote OMNICEF® capsules. OMNICEF®,
a cephalosporin antibiotic, is for the treatment of uncomplicated skin and skin
structure infections. Medicis will promote OMNICEF® in the U.S. market to
dermatologists and podiatrists and will receive revenue generated in these
categories on a per prescription filled basis. Abbott will continue to promote
OMNICEF® to primary care physicians and pediatricians. The agreement expires in
2013.

On August 15, 2000, Medicis entered into a multi-year development,
commercialization and license agreement covering Corixa Corporations
(Corixa) novel psoriasis immunotherapeutic product, PVAC. Under terms of the
agreement, Medicis made a non-refundable payment to Corixa of $17.0 million at
closing, with additional potential development milestone payments of $35
million, and potential commercialization and cumulative net sales threshold
milestone payments of $55 million. The $17.0 million payment was
recorded as a charge to research and development expense during the
first quarter of fiscal 2001. Additionally, upon regulatory approval and
commercial sale of the product, Medicis will purchase inventory from Corixa and
pay royalties on net sales of the product.

NOTE 6. MERGER OF ASCENT PEDIATRICS, INC.

On November 15, 2001, the Company completed its merger with Ascent,
purchasing all of the outstanding capital stock and retiring the indebtedness
of Ascent for consideration of approximately $60.0 million in cash plus up to
an additional $10.0 million per year for each of the first five years following
closing based upon reaching certain sales threshold milestones on the Ascent
products for each twelve month period ended November 15, 2006. The fixed
purchase price of $60.0 million was allocated as follows (amounts in
thousands):

|                                    |  |   |        |  |  |  |  |  |  |  |  | 
|----------------------------------- |  | - | ------ |  |  |  |  |  |  |  |  | 
|Intangible assets  core technology |  | $ | 2,049  | 
|                                   
|                                   
|                                   
|                                   
|Intangible assets  trademarks      |  |   | 2,868  | 
|                                   
|                                   
|                                   
|                                   
|Intangible assets  customer list   |  |   | 165    | 
|                                   
|                                   
|                                   
|                                   
|Deferred tax assets                 |  |   | 25,552 | 
|                                   
|                                   
|                                   
|                                   
|Goodwill                            |  |   | 29,101 | 
|                                   
|                                   
|                                   
|                                   
|In-process research and development |  |   | 6,217  | 
|                                   
|                                   
|                                   
|                                   
|Net assets acquired                 |  |   | 748    | 

Net assets acquired of $748,000 consists of current assets and net fixed
assets of $5.2 million and $148,000, respectively, offset by current
liabilities of $4.6 million. Current assets consisted primarily of cash,
accounts receivable, inventories and prepaid assets. Net fixed assets consisted
primarily of computers. Current liabilities consisted primarily of accounts
payable, accrued payroll and accrued commissions. The contingent portions of
the purchase price will be added to goodwill when and if threshold milestones
have been achieved or at such time that a payment is deemed to be probable. As
of June 30, 2002, the first-year threshold had been deemed to be probable, and
$10.0 million was recorded as additional goodwill and is payable to the selling
shareholders. The Company additionally incurred approximately $6.7 million of
costs related to the transaction, consisting of approximately $3.4 million of
professional services, including finder fees, $0.9 million of severance costs and $2.4 million of other
costs. These costs were treated as additional direct costs of acquisition and
capitalized.

The value assigned to in-process research and development was determined
by an independent valuation analysis performed by a firm other than our
independent auditors. As of the valuation date, there were two projects that
were considered to be in-process. The values of the projects were determined
based on analyses of estimated cash flows to be generated by the products that
are expected to result from the in-process projects. These cash flows were
estimated by forecasting total revenues expected from these products, then
deducting appropriate operating expenses, cash flow adjustments and
contributory asset returns to establish a forecast of net return on the
in-process technology. These net returns were substantially reduced to take
into account the time value of money and the risks associated with the inherent
difficulties and uncertainties in the FDA approval process. The above analysis
resulted in $6.2 million of value assigned to acquired in-process research and
development, which was expensed on the

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acquisition date in accordance with generally accepted accounting principles.
Medicis management believes the assumptions used in valuing in-process
research and development are reasonable, but are inherently uncertain, and no
assurance can be given that the assumptions made will occur.

Ascent focuses on the marketing and sale of prescription products to U.S.
based pediatricians. Ascents portfolio of pediatric specialty pharmaceutical
products currently includes ORAPRED® (prednisolone sodium phosphate), an oral
liquid steroid for children with asthma and other respiratory inflammatory
conditions; PRIMSOL® (trimethoprim HCI), an antibiotic oral solution for
children with acute otitis media, or middle ear infections; and PEDIAMIST®, an
over-the-counter saline nasal mist, as well as certain projects that are under
development. Sales of ORAPRED® comprise the majority of the Ascent product
sales. Ascent currently supports these products with a dedicated sales force,
numbering approximately 75 sales representatives and sales management. The
sales force also now markets other core dermatology products to pediatric
physicians.

The merger was accounted for as a purchase business combination in
accordance with SFAS No. 141, and accordingly, the results of Ascents
operations are included in our consolidated results from the date of the
merger.

The following unaudited pro forma data sets forth the combined
consolidated results of operations for fiscal years 2002 and 2001 as if the
merger had taken place on July 1, 2000. The pro forma data gives effect to
actual operating results prior to the merger, with adjustments for interest
income, interest expense, intangible amortization expense and income taxes. No
effect has been given to cost reductions or operating synergies in this
presentation.

| |  |                                     |  |   |         |                                          |  |      |         |  |  | 
| |  | ----------------------------------- |  | - | ------- | ---------------------------------------- |  | ---- | ------- |  |  | 
| |  |                                     |  |   |         | FISCAL YEAR ENDED                       
| |  |                                     |  |   |         | JUNE 30,                                
| |  |                                     |  |   |         |                                         
| |  |                                     |  |   |         | 2002                                     |  | 2001
| |  |                                     |  |   |         |                                          |  |     
| |  |                                     |  |   |         | (in thousands, except per share amounts)
| |  |                                     |  |   |         |                                          |  |      |         |  |  | 
|
|
|
|
| |  | Net revenues                        |  | $ | 219,072 |                                          |  | $    | 173,346 | 
|
|
|
|
| |  | Net income                          |  |   | 42,668  |                                          |  |      | 30,848  | 
| |  |                                     |  |   |         |                                          |  |      |         |  |  | 
| |  | Basic net
income per common share   |  | $ | 1.41    |                                          |  | $    | 1.02    | 
| |  |                                     |  |   |         |                                          |  |      |         |  |  | 
| |  | Diluted net
income per common share |  | $ | 1.36    |                                          |  | $    | 0.97    | 
| |  |                                     |  |   |         |                                          |  |      |         |  |  | 

Pro forma net income for fiscal 2002 includes $6.4 million of
merger-related costs incurred by Ascent prior to the merger which consist
primarily of transaction brokers fees ($3,000,000); retention payments
($1,675,000); and legal, accounting, consulting and other fees ($1,725,000).
The unaudited pro forma results are provided for information purposes only and
do not purport to represent what the results of operations would actually have
been had the transaction in fact occurred as of the dates indicated, or to
project the results of operations for any future period.

