UNITED STATESSECURITIES AND EXCHANGE COMMISSION  Washington, D.C. 20549


FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2001.
Or
[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to _____.

Commission file number 0-18443

MEDICIS PHARMACEUTICAL CORPORATION(Exact name of registrant as specified in its charter)

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|Delaware                          |  | 52-1574808                          
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|(State of other jurisdiction      |  | (I.R.S. Employer Identification No.)
|of incorporation or organization) |  |                                     

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|8125 North Hayden Road, Scottsdale, Arizona         |  | 85258-2463    
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|(Address of principal executive office)             |  | (Zip Code)    
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|Registrants telephone number, including area code: |  | (602) 808-8800

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|Securities registered pursuant to Section 12(b) of the Act: Class A Common Stock, $0.014 par value
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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 [   ]

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 [   ].

The aggregate market value of the voting stock held on September 20, 2001 by non-affiliates of the
registrant was $1,026,575,610 (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 20, 2001, there were 30,165,251
outstanding shares of Class A Common Stock $0.014 par value and 422,962 shares
of Class B Common Stock $0.014 par value.

Documents incorporated by reference:

Portions of the Proxy Statement for the Registrants 2001 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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PART I

ITEM 1: BUSINESS

Medicis Pharmaceutical Corporation (Medicis or The
Company) is a specialty pharmaceutical company and the leading independent
pharmaceutical company in the United States focusing primarily on the treatment
of dermatological conditions. Medicis offers prescription products and an
over-the-counter (OTC) product, emphasizing the clinical effectiveness,
quality, affordability and cosmetic elegance of its products. Medicis develops
and markets leading products for major segments within dermatology, including
acne, fungal infections, rosacea, hyperpigmentation, photoaging, psoriasis, eczema, skin
and skin-structure infections, seborrheic dermatitis, head lice and cosmesis
(improvement in the texture and appearance of skin). Medicis has built its
business by successfully executing a four-part growth strategy. The Companys
growth strategy includes: (1) expanding sales of existing brands; (2)
launching new products from research and development efforts; (3) acquiring
complementary strategic products, businesses and technologies; and (4)
collaborating with other companies.

Medicis derives a majority of its revenue from sales of its DYNACIN®,
LOPROX®, LUSTRA®, LUSTRA-AF®, and ALUSTRA, PLEXION and PLEXION TS, TRIAZ®,
OVIDE® and BUPHENYL® products (the Key Products).

PRINCIPAL PRODUCTS AND PRODUCT LINES

The Companys primary products include the prescription brands DYNACIN®
(minocycline HCl), LOPROX® (ciclopirox), LUSTRA®, LUSTRA-AF® and ALUSTRA
(hydroquinone), PLEXION and PLEXION TS (sodium sulfacetamide/sulfur), TRIAZ®
(benzoyl peroxide), OVIDE® (malathion) and BUPHENYL® (sodium phenylbutyrate), a
prescription product indicated in the treatment of Urea Cycle Disorder, and the
over-the-counter brand ESOTERICA®.

PRESCRIPTION PHARMACEUTICALS

Medicis focuses its pharmaceutical sales efforts on prescription products
for the treatment of acne, acne-related conditions, rosacea, fungal infections,
psoriasis, seborrheic dermatitis, hyperpigmentation and photodamaged skin,
including the appearance of fine lines and wrinkles. The Companys principal
branded pharmaceutical products are described below.

DYNACIN® is an oral, systemic antibiotic, available in 50-mg., 75-mg. and
100-mg. dosage forms, and is prescribed for the treatment of moderate to severe
acne. DYNACIN® is the number one brand of minocycline prescribed for the
treatment of moderate to 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 schedule of 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 require ingestion on an empty stomach and may increase patient
sensitivity to sunlight, creating a greater risk of sunburn. Moreover, the
other forms of tetracycline, including doxycycline, have been reported to often
cause gastric irritation. 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. The Company believes the retail price of DYNACIN® products is
approximately 30% lower than the average reported retail price of a competing
branded minocycline product, Minocin®, while selling at a price higher than the
average reported retail price of generic minocycline. DYNACIN® was launched in
the second quarter of the fiscal year ended June 30, 1993 with 50-mg. and
100-mg. dosage forms available. The Company launched DYNACIN® in 75-mg. dosage
form in the fourth quarter of the fiscal year ended June 30, 1999 (fiscal
1999). The Company has a manufacturing and supply agreement with Watson
Pharmaceuticals, Inc. (Watson) as successor-in-interest to Schein
Pharmaceutical, Inc. (Schein) for the supply of DYNACIN®. Watson acquired
Schein in August 2000.

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<
P>LOPROX® cream 0.77% and lotion 0.77% are both broad-spectrum prescription
antifungal agents indicated for the topical treatment of tinea pedis, tinea
corporis, tinea cruris, tinea versicolor and cutaneous candidiasis. In the
second quarter of the fiscal year ended June 30, 2000 (fiscal 2000), the
Company received FDA approval to market LOPROX® Gel (0.77% ciclopirox) for the
treatment of seborrheic dermatitis and fungal infections. Currently, LOPROX®
Gel is the only gel approved in the United States for seborrheic dermatitis.
Currently, LOPROX® is the only hydroxypyridone antifungal agent available in
the United States. LOPROX® works with a unique mode of action that has been
shown to have fungistatic and fungicidal properties and enhanced penetration.
The Company believes 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, the Company believes LOPROX® may be a better
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 Company believes it is among the lowest
priced branded prescription topical antifungals. The United States market for
topical antifungal pharmaceuticals reached nearly $600 million in 2000. The
overall market for antifungals in the United States is approximately $1.7
billion annually. The most frequently prescribed topical antifungal products
in addition to LOPROX® include Spectazole®, Nizoral®, Oxistat® and Lotrisone®
(steroid/antifungal combination). LOPROX® was licensed from Aventis Pharma
(Aventis) as successor-in-interest to Hoechst Marion Roussell (HMR) in
November 1998 and re-launched by Medicis in the third quarter of fiscal 1999.
LOPROX® products are manufactured to the Companys specifications and supplied
under an agreement with Aventis.

LUSTRA®,
LUSTRA-AF® and ALUSTRA are internally developed, patented,
topical therapies prescribed for the treatment of ultra-violet 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
a patented vehicle containing glycolic acid in an anti-oxidant complex. LUSTRA®
is second in market share only to LUSTRA-AF®, the leading prescription topical
treatment for dyschromia and hyperpigmentation. In controlled clinical trials
sponsored by the Company in 1998, LUSTRA® demonstrated a reduction in pigmented
lesions in a two-week period with statistically significant performance over
the competing brands Solaquin Forte® and Melanex®. The Company started shipping
LUSTRA® to wholesalers in February 1998. LUSTRA-AF® contains broad-spectrum UVA
and UVB sunscreen agents and was introduced to the market in the fourth quarter
of fiscal 1999. ALUSTRA contains retinol and was announced to the market in
the fourth quarter of the fiscal year ended June 30, 2001 (fiscal 2001).
LUSTRA®, LUSTRA-AF® and ALUSTRA are manufactured in accordance with a
manufacturing agreement with Contract Pharmaceuticals, Limited (Contract
Pharmaceuticals).

PLEXIONand PLEXION TSare internally developed, patent
pending, 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 usually on the nose and cheeks and occasionally on the chin
and forehead. Rosacea affects about 13 million Americans each year and
typically affects fair-skinned adults between the ages of 30 and 50. PLEXION
is appropriate for this population and is designed to be used in conjunction
with other prescription rosacea therapies. The active ingredients in PLEXION
and PLEXION TS are sodium sulfacetamide and sulfur. Sales of products to treat
rosacea in the United States in 2000 were nearly $292 million. PLEXION, the
first and only prescription cleanser indicated for the treatment of rosacea,
was launched by Medicis in the fourth quarter of fiscal 2000 and is available
in 6- and 12-ounce sizes. The topical acne rosacea
market is comprised of products such as MetroGel®, MetroCream® and MetroLotion®. PLEXION TS, a
gentle topical suspension treatment for comedonal acne, was launched by Medicis
in the fourth quarter of fiscal 2001. The Company believes PLEXION and PLEXION
TS are priced comparably to competing brands. The Company has a manufacturing
and supply agreement with Contract Pharmaceuticals for the production of
PLEXION and PLEXION TS.

TRIAZ® is an internally developed, patented, topical therapy prescribed
for the treatment of all forms and varying degrees of acne, and is available as
a gel or cleanser in three concentrations. The combined sales of topically
applied prescription acne products were estimated to be over $1 billion in the
United States in 2000. TRIAZ® is currently the leading branded prescription
benzoyl peroxide product in dermatology. While other topical acne treatments,
including Cleocin-T® and Benzamycin®, are generally effective, TRIAZ® offers
advantages over each product, including improved stability, greater convenience
of use, reduced cost and fewer side effects. The Company

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believes the average reported retail price of TRIAZ® is less than that of
either Cleocin-T® or Benzamycin®. 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. Glycolic acid is believed
by the Company to enhance the effectiveness of benzoyl peroxide by exfoliating
the outer layer of the skin and zinc lactate is believed by the Company to act
to reduce the appearance of inflammation and irritation often associated with
acne. TRIAZ® was developed by the Companys research and development department
and was introduced in the second quarter of the fiscal year ended June 30,
1996. The Company has patents and certain licensed patent rights covering
varying aspects of TRIAZ®. TRIAZ® products are manufactured to the Companys
specifications on a purchase order basis by West Pharmaceutical Services
Lakewood, Inc. (West Pharmaceutical Services) and in accordance with a supply
agreement with Contract Pharmaceuticals.

OVIDE® Lotion, 0.5% is a topical pediculicide indicated for
the treatment of pediculus humanus capitis, or head lice, and their ova and is
available in 2-ounce bottles. Head lice products accounted for $170 million in
sales in 1998 in the United States. Approximately 10 to 12 million Americans,
mostly school-age children, are infested with head lice each year, and a
growing body of evidence indicates significant levels of head lice that are
resistant to currently available OTC treatments like NIX® and RID®. The Company
believes OVIDE® is a prescription alternative to the OTC treatments, offering
both an excellent kill rate and ovicial activity. In addition, in controlled
clinical studies, OVIDE® demonstrated residual activity with 90.4% of patients
still lice-free 7 days after treatment. Until OVIDE®, the only prescription
pediculicide available was lindane. Because of CNS toxicity potential, the FDA
required a labeling change recommending lindanes use only for patients who
have either failed to respond to adequate doses or are intolerant of other
approved therapies. Used as directed, the Company believes OVIDE® provides safe
and effective control of head lice and their ova. The Company introduced OVIDE®
during the fourth quarter of fiscal 1999. OVIDE® is manufactured for the
Company by West Pharmaceutical Services on a purchase order basis.

LIDEX® is a high-potency topical corticosteroid brand prescribed for the
treatment of inflammatory and hyperproliferative skin diseases such as eczema,
psoriasis, atopic dermatitis, poison ivy and other inflammatory skin
conditions. Competing steroid brands in the high-potency category include
Halog®, Elocon®, and Cyclocort®. LIDEX® was introduced more than 20 years ago
and the Company believes it is among the most widely accepted topical steroid
treatments available. Topical corticosteroid treatments had estimated market
sales of $895 million in 2000. The active ingredient in LIDEX®, fluocinonide,
works to alleviate inflammations of the skin by reducing swelling and pain,
relieving itching and constricting blood vessels in the skin. The LIDEX®
product line consists of various strengths and cosmetically elegant
formulations, including gels, ointments, creams, solutions and emollient
creams. The Company believes this broad product line allows dermatologists to
prescribe the most appropriate product based on the severity and location of a
patients condition, as well as the thickness of a patients skin. With the
exception of the LIDEX®-E Cream, the various forms of LIDEX® are
preservative-free, and the active ingredient is fully dissolved in the vehicle
of the medication, resulting in better absorption of the medication into the
skin. The Company believes LIDEX® is priced comparably to other branded
corticosteroid products, but significantly higher than the average reported
retail price of generic products containing fluocinonide. The Company acquired
the rights to LIDEX® in the United States and Canada from Syntex (U.S.A.) Inc.
and Syntex Pharmaceuticals International Limited, respectively, (Syntex) in
the third quarter of the fiscal year ended June 30, 1997 (fiscal 1997). The
Company has a manufacturing and supply agreement with Patheon, Inc. (Patheon)
for the production of LIDEX® and also uses West Pharmaceutical Services to
manufacture one LIDEX® product on a purchase order basis.

SYNALAR® is a mid- to low-potency topical corticosteroid brand prescribed
for the treatment of less severe forms of inflammatory and hyperproliferative
skin diseases such as eczema, psoriasis, poison ivy, atopic dermatitis and
other inflammatory skin conditions. The active ingredient in SYNALAR®,
fluocinolone acetonide, works to alleviate inflammations of the skin by
reducing swelling and pain, relieving itching and constricting blood vessels in
the skin. The SYNALAR® product line consists of various strengths and
cosmetically elegant formulations, including ointments, creams, emollient
creams and solutions. The Company believes this flexibility allows physicians
to prescribe the most appropriate product based upon the severity and location
of a patients condition, as well as the thickness of a patients skin.
Competing steroid brands in the mid- and low-potency categories include
Aristocort®, Cutivate® and Valisone®. SYNALAR® is priced comparably to other
branded corticosteroid products but higher than the average reported price of
generic products containing fluocinolone

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acetonide. The Company acquired the rights to SYNALAR® in the United
States and Canada from Syntex in the third quarter of fiscal 1997. The Company
has a manufacturing and supply agreement with Patheon for the production of
SYNALAR®.