NOTE 7. PRODUCT LINE ACQUISITION

On September 21, 1999, the Company purchased VECTRIN®, a branded
minocycline HCl product line, and ownership of its Abbreviated New Drug
Application (ANDA) from Warner Chilcott, plc (Warner Chilcott). Under
terms of the agreement, the Company paid Warner Chilcott $11.1 million cash at
closing and paid an additional $2.2 million and $2.0 million in contingent
payments fiscal 2001 and 2000, respectively. The Company accounted for this
transaction as an acquisition of an intangible asset.

NOTE 8: LICENSE OF PRODUCTS TO BIOGLAN PHARMA PLC

In February 1999, the Company licensed to Bioglan the products OCCLUSAL®,
PENTRAX® and SALAC®. Under the agreement, the Company received quarterly
license payments for three years with a buyout

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##### Table of Contents



option of $15.5 million at the end of the term. Bioglan did not make the
final license payment due October 1, 2001. Bioglan also notified the Company
that it would not exercise the $15.5 million buyout option and returned the
rights to the licensed products to Medicis. Medicis considered these amounts
due and sought payment through arbitration with Bioglan, as provided for in the
contract.

Bioglan is in administration in the United Kingdom with an expected
liquidation at the completion of the administration (similar to a bankruptcy in
the United States without a reorganization). Medicis negotiated with the
Bioglan administrator for claims against Bioglan for legal fees, license
payments and losses due to not exercising the final buyout option. A settlement
agreement was reached between Medicis and Bioglan as a result of the
arbitration process, where a specific amount was determined to be owed to
Medicis for the outstanding license payment and a portion of the buyout option.
This amount will be recognized as an unsecured creditor claim to be submitted
in the subsequent liquidation or other insolvency process of Bioglan. Given
the current financial condition of Bioglan, full or partial recovery of these
claims is uncertain. The Company has not established any receivables on its
balance sheet related to the amounts due. The Company has $4.8 million of
product rights remaining on its balance sheet related to these products.
Management believes these intangible assets are not impaired based on current
and expected sales volumes of the products, whether they are made available for
commercial sale by Medicis or are ultimately sold to a third party.

NOTE 9. SHORT-TERM INVESTMENTS

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

The following is a summary of available-for-sale securities (amounts in
thousands):

|                          |  |               |         |       |  |            |       |            |  |       |    |  |  |   |         | 
|------------------------- |  | ------------- | ------- | ----- |  | ---------- | ----- | ---------- |  | ----- | -- |  |  | - | ------- | 
|                          |  | JUNE 30, 2002
|                          |  |              
|                          |  |               |         |       |  | Gross      |       | Gross      |  | Gross
|                          |  |               |         |       |  | Unrealized |       | Unrealized |  | Fair 
|                          |  | Cost          |         | Gains |  | Losses     |       | Value     
|                          |  |               |         |       |  |            |       |           
|U.S. corporate securities |  | $             | 24,902  |       |  | $          | 133   |            |  | $     | 7  |  |  | $ | 25,028  | 
|                         
|                         
|                         
|                         
|Other debt securities     |  |               | 251,781 |       |  |            | 1,561 |            |  |       | 3  |  |  |   | 253,339 | 
|                          |  |               |         |       |  |            |       |            |  |       |    |  |  |   |         | 
|Total securities          |  | $             | 276,683 |       |  | $          | 1,694 |            |  | $     | 10 |  |  | $ | 278,367 | 
|                          |  |               |         |       |  |            |       |            |  |       |    |  |  |   |         | 

|                          |  |               |         |       |  |            |       |            |  |       |    |  |  |   |         | 
|------------------------- |  | ------------- | ------- | ----- |  | ---------- | ----- | ---------- |  | ----- | -- |  |  | - | ------- | 
|                          |  | JUNE 30, 2001
|                          |  |              
|                          |  |               |         |       |  | Gross      |       | Gross      |  | Gross
|                          |  |               |         |       |  | Unrealized |       | Unrealized |  | Fair 
|                          |  | Cost          |         | Gains |  | Losses     |       | Value     
|                          |  |               |         |       |  |            |       |           
|U.S. corporate securities |  | $             | 22,580  |       |  | $          | 160   |            |  | $     | 1  |  |  | $ | 22,739  | 
|                         
|                         
|                         
|                         
|Other debt securities     |  |               | 157,206 |       |  |            | 971   |            |  |       | 17 |  |  |   | 158,160 | 
|                          |  |               |         |       |  |            |       |            |  |       |    |  |  |   |         | 
|Total securities          |  | $             | 179,786 |       |  | $          | 1,131 |            |  | $     | 18 |  |  | $ | 180,899 | 
|                          |  |               |         |       |  |            |       |            |  |       |    |  |  |   |         | 

F-17



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##### Table of Contents



During the years ended June 30, 2002 and 2001, the gross realized gains on
sales of available-for-sale securities totaled $1,663,672 and $1,455,758,
respectively, and the gross realized losses totaled $22,661 and $131,200
respectively. Such amounts of gains and losses are determined based on the
specific identification method. The net adjustment to unrealized gains during
fiscal 2002 and fiscal 2001 on available-for-sale securities included in
stockholders equity totaled $353,567 and $261,331, respectively. The amortized
cost and estimated fair value of the available-for-sale securities at June 30,
2002, by maturity, are shown below (amounts in thousands). Expected maturities
will differ from contractual maturities because the issuers of the securities
may have the right to prepay obligations without prepayment penalties, and the
Company views its available-for-sale securities as available for current
operations.

|                                     |  |               |         |            |  |           |         | 
|------------------------------------ |  | ------------- | ------- | ---------- |  | --------- | ------- | 
|                                     |  | JUNE 30, 2002
|                                     |  |              
|                                     |  |               |         |            |  | Estimated
|                                     |  | Cost          |         | Fair Value
|                                     |  |               |         |           
|Available-for-sale                   |  |               |         |            |  |           |         | 
|                                    
|                                    
|                                    
|                                    
|Due in one year or less              |  | $             | 127,749 |            |  | $         | 128,335 | 
|                                    
|                                    
|                                    
|                                    
|Due after one year through two years |  |               | 118,459 |            |  |           | 119,172 | 
|                                    
|                                    
|                                    
|                                    
|Due after two years                  |  |               | 30,475  |            |  |           | 30,860  | 
|                                     |  |               |         |            |  |           |         | 
|                                     |  | $             | 276,683 |            |  | $         | 278,367 | 
|                                     |  |               |         |            |  |           |         | 

NOTE 10. DEBT

The Company has a revolving line of credit facility of up to $25.0 million
from Wells Fargo Bank, N.A. The facility may be drawn upon by the Company, at
its discretion, and is collateralized by principal assets of the Company. The
outstanding balance of the credit facility bears interest at a floating rate of
150 basis points in excess of the 30-day London Interbank Offered Rate and
expires in November 2002. The agreement requires the Company to comply with
certain covenants, including covenants relating to the Companys financial
condition and results of operation. The Company has not drawn on this credit
facility. The Company expects to renew the line of credit in November 2002.

NOTE 11. CONTINGENT CONVERTIBLE SENIOR NOTES

On June 4, 2002 and June 10, 2002, the Company sold $400.0 million
aggregate principal amount of its 2.5% Contingent Convertible Notes Due 2032 in
private transactions. The Notes bear interest at a rate of 2.5% per annum,
which is payable on June 4 and December 4 of each year, beginning on December
4, 2002. The Company has accrued approximately one month of interest expense
as of June 30, 2002. The Company also will pay contingent interest at a rate
equal to 0.5% per annum during any six-month period, with the initial six-month
period commencing June 4, 2007, if the average trading price of the Notes
reaches certain thresholds. The Notes will mature on June 4, 2032.

The Company may redeem some or all of the Notes at any time on or after
June 11, 2007, at a redemption price, payable in cash, of 100% of the principal
amount of the Notes, plus accrued and unpaid interest. Holders of the Notes
may require the Company to repurchase all or a portion of their Notes on June
4, 2007, 2012 and 2017, and upon a change in control, as defined in the
indenture governing the Notes, at 100% of the principal amount of the Notes,
plus accrued and unpaid interest to the date of the repurchase, payable in
cash.

The Notes are convertible, at the holders option, prior to the maturity
date into shares of the Companys Class A common stock in the following
circumstances:



| |  |  | during any quarter commencing after June 30, 2002, if
the closing price of the Companys Class A common stock over a
specified number of trading days during the previous quarter is
more than 110% of the conversion price of the Notes on the last
trading day of the previous quarter. The Notes are initially
convertible at a conversion price of $58.10 per share, which is
equal to a conversion rate of approximately 17.217 shares per
$1,000 principal amount of Notes, subject to adjustment;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-18



---



##### Table of Contents





| |  |  | if the Company has called the Notes for redemption;                                                                                                                                                                                                                                                                                                                                                                                                        
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | during the five trading day period immediately
following any nine consecutive day trading period in which the
trading price of the Notes per $1,000 principal amount for each
day of such period was less than 95% of the product of the
closing sale price of the Companys Class A common stock on that
day multiplied by the number of shares of the Companys Class A
common stock issuable upon conversion of $1,000 principal amount
of the Notes; or
|
| |  |  | upon the occurrence of specified corporate
transactions.                                                                                                                                                                                                                                                                                                                                                                                                   

The Notes, which are unsecured, do not contain any restrictions on the
payment of dividends, the incurrence of additional indebtedness or the
repurchase of the Companys securities and do not contain any financial
covenants.

The Company incurred $12.6 million of fees and other origination costs
related to the issuance of the Notes. The Company is amortizing these costs
over a five year period.

NOTE 12. COMMITMENTS AND CONTINGENCIES

Occupancy Arrangements

The Company presently occupies approximately 49,000 square feet of office
space, at an average annual expense of $1,346,000, under a lease agreement that
expires in February 2010. The lease contains certain rent escalation clauses
and, upon expiration, can be renewed for two additional periods of five years
each. Rent expense was approximately $1.4 million,
$1.4 million and $1.0 million in
fiscal 2002, 2001 and 2000, respectively. The Company relocated to its present
office space in Scottsdale, Arizona, in February 2000. At June 30, 2002,
approximate future lease payments under the operating lease are as follows
(amounts in thousands):

|                     |  |   |        | 
|-------------------- |  | - | ------ | 
|YEAR ENDING JUNE 30, |  |   |        | 
|                     |  |   |        | 
|2003                 |  |   | 1,285  | 
|                    
|                    
|                    
|                    
|2004                 |  |   | 1,329  | 
|                    
|                    
|                    
|                    
|2005                 |  |   | 1,362  | 
|                    
|                    
|                    
|                    
|2006                 |  |   | 1,409  | 
|                    
|                    
|                    
|                    
|2007                 |  |   | 1,409  | 
|                    
|                    
|                    
|                    
|Thereafter           |  |   | 3,641  | 
|                     |  |   |        | 
|                     |  | $ | 10,435 | 
|                     |  |   |        | 

Medicis Canada, Inc., a wholly owned subsidiary, presently leases
approximately 7,500 square feet of office and warehouse space in St-Laurent,
Quebec, Canada, under a lease agreement that expires in April 2005.

Research and Development and Consulting Contracts

The Company has various consulting agreements with certain scientists in
exchange for the assignment of certain rights and consulting services. At June
30, 2002, the Company had approximately $867,300 of commitments (solely
attributable to the Chairman of the Central Research Committee of the Company)
payable over the remaining five years under an agreement that is cancelable by
either party under certain conditions.

Other

On
November 9, 2001, prior to its merger with Medicis, Ascent received notice that Triumph-Connecticut
Limited Partnership and related parties had brought a civil action against it
in Massachusetts. In the action, the Triumph group claims that the execution
by Ascent of the merger agreement and the consummation of the merger without
the consent of the Triumph group or the payment to the Triumph group of a
specified amount breaches the terms of a January 1997 securities purchase
agreement, the terms of warrants issued to the Triumph group, an implied
covenant of good faith and fair dealing, and certain deceptive trade laws. The
Triumph group is seeking damages in an amount not less than

F-19



---



##### Table of Contents



$22.1 million, plus treble damages. The Company believes that the claims
of the Triumph group are without merit and we intend to vigorously contest and
defend this suit.

The Company and certain of its subsidiaries are parties to other actions
and proceedings incident to their businesses, including litigation regarding
its intellectual property, challenges to the enforceability or validity of its
intellectual property and claims that its products infringe on the intellectual
property rights of others.