TOPICORT® gels, creams, and ointments are Class II, high-potency
corticosteroids indicated for topical use on corticosteroid-responsive
inflammatory skin conditions, including psoriasis, contact dermatitis,
seborrheic dermatitis, stasis dermatitis, rhus dermatitis, atopic dermatitis
and more. TOPICORT® LP cream is a Class III corticosteroid. Class II, or
high-potency steroids, offer effective treatment without the risks commonly
associated with super-potent, Class I products. Unlike Class I steroids,
TOPICORT® has no dosing restrictions and minimizes the
hypothalamic-pituitary-adrenal (HPA) suppression commonly seen with Class I
use. The Company believes TOPICORT® cream and gel have long been regarded as
preferable to other available creams and gels because of their excellent
cosmetic qualities. They do not contain propylene glycol (solvent), parabans
(preservatives), or added fragrances that may cause irritation to patients with
sensitive skin. Each of the TOPICORT® products is available in 15- and 60-gram
tubes. Topical corticosteroid treatments had estimated market sales of $895
million in 2000. The Company licensed the rights to TOPICORT® in the United
States from Aventis as successor-in-interest to HMR in November 1998. The
Company has a manufacturing and supply agreement with Aventis for the
production of TOPICORT®.

BUPHENYL®is an orphan drug that was approved by the FDA in 1986 as an
adjunctive therapy for the treatment of hyperammonemia in patients with Urea
Cycle Disorder. The product provides an alternative pathway to ureagenesis for
waste nitrogen disposal and helps maintain nitrogen homeostasis. Urea cycle
disorder is a rare genetic defect that effects the hepatic urea cycle, which is
responsible for protein metabolism. Protein is normally broken down to nitrogen
and excreted as urea. However, patients with deficiencies have either absent or
significantly reduced synthesis of urea that prevents normal nitrogen
homeostasis, causing ammonia and other nitrogenous compounds to accumulate in
the blood. The Company acquired this product when it purchased Ucyclyd Pharma,
Inc. (Ucyclyd), in April 1999. The Company has a supply agreement with
Pharmaceutics International Inc. (PII) for the production of BUPHENYL®.

NON-PRESCRIPTION PRODUCT

The Company derived revenue from sales of an OTC product, ESOTERICA®, and
from contract revenue in fiscal 2001. A description of the Companys
non-prescription product follows.

ESOTERICA®, the leading fade cream line in the United States, is a line of
topical creams used to treat minor skin discoloration conditions such as age
spots, uneven skin tones, dark patches, blotches and freckles. ESOTERICA® is
available in five formulations, consisting of four creams containing various
concentrations of the active ingredient hydroquinone and a body lotion. The
Company believes hydroquinone is the only agent proven to reduce
hyperpigmentation and the only product legally sold in the United States for
this purpose. Competing OTC products used to treat minor skin discolorations
include Porcelana® and AMBI®, which are sold in a variety of creams, gels and
lotions. The Company has a manufacturing agreement for the production of
ESOTERICA® with Contract Pharmaceuticals.

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PRODUCTS IN DEVELOPMENT

Medicis has developed and obtained rights to certain pharmaceutical agents
in various stages of development. The Company has a variety of products under
development, ranging from new products to existing product line extensions to
reformulations of existing products. The Companys 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. While development periods vary, the Company generally selects
products for internal development with the objective of proceeding from
formulation to product launch within a two-year period. With the Companys
increasing financial strength, Medicis has begun adding long-term projects to
its development pipeline and may add longer-term projects with inherently
greater risk in the future. The Company has in the past supplemented, and may
in the future supplement, its research and development efforts by entering into
research and development agreements with other pharmaceutical and biotechnology
companies to defray certain costs and risks of product development.

The Company directs the efforts of contract laboratory research facilities
to perform formulation and research work on active ingredients, as well as to
conduct preclinical studies and clinical trials. All products and technologies
under development require significant commitments of personnel and financial
resources. Several products require extensive clinical evaluation and
premarketing clearance by the United Stated Food and Drug Administration
(FDA) and comparable agencies in other countries prior to commercial sale.
Certain of the products and technologies under development have been licensed
from third parties. The failure of the Company to meet its obligations under
one or more of these agreements could result in the termination of the
Companys rights under such agreements and other liabilities. In addition, the
Company regularly reevaluates its product development efforts. On the basis of
these reevaluations, the Company has in the past, and may in the future,
abandon development efforts for particular products. There can be no assurance
that any product or technology under development will result in the successful
introduction of any new product.

The Companys research and development costs for Company-sponsored and
unreimbursed co-sponsored pharmaceutical projects for fiscal 2001, 2000 and
1999 were $25,500,000, $4,903,000, and $3,396,000 respectively. Research and
development costs for fiscal 2001 includes $17.0 million paid to Corixa
Corporation (Corixa) for a development, commercialization and license
agreement covering Corixas novel psoriasis immunotherapeutic product and
$788,000 of research and development expenses related to this agreement. Under
the terms of the agreement, there are additional potential development
milestone payments of $35 million and potential commercialization and
cumulative net sales threshold milestone payments of $55 million.

In November 1998, the Company licensed the right to manufacture, market
and sell the LOPROX®, TOPICORT® and A/T/S® products from Aventis as
successor-in-interest to HMR. The licensing of these products also included
several in-process research and development projects, including LOPROX® Gel,
which was launched in fiscal 2000. Although the Company intends to continue
such development projects, there can be no assurance that any technology
previously under development by Aventis will result in the successful
introduction of any additional new line extensions, or that the Company will
continue the development of any such projects in the future.

MARKETING AND SALES

Medicis believes that its prescription pharmaceutical marketing and sales
organization is one of the most productive in the dermatology sector. The
Companys marketing efforts are focused on assessing and meeting the needs of
dermatologists, podiatrists and other specialties that treat conditions of the
skin. The Companys prescription sales team, consisting of 74 members at June
30, 2001, regularly calls on dermatologists, focusing on the approximately
3,200 dermatologists who are responsible for 80% of all prescriptions written
by dermatologists in the United States. The sales team also calls on
high-prescribing podiatrists. The Company believes it has created for its sales
team an attractive incentive program based upon goals in market-share growth
and market-share maintenance. The Company focuses on cultivating relationships
of trust and confidence with the specialists themselves. In addition, the
Company uses a variety of marketing techniques to promote its products
including: sampling, journal advertising, promotional materials, specialty
publications, rebate coupons, money-back or product

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replacement guarantees, a leadership position in educational conferences and
exposure of its products on the Internet.

The Companys OTC product is promoted to retailers and wholesalers by
manufacturers representatives who also support a substantial number of
products of other manufacturers. The Company also markets its OTC product
through internally developed trade promotions, radio and print advertising,
couponing and by increasing consumer awareness.

WAREHOUSING AND DISTRIBUTION

Medicis utilizes an independent national warehousing corporation to store
and distribute its products from primarily two regional warehouses in Nevada
and Georgia, as well as an additional warehouse in Maryland. Upon the receipt
of a purchase order through electronic data input (EDI), phone, mail or
facsimile, the order is processed into the Companys 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 the
Company via EDI the necessary information to automatically process the invoice
in a timely manner.

CUSTOMERS

The Companys customers include the nations leading wholesale
pharmaceutical distributors, such as McKesson Corporation (McKesson),
AmerisourceBergen Corporation (AmerisourceBergen), Cardinal Health, Inc.
(Cardinal), Quality King Distributors (Quality King) and major drug chains.
During fiscal 2001, Cardinal, McKesson and Quality King accounted for 22.2%,
18.0% and 10.3%, respectively, of the Companys net revenues. During fiscal
2000, Cardinal, McKesson, Quality King and AmerisourceBergen accounted for
21.0%, 18.1%, 11.3% and 10.2%, respectively of the Companys net revenues.
During fiscal 1999, McKesson and Cardinal accounted for 18.0% and 14.1%
respectively, of the Companys net revenues. 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 the Company, cause a reduction in the
inventory levels of distributors and retailers, or otherwise result in
reductions in purchases of the Companys products, any of which could have a
material adverse impact on the Companys business, financial condition and
results of operations.

MANUFACTURING

Medicis currently contracts for all of its manufacturing needs and is
required by the FDA to contract only with manufacturers that comply with
current Good Manufacturing Practices (cGMP) regulations and other applicable
laws and regulations. The Company typically enters into short-term
manufacturing contracts with third-party manufacturers.

Watson, as successor-in-interest to Schein, manufactures the Companys
DYNACIN® product line in compliance with the Companys specifications and
quality standards pursuant to a supply agreement. Under the agreement, Watson
manufactures DYNACIN® for sale in the branded market exclusively for the
Company, 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. The Companys supply agreement expires in December
2003, but is subject to automatic renewal for successive two-year periods if
neither party gives timely notice of termination. It may also be terminated by
either party without cause upon 12 months notice to the other party. Watson
may also terminate the exclusivity portion of the agreement if its profit
margin on sales of DYNACIN® products falls below a specified level. The
agreement also provides that the Company will purchase all of its requirements
for minocycline from Watson but may purchase some of its requirements from
another manufacturer if Watson fails to meet certain cost standards or fails to
provide the Company with all of its requirements for two of four consecutive
quarters. In addition, the Company may use alternative sources if Watson
terminates the Companys exclusive rights to purchase branded minocycline based
upon the Companys failure to meet the specified profit

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margins, as defined. Either party may terminate the agreement if one party
cannot perform under the agreement for a period of three months or longer for
certain reasons beyond its control. The Company believes that it has
alternative sources of supply and that it would be able to use these
alternative sources to preserve an adequate supply of DYNACIN®. However, the
inability of any supplier to fulfill the Companys supply requirements for
DYNACIN®, the Companys largest-selling product, in a timely fashion, would
have a material adverse effect on the Companys business, financial condition
and results of operations.

The Companys LUSTRA®, LUSTRA-AF®, ALUSTRA, PLEXION, PLEXION TS, TRIAZ®
and ESOTERICA® products are manufactured by Contract Pharmaceuticals pursuant
to manufacturing agreements which expire in July 2002, but are subject to
renewal.

The Companys LOPROX® and TOPICORT® products are manufactured by Aventis
in accordance with a supply agreement entered into by the Company in connection
with the license of LOPROX® and TOPICORT®. The Aventis supply agreement expires
in November 2001; however, the Company plans to extend the agreement through an
automatic two-year extension.

The majority of the Companys LIDEX® and SYNALAR® products are
manufactured primarily by Patheon in accordance with a manufacturing and supply
agreement assumed by Medicis when it acquired the LIDEX® and SYNALAR® products.
Under the terms of an agreement with the Company, F. Hoffman-La Roche, Ltd.
supplies, at cost, active ingredients necessary for manufacturing the LIDEX®
and SYNALAR® products. The Patheon manufacture and supply agreement expires in
January 2002; however, the Company plans to extend this agreement through an
automatic one year extension, which is available each year by contract unless
either party gives timely notice of termination.

The Companys BUPHENYL® products are manufactured by PII pursuant to a
supply agreement that expires in August 2004, but is subject to renewal.

CERTAIN LICENSE AND ROYALTY AGREEMENTS

Pursuant to license agreements with third parties, Medicis has acquired
rights to manufacture, use or market certain of its existing products, as well
as many of its proposed products and technologies. Such agreements typically
contain provisions requiring the Company to use its 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 the
Companys failure to perform its payment or other obligations. In addition, the
Company has entered into agreements to license certain rights to manufacture,
use and sell certain of its technologies outside the United States and Canada
to various licensees.

In May 2001, the Company entered into an exclusive agreement with Abbott
Laboratories (Abbott) for Medicis to promote OMNICEF® (cefdinir) capsules.
Medicis will promote OMNICEF® in the U.S. market to dermatologists and
podiatrists and will receive revenue from prescriptions generated in these
categories.

In September 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). The Company is making
royalty payments and may be obligated to make additional milestone payments
conditioned upon the occurrence of certain events.

In November 1998, the Company entered into a license agreement with
Aventis as successor-in-interest to HMR. The license is for a term of three
years with an option to purchase the products at the end of the term. The
products licensed are LOPROX®, TOPICORT® and A/T/S®.

TRADEMARKS

The Company believes that trademark protection is an important part of
establishing product and brand recognition. The Company owns more than 100
registered trademarks and trademark applications and has acquired the rights to
several trademarks by license. United States federal registrations for
trademarks remain in force for 10

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years and may be renewed every 10 years after issuance, provided the mark
is still being used in commerce. There can be no assurance that any such
trademark or service mark registrations will afford the Company adequate
protection, or that the Company will have the financial resources to enforce
its rights under any such trademark or service mark registrations. The
inability of the Company to protect its trademarks or service marks from
infringement could result in the impairment of any goodwill which may be
developed in such trademarks or service marks. Moreover, the Companys
inability to use one or more of its trademarks or service marks, because of
successful third-party claims to such marks, could have a material adverse
effect on the Companys business, financial condition and results of
operations.

From time to time, the Company receives communications from parties who
allege that their trademark or service mark interests may be damaged either by
the Companys use of a particular trademark or service mark or its registration
of such trademark or service mark, and, on occasion, the Company also sends
such communications to third parties. In general, the Company seeks to resolve
such conflicts before an actual opposition to registration or suit for
infringement is filed. There can, however, be no assurance that such actions
will not be filed or that, if filed, they will not have a material adverse
effect upon the Companys business, financial condition or results of
operations.

PATENTS AND PROPRIETARY RIGHTS

The Company is pursuing several United States patent applications. There
can be no assurance that patents will be issued with respect to any of these
applications. The Company has acquired rights under certain patents and patent
applications from third-party licensors. The Company has obtained patents on
some of its products directed to aspects of certain of its products, including
a United States patent expiring in October 2015 covering various formulations
of its TRIAZ® product line, and a United States patent expiring in August 2017
covering its LUSTRA®, LUSTRA-AF® and ALUSTRA products.