The Company believes that the ultimate outcome based on the information
available to the Company with respect to any of these matters is either covered
by insurance and/or established reserves, or in some cases rights of offset,
and in the aggregate should not have a material adverse effect on its business,
financial position or results of operations. There can be no assurance,
however, that an adverse determination on any action or proceeding will not
have a material adverse effect on the Companys business, financial condition
and results of operations, or that the Company will be able to realize the full
amount of any indemnification obligation that any person may have to the
Company or that any such indemnification will adequately cover any liability.

NOTE 13. INCOME TAXES

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

|                                      |                                                              |   |          |       |           |   |         |        |           |   |       |       |   |   |        |        |  
|------------------------------------- | ------------------------------------------------------------ | - | -------- | ----- | --------- | - | ------- | ------ | --------- | - | ----- | ----- | - | - | ------ | ------ | -
|                                      |                                                              |   | JUNE 30,
|                                      |                                                              |   |         
|                                      |                                                              |   | 2002     |       | 2001     
|                                      |                                                              |   |          |       |          
|                                      |                                                              |   | Current  |       | Long-term |   | Current |        | Long-term
|                                      |                                                              |   |          |       |           |   |         |        |          
|Deferred tax assets:                  |                                                              |   |          |       |           |   |         |        |           |   |       |       |   |   |        |       
|                                     
|                                     
|                                     
|                                     
|                                      | Net operating loss carryforwards                             |   | $        |      |           |   | $       | 32,724 |           |   | $     |      |   |   | $      | 95     |  
|                                     
|                                     
|                                     
|                                     
|                                      | Reserves and liabilities                                     |   |          | 7,961 |           |   |         |       |           |   |       | 5,161 |   |   |        |       |  
|                                     
|                                     
|                                     
|                                     
|                                      | Research
and development credits                             |   |          |      |           |   |         | 1,246  |           |   |       |      |   |   |        |       |  
|                                     
|                                     
|                                     
|                                     
|                                      | Valuation allowance                                          |   |          |      |           |   |         | (8,132 | )         |   |       |      |   |   |        |       |  
|                                      |                                                              |   |          |       |           |   |         |        |           |   |       |       |   |   |        |       
|                                      |                                                              |   | 7,961    |       |           |   | 25,838  |        |           |   | 5,161 |       |   |   | 95     |       
|                                     
|                                     
|                                     
|                                     
|Deferred tax liabilities:             |                                                              |   |          |       |           |   |         |        |           |   |       |       |   |   |        |       
|                                     
|                                     
|                                     
|                                     
|                                      | Unrealized losses on securities                              |   |          | (573  | )         |   |         |       |           |   |       | (356  | ) |   |        |       |  
|                                     
|                                     
|                                     
|                                     
|                                      | Excess of net book value over tax basis
of intangible assets |   |          |      |           |   |         | (8,268 | )         |   |       |      |   |   |        | (4,927 | )
|                                      |                                                              |   |          |       |           |   |         |        |           |   |       |       |   |   |        |       
|Net deferred tax assets (liabilities) |                                                              | $ | 7,388    |       |           | $ | 17,570  |        |           | $ | 4,805 |       |   | $ | (4,832 | )     
|                                      |                                                              |   |          |       |           |   |         |        |           |   |       |       |   |   |        |       

During fiscal 2002, the Company merged with Ascent in a taxable stock
transaction. As a result of the Ascent merger, net deferred tax assets were
recorded. The deferred tax assets recorded relate primarily to Ascents
reserves, net operating loss carryovers, capitalized research and
experimentation costs, and research and experimentation credits. The deferred
tax liabilities related to Ascents intangible assets that have no tax basis.
All of the net operating losses and research and experimentation credits of
Ascent are limited for tax purposes under Internal Revenue Code sections 382
and 383 which limit the annual utilization of tax attributes after an ownership
change.

At June 30, 2002, the Company has federal net operating loss carryforwards
of approximately $75 million that begin expiring in varying amounts in the
years 2008 through 2021 if not previously utilized. Additionally, the Company
has research and experimentation credits of $1.2 million that begin to expire
in 2008 if not utilized. All of the net operating loss and research and
experimentation carryforwards are attributable to the Companys merger with
Ascent. As such, they are limited for tax purposes under Internal Revenue Code
sections 382 and 383 that limit the annual utilization of net operating losses
and income tax credits, respectively.

The Company recorded a deferred tax asset valuation allowance of $8.1
million during fiscal 2002 since there is less than a 50% chance that the tax
benefits of a portion of Ascents net operating loss and credit carryforwards
will be realized due to the limitations described above. Subsequent tax
benefits resulting from

F-20



---



##### Table of Contents



realization of the loss carryforwards and research and experimentation
credits will be applied to reduce the valuation allowance and goodwill related
to the merger with Ascent.

During fiscal 2002, the Company recorded $218,000 of deferred taxes
relating to unrealized gains on available-for-sale securities presented in
other comprehensive income in stockholders equity. During fiscal 2001, the
Company recorded $80,000 of deferred taxes relating to unrealized gains on
available-for-sale securities.

During fiscal 2002, 2001 and 2000, the Company made tax payments of
$20.2 million, $8.2 million and $14.8 million respectively.

Components of the provision for income taxes are as follows (amounts in
thousands):

|         |         |       |        |          |        |      |        |        |        |  |        |        |        | 
|-------- | ------- | ----- | ------ | -------- | ------ | ---- | ------ | ------ | ------ |  | ------ | ------ | ------ | 
|         |         |       |        | JUNE 30,
|         |         |       |        |         
|         |         |       |        | 2002     |        | 2001 |        | 2000  
|         |         |       |        |          |        |      |        |       
|Current  |         |       |        |          |        |      |        |        |        |  |        |       
|        
|        
|        
|        
|         | Federal |       | $      | 25,966   |        |      | $      | 18,503 |        |  | $      | 19,849 |       
|        
|        
|        
|        
|         | State   |       |        | 1,693    |        |      |        | 986    |        |  |        | 1,564  |       
|        
|        
|        
|        
|         | Foreign |       |        | 368      |        |      |        | 23     |        |  |        | 27     |       
|         |         |       |        |          |        |      |        |        |        |  |        |       
|         |         |       | 28,027 |          |        |      | 19,512 |        |        |  | 21,440 |       
|         |         |       |        |          |        |      |        |        |        |  |        |       
|Deferred |         |       |        |          |        |      |        |        |        |  |        |       
|        
|        
|        
|        
|         | Federal |       |        | 893      |        |      |        | (482   | )      |  |        | 2,768  |       
|        
|        
|        
|        
|         | State   |       |        | 40       |        |      |        | (125   | )      |  |        | 180    |       
|         |         |       |        |          |        |      |        |        |        |  |        |       
|         |         |       | 933    |          |        |      | (607   | )      |        |  | 2,948  |       
|         |         |       |        |          |        |      |        |        |        |  |        |       
|         |         | Total |        | $        | 28,960 |      |        | $      | 18,905 |  |        | $      | 24,388 | 
|         |         |       |        |          |        |      |        |        |        |  |        |       