The Company believes that its success will depend in part on its ability
to obtain and maintain patent protection for its own inventions, and to obtain
and maintain adequate licenses for the use of patents licensed or sublicensed
by third parties. There can be no assurance that any patent issued to, or
licensed by, the Company will provide protection that has commercial
significance. In this regard, the patent position of pharmaceutical compounds
is particularly uncertain. There can be no assurance that challenges will not
be instituted against the validity or enforceability of any patent owned by or
licensed to the Company or, if instituted, that such challenges will not be
successful. The cost of litigation to uphold the validity and prevent
infringement of patents can be substantial and require a significant commitment
of managements time. Furthermore, there can be no assurance that others will
not independently develop similar technologies or duplicate the technology
owned by or licensed to the Company or design around the patented aspects of
such technology. The Company only conducts complete searches to determine
whether its products infringe upon any existing patents as it deems
appropriate. There can be no assurance that the products and technologies the
Company currently markets, or may seek to market in the future, will not
infringe patents or other rights owned by others. A claim or finding of
infringement on one of the Companys products could have a material adverse
effect on the Companys business, financial condition and results of operation.

The Company believes that the laws governing the obtaining and enforcing
of foreign patents are different than those for obtaining domestic patents.
Therefore, the Company recognizes that its patent position, if any, may be
different in the United States than in Europe or elsewhere. In addition, the
protection provided by foreign patents once they are obtained may be different
than that provided by domestic patents.

The Company relies and expects to continue to rely upon unpatented
proprietary know-how and continuing technological innovation in the development
and manufacture of many of its principal products. The Companys policy is to
require all its employees, consultants and advisors to enter into
confidentiality agreements with the Company. There can be no assurance,
however, that these agreements will provide meaningful protection for the
Companys trade secrets or proprietary know-how in the event of any
unauthorized use or disclosure of such information. In addition, there can be
no assurance that others will not obtain access to or independently develop
similar or equivalent trade secrets or know-how.

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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 the Companys Key
Products for the treatment of dermatological conditions, as well as among
manufacturers in the OTC market for brands which compete with ESOTERICA®. Many
of the Companys 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 the
Company. Additionally, many of the Companys present and potential competitors
have research and development capabilities that may allow them to develop new
or improved products that may compete with the Companys product lines. The
Companys products could be rendered obsolete or made uneconomical by the
development of new products to treat the conditions addressed by the Companys
products, technological advances affecting the cost of production, or marketing
or pricing actions by one or more of the Companys competitors. Each of the
Companys products competes for a share of the existing market with numerous
products that have become standard treatments recommended or prescribed by
dermatologists.

DYNACIN® competes with Minocin®, a branded minocycline product marketed by
American Home Products (AHP) and with numerous generic minocycline products
marketed by Watson, Barr Laboratories, Inc., Ranbaxy Pharmaceuticals
Inc. and ESI Lederle, Inc. Other oral
antibiotics utilized for the treatment of acne include erythromycin,
doxycycline and tetracycline marketed in branded and generic forms by a variety
of companies. The Company believes that LOPROX® competes primarily with
Spectazole®, marketed by Ortho Dermatological and Nizoral®, marketed by Janssen
Pharmaceutica, Inc (Janssen). The Company believes that its LUSTRA® line
primarily competes with Solaquin Forte® and Glyquin®, marketed by ICN
Pharmaceuticals, Inc. (ICN Pharmaceuticals) and Melanex®, marketed by
Neutrogena Dermatologics. The Company believes that while
PLEXION competes in the same market as Metrocream®,
Metrogel®, and Metrolotion®, all marketed by Galderma
Laboratories, Inc. (Galderma), it does not directly
compete against these products as it is the only prescription
cleanser indicated for the treatment of acne rosacea. The Company
believes that PLEXION
TS, a topical suspension treatment for comedonal acne, is a
gentle alternative to other topical retinoid acne therapies. The Company believes that TRIAZ®
competes with Benzamycin®, marketed by Dermik Laboratories, Inc. (Dermik
Labs); Cleocin-T®, marketed by Watson; and Benzac®, marketed by Galderma and
with generic products such as the prescription product clindamycin, marketed by
various manufacturers. The Company believes that OVIDE® primarily competes with
the OTC products Nix®, marketed by Warner-Lambert Consumer Healthcare
(Warner-Lambert) and Rid®, marketed by Pfizer, Inc. (Pfizer) and with
generic products such as the prescription product lindane, marketed by various
manufacturers. LIDEX®, SYNALAR® and TOPICORT® compete with a number of
corticosteroid brands in the super-, high-, mid-, and low-potency categories
for the treatment of inflammatory and hyperproliferative skin conditions.
Competing brands include Halog® and Ultravate®, marketed by Bristol-Myers
Squibb Company (Bristol-Myers); Elocon® and Diprolene®, marketed by
Schering-Plough Corporation (Schering-Plough); Cyclocort and Aristocort,
marketed by Fujisawa Healthcare, Inc.; Temovate® and Cutivate®, marketed by
GlaxoSmithKline plc (GlaxoSmithKline) and Psorcon®, marketed by Dermik Labs.
ESOTERICA® primarily competes with Porcelana®, marketed by Schwarzkopf & Dep,
Inc. and Ambi®, marketed by Kiwi Brands, a division of Sara Lee Brands
Corporation.

Several of the Companys products, including DYNACIN®, LIDEX®, SYNALAR®
and TOPICORT® 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
OTC 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 the Companys
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 (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 (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 in 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 OTC drugs are exempt from the
FDAs premarketing approval requirements. In 1972, the FDA instituted the
ongoing OTC Drug Review to evaluate the safety and effectiveness of OTC 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 OTC drug ingredients that the FDA will consider
generally recognized as safe and effective and therefore not subject to
premarket approval. OTC drug ingredients are classified by the FDA in one of
three categories: Category I ingredients which are deemed safe and effective
for OTC use: Category II ingredients which are deemed not generally
recognized as safe and effective for OTC 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
OTC 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 OTC labeling requirements and prohibitions against
promotion for conditions other than those stated in the labeling. OTC 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 ingredient in DYNACIN®, minocycline; LOPROX®, ciclopirox;
TOPICORT®, desoximetasone; OVIDE® lotion, malathion; BUPHENYL® powder and
tablets, sodium phenylbutyrate; and LIDEX® and SYNALAR®, fluocinonide and
fluocinolone acetonide, respectively, have been approved by the FDA under an
NDA. The active ingredient in the TRIAZ® products has been classified as a
Category III ingredient under a tentative final FDA monograph for OTC use in
treatment of labeled conditions. The FDA has requested, and a task force of the
Non-Prescription Drug Manufacturers Association (NDMA), a trade association
of OTC 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 the Company sells on a prescription basis, have the same
ingredients at the same dosage levels as the OTC products. When the FDA issues
the final monograph, the Company may be required by the FDA to sell TRIAZ® as
an OTC drug unless the Company files 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 the Company and could have
a material adverse effect on the Companys business, financial condition and
results of operations.

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Certain ESOTERICA® and LUSTRA® products contain the active ingredient
hydroquinone at a 2% and 4% concentration, respectively. Independent expert
dermatologists have formally expressed the view that hydroquinone is generally
recognized as safe and effective for its intended use. Hydroquinone at a 2%
concentration is currently a Category I ingredient under a tentative final
monograph. 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.
The Company, in conjunction with the NDMA and other manufacturers, is
responsible for 50% of the costs associated with these studies. An adverse
decision by the FDA on the safety of hydroquinone could result in the assertion
of product liability claims against the Company. Moreover, if hydroquinone is
not maintained as a Category I or Category III ingredient, the Company would be
required to cease marketing the ESOTERICA® and LUSTRA® products containing
hydroquinone. An adverse decision by the FDA on the safety of hydroquinone
could have a material adverse effect on the Companys business, financial
condition and results of operations.

The ESOTERICA®, TRIAZ®, LUSTRA®, LUSTRA-AF® and ALUSTRA products must
meet the composition and labeling requirements established by the FDA for
products containing their respective basic ingredients. The Company believes
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. PLEXION and PLEXION TS, 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.

The Company believes that certain of its products, as they are promoted
and intended by the Company 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, the
Company may be required to seek FDA approval for such products, market such
products as OTC products or withdraw such products from the market. The Company
believes that such products are subject to regulations governing product
safety, use of ingredients, labeling, promotion and manufacturing methods.

The Company also will be subject to foreign regulatory authorities
governing clinical trials and pharmaceutical sales if it seeks to market its
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 submitted for review by the Company.

EMPLOYEES

At June 30, 2001, the Company had 188 full-time employees. The Company
believes its relationship with its employees is good. The Company intends to
hire additional personnel as needed during the next 12 months and intends to
expand the size of its sales force by 25%, or approximately 20 sales
representatives, over the next 12 months.

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, 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.

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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.

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.

We Rely On Others To Manufacture Our Products

Currently, we contract out for all of our product manufacturing needs and
do not manufacture any of our products. Typically, these 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 out-source the
manufacturing of our products on reasonable or acceptable terms.

The underlying cost to Medicis 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 impacted.

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
manufacturer or any difficulties which could arise in the manufacturing process
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 have a negative effect on our sales
margins and market share, as well as our overall business and financial
results. If we are unable to supply sufficient amounts of our products on a
timely basis, our market share could decrease and, correspondingly, our
profitability could decrease.

We have entered into exclusive supply or manufacturing agreements for
certain products, such as DYNACIN® and LIDEX®. Under these agreements, with
certain exception, 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 such as Medicis comply with the FDAs regulations, including those
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 Medicis from the interruption of the manufacturing of
our largest selling products caused by certain events, the loss of a
manufacturer could still have a negative effect on our sales, margins and
market share, as well as our overall business and financial results.

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

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

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customers may cancel other orders and stock and sell competing products. This
in turn could cause a loss of our market share and negatively affect our
revenues.

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 shortages in raw materials
required by our manufacturers, changes in our sources for manufacturing, our
failure to timely locate and obtain replacement manufacturers as needed and
conditions effecting the cost and availability of raw materials.

The Growth Of Managed Care Organizations And Other Third-Party Reimbursement
Policies May Have An Adverse Effect On Our Pricing Policies And Our Margins

Our operating results and business success depends 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 (MCOs). Over 70% of the U.S. population now participates in
some version of managed care. Because of the size of the patient population
covered by MCOs, marketing of prescription drugs to them and the pharmacy
benefit managers (PBMs) that serve many of these organizations has become
important to our business. MCOs and other third-party payors try to negotiate
the pricing of medical services and products to control their costs. MCOs and
PBMs 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 MCO 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 MCO
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 negatively affected, 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.

Managed care initiatives to control costs have influenced primary-care
physicians to refer fewer patients to dermatologists and other specialists. The
result has been a declining market for dermatological products. Further
reductions in these referrals could have a material adverse effect on the size
of our potential market as well as our business, financial condition and
results of operation.

Our Continued Growth Depends On Acquisitions

The Companys strategy for continued growth to a material extent involves
the acquisition of new product lines or businesses. These acquisitions could be
by acquiring other pharmaceutical companies, acquiring a portion of a companys
assets or product lines, or obtaining licenses or other rights to manufacture
and distribute products. Currently, we intend to focus our acquisition,
licensing and development efforts on skin care products, which has been our
historical focus, and possibly on other specialty pharmaceutical niches. We
cannot be certain that we will be able to identify suitable acquisition
candidates or products or if any will be available at all. In addition, even if
suitable acquisitions are identified, we may not be able to secure terms which
are beneficial. Other pharmaceutical companies with greater financial,
marketing and sales resources than we have also tried to grow through these
same acquisition and licensing strategies. Because of their greater resources,
our competitors may be able to offer better terms for an acquisition than
Medicis can offer, or they may be able to demonstrate a greater ability than
Medicis to market licensed products.

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Our Continued Growth Depends Upon Our Ability To Develop New Products

Medicis has 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 developments can be sold, will require significant
commitments of personnel and financial resources. Due to the limited financial
resources available for research and development, there can be no assurance
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. There can be no
certainty 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 Medicis is unable to enter into additional
research partnership arrangements, we may incur additional costs to continue
research and development internally or abandon certain projects.

Our Business Strategy May Cause Fluctuating Operating Results

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. For example, the following events or occurrences
could cause fluctuations in our financial performance from period to period:

| |   |                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | changes in the levels we spend to develop, acquire or license new product lines;                                                                              
| |  
| |  | changes in the amount we spend to promote our products;                                                                                                       
| |  
| |  | delays between our expenditures to acquire new product lines
or businesses and the generation of revenues from those acquired
products 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;                                                                                      
| |  
| |  | development of new competitive products by others;                                                                                                            
| |  
| |  | the mix of products that we sell during any time period; and                                                                                                  
| |  
| |  | our responses to price competition.                                                                                                                           

Fluctuations In Demand For Our Products Create Inventory Maintenance
Uncertainties

Medicis historically has experienced lower sales levels in the first
quarter of our fiscal year (July 1  September 30). In addition, we typically
experience greater revenues and, correspondingly, greater income during the
last month of each fiscal quarter. We try to match our expenditures for
inventory with these historical fluctuations in demand. However, if these
demand patterns change or we experience even a small 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

15



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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.