Income tax expense for the three years ended June 30, 2002, 2001 and 2000
differs from the amount computed, applying the federal statutory rates as
follows:

|                                                           |  |          |      |      |  |      |      |   |  |  |      |  
|---------------------------------------------------------- |  | -------- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                                                           |  | JUNE 30,
|                                                           |  |         
|                                                           |  | 2002     |      | 2001 |  | 2000
|                                                           |  |          |      |      |  |     
|Statutory federal income tax rate                          |  |          | 35.0 | %    |  |      | 35.0 | % |  |  | 35.0 | %
|                                                          
|                                                          
|                                                          
|                                                          
|State tax rate, net of federal benefit                     |  |          | 1.5  |      |  |      | 0.9  |   |  |  | 1.7  |  
|                                                          
|                                                          
|                                                          
|                                                          
|Tax-exempt interest                                        |  |          | (2.7 | )    |  |      | (3.5 | ) |  |  | (2.3 | )
|                                                          
|                                                          
|                                                          
|                                                          
|Non-deductible
in-process research and development expense |  |          | 2.9  |      |  |      | 0.0  |   |  |  | 0.0  |  
|                                                          
|                                                          
|                                                          
|                                                          
|Other                                                      |  |          | 0.0  |      |  |      | (0.5 | ) |  |  | 1.8  |  
|                                                           |  |          |      |      |  |      |      |   |  |  |      |  
|                                                           |  |          | 36.7 | %    |  |      | 31.9 | % |  |  | 36.2 | %
|                                                           |  |          |      |      |  |      |      |   |  |  |      |  

NOTE 14. STOCK TRANSACTIONS

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

In June 2002, the Company purchased approximately 3.2 million shares of
Class A common stock at an average price of $46.48. This purchase was made in
conjunction with the Companys sale of its $400.0 million Contingent
Convertible Senior Notes, where the Company agreed to purchase shares of its
Class A common stock sold short by purchasers of the Notes concurrently with
the sale of the Notes. The price per share of the purchase of Class A common
stock was equal to the closing sale price of the stock on the trading day on
which the Note offering was priced.

In February 2002, the Company issued 43,946 shares of Class A common stock
upon the conversion of 43,946 shares of Class B common stock by a shareholder
who was not an officer, director or 5% or greater shareholder of Medicis. The
conversion was pursuant to the terms of the Class B common stock and did not
result in the receipt of additional cash consideration by Medicis. The shares
of Class B common stock converted in the

F-21



---



##### Table of Contents



transaction were originally issued to the shareholder in October 1988.
The original issuance and the conversion were made in reliance upon exemptions
from the registration requirements of the Securities Act of 1933 afforded to
transactions not involving a public offering. As a consequence of this
conversion, the number of outstanding shares of Class B common stock decreased
from 422,962 shares to 379,016 shares at June 30, 2002.

In September 2001, the Company purchased 102,000 shares of common stock at
an average price of $42.58 in the open market under a stock repurchase program
that was approved by the Companys Board of Directors in May 1999. This stock
repurchase program provides for the repurchase of up to $75 million of Class A
common stock at such times as management may determine.

In March 2001, the Company purchased approximately 300,000 shares of
common stock at an average price of $33.13 in the open market under the stock
repurchase program.

NOTE 15. DEFERRED COMPENSATION

In July 2001, the Company granted 55,000 restricted shares of Class A
common stock to certain employees. The Company recorded deferred compensation
of $2,577,850, representing the market price of the shares at the date of
grant. The amount of deferred compensation is presented as a reduction of
stockholders equity and is being amortized ratably over the service period of
the employees receiving the grants.

Amortization of deferred compensation was $484,000 for fiscal 2002 and has
been included in selling, general and administrative expense in the
accompanying consolidated statements of income. The Company expects to record
compensation expense related to deferred compensation of approximately $129,000
per quarter through September 30, 2006. Expense with respect to the grants
could be reduced and/or reversed to the extent employees receiving the grants
leave the Company prior to vesting in the award. The vesting period for the
restricted shares begins after the third anniversary of the date of grant.

NOTE 16. STOCK OPTION PLANS

As of June 30, 2002, the Company has four active Stock Option Plans (the
1998, 1996, 1995 and 1992 Plans or, collectively, the Plans). As of June 30,
2002, the 1998, 1996, 1995 and 1992 Plans had the following options
outstanding: 4,082,473; 1,334,237; 76,893; and 74,200, respectively. The Plans
allow the Company to designate options as qualified incentive or non-qualified
on an as-needed basis. Qualified and non-qualified stock options vest over a
period determined at the time the options are granted, ranging from one to five
years, and generally have a maximum term of ten years. Options are granted at
the fair market value on the grant date. Options outstanding at June 30, 2002,
vary in price from $2.32 to $70.75, with a weighted average of $42.15 as is set
forth in the following chart:
F-22Table of Contents