Medicis Is Subject To Extensive Governmental Regulation

Pharmaceutical companies are subject to heavy 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 OTC 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 OTC 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 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 premarketing approval of the product. All products which
are considered cosmetics or 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 premarketing 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 premarketing 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 and restrictions on access to certain
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 AHP, Schering-Plough, Bristol-Myers, Elan Corporation, plc,
Galderma, Dermik Labs, Ortho Pharmaceuticals, ICN Pharmaceuticals,
Warner-Lambert, GlaxoSmithKline, Pharmacia & Upjohn, Pfizer 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 have a significant negative impact on our business and financial
results, including reductions in our market share and gross margins.

Medicis sells and distributes both prescription brands and an OTC product.
Each of these products competes with products produced by others to treat the
same conditions. Several of our prescription products,

16



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including DYNACIN®, LIDEX®, SYNALAR® and TOPICORT®, 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.

Our Success Depends On The Management Of Recent And Future Growth

Medicis 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 negatively impacted.

There Are High Costs Of Obtaining FDA And Other Regulatory Approvals

The process of obtaining FDA and other regulatory approvals is lengthy 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 have a significant negative effect on our
business performance and financial results. Even if premarketing 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 prohibition of
the
               sale of all products from the same lot;

     suspending manufacturing;

     recalling products; and

     withdrawing marketing clearance.

In its regulation of advertising, the FDA from time to time issues
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.

Dependence Of Licenses From Others

We have acquired the right to manufacture, use or market certain products,
including certain of our Key Products. We also expect to continue to obtain
licenses for other products and technologies in the future. Our license

17



---



agreements generally require us to develop a market for the licensed products.
If we do not exert enough efforts to 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, 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 have a material negative effect on 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 adversely affect our reputation. These problems, individually or
together, could have a material adverse effect on our business and results of
operation.

We have granted licenses to certain products. We cannot be certain that a
licensee will fulfill their obligations under such licenses. The
non-performance of a licensee for our products could have a material adverse
effect on our business and results of operations.

Adequacy Of Trademarks, Patents And Proprietary Rights

We believe that the protection of our trademarks and service marks is an
important factor in product recognition, maintaining goodwill and in
maintaining or increasing market share. If we do not adequately protect our
rights in our various trademarks and service marks from infringement, any
goodwill which has been developed in those marks could be lost or impaired. 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 all the goodwill which has been developed in those marks and
could be liable for damages caused by an infringement.

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 patents and 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
managements time.

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 have a material
adverse effect on the Companys business, financial condition and results of
operations. The costs of responding to infringement claims could be substantial
and could require a substantial commitment of managements time.

18



---



We also rely upon unpatented proprietary know-how and continuing
technological innovation in developing and manufacturing many of our principal
products. Medicis requires all of its employees, consultants and advisors to
enter into confidentiality agreements prohibiting them from taking 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.

Product Liability

Medicis is 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 severely damage our business, financial
condition and profitability.

ITEM 2: PROPERTIES

Medicis presently occupies approximately 49,000 square feet of office
space in Scottsdale, Arizona, 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 $1,430,000,
$1,024,500, and $564,000 for fiscal 2001, 2000 and 1999, respectively.

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 2002.

ITEM 3: LEGAL PROCEEDINGS

The Company and certain of its subsidiaries are parties to 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. The Company believes liability in the event of final
adverse determinations in any of these matters is either covered by insurance
and/or established reserves, or, should not, in the aggregate, have a material
adverse effect on the business, financial position or results of operations of
the Company. There can be no assurance, however, that an adverse determination
on any action or proceeding will not have a material adverse effect on the
business, financial condition and results of operations of the Company, 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.

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 2001.

19



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PART II

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

Dividend Policy

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

Price Range of Common Stock

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, 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 | 
|                               
|                               
|                               
|                               
|FISCAL YEAR ENDED JUNE 30, 2000 |                |  |      |       |     |  |   |      
|                               
|                               
|                               
|                               
|                                | First Quarter  |  | $    | 32.88 |     |  | $ | 20.25 | 
|                               
|                               
|                               
|                               
|                                | Second Quarter |  |      | 43.75 |     |  |   | 22.75 | 
|                               
|                               
|                               
|                               
|                                | Third Quarter  |  |      | 51.94 |     |  |   | 35.25 | 
|                               
|                               
|                               
|                               
|                                | Fourth Quarter |  |      | 64.75 |     |  |   | 34.25 | 

On September 19, 2001, the last reported sale price on the New York Stock
Exchange for Medicis Class A Common Stock was $43.64 per share. As of such
date, there were approximately 241 holders of record of Class A Common Stock.

20



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ITEM 6: SELECTED FINANCIAL DATA

The following selected financial data has been derived from the consolidated
financial statements of Medicis Pharmaceutical Corporation for the fiscal years
2001, 2000, 1999, 1998 and 1997. Gross profit does not include amortization of
the related intangibles.

|                                                                              |                                     |   |         |                                       |   |      |         |         |   |      |         |         |   |   |         |         |   |   |        |        |  | 
|----------------------------------------------------------------------------- | ----------------------------------- | - | ------- | ------------------------------------- | - | ---- | ------- | ------- | - | ---- | ------- | ------- | - | - | ------- | ------- | - | - | ------ | ------ |  | 
|                                                                              |                                     |   |         | JUNE 30,                             
|                                                                              |                                     |   |         |                                      
|                                                                              |                                     |   |         | 2001                                  |   | 2000 |         | 1999    |   | 1998 |         | 1997   
|                                                                              |                                     |   |         |                                       |   |      |         |         |   |      |         |        
|                                                                              |                                     |   |         | (in thousands, except per share data)
|Statements of Operations Data:                                                |                                     |   |         |                                       |   |      |         |         |   |      |         |         |   |   |         |         |   |   |        |       
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Net revenues                                                                  |                                     | $ | 167,801 |                                       |   | $    | 139,099 |         |   | $    | 116,871 |         |   | $ | 77,571  |         |   | $ | 41,159 |       
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Gross profit                                                                  |                                     |   | 137,105 |                                       |   |      | 113,188 |         |   |      | 95,236  |         |   |   | 63,592  |         |   |   | 31,797 |       
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Operating expenses:                                                           |                                     |   |         |                                       |   |      |         |         |   |      |         |         |   |   |         |         |   |   |        |       
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Selling, general and administrative |   |         | 59,507                                |   |      |         | 45,404  |   |      |         | 38,219  |   |   |         | 27,424  |   |   |        | 16,484 | 
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Research and development expenses   |   |         | 25,516                                |   |      |         | 4,903   |   |      |         | 3,396   |   |   |         | 2,885   |   |   |        | 1,450  | 
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Depreciation and amortization       |   |         | 8,261                                 |   |      |         | 7,375   |   |      |         | 5,810   |   |   |         | 2,903   |   |   |        | 999    | 
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | In-process research and development |   |         |                                      |   |      |         |        |   |      |         | 9,500   |   |   |         | 35,400  |   |   |        |       | 
|                                                                              |                                     |   |         |                                       |   |      |         |         |   |      |         |         |   |   |         |         |   |   |        |       
|Total operating expenses                                                      |                                     |   | 93,284  |                                       |   |      | 57,682  |         |   |      | 56,925  |         |   |   | 68,612  |         |   |   | 18,933 |       
|                                                                              |                                     |   |         |                                       |   |      |         |         |   |      |         |         |   |   |         |         |   |   |        |       
|Operating income (loss)                                                       |                                     |   | 43,821  |                                       |   |      | 55,506  |         |   |      | 38,311  |         |   |   | (5,020  | )       |   |   | 12,864 |       
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Other:                                                                        |                                     |   |         |                                       |   |      |         |         |   |      |         |         |   |   |         |         |   |   |        |       
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Gain on sale of assets              |   |         |                                      |   |      |         |        |   |      |         | 17,650  |   |   |         |        |   |   |        |       | 
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Net interest income                 |   |         | 15,504                                |   |      |         | 11,875  |   |      |         | 9,678   |   |   |         | 7,037   |   |   |        | 3,787  | 
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Income tax (expense) benefit        |   |         | (18,905                               | ) |      |         | (24,387 | ) |      |         | (24,202 | ) |   |         | (14,424 | ) |   |        | 694    | 
|                                                                              |                                     |   |         |                                       |   |      |         |         |   |      |         |         |   |   |         |         |   |   |        |       
|Net income (loss)                                                             |                                     | $ | 40,420  |                                       |   | $    | 42,994  |         |   | $    | 41,437  |         |   | $ | (12,407 | )       |   | $ | 17,345 |       
|                                                                              |                                     |   |         |                                       |   |      |         |         |   |      |         |         |   |   |         |         |   |   |        |       
|Basic net income (loss) per common share                                      |                                     | $ | 1.34    |                                       |   | $    | 1.48    |         |   | $    | 1.46    |         |   | $ | (0.51   | )       |   | $ | 0.88   |       
|                                                                              |                                     |   |         |                                       |   |      |         |         |   |      |         |         |   |   |         |         |   |   |        |       
|Diluted net income (loss) per common share                                    |                                     | $ | 1.28    |                                       |   | $    | 1.41    |         |   | $    | 1.41    |         |   | $ | (0.51   | )       |   | $ | 0.83   |       
|                                                                              |                                     |   |         |                                       |   |      |         |         |   |      |         |         |   |   |         |         |   |   |        |       
|Number of shares used in computing basic
net income (loss) per common share   |                                     |   | 30,134  |                                       |   |      | 29,029  |         |   |      | 28,414  |         |   |   | 24,102  |         |   |   | 19,788 |       
|                                                                              |                                     |   |         |                                       |   |      |         |         |   |      |         |         |   |   |         |         |   |   |        |       
|Number of shares used in computing diluted
net income (loss) per common share |                                     |   | 31,694  |                                       |   |      | 30,499  |         |   |      | 29,462  |         |   |   | 24,102  |         |   |   | 20,891 |       
|                                                                              |                                     |   |         |                                       |   |      |         |         |   |      |         |         |   |   |         |         |   |   |        |       

|                                                  |  |                |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|------------------------------------------------- |  | -------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                                  |  | JUNE 30,      
|                                                  |  |               
|                                                  |  | 2001           |         | 2000 |  | 1999 |         | 1998 |  | 1997
|                                                  |  |                |         |      |  |      |         |      |  |     
|                                                  |  | (in thousands)
|Balance
Sheet Data:                               |  |                |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|Cash, cash equivalents and short-term
investments |  | $              | 334,157 |      |  | $    | 285,737 |      |  | $    | 237,304 |  |  | $ | 237,921 |  |  | $ | 85,132  | 
|                                                 
|                                                 
|                                                 
|                                                 
|Working capital                                   |  |                | 358,468 |      |  |      | 312,302 |      |  |      | 278,612 |  |  |   | 262,956 |  |  |   | 94,803  | 
|                                                 
|                                                 
|                                                 
|                                                 
|Total assets                                      |  |                | 548,696 |      |  |      | 495,340 |      |  |      | 467,510 |  |  |   | 352,350 |  |  |   | 140,537 | 
|                                                 
|                                                 
|                                                 
|                                                 
|Long-term obligations                             |  |                |        |      |  |      | 14,914  |      |  |      | 34,716  |  |  |   | 95      |  |  |   | 111     | 
|                                                 
|                                                 
|                                                 
|                                                 
|Stockholders equity                              |  |                | 503,454 |      |  |      | 437,439 |      |  |      | 373,748 |  |  |   | 324,495 |  |  |   | 131,565 | 

|                                          |  |                |        |      |  |      |        |      |  |      |        |  |  |  |        |  |  |  |        | 
|----------------------------------------- |  | -------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  |  | ------ |  |  |  | ------ | 
|                                          |  | JUNE 30,      
|                                          |  |               
|                                          |  | 2001           |        | 2000 |  | 1999 |        | 1998 |  | 1997
|                                          |  |                |        |      |  |      |        |      |  |     
|                                          |  | (in thousands)
|Cash
Flow Data:                           |  |                |        |      |  |      |        |      |  |      |        |  |  |  |        |  |  |  |        | 
|Net cash provided by operating activities |  |                | 70,620 |      |  |      | 41,238 |      |  |      | 25,424 |  |  |  | 14,745 |  |  |  | 13,787 | 

21



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

The following Managements Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements, which
describe the Company's objectives, intentions, goals, strategies,
outlook or expectations. Forward-looking statements involve risks and
uncertainties. The Companys actual results could differ materially from
those anticipated in any forward-looking statements as a result of a
variety of factors, including those discussed under the heading Factors that May
Affect Future Results.

OVERVIEW

Medicis is a specialty pharmaceutical company and the leading independent
pharmaceutical company in the United States focusing primarily on the treatment
of dermatological conditions. Medicis offers prescription products and an
over-the-counter (OTC) product, emphasizing the clinical effectiveness,
quality, affordability and cosmetic elegance of its products. Medicis develops
and markets leading products for major segments within dermatology, including
acne, fungal infections, rosacea, hyperpigmentation, photoaging psoriasis, eczema, skin
and skin-structure infections, seborrheic dermatitis, head lice and cosmesis
(improvement in the texture and appearance of skin). Medicis has built its
business by successfully executing a four-part growth strategy. The Companys
growth strategy includes: (1) expanding sales of existing brands; (2) launching
new products from research and development efforts; (3) acquiring complementary
stragetic products, businesses and technologies; and (4) collaborating with
other companies.

The Companys primary products include the prescription brands DYNACIN®
(minocycline HCl), LOPROX® (ciclopirox), LUSTRA®, LUSTRA-AF, and ALUSTRA
(hydroquinone), PLEXION and PLEXION TS (sodium sulfacetamide/sulfur), TRIAZ®
(benzoyl peroxide), OVIDE® (malathion) and BUPHENYL® (sodium phenylbutyrate), a
prescription product indicated in the treatment of Urea Cycle Disorder, and the
over-the-counter brand ESOTERICA®.