| |  |          |                |             |  |             |           |          |  |             |      |          |  |   |       |         |  |          |         |  |  |   |       | 
| |  | -------- | -------------- | ----------- |  | ----------- | --------- | -------- |  | ----------- | ---- | -------- |  | - | ----- | ------- |  | -------- | ------- |  |  | - | ----- | 
| |  |          |                |             |  |             |           |          |  | Weighted    |      | Weighted |  |   |       |         |  | Weighted
| |  | Range of |                |             |  |             |           | Average  |  | Average     |      |          |  |   |       | Average
| |  | Exercise |                | Number      |  | Contractual |           | Exercise |  | Number      |      | Exercise
| |  | Prices   |                | Outstanding |  | Life        |           | Price    |  | Exercisable |      | Price   
| |  |          |                |             |  |             |           |          |  |             |      |         
| |  | $        | 2.32 - $2.32   |             |  |             | 4,000     |          |  |             | 3.25 |          |  | $ | 2.32  |         |  |          | 4,000   |  |  | $ | 2.32  | 
|
|
|
|
| |  | $        | 2.33 - $22.00  |             |  |             | 1,180,760 |          |  |             | 6.84 |          |  | $ | 21.45 |         |  |          | 362,818 |  |  | $ | 20.20 | 
|
|
|
|
| |  | $        | 22.22 - $28.50 |             |  |             | 698,840   |          |  |             | 6.20 |          |  | $ | 24.45 |         |  |          | 349,272 |  |  | $ | 24.74 | 
|
|
|
|
| |  | $        | 28.59 - $53.50 |             |  |             | 572,242   |          |  |             | 6.66 |          |  | $ | 36.75 |         |  |          | 247,994 |  |  | $ | 32.52 | 
|
|
|
|
| |  | $        | 53.78 - $53.80 |             |  |             | 18,000    |          |  |             | 9.55 |          |  | $ | 53.79 |         |  |          | 0       |  |  | $ | 0.00  | 
|
|
|
|
| |  | $        | 53.90 - $53.90 |             |  |             | 1,208,591 |          |  |             | 9.05 |          |  | $ | 53.90 |         |  |          | 160     |  |  | $ | 53.90 | 
|
|
|
|
| |  | $        | 53.95 - $55.05 |             |  |             | 9,550     |          |  |             | 9.05 |          |  | $ | 54.22 |         |  |          | 270     |  |  | $ | 54.84 | 
|
|
|
|
| |  | $        | 55.25 - $55.25 |             |  |             | 1,592,035 |          |  |             | 8.07 |          |  | $ | 55.25 |         |  |          | 343,400 |  |  | $ | 55.25 | 
|
|
|
|
| |  | $        | 55.40 - $69.13 |             |  |             | 281,385   |          |  |             | 8.93 |          |  | $ | 58.59 |         |  |          | 99,685  |  |  | $ | 61.32 | 
|
|
|
|
| |  | $        | 70.75 - $70.75 |             |  |             | 2,400     |          |  |             | 8.33 |          |  | $ | 70.75 |         |  |          | 480     |  |  | $ | 70.75 | 

A summary of stock options granted within the Plans and related
information for the years ended June 30, 2002, 2001 and 2000 is as follows:

|                         |  |           |           |               |  |       |           |       |  |  |            |   |  |          |       | 
|------------------------ |  | --------- | --------- | ------------- |  | ----- | --------- | ----- |  |  | ---------- | - |  | -------- | ----- | 
|                         |  |           |           |               |  |       |           |       |  |  |            |   |  | Weighted
|                         |  |           |           |               |  |       |           |       |  |  |            |   |  | Average 
|                         |  | Qualified |           | Non-Qualified |  | Total |           | Price
|                         |  |           |           |               |  |       |           |      
|Balance at June 30, 1999 |  |           | 1,493,960 |               |  |       | 1,754,887 |       |  |  | 3,248,847  |   |  | $        | 20.76 | 
|                        
|                        
|                        
|                        
|Granted                  |  |           | 906,337   |               |  |       | 1,084,163 |       |  |  | 1,990,500  |   |  | $        | 23.31 | 
|                        
|                        
|                        
|                        
|Exercised                |  |           | (366,789  | )             |  |       | (461,152  | )     |  |  | (827,941   | ) |  | $        | 12.27 | 
|                        
|                        
|                        
|                        
|Terminated/expired       |  |           | (157,839  | )             |  |       | (48,842   | )     |  |  | (206,681   | ) |  | $        | 24.75 | 
|                         |  |           |           |               |  |       |           |       |  |  |            |   |  |          |       | 
|Balance at June 30, 2000 |  |           | 1,875,669 |               |  |       | 2,329,056 |       |  |  | 4,204,725  |   |  | $        | 23.45 | 
|                        
|                        
|                        
|                        
|Granted                  |  |           | 539,057   |               |  |       | 1,389,668 |       |  |  | 1,928,725  |   |  | $        | 55.57 | 
|                        
|                        
|                        
|                        
|Exercised                |  |           | (350,757  | )             |  |       | (700,253  | )     |  |  | (1,051,010 | ) |  | $        | 21.38 | 
|                        
|                        
|                        
|                        
|Terminated/expired       |  |           | (167,270  | )             |  |       | (47,545   | )     |  |  | (214,815   | ) |  | $        | 36.22 | 
|                         |  |           |           |               |  |       |           |       |  |  |            |   |  |          |       | 
|Balance at June 30, 2001 |  |           | 1,896,699 |               |  |       | 2,970,926 |       |  |  | 4,867,625  |   |  | $        | 36.07 | 
|                        
|                        
|                        
|                        
|Granted                  |  |           | 549,802   |               |  |       | 1,014,684 |       |  |  | 1,564,486  |   |  | $        | 53.73 | 
|                        
|                        
|                        
|                        
|Exercised                |  |           | (281,383  | )             |  |       | (329,622  | )     |  |  | (611,005   | ) |  | $        | 23.53 | 
|                        
|                        
|                        
|                        
|Terminated/expired       |  |           | (186,927  | )             |  |       | (66,376   | )     |  |  | (253,303   | ) |  | $        | 41.70 | 
|                         |  |           |           |               |  |       |           |       |  |  |            |   |  |          |       | 
|Balance at June 30, 2002 |  |           | 1,978,191 |               |  |       | 3,589,612 |       |  |  | 5,567,803  |   |  | $        | 42.15 | 
|                         |  |           |           |               |  |       |           |       |  |  |            |   |  |          |       | 

Options exercisable under the Plans at June 30, 2002 were 1,408,079 with
an average exercisable price of $34.93. During fiscal 2000, 1,875 non-qualified
stock options not subject to the Plans were exercised at a price of $6.47.

F-23



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##### Table of Contents



The Company elected the adoption of the disclosure-only provisions of SFAS
No. 123 in fiscal 1998. In accordance with the provisions of SFAS No. 123, the
Company applies APB No. 25 and related interpretations in accounting for option
grants to employees under its stock option plans. If the Company had elected to
recognize compensation costs based upon the fair value of the options granted
at grant date as prescribed by SFAS No. 123, operating results would have
changed to the pro forma amounts indicated in the table below (in thousands,
except earnings per share):

|                         |                              |   |        |      |      |   |        |      |  |   |        |      | 
|------------------------ | ---------------------------- | - | ------ | ---- | ---- | - | ------ | ---- |  | - | ------ | ---- | 
|                         |                              |   | 2002   |      | 2001 |   | 2000  
|                         |                              |   |        |      |      |   |       
|Net income  as reported |                              | $ | 50,024 |      |      | $ | 40,420 |      |  | $ | 42,994 |     
|                        
|                        
|                        
|                        
|Net income  pro forma   |                              | $ | 35,765 |      |      | $ | 26,841 |      |  | $ | 35,641 |     
|                        
|                        
|                        
|                        
|Diluted earnings         |                              |   |        |      |      |   |        |      |  |   |        |     
|                        
|                        
|                        
|                        
|                         | Per common share as reported |   | $      | 1.59 |      |   | $      | 1.28 |  |   | $      | 1.41 | 
|                        
|                        
|                        
|                        
|                         | Per common share pro forma   |   | $      | 1.14 |      |   | $      | 0.85 |  |   | $      | 1.17 | 

The weighted average fair value of options granted during fiscal 2002,
2001 and 2000 was $17.88, $16.62 and $11.95, respectively.

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

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

|                                |  |         |     |         |  |         |     |   |  |  |     |  
|------------------------------- |  | ------- | --- | ------- |  | ------- | --- | - |  |  | --- | -
|                                |  | 2002    |     | 2001    |  | 2000   
|                                |  |         |     |         |  |        
|Expected dividend yield         |  |         | 0.0 | %       |  |         | 0.0 | % |  |  | 0.0 | %
|                               
|                               
|                               
|                               
|Expected stock price volatility |  |         | 0.4 |         |  |         | 0.5 |   |  |  | 0.5 |  
|                               
|                               
|                               
|                               
|Risk-free interest rate         |  |         | 3.0 | %       |  |         | 5.0 | % |  |  | 5.5 | %
|                               
|                               
|                               
|                               
|Expected life options           |  | 5 Years |     | 5 Years |  | 5 Years

NOTE 17. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share amounts):

|                                                    |                                |                                    |        |          |       |      |        |        |       |   |        |        |       | 
|--------------------------------------------------- | ------------------------------ | ---------------------------------- | ------ | -------- | ----- | ---- | ------ | ------ | ----- | - | ------ | ------ | ----- | 
|                                                    |                                |                                    |        | JUNE 30,
|                                                    |                                |                                    |        |         
|                                                    |                                |                                    |        | 2002     |       | 2001 |        | 2000  
|                                                    |                                |                                    |        |          |       |      |        |       
|Numerator                                           |                                |                                    |        |          |       |      |        |        |       |   |        |       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Net income                     |                                    | $      | 50,024   |       |      | $      | 40,420 |       |   | $      | 42,994 |      
|                                                    |                                |                                    |        |          |       |      |        |        |       |   |        |       
|Denominator for basic net income per common
share   |                                |                                    | 30,268 |          |       |      | 30,134 |        |       |   | 29,029 |       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Effect of dilutive securities: |                                    |        |          |       |      |        |        |       |   |        |        |      
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                | Stock options and restricted stock |        |          | 1,137 |      |        |        | 1,560 |   |        |        | 1,470 | 
|                                                    |                                |                                    |        |          |       |      |        |        |       |   |        |       
|Denominator for diluted net income per common
share |                                |                                    | 31,405 |          |       |      | 31,694 |        |       |   | 30,499 |       
|                                                    |                                |                                    |        |          |       |      |        |        |       |   |        |       
|Basic net income per common share                   |                                | $                                  | 1.65   |          |       | $    | 1.34   |        |       | $ | 1.48   |       
|                                                    |                                |                                    |        |          |       |      |        |        |       |   |        |       
|Diluted net income per common share                 |                                | $                                  | 1.59   |          |       | $    | 1.28   |        |       | $ | 1.41   |       
|                                                    |                                |                                    |        |          |       |      |        |        |       |   |        |       

F-24



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##### Table of Contents



The diluted net income per common share computation for 2002 and 2001
excludes 3,046,663 and 108,457 shares of stock, respectively, which represented
outstanding stock options whose exercise prices were greater than the average
market price of the common shares during the respective fiscal years and were
anti-dilutive. Diluted net income per share as of June 30, 2002 also excludes
6,884,681 shares of common stock issuable upon conversion of the contingent
convertible senior notes based upon those shares underlying common stock price
of $58.10.

NOTE 18. FINANCIAL INSTRUMENTS  CONCENTRATIONS OF CREDIT RISK

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

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

At June 30, 2002 and 2001, three customers comprised approximately 83.8 %
and 54.5%, respectively, of accounts receivable. The Company does not require
collateral from its customers, but performs periodic credit evaluations of its
customers financial condition. Management does not believe a significant
credit risk existed at June 30, 2002.

NOTE 19. DEFINED CONTRIBUTION PLAN

The Company has a defined contribution plan (the Contribution Plan) that
is intended to qualify under Section 401(k) of the Internal Revenue Code. All
employees, except those who have not attained the age of 21, are eligible to
participate in the Contribution Plan. Participants may contribute, through
payroll deductions, up to 20.0% of their basic compensation, not to exceed
Internal Revenue Code limitations. Although the Contribution Plan provides for
profit sharing contributions by the Company, the Company had not made any such
contributions since its inception until April 2002. Beginning in April 2002,
the Company began matching employee contributions at 50% of the first 3% of
basic compensation contributed by the participants. During fiscal 2002, the
Company recognized expense related to matching contributions under the
Contribution Plan of $70,000.

F-25



---



##### Table of Contents



NOTE 20. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The table below lists the quarterly financial information for fiscal 2002
and 2001. All figures are in thousands, except per share amounts, and certain
amounts do not total the annual amounts due to rounding.

|                                    |  |                    |        |                   |  |                          |        |               |  |   |        |  |  |   |        | 
|----------------------------------- |  | ------------------ | ------ | ----------------- |  | ------------------------ | ------ | ------------- |  | - | ------ |  |  | - | ------ | 
|                                    |  |                    |        |                   |  | YEAR ENDED JUNE 30, 2002 |        |               |  |  
|                                    |  |                    |        |                   |  | (FOR THE QUARTERS ENDED) |        |               |  |  
|                                    |  | SEPTEMBER 30, 2001 |        | DECEMBER 31, 2001 |  | MARCH 31, 2002           |        | JUNE 30, 2002
|                                    |  |                    |        |                   |  |                          |        |              
|Net revenues                        |  | $                  | 45,515 |                   |  | $                        | 53,042 |               |  | $ | 56,623 |  |  | $ | 57,628 | 
|                                   
|                                   
|                                   
|                                   
|Gross profit                        |  |                    | 37,874 |                   |  |                          | 44,015 |               |  |   | 47,225 |  |  |   | 47,928 | 
|                                   
|                                   
|                                   
|                                   
|Net income                          |  |                    | 13,781 |                   |  |                          | 8,631  |               |  |   | 15,875 |  |  |   | 11,737 | 
|                                   
|                                   
|                                   
|                                   
|Basic net income
per common share   |  | $                  | 0.46   |                   |  | $                        | 0.28   |               |  | $ | 0.52   |  |  | $ | 0.39   | 
|                                   
|                                   
|                                   
|                                   
|Diluted net income
per common share |  | $                  | 0.44   |                   |  | $                        | 0.27   |               |  | $ | 0.50   |  |  | $ | 0.38   | 