Medicis derives a majority of its revenue from sales of its DYNACIN®,
LOPROX®, LUSTRA®, LUSTRA-AF®, ALUSTRA, PLEXION, PLEXION TS, TRIAZ®, OVIDE®
and BUPHENYL® products (the Key Products). The Company believes that sales of
the Key Products will constitute the majority of net revenues for the
foreseeable future. Accordingly, any factor adversely affecting the sale of the
Key Products, individually or collectively, could have a material adverse
effect on the Companys business, financial condition and results of
operations. In December 2000, a generic version of the Companys DYNACIN® 75
mg. product was approved by the FDA. The Company cannot, at this time, validate
its assumptions of the full impact of the approval of the competitive product
on its business nor can it determine the potential impact of future approvals
of generic 75 mg. products. Each of the Key Products could be rendered obsolete
or uneconomical by regulatory or competitive changes. The sale of the Key
Products could also be adversely affected by other factors, including
manufacturing or supply interruptions; the development of new competitive
pharmaceuticals to treat the conditions addressed by the Key Products;
technological advances; factors affecting the cost of production; marketing or
pricing actions by one or more of the Companys competitors; regulatory action
by the FDA; changes in the prescribing practices of dermatologists; changes in
the reimbursement policies of third-party payors; product liability claims; the
outcome of disputes relating to trademarks, patents and other rights; or other
factors.

The Companys results of operations may vary from period to period due to
a variety of factors, including expenditures incurred to acquire, license and
promote pharmaceuticals; expenditures and timing relating to the acquisition
and integration of businesses; the introduction of new products by the Company
or its competitors; cost increases from third-party manufacturers;
manufacturing and supply interruptions; the availability and cost of raw
materials; the mix of products sold by the Company; changes in marketing and
sales expenditures; market acceptance of the Companys products; competitive
pricing pressures; the outcome of disputes relating to trademarks, patents and
other rights; general economic and industry conditions that affect customer
demand; and the Companys level of research and development activities. As a
result of customer buying patterns, a substantial portion of the Companys
revenues has been in the last month of each quarter. The Company schedules its
inventory purchases to meet anticipated customer demand. As a result,
relatively small delays in the receipt of manufactured products by the Company
could result in revenues being deferred or lost. The Companys operating
expenses are based upon

22



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anticipated sales levels, and a high percentage of the Companys operating
expenses are relatively fixed in the short term. Consequently, variations in
the timing of revenue recognition could cause significant fluctuations in
operating results from period to period and may result in unanticipated
periodic earnings shortfalls or losses. There can be no assurance that the
Company will maintain or increase revenues or profitability or avoid losses in
any future period.

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

All research and development costs, including payments related to products
under development, and research consulting agreements, are expensed as
incurred. The Company may continue to make up-front, non-refundable payments to
third parties for research and development work which has been completed.
Medicis, upon regulatory approval or commercialization of the product under
development, may obtain the marketing rights. These up-front payments may be
expensed at the time of payment depending on the nature of the payment made.

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

The Company intends to seek additional licensing opportunities and
acquisitions of products, companies or technologies to leverage its existing
distribution channels and marketing infrastructure, to provide additional
opportunities for growth, and to aggressively market new formulations of
existing product lines. The Company can give no assurance that opportunities
will be available on terms acceptable to the Company, if at all.

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

The success of the Companys growth efforts is subject to a number of
risks and uncertainties, which include but are not limited to: dependence on
sales of the Key Products; integration of new product or business acquisitions;
possible delays or failure by Corixa or the Company to develop and/or
commercialize any technology covered by the new collaborative agreement between
the parties, possible risks related to adverse clinical results as products
including any of such technology move into clinical trials, the impact of
alternative technological advances and competition on the collaborative
relationship between the parties, and inherent risks in early stage development
of such technology; reliance upon third-party manufacturers to produce certain
Key Products; the ability to effectively manage a changing business;
uncertainties related to pharmaceutical pricing and reimbursement; and the
uncertainty of competitive forces within the pharmaceutical industry that
affects both the market for the Companys product, and the availability of
product lines or businesses for acquisition that meet the Companys acquisition
or licensing criteria. The future results of operations, both annually and from
quarter to quarter, are subject to a variety of factors applicable to the
Company and to the industries and markets in which it operates.

23



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The Companys customers include the nations leading wholesale
pharmaceutical distributors, such as McKesson; AmerisourceBergen; Cardinal;
Quality King and other major drug chains. During fiscal 2001, Cardinal,
McKesson and Quality King accounted for 22.2%, 18.0% and 10.3%, respectively,
of the Companys net revenues. During fiscal 2000, Cardinal, McKesson, Quality
King and AmerisourceBergen accounted for 21.0%, 18.1%, 11.3% and 10.2%,
respectively, of the Companys net revenues. During fiscal 1999, McKesson and
Cardinal accounted for 18.0% and 14.1%, respectively, of the Companys net
revenues. The loss of any of these customers accounts could have a material
adverse effect upon the Companys business, financial condition or results of
operations.

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,
|                     |  |         
|                     |  | 2001*    |       | 2000 |  | 1999**
|                     |  |          |       |      |  |       
|Net revenues         |  |          | 100.0 | %    |  |        | 100.0 | % |  |  | 100.0 | %
|                    
|                    
|                    
|                    
|Gross profit         |  |          | 81.7  |      |  |        | 81.4  |   |  |  | 81.5  |  
|                    
|                    
|                    
|                    
|Operating expenses   |  |          | 45.0  |      |  |        | 41.5  |   |  |  | 40.6  |  
|                    
|                    
|                    
|                    
|Operating income     |  |          | 36.7  |      |  |        | 39.9  |   |  |  | 40.9  |  
|                    
|                    
|                    
|                    
|Interest income, net |  |          | 9.2   |      |  |        | 8.5   |   |  |  | 8.3   |  
|                    
|                    
|                    
|                    
|Income tax expense   |  |          | (15.0 | )    |  |        | (17.5 | ) |  |  | (17.8 | )
|                     |  |          |       |      |  |        |       |   |  |  |       |  
|Net income           |  |          | 30.9  | %    |  |        | 30.9  | % |  |  | 31.4  | %
|                     |  |          |       |      |  |        |       |   |  |  |       |  

*Absent tax-effected research and development expense of $17.8 million related
to collaboration with Corixa

**Absent tax-effected special charge for in-process research and development
and tax-effected gain on divested products

24



---



The following table reflects certain selected unaudited quarterly
operating results of the Company for each of the last eight quarters through
the quarter ended June 30, 2001. The Company believes that all necessary
adjustments have been included to fairly present the quarterly information. The
operating results for any quarter are not necessarily indicative of the results
for any future period. Gross profit does not include amortization of the
related intangibles.

FISCAL 2001 AND FISCAL 2000 ANALYSIS
(in thousands, except per share data)

|                                                      |  |                                       |        |             |  |       |        |      |  |       |        |      |  |       |        |      |  |   |        |  |  |   |        |  |  |   |        |  |  |   |        | 
|----------------------------------------------------- |  | ------------------------------------- | ------ | ----------- |  | ----- | ------ | ---- |  | ----- | ------ | ---- |  | ----- | ------ | ---- |  | - | ------ |  |  | - | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                                      |  | Fiscal 2001                           |        | Fiscal 2000
|                                                      |  |                                       |        |            
|                                                      |  | Sept.*                                |        | Dec.        |  | March |        | June |  | Sept. |        | Dec. |  | March |        | June
|                                                      |  |                                       |        |             |  |       |        |      |  |       |        |      |  |       |        |     
|                                                      |  | (in thousands, except per share data)
|Net revenues                                          |  | $                                     | 40,254 |             |  | $     | 41,367 |      |  | $     | 42,346 |      |  | $     | 43,834 |      |  | $ | 31,644 |  |  | $ | 33,379 |  |  | $ | 35,049 |  |  | $ | 39,027 | 
|                                                     
|                                                     
|                                                     
|                                                     
|Gross profit                                          |  |                                       | 32,775 |             |  |       | 33,575 |      |  |       | 34,876 |      |  |       | 35,879 |      |  |   | 25,858 |  |  |   | 26,940 |  |  |   | 28,726 |  |  |   | 31,664 | 
|                                                     
|                                                     
|                                                     
|                                                     
|Operating expenses                                    |  |                                       | 18,542 |             |  |       | 17,826 |      |  |       | 18,587 |      |  |       | 20,541 |      |  |   | 13,230 |  |  |   | 13,003 |  |  |   | 14,076 |  |  |   | 17,372 | 
|                                                     
|                                                     
|                                                     
|                                                     
|Operating income                                      |  |                                       | 14,233 |             |  |       | 15,749 |      |  |       | 16,289 |      |  |       | 15,338 |      |  |   | 12,628 |  |  |   | 13,937 |  |  |   | 14,650 |  |  |   | 14,292 | 
|                                                     
|                                                     
|                                                     
|                                                     
|Net income                                            |  |                                       | 11,991 |             |  |       | 12,737 |      |  |       | 13,302 |      |  |       | 13,863 |      |  |   | 9,640  |  |  |   | 10,481 |  |  |   | 11,063 |  |  |   | 11,810 | 
|                                                     
|                                                     
|                                                     
|                                                     
|Net income per
common share:                          |  |                                       |        |             |  |       |        |      |  |       |        |      |  |       |        |      |  |   |        |  |  |   |        |  |  |   |        |  |  |   |        | 
|                                                     
|                                                     
|                                                     
|                                                     
|Basic                                                 |  | $                                     | 0.40   |             |  | $     | 0.42   |      |  | $     | 0.44   |      |  | $     | 0.46   |      |  | $ | 0.34   |  |  | $ | 0.36   |  |  | $ | 0.38   |  |  | $ | 0.40   | 
|                                                     
|                                                     
|                                                     
|                                                     
|Diluted                                               |  | $                                     | 0.38   |             |  | $     | 0.40   |      |  | $     | 0.42   |      |  | $     | 0.44   |      |  | $ | 0.33   |  |  | $ | 0.35   |  |  | $ | 0.36   |  |  | $ | 0.38   | 
|                                                     
|                                                     
|                                                     
|                                                     
|Shares used in
computing net
income per
common share: |  |                                       |        |             |  |       |        |      |  |       |        |      |  |       |        |      |  |   |        |  |  |   |        |  |  |   |        |  |  |   |        | 
|                                                     
|                                                     
|                                                     
|                                                     
|Basic                                                 |  |                                       | 29,645 |             |  |       | 30,274 |      |  |       | 30,414 |      |  |       | 30,209 |      |  |   | 28,750 |  |  |   | 28,834 |  |  |   | 29,164 |  |  |   | 29,375 | 
|                                                     
|                                                     
|                                                     
|                                                     
|Diluted                                               |  |                                       | 31,624 |             |  |       | 32,083 |      |  |       | 31,787 |      |  |       | 31,493 |      |  |   | 29,471 |  |  |   | 30,170 |  |  |   | 30,967 |  |  |   | 31,079 | 

*Absent tax-effected research and development expense of $17.8 million related to collaboration with Corixa

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

Years ended June 30, 2001 and 2000

Net Revenues

Net revenues for fiscal 2001 increased 20.6%, or $28.7 million, to $167.8
million from $139.1 million for fiscal 2000. The Companys net revenues
increased in fiscal 2001 primarily due to the addition of sales in the current
fiscal year of its recently launched 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 its new ALUSTRA product and increases in sales of the
Companys 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 in fiscal 2000. As a percentage of net
revenues, gross profit was 81.7% and 81.4% in fiscal 2001 and fiscal 2000,
respectively. Gross profit increased primarily as a result of revenue
associated with the LOPROX®, LUSTRA®,

25



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PLEXION, PLEXION TS and BUPHENYL® products, which enjoy higher gross profit
percentages than the Companys other products. Amortization of related
intangible assets is not included in gross profit.

Selling, General and Administrative Expenses

Selling, general and administrative expenses in fiscal 2001 increased
31.1%, or $14.1 million, to $59.5 million from $45.4 million in fiscal 2000. As
a percentage of net revenues, selling, general and administrative expenses
increased 2.9 percentage points. This increase was primarily attributable to an
increase in personnel costs. The increase in personnel costs was primarily due
to an increase in the number of employees, to 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 in fiscal 2001 increased $20.6 million,
to $25.5 million from $4.9 million in 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 and $788,000
of research and development expenses related to this agreement. Absent these
charges, research and development expenses in fiscal 2001 increased $2.8
million, or 57.6%, to $7.7 million from $4.9 million in fiscal 2000, primarily
due to development efforts related to projects in the Companys pipeline and
expenses associated with the clinical support of the Companys existing
products.

Depreciation and Amortization Expenses

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

Operating Income

Operating income for fiscal 2001 decreased $11.7 million, to $43.8 million
from $55.5 million in fiscal 2000 primarily due to the research and development
expense of $17.8 million related to the Corixa collaboration. Absent this
charge, operating income increased $6.1 million, to $61.6 million from $55.5
million in fiscal 2000. This increase was primarily a result of higher sales
volume offset by an increase in operating expenses.

Interest Income

Interest income in fiscal 2001 increased $2.7 million, to $16.8 million
from $14.1 million in fiscal 2000, primarily due to higher average cash, cash
equivalents and short-term investment balances during fiscal 2001. The
Companys higher average cash, cash equivalents and short-term investment
balances are 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 in fiscal 2001 decreased $1.0 million, to $1.2 million
from $2.2 million in 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 in fiscal 2000. The decrease in income tax expense
was due to a decrease in pre-tax income. The decrease in pre-tax income was due
to the research and development expense of $17.8 million related to the Corixa
collaboration. The decrease in the effective tax rate in fiscal 2001, as
compared to fiscal 2000, was primarily attributable to a change in

26



---



investment mix to non-taxable securities, contributions to charitable programs
that receive favorable tax treatment and an increase in the Companys research
and development credits.

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 primarily
due to the tax-effected research and development expense of $11.5 million
related to the Corixa collaboration. Absent this charge, net income increased
20.7%, or $8.9 million, to $51.9 million from $43.0 million in fiscal 2000.
This increase was due primarily to an increase in sales volume and interest
income, offset by an increase in strategic operating expenses.

Years ended June 30, 2000 and 1999

Net Revenues

Net revenues for fiscal 2000 increased 19.0%, or $22.2 million, to $139.1
million from $116.9 million for fiscal 1999. The Companys net revenues
increased in fiscal 2000 primarily as a result of sales growth associated with
the Companys DYNACIN®, LOPROX®, BUPHENYL® and TRIAZ® products. In fiscal 1999,
the Company divested or licensed 16 non-strategic products to Bioglan Pharma
plc (Bioglan). Net revenue associated with these products for fiscal 1999 was
$19.3 million. Absent divested products, net revenues for fiscal 2000 increased
42.6%, or $41.6 million, to $139.1 from $97.5 million in fiscal 1999.

Gross Profit

Gross profit during fiscal 2000 increased 18.8%, or $18.0 million, to
$113.2 million from $95.2 million in fiscal 1999. As a percentage of net
revenues, gross profit was 81.4% and 81.5% in fiscal 2000 and fiscal 1999,
respectively. Gross profit remained consistent primarily as a result of revenue
associated with the LOPROX®, LUSTRA® and BUPHENYL® products, which enjoy higher
gross profit percentages than the Companys other products, offset by an
increase in revenues associated with the DYNACIN® products, which have lower
gross profit percentages than the Companys other products. Amortization of
related intangible assets is not included in gross profit.

Selling, General and Administrative Expenses

Selling, general and administrative expenses in fiscal 2000 increased
18.8%, or $7.2 million, to $45.4 million from $38.2 million in fiscal 1999.
This increase was primarily attributable to an increase in personnel costs. The
increase in personnel costs was primarily due to an increase in the number of
employees, to 172 in fiscal 2000 from 144 in fiscal 1999, and yearly salary
escalations for existing employees. The increase was also due to variable costs
commensurate with increased sales volumes. Selling, general and administrative
expenses as a percentage of net revenues in fiscal 2000 remained consistent
from fiscal 1999.

Research and Development Expenses

Research and development expenses in fiscal 2000 increased 44.4%, or $1.5
million, to $4.9 million from $3.4 million in fiscal 1999. The increase was
primarily due to the timing of various research and development projects and
expenses associated with the clinical support of the Companys existing
products.

Depreciation and Amortization Expenses

Depreciation and amortization expenses in fiscal 2000 increased 26.9%, or
$1.6 million, to $7.4 million from $5.8 million in fiscal 1999. This increase
was primarily attributable to a full year of amortization of the purchase price
of the LOPROX®, TOPICORT® and A/T/S® products purchased by the Company in
November 1998; the BUPHENYL® products purchased in April 1999; and the VECTRIN®
products purchased in September 1999. The Company is amortizing the various
purchase prices over a period of 15 to 25 years.

27



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In-Process Research and Development

In fiscal 1999, the Company recorded a $9.5 million charge to operations
as in-process research and development related to new indications and forms of
certain products acquired, and had incurred additional charges for in-process
research and development of $35.4 million in 1998. The acquired in-process
research and development projects are in various stages of development, had not
reached technological feasibility at the time of acquisition and had no known
alternative uses.

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

A portion of the Companys in-process research and development projects
acquired in 1998 related to OTC products. Such projects were discontinued
during fiscal 1999 in conjunction with the Companys change in strategic focus
to prescription products. Of the remaining acquired in-process research and
development projects from 1998, the most significant project resulted in a new
product introduction during late fiscal 1999, as that product was completed and
commenced commercial sale. The Company continues its development efforts on the
remaining projects that were acquired in both 1998 and 1999 in the in-process
state. During fiscal 2000, the Company incurred development costs of
approximately $500,000, and should all of the remaining projects continue to
move toward commercialization, the Company estimates that future expenditures
could approximate $4.0 million over the next few years.

Operating Income

Operating income for fiscal 2000 increased $17.2 million, to $55.5 million
from $38.3 million in fiscal 1999. Absent special charges in fiscal 1999,
operating income in fiscal 2000 increased 16.1%, or $7.7 million, to $55.5
million from $47.8 million in fiscal 1999. This increase was primarily a result
of higher sales volume offset by an increase in cost of sales and operating
expenses.

Interest Income

Interest income in fiscal 2000 increased $2.6 million, to $14.1 million
from $11.5 million in fiscal 1999, primarily due to higher average cash, cash
equivalents and short-term investment balances during fiscal 2000. The
Companys higher average cash, cash equivalents and short-term investment
balances are due to cash generated from operations and proceeds from the
divestiture of non-strategic products in fiscal 1999, offset by a $22.0 million
payment made in November 1999 to Aventis, as successor-in-interest to HMR,
relating to the license of the LOPROX®, TOPICORT® and A/T/S® products, as well
as payments made in association with the acquisitions of the company Ucyclyd,
and the VECTRIN® products.

Interest Expense

Interest expense in fiscal 2000 increased $0.4 million, to $2.2 million
from $1.8 million in fiscal 1999. This increase was primarily attributable to a
full year of interest expense related to 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 2000 increased $0.2 million, to $24.4
million from $24.2 million in fiscal 1999. The increase in income tax expense
in fiscal 2000, as compared to fiscal 1999, was primarily due to an increase in
pre-tax income in fiscal 2000. In fiscal 1999, pre-tax income included a gain
of $17.7 million related to the sale of assets to Bioglan. Absent this gain on
the divestiture of products, pre-tax income increased $19.4 million, to $67.4
million from $48.0 million in fiscal 1999. Income tax expense increased $7.2
million, to $24.4 million from

28



---



$17.1 million in fiscal 1999. The decrease in the effective tax rate in fiscal
2000, as compared to fiscal 1999, was primarily attributable to the
implementation of tax-saving strategies and an increase in tax-exempt interest
income.

Net Income

Net income during fiscal 2000 increased approximately $1.6 million, to
$43.0 million from $41.4 million in fiscal 1999. Fiscal 1999 included special
charges to operations for in-process research and development related to the
license of LOPROX®, TOPICORT® and A/T/S®. Net income in fiscal 1999 also
included $17.7 million related to a gain on the sale of assets to Bioglan.
Absent tax-effected special charges and a tax-effected gain on divested
products in fiscal 1999, net income increased approximately 17.3%, or $6.4
million, to $43.0 million from $36.6 million in fiscal 1999. This increase was
due primarily to an increase in sales volume and interest income offset by an
increase in depreciation and amortization and research and development
expenses.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities for fiscal 2001 increased $29.4
million, to $70.6 million from $41.2 million in fiscal 2000. The change is
primarily due to an income tax receivable collected during fiscal 2001 and
positive cash flow fluctuations in other balance sheet accounts, offset by the
research and development expense related to the Corixa collaboration, which
reduced net income.

Net cash used in investing activities for fiscal 2001 increased $95.4
million, to $82.0 million from net cash provided by investing activities of
$13.4 million in fiscal 2000. The change is primarily due to payments made for
the license of product rights and the fluctuation in available-for-sale
investments.

Net cash provided by financing activities increased $2.6 million, to $12.5
million from $9.9 million in fiscal 2000. The change is primarily attributable
to proceeds received on the exercise of options under the Companys stock
option plans, offset by the purchase of treasury stock.

The Company had cash, cash equivalents and short-term investments of
$334.2 million and working capital of $358.5 million at June 30, 2001, as
compared to $285.7 million and $312.3 million, respectively, at June 30, 2000.

OTHER MATTERS

On May 10, 2001, Abbott and Medicis entered into an exclusive agreement
for Medicis to promote OMNICEF® (cefdinir) 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 from prescriptions generated in these
categories. Abbott will continue to promote OMNICEF® to primary care physicians
and pediatricians. In the U.S., the market for treatment of bacterial skin and
skin structure infections is estimated to be more than $1.5 billion.

On August 15, 2000, Medicis entered into a multi-year development,
commercialization and license agreement covering Corixas 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.

On September 21, 1999, the Company purchased VECTRIN®, a branded
minocycline HCl product line, and ownership of its ANDA from Warner Chilcott.
Under terms of the agreement, the Company paid Warner Chilcott $11.1 million
cash at closing and paid an additional $2.0 million in contingent payments in
April 2000. Additionally, the Company is making royalty payments and may be
obligated to make additional milestone payments conditioned upon the occurrence
of certain events.

On June 29, 1999, the Company sold the OTC products ZOSTRIX®, EXOREX and
THERAPLEX® and the prescription product ZONALON® to Bioglan. Medicis received
cash of $900,000 and issued a note receivable for $39.1 million, which was
collected in July 1999. Under terms of the agreement, the Company paid IMX

29



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Pharmaceuticals, Inc. $3.6 million subsequent to fiscal 1999 for the sale of
its interest in the EXOREX joint venture.

On April 19, 1999, the Company acquired 100% of the common stock of
Ucyclyd for net cash of approximately $14.3 million. Ucyclyds primary product,
the orphan drug BUPHENYL®, is indicated in the treatment of Urea Cycle
Disorder. Under terms of the agreement, the Company paid $15.1 million at the
close of the transaction, paid an additional $5.7 million in contingent
payments in April 2000 and may be required to pay an additional $2.7 million
upon regulatory approval of a product line extension.

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

In November 1998, the Company agreed to license, with an option to
purchase, the LOPROX®, TOPICORT® and A/T/S® products from Aventis. The Company,
using cash reserves, paid $22.0 million on the close of the transaction, made
another payment of $22.0 million in November 1999 and another payment of $22.0
million in November 2000. The Company has the option to purchase the products
for $16.5 million in November 2001. The purchase price is recorded at its
discounted value as a short-term obligation. The discount is being recorded as
interest expense over the related period. For accounting purposes, the Company
has recorded the transaction as an acquisition. In conjunction with this
acquisition, the Company recorded a charge to operations of $9.5 million, based
upon an independent valuation, relating to acquired in-process research and
development for projects that are in various stages of development, have not
reached technological feasibility, and have no known alternative future uses.

Inflation did not have a significant impact upon the results of the
Company during fiscal 2001, 2000 or 1999.

EFFECTS OF RECENTLY ISSUED ACCOUNTING STANDARDS

In June 2001, the 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 is currently reviewing the impact of SFAS No. 141 and
SFAS No. 142. The Company is required to adopt SFAS No. 141 for business
combinations commencing after July 1, 2001, and is required to adopt SFAS No.
142 on July 1, 2002. The Company is evaluating the provisions of SFAS No. 142
and the interpretations being developed to determine whether the Company will
implement SFAS No. 142 as of July 1, 2001, which is permitted under the
standard. The Company has not yet determined the potential impact of the
standard and whether the Company will adopt the provision early.

MARKET RISK AND RISK MANAGEMENT POLICIES

The Company is exposed to market risk primarily from interest rates and,
to a lesser extent, from changes in foreign currency exchange rates. The
following describes the nature of the risks and demonstrates that, in general,
such market risk is not material to the Company.

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

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

30



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ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Companys financial statements and schedule at June 30, 2001 and 2000
and for each of the three years in the period ending June 30, 2001 and the
Independent Auditors Report thereon are contained on pages F-1
through F-20
and S-1 of this Form 10-K.

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

None.

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 the Companys definitive proxy statement for the
2001 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A.

31



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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, 2001 and 2000                                            |                                                                                                                                                                                                                                                                                                                               |  | F-3  | 
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               |                                               | Consolidated statements of income for the years ended
June 30, 2001, 2000 and 1999               |                                                                                                                                                                                                                                                                                                                               |  | F-5  | 
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               |                                               | Consolidated statements of stockholders equity for the years
ended June 30, 2001, 2000 and 1999 |                                                                                                                                                                                                                                                                                                                               |  | F-6  | 
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               |                                               | Consolidated statements of cash flows for the years ended June 30,
2001, 2000 and 1999           |                                                                                                                                                                                                                                                                                                                               |  | F-8  | 
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               |                                               | Notes to consolidated financial statements                                                       |                                                                                                                                                                                                                                                                                                                               |  | F-9  | 
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               | (2)    Financial Statement Schedules:         |                                                                                                  |                                                                                                                                                                                                                                                                                                                               |  |     
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               |                                               | Schedule II  Valuation and Qualifying Accounts                                                  |                                                                                                                                                                                                                                                                                                                               |  | S-1  | 
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|                                                                               |                                               |                                                                                                  | The 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)
|           
|           
|           
|           
|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)                                                                                                                 
|           
|           
|           
|           
|4.3         |  | - |  | 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)                                                                                                                                                            
|           
|           
|           
|           
|10.58       |  | - |  | 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,                                                                                                                                                                

32



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|            |  |   |  |                                                                                                                                                                                                                                                       
|----------- |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |   |  | Description                                                                                                                                                                                                                                           
|
|           
|           
|           
|           
|            |  |   |  | 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)                                                                                                                                                        
|           
|           
|           
|           
|10.77       |  | - |  | Securities Account Pledge and Security Agreement, dated November 22, 1996, by
and between the Company and Norwest Bank Arizona, N.A. (12)                                                                                                             
|           
|           
|           
|           
|10.77(a)    |  | - |  | First Amendment to Securities Account Pledge and Security Agreement dated
November 22, 1998, by and between the Company and Norwest Bank Arizona, N.A. (14)                                                                                           
|           
|           
|           
|           
|10.78       |  | - |  | Acknowledgment of Control of Pledged Securities Account, dated November 22, 1996,
by and among Norwest Bank Arizona, N.A. and the Company and Norwest Bank Minnesota,
N.A. (12)                                                                       
|           
|           
|           
|           
|10.78(a)    |  | - |  | First Amendment to Acknowledgement of Control of Pledged Securities Account
dated November 22, 1998, by and between the Company and Norwest Bank
Arizona, N.A. (14)                                                                                   
|           
|           
|           
|           
|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)                                                                                                                                                   

33



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|            |  |   |  |                                                                                                                                                      
|----------- |  | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |   |  | Description                                                                                                                                          
|           
|           
|           
|           
|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)                                                  
|           
|           
|           
|           
|21.1        |  | - |  | Subsidiaries (16)                                                                                                                                    
|           
|           
|           
|           
|23.1        |  | - |  | Consent of Ernst & Young LLP, Independent Auditors (18)                                                                                              
|           
|           
|           
|           
|24. 1       |  | - |  | Power of Attorney(18) See signature page(s)                                                                                                          



| | (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                                                                        
|
| | (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                       

34



---





| | (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) |  | Filed herewith                                                                                                                                                                                    



|(b) |  | No reports on Form 8-K were filed with the SEC for the quarter ended June
30, 2001.                         
|--- |  | ------------------------------------------------------------------------------------------------------------
|   
|(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.                   