|                                    |  |                    |        |                   |  |                          |        |               |  |   |        |  |  |   |        | 
|----------------------------------- |  | ------------------ | ------ | ----------------- |  | ------------------------ | ------ | ------------- |  | - | ------ |  |  | - | ------ | 
|                                    |  |                    |        |                   |  | YEAR ENDED JUNE 30, 2002
|                                    |  |                    |        |                   |  | (FOR THE QUARTERS ENDED)
|                                    |  | SEPTEMBER 30, 2000 |        | DECEMBER 31, 2000 |  | MARCH 31, 2001           |        | JUNE 30, 2001
|                                    |  |                    |        |                   |  |                          |        |              
|Net revenues                        |  | $                  | 40,254 |                   |  | $                        | 41,367 |               |  | $ | 42,346 |  |  | $ | 43,834 | 
|                                   
|                                   
|                                   
|                                   
|Gross profit                        |  |                    | 32,775 |                   |  |                          | 33,575 |               |  |   | 34,876 |  |  |   | 35,879 | 
|                                   
|                                   
|                                   
|                                   
|Net income                          |  |                    | 517    |                   |  |                          | 12,737 |               |  |   | 13,302 |  |  |   | 13,864 | 
|                                   
|                                   
|                                   
|                                   
|Basic net income
per common share   |  | $                  | 0.02   |                   |  | $                        | 0.42   |               |  | $ | 0.44   |  |  | $ | 0.46   | 
|                                   
|                                   
|                                   
|                                   
|Diluted net income
per common share |  | $                  | 0.02   |                   |  | $                        | 0.40   |               |  | $ | 0.42   |  |  | $ | 0.44   | 

Gross profit does not include amortization of the related intangibles.

F-26



---



##### Table of Contents






SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS

(in thousands)

|                         |                               |            |  |              |       |            |  |                  |       |      |  |  |   |                   |  |  |   |  |  |   |       | 
|------------------------ | ----------------------------- | ---------- |  | ------------ | ----- | ---------- |  | ---------------- | ----- | ---- |  |  | - | ----------------- |  |  | - |  |  | - | ----- | 
|                         |                               |            |  | Balance at   |       | Charged to |  |                  |       |      |  |  |   |                   |  |  |   | 
|                         |                               |            |  | beginning of |       | costs and  |  | Charged to other |       |      |  |  |   | Balance at end of
|Description              |                               | year       |  | expenses     |       | accounts   |  | Deductions       |       | year
|                         |                               |            |  |              |       |            |  |                  |       |     
|Year Ended June 30, 2002 |                               |            |  |              |       |            |  |                  |       |      |  |  |   |                   |  |  |   |  |  |  
|                        
|                        
|                        
|                        
|                         | Deducted from Asset Accounts: |            |  |              |       |            |  |                  |       |      |  |  |   |                   |  |  |   |  |  |   |      
|                        
|                        
|                        
|                        
|                         | Accounts Receivable:          |            |  |              |       |            |  |                  |       |      |  |  |   |                   |  |  |   |  |  |   |      
|                        
|                        
|                        
|                        
|                         |                               | Allowances |  | $            | 5,050 |            |  | $                | 2,345 |      |  |  |  |                   |  |  |  |  |  | $ | 7,395 | 
|                        
|                        
|                        
|                        
|Year Ended June 30, 2001 |                               |            |  |              |       |            |  |                  |       |      |  |  |   |                   |  |  |   |  |  |  
|                        
|                        
|                        
|                        
|                         | Deducted from Asset Accounts: |            |  |              |       |            |  |                  |       |      |  |  |   |                   |  |  |   |  |  |   |      
|                        
|                        
|                        
|                        
|                         | Accounts Receivable:          |            |  |              |       |            |  |                  |       |      |  |  |   |                   |  |  |   |  |  |   |      
|                        
|                        
|                        
|                        
|                         |                               | Allowances |  | $            | 4,190 |            |  | $                | 860   |      |  |  |  |                   |  |  |  |  |  | $ | 5,050 | 
|                        
|                        
|                        
|                        
|Year Ended June 30, 2000 |                               |            |  |              |       |            |  |                  |       |      |  |  |   |                   |  |  |   |  |  |  
|                        
|                        
|                        
|                        
|                         | Deducted from Asset Accounts: |            |  |              |       |            |  |                  |       |      |  |  |   |                   |  |  |   |  |  |   |      
|                        
|                        
|                        
|                        
|                         | Accounts Receivable:          |            |  |              |       |            |  |                  |       |      |  |  |   |                   |  |  |   |  |  |   |      
|                        
|                        
|                        
|                        
|                         |                               | Allowances |  | $            | 3,815 |            |  | $                | 375   |      |  |  |  |                   |  |  |  |  |  | $ | 4,190 | 

S-1



---



##### Table of Contents






Exhibit Index

|            |  |   |  |                                                                                                                                                            |  |  |  |  |  |  |  |  |  |  |  | 
|----------- |  | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  |  |  |  |  | 
|Exhibit No. |  |   |  | Description                                                                                                                                               
|           
|           
|           
|           
|            |  |   |  |                                                                                                                                                           
|           
|           
|           
|           
|10.20       |  | - |  | Medicis Pharmaceutical Corporation 2002 Stock Option Plan (filed herewith)                                                                                
|           
|           
|           
|           
|            |  |   |  |                                                                                                                                                           
|           
|           
|           
|           
|12          |  | - |  | Computation of Ratios of Earnings to Fixed Charges (filed herewith)                                                                                       
|           
|           
|           
|           
|            |  |   |  |                                                                                                                                                           
|           
|           
|           
|           
|21.1        |  | - |  | Subsidiaries (filed herewith)                                                                                                                             
|           
|           
|           
|           
|            |  |   |  |                                                                                                                                                           
|           
|           
|           
|           
|23.1        |  | - |  | Consent of Ernst & Young LLP, Independent Auditors (filed herewith)                                                                                       
|           
|           
|           
|           
|            |  |   |  |                                                                                                                                                           
|           
|           
|           
|           
|24.1        |  | - |  | Power of Attorney See signature page(s)                                                                                                                   
|           
|           
|           
|           
|            |  |   |  |                                                                                                                                                           
|           
|           
|           
|           
|99.1        |  | - |  | Certification of Periodic Financial Reports by the Chief Executive
Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350
(filed herewith)