35



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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 a 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 28, 2001



| | 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 28, 2001 
|                                                  
|/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 28, 2001 
|                                                  
|/s/ ARTHUR G. ALTSCHUL, JR.Arthur G. Altschul, Jr. |  | Director                                                                                                                          |  | September 28, 2001 
|                                                  
|/s/ SPENCER DAVIDSONSpencer Davidson               |  | Director                                                                                                                          |  | September 28, 2001 
|                                                  
|/s/ PETER S. KNIGHT, ESQ.Peter S. Knight, Esq      |  | Director                                                                                                                          |  | September 28,  2001
|                                                  
|/s/ MICHAEL A. PIETRANGELOMichael A. Pietrangelo   |  | Director                                                                                                                          |  | September 28, 2001 
|                                                  
|/s/ PHILIP S. SCHEIN, M.D.Philip S. Schein, M.D.   |  | Director                                                                                                                          |  | September 28, 2001 
|                                                  
|/s/ LOTTIE SHACKELFORDLottie Shackelford           |  | Director                                                                                                                          |  | September 28, 2001 

36



---



MEDICIS PHARMACEUTICAL CORPORATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                  |  |     
|------------------------------------------------- |  | ----
|                                                  |  | PAGE
|                                                  |  |     
|Report of Ernst & Young LLP, Independent Auditors |  | F-2 
|                                                 
|                                                 
|                                                 
|                                                 
|Consolidated Balance Sheets                       |  | F-3 
|                                                 
|                                                 
|                                                 
|                                                 
|Consolidated Statements of Income                 |  | F-5 
|                                                 
|                                                 
|                                                 
|                                                 
|Consolidated Statements of Stockholders Equity   |  | F-6 
|                                                 
|                                                 
|                                                 
|                                                 
|Consolidated Statements of Cash Flows             |  | F-7 
|                                                 
|                                                 
|                                                 
|                                                 
|Notes to Consolidated Financial Statements        |  | F-8 

F-1



---



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, 2001 and 2000, and
the related consolidated statements of income, stockholders equity, and cash
flows for each of the three years in the period ended June 30, 2001. Our audits
also included the financial statement schedule listed in the Index at Item
14(a). 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 condition of Medicis
Pharmaceutical Corporation and subsidiaries at June 30, 2001 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 2001, 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 8, 2001

F-2



---



MEDICIS PHARMACEUTICAL CORPORATION

CONSOLIDATED BALANCE SHEETS

|                            |                                                                     |                                       |                                    |                       |             |            |             |             |             |            |             | 
|--------------------------- | ------------------------------------------------------------------- | ------------------------------------- | ---------------------------------- | --------------------- | ----------- | ---------- | ----------- | ----------- | ----------- | ---------- | ----------- | 
|                            |                                                                     |                                       |                                    |                       |             | JUNE 30,  
|                            |                                                                     |                                       |                                    |                       |             |           
|                            |                                                                     |                                       |                                    |                       |             | 2001       |             | 2000       
|                            |                                                                     |                                       |                                    |                       |             |            |             |            
|Assets
Current assets:      |                                                                     |                                       |                                    |                       |             |            |             |            
|                           
|                           
|                           
|                           
|                            |                                                                     | Cash and cash equivalents             |                                    | $                     | 153,257,738 |            |             | $           | 152,270,780 |           
|                           
|                           
|                           
|                           
|                            |                                                                     | Short-term investments                |                                    |                       | 180,899,419 |            |             |             | 133,466,609 |           
|                           
|                           
|                           
|                           
|                            |                                                                     | Accounts receivable, less allowances: |                                    |                       |             |            |             |             |             |           
|                           
|                           
|                           
|                           
|                            |                                                                     |                                       | 2001: $5,050,000; 2000: $4,190,000 |                       |             | 36,525,525 |             |             |             | 33,164,092 |            
|                           
|                           
|                           
|                           
|                            |                                                                     | Inventories                           |                                    |                       | 8,750,474   |            |             |             | 10,001,731  |           
|                           
|                           
|                           
|                           
|                            |                                                                     | Deferred tax assets                   |                                    |                       | 4,805,270   |            |             |             | 3,366,268   |           
|                           
|                           
|                           
|                           
|                            |                                                                     | Other current assets                  |                                    |                       | 14,640,434  |            |             |             | 19,018,672  |           
|                            |                                                                     |                                       |                                    |                       |             |            |             |            
|                            |                                                                     |                                       |                                    | Total current assets  |             |            | 398,878,860 |             |             |            | 351,288,152 | 
|                           
|                           
|                           
|                           
|Property and equipment, net |                                                                     |                                       | 1,964,396                          |                       |             |            | 1,758,946   |            
|                           
|                           
|                           
|                           
|Intangible assets:          |                                                                     |                                       |                                    |                       |             |            |             |            
|                           
|                           
|                           
|                           
|                            | Intangible assets related to product line and business acquisitions |                                       |                                    | 160,274,323           |             |            |             | 156,569,425 |            
|                           
|                           
|                           
|                           
|                            | Other intangible assets                                             |                                       |                                    | 10,875,675            |             |            |             | 899,414     |            
|                            |                                                                     |                                       |                                    |                       |             |            |             |            
|                            |                                                                     |                                       | 171,149,998                        |                       |             |            | 157,468,839 |            
|                           
|                           
|                           
|                           
|                            | Less: accumulated amortization                                      |                                       |                                    | 23,873,544            |             |            |             | 16,286,738  |            
|                            |                                                                     |                                       |                                    |                       |             |            |             |            
|                            |                                                                     |                                       |                                    | Net intangible assets |             |            | 147,276,454 |             |             |            | 141,182,101 | 
|                           
|                           
|                           
|                           
|Other non-current assets    |                                                                     |                                       | 576,408                            |                       |             |            | 1,110,356   |            
|                            |                                                                     |                                       |                                    |                       |             |            |             |            
|                            |                                                                     | $                                     | 548,696,118                        |                       |             | $          | 495,339,555 |            
|                            |                                                                     |                                       |                                    |                       |             |            |             |            

See accompanying notes.

F-3



---



MEDICIS PHARMACEUTICAL CORPORATION

CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                                 |                        |                                |                            |   |            |             |             |   |            |             | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------- | ------------------------------ | -------------------------- | - | ---------- | ----------- | ----------- | - | ---------- | ----------- | 
|                                                                                                                                                                 |                        |                                |                            |   | JUNE 30,  
|                                                                                                                                                                 |                        |                                |                            |   |           
|                                                                                                                                                                 |                        |                                |                            |   | 2001       |             | 2000       
|                                                                                                                                                                 |                        |                                |                            |   |            |             |            
|Liabilities
Current liabilities:                                                                                                                                 |                        |                                |                            |   |            |             |             |  
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                 |                        | Accounts payable               |                            | $ | 12,531,256 |             |             | $ | 10,554,984 |            
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                 |                        | Short-term contract obligation |                            |   | 16,160,010 |             |             |   | 22,000,000 |            
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                 |                        | Income taxes payable           |                            |   | 262,620    |             |             |   |           |            
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                 |                        | Other current liabilities      |                            |   | 11,456,686 |             |             |   | 6,431,617  |            
|                                                                                                                                                                 |                        |                                |                            |   |            |             |             |  
|                                                                                                                                                                 |                        |                                | Total current liabilities  |   |            | 40,410,572  |             |   |            | 38,986,601  | 
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                 | Long-term liabilities: |                                |                            |   |            |             |             |   |           
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                 |                        | Long-term contract obligation  |                            |   |           |             |             |   | 14,913,603 |            
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                 |                        | Deferred tax liability         |                            |   | 4,831,924  |             |             |   | 4,000,102  |            
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|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: 30,120,095 and 29,069,085 at June 30, 2001
and
2000, respectively |                        |                                | 421,681                    |   |            |             | 406,967     |  
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|Class B Common Stock, $0.014 par value; shares authorized: 1,000,000;
issued and outstanding: 422,962 at June 30, 2001 and 2000                                  |                        |                                | 5,921                      |   |            |             | 5,921       |  
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|Additional paid-in capital                                                                                                                                       |                        |                                | 407,442,306                |   |            |             | 372,067,685 |  
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|Accumulated other comprehensive income                                                                                                                           |                        |                                | 611,218                    |   |            |             | 479,410     |  
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|Accumulated earnings                                                                                                                                             |                        |                                | 104,898,951                |   |            |             | 64,479,266  |  
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|                                                                                                                                                                
|Treasury stock, 299,600 shares at cost                                                                                                                           |                        |                                | (9,926,455                 | ) |            |             |            |  
|                                                                                                                                                                 |                        |                                |                            |   |            |             |             |  
|                                                                                                                                                                 |                        |                                | Total stockholders equity |   |            | 503,453,622 |             |   |            | 437,439,249 | 
|                                                                                                                                                                 |                        |                                |                            |   |            |             |             |  
|                                                                                                                                                                 |                        | $                              | 548,696,118                |   |            | $           | 495,339,555 |  
|                                                                                                                                                                 |                        |                                |                            |   |            |             |             |  

See accompanying notes.

F-4



---



MEDICIS PHARMACEUTICAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

|                                                             |                              |   |                     |             |      |   |             |            |  |   |             |            | 
|------------------------------------------------------------ | ---------------------------- | - | ------------------- | ----------- | ---- | - | ----------- | ---------- |  | - | ----------- | ---------- | 
|                                                             |                              |   | YEAR ENDED JUNE 30,
|                                                             |                              |   |                    
|                                                             |                              |   | 2001                |             | 2000 |   | 1999       
|                                                             |                              |   |                     |             |      |   |            
|Net revenues                                                 |                              | $ | 167,801,480         |             |      | $ | 139,099,152 |            |  | $ | 116,870,540 |           
|                                                            
|                                                            
|                                                            
|                                                            
|Operating costs and expenses:                                |                              |   |                     |             |      |   |             |            |  |   |             |           
|                                                            
|                                                            
|                                                            
|                                                            
|Cost of sales                                                |                              |   | 30,696,614          |             |      |   | 25,911,579  |            |  |   | 21,633,902  |           
|                                                            
|                                                            
|                                                            
|                                                            
|Selling, general and administrative                          |                              |   | 59,507,765          |             |      |   | 45,403,841  |            |  |   | 38,219,119  |           
|                                                            
|                                                            
|                                                            
|                                                            
|Research and development                                     |                              |   | 25,515,552          |             |      |   | 4,902,715   |            |  |   | 3,396,393   |           
|                                                            
|                                                            
|                                                            
|                                                            
|Depreciation and amortization                                |                              |   | 8,260,938           |             |      |   | 7,374,534   |            |  |   | 5,810,288   |           
|                                                            
|                                                            
|                                                            
|                                                            
|In-process research and development                          |                              |   |                    |             |      |   |            |            |  |   | 9,500,000   |           
|                                                             |                              |   |                     |             |      |   |             |            |  |   |             |           
|                                                             | Operating costs and expenses |   |                     | 123,980,869 |      |   |             | 83,592,669 |  |   |             | 78,559,702 | 
|                                                             |                              |   |                     |             |      |   |             |            |  |   |             |           
|Operating income                                             |                              |   | 43,820,611          |             |      |   | 55,506,483  |            |  |   | 38,310,838  |           
|                                                            
|                                                            
|                                                            
|                                                            
|Interest income                                              |                              |   | 16,766,962          |             |      |   | 14,120,839  |            |  |   | 11,503,256  |           
|                                                            
|                                                            
|                                                            
|                                                            
|Interest expense                                             |                              |   | (1,262,653          | )           |      |   | (2,245,578  | )          |  |   | (1,825,200  | )         
|                                                            
|                                                            
|                                                            
|                                                            
|Gain on sale of assets                                       |                              |   |                    |             |      |   |            |            |  |   | 17,650,903  |           
|                                                             |                              |   |                     |             |      |   |             |            |  |   |             |           
|Income before taxes                                          |                              |   | 59,324,920          |             |      |   | 67,381,744  |            |  |   | 65,639,797  |           
|                                                            
|                                                            
|                                                            
|                                                            
|Income tax expense                                           |                              |   | (18,905,235         | )           |      |   | (24,387,562 | )          |  |   | (24,202,571 | )         
|                                                             |                              |   |                     |             |      |   |             |            |  |   |             |           
|Net income                                                   |                              | $ | 40,419,685          |             |      | $ | 42,994,182  |            |  | $ | 41,437,226  |           
|                                                             |                              |   |                     |             |      |   |             |            |  |   |             |           
|Basic net income per common
share                            |                              | $ | 1.34                |             |      | $ | 1.48        |            |  | $ | 1.46        |           
|                                                             |                              |   |                     |             |      |   |             |            |  |   |             |           
|Diluted net income per common
share                          |                              | $ | 1.28                |             |      | $ | 1.41        |            |  | $ | 1.41        |           
|                                                             |                              |   |                     |             |      |   |             |            |  |   |             |           
|Shares used in computing basic net income per
common share   |                              |   | 30,133,514          |             |      |   | 29,028,896  |            |  |   | 28,413,608  |           
|                                                             |                              |   |                     |             |      |   |             |            |  |   |             |           
|Shares used in computing diluted net income per
common share |                              |   | 31,693,702          |             |      |   | 30,498,776  |            |  |   | 29,462,311  |           
|                                                             |                              |   |                     |             |      |   |             |            |  |   |             |           

See accompanying notes.

F-5



---



MEDICIS PHARMACEUTICAL CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

|                         |                                                         |                      |                      |           |              |   |              |        |        |  |         |   |  |   |       |   |  |  | 
|------------------------ | ------------------------------------------------------- | -------------------- | -------------------- | --------- | ------------ | - | ------------ | ------ | ------ |  | ------- | - |  | - | ----- | - |  |  | 
|                         |                                                         |                      |                      |           | Class A      |   | Class B     
|                         |                                                         |                      |                      |           | Common Stock |   | Common Stock
|                         |                                                         |                      |                      |           |              |   |             
|                         |                                                         |                      |                      |           | Shares       |   | Amount       |        | Shares |  | Amount 
|                         |                                                         |                      |                      |           |              |   |              |        |        |  |        
|Balance at June 30, 1998 |                                                         |                      | 27,712,837           |           |              | $ | 387,980      |        |        |  | 422,962 |   |  | $ | 5,921 |  
|                        
|                        
|                        
|                        
|Comprehensive income:    |                                                         |                      |                      |           |              |   |              |        |        |  |         |   |  |   |       |  
|                        
|                        
|                        
|                        
|                         | Net income                                              |                      |                      |          |              |   |              |       |        |  |         |  |  |   |       |  | 
|                        
|                        
|                        
|                        
|                         | Net unrealized losses on available-for-sale
securities  |                      |                      |          |              |   |              |       |        |  |         |  |  |   |       |  | 
|                        
|                        
|                        
|                        
|                         | Net unrealized gains on foreign currency
translation    |                      |                      |          |              |   |              |       |        |  |         |  |  |   |       |  | 
|                        
|                        
|                        
|                        
|                         |                                                         | Comprehensive income |                      |           |              |   |              |        |        |  |         |   |  |   |       |   |  | 
|                        
|                        
|                        
|                        
|                         | Exercise of stock options                               |                      |                      | 526,432   |              |   |              | 7,370  |        |  |         |  |  |   |       |  | 
|                        
|                        
|                        
|                        
|                         | Tax effect of stock options exercised                   |                      |                      |          |              |   |              |       |        |  |         |  |  |   |       |  | 
|                        
|                        
|                        
|                        
|                         | Options issued in lieu of payment
for services rendered |                      |                      |          |              |   |              |       |        |  |         |  |  |   |       |  | 
|                         |                                                         |                      |                      |           |              |   |              |        |        |  |         |   |  |   |       |  
|Balance at June 30, 1999 |                                                         |                      | 28,239,269           |           |              |   | 395,350      |        |        |  | 422,962 |   |  |   | 5,921 |  
|                        
|                        
|                        
|                        
|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                               |                      |                      | 829,816   |              |   |              | 11,617 |        |  |         |  |  |   |       |  | 
|                        
|                        
|                        
|                        
|                         | Tax effect of stock options exercised                   |                      |                      |          |              |   |              |       |        |  |         |  |  |   |       |  | 
|                        
|                        
|                        
|                        
|                         | Options issued in lieu of payment for services
rendered |                      |                      |           |              |   |              |        |        |  |         |   |  |   |       |   | 
|                        
|                        
|                        
|                        
|                         | Balance at June 30, 2000                               
|                        
|                        
|                        
|                        
|                         | Comprehensive income:                                   |                      |                      |          |              |   |              |       |        |  |         |  |  |   |       |  | 
|                         |                                                         |                      |                      |           |              |   |              |        |        |  |         |   |  |   |       |  
|                         |                                                         |                      | 29,069,085           |           |              |   | 406,967      |        |        |  | 422,962 |   |  |   | 5,921 |  
|                        
|                        
|                        
|                        
|                         | Net income                                              |                      |                      |          |              |   |              |       |        |  |         |  |  |   |       |  | 
|                        
|                        
|                        
|                        
|                         | Net unrealized gains on available-for-sale
securities   |                      |                      |          |              |   |              |       |        |  |         |  |  |   |       |  | 
|                        
|                        
|                        
|                        
|                         | Net unrealized losses on foreign currency
translation   |                      |                      |          |              |   |              |       |        |  |         |  |  |   |       |  | 
|                        
|                        
|                        
|                        
|                         |                                                         |                      | Comprehensive income |           |              |   |              |        |        |  |         |   |  |   |       |   |  |  | 
|                        
|                        
|                        
|                        
|                         | Exercise of stock options                               |                      |                      | 1,051,010 |              |   |              | 14,714 |        |  |         |  |  |   |       |  | 
|                        
|                        
|                        
|                        
|                         | Tax effect of stock options exercised                   |                      |                      |          |              |   |              |       |        |  |         |  |  |   |       |  | 
|                        
|                        
|                        
|                        
|                         | Options issued in lieu of payment for services
rendered |                      |                      |          |              |   |              |       |        |  |         |  |  |   |       |  | 
|                        
|                        
|                        
|                        
|                         | Purchase of treasury stock                              |                      |                      |          |              |   |              |       |        |  |         |  |  |   |       |  | 
|                         |                                                         |                      |                      |           |              |   |              |        |        |  |         |   |  |   |       |  
|Balance at June 30, 2001 |                                                         |                      | 30,120,095           |           |              | $ | 421,681      |        |        |  | 422,962 |   |  | $ | 5,921 |  
|                         |                                                         |                      |                      |           |              |   |              |        |        |  |         |   |  |   |       |  

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                         |                                                         |                      |                      |            |            |   |               |          |             |   |             |            |  |  | 
|------------------------ | ------------------------------------------------------- | -------------------- | -------------------- | ---------- | ---------- | - | ------------- | -------- | ----------- | - | ----------- | ---------- |  |  | 
|                         |                                                         |                      |                      |            |            |   |               |          | Accumulated |   |             |            | 
|                         |                                                         |                      |                      |            | Additional |   | Other         |          | Accumulated
|                         |                                                         |                      |                      |            | Paid-In    |   | Comprehensive |          | (Deficit)  
|                         |                                                         |                      |                      |            | Capital    |   | Income (Loss) |          | Earnings   
|                         |                                                         |                      |                      |            |            |   |               |          |            
|Balance at June 30, 1998 |                                                         | $                    | 343,976,037          |            |            | $ | 77,689        |          |             | $ | (19,952,142 | )         
|                        
|                        
|                        
|                        
|Comprehensive income:    |                                                         |                      |                      |            |            |   |               |          |             |   |             |           
|                        
|                        
|                        
|                        
|                         | Net income                                              |                      |                      |           |            |   |               |         |             |   |             | 41,437,226 | 
|                        
|                        
|                        
|                        
|                         | Net unrealized losses on available-for-sale securities  |                      |                      |           |            |   |               | (371,619 | )           |   |             |           | 
|                        
|                        
|                        
|                        
|                         | Net unrealized gains on foreign currency translation    |                      |                      |           |            |   |               | 146      |             |   |             |           | 
|                        
|                        
|                        
|                        
|                         |                                                         | Comprehensive income |                      |            |            |   |               |          |             |   |             |            |  | 
|                        
|                        
|                        
|                        
|                         | Exercise of stock options                               |                      |                      | 3,834,839  |            |   |               |         |             |   |             |           | 
|                        
|                        
|                        
|                        
|                         | Tax effect of stock options exercised                   |                      |                      | 4,329,969  |            |   |               |         |             |   |             |           | 
|                        
|                        
|                        
|                        
|                         | Options issued in lieu of payment for services rendered |                      |                      | 15,000     |            |   |               |         |             |   |             |           | 
|                         |                                                         |                      |                      |            |            |   |               |          |             |   |             |           
|Balance at June 30, 1999 |                                                         |                      | 352,155,845          |            |            |   | (293,784      | )        |             |   | 21,485,084  |           
|                        
|                        
|                        
|                        
|Comprehensive income:    |                                                         |                      |                      |            |            |   |               |          |             |   |             |           
|                        
|                        
|                        
|                        
|                         | Net income                                              |                      |                      |           |            |   |               |         |             |   |             | 42,994,182 | 
|                        
|                        
|                        
|                        
|                         | Net unrealized gains on available-for-sale securities   |                      |                      |           |            |   |               | 790,228  |             |   |             |           | 
|                        
|                        
|                        
|                        
|                         | Net unrealized losses on foreign currency translation   |                      |                      |           |            |   |               | (17,034  | )           |   |             |           | 
|                        
|                        
|                        
|                        
|                         |                                                         |                      | Comprehensive income |            |            |   |               |          |             |   |             |            |  |  | 
|                        
|                        
|                        
|                        
|                         | Exercise of stock options                               |                      |                      | 10,162,400 |            |   |               |         |             |   |             |           | 
|                        
|                        
|                        
|                        
|                         | Tax effect of stock options exercised                   |                      |                      | 9,728,440  |            |   |               |         |             |   |             |           | 
|                        
|                        
|                        
|                        
|                         | Options issued in lieu of payment for services rendered |                      |                      | 21,000     |            |   |               |         |             |   |             |           | 
|                         |                                                         |                      |                      |            |            |   |               |          |             |   |             |           
|Balance at June 30, 2000 |                                                         |                      | 372,067,685          |            |            |   | 479,410       |          |             |   | 64,479,266  |           
|                        
|                        
|                        
|                        
|Comprehensive income:    |                                                         |                      |                      |            |            |   |               |          |             |   |             |           
|                        
|                        
|                        
|                        
|                         | Net income                                              |                      |                      |           |            |   |               |         |             |   |             | 40,419,685 | 
|                        
|                        
|                        
|                        
|                         | Net unrealized gains on available-for-sale securities   |                      |                      |           |            |   |               | 261,331  |             |   |             |           | 
|                        
|                        
|                        
|                        
|                         | Net unrealized losses on foreign currency translation   |                      |                      |           |            |   |               | (129,523 | )           |   |             |           | 
|                        
|                        
|                        
|                        
|                         |                                                         |                      | Comprehensive income |            |            |   |               |          |             |   |             |            |  |  | 
|                        
|                        
|                        
|                        
|                         | Exercise of stock options                               |                      |                      | 22,459,947 |            |   |               |         |             |   |             |           | 
|                        
|                        
|                        
|                        
|                         | Tax effect of stock options exercised                   |                      |                      | 12,886,174 |            |   |               |         |             |   |             |           | 
|                        
|                        
|                        
|                        
|                         | Options issued in lieu of payment for services rendered |                      |                      | 28,500     |            |   |               |         |             |   |             |           | 
|                        
|                        
|                        
|                        
|                         | Purchase of treasury stock                              |                      |                      |           |            |   |               |         |             |   |             |           | 
|                         |                                                         |                      |                      |            |            |   |               |          |             |   |             |           
|Balance at June 30, 2001 |                                                         | $                    | 407,442,306          |            |            | $ | 611,218       |          |             | $ | 104,898,951 |           
|                         |                                                         |                      |                      |            |            |   |               |          |             |   |             |           

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                         |                                                         |                      |                      |          |          |   |            |            |       |   |             |            |            |            | 
|------------------------ | ------------------------------------------------------- | -------------------- | -------------------- | -------- | -------- | - | ---------- | ---------- | ----- | - | ----------- | ---------- | ---------- | ---------- | 
|                         |                                                         |                      |                      |          | Treasury |   |            |            |      
|                         |                                                         |                      |                      |          | Stock    |   |            |            |      
|                         |                                                         |                      |                      |          |          |   |            |            |      
|                         |                                                         |                      |                      |          | Shares   |   | Amount     |            | Total
|                         |                                                         |                      |                      |          |          |   |            |            |      
|Balance at June 30, 1998 |                                                         |                      |                     |          |          | $ |           |            |       | $ | 324,495,485 |           
|                        
|                        
|                        
|                        
|Comprehensive income:    |                                                         |                      |                      |          |          |   |            |            |       |   |             |           
|                        
|                        
|                        
|                        
|                         | Net income                                              |                      |                      |         |          |   |            |           |       |   |             | 41,437,226 |           
|                        
|                        
|                        
|                        
|                         | Net unrealized losses on available-for-sale securities  |                      |                      |         |          |   |            |           |       |   |             | (371,619   | )         
|                        
|                        
|                        
|                        
|                         | Net unrealized gains on foreign currency translation    |                      |                      |         |          |   |            |           |       |   |             | 146        |           
|                        
|                        
|                        
|                        
|                         |                                                         | Comprehensive income |                      |          |          |   |            |            |       |   |             |            | 41,065,753 |           
|                        
|                        
|                        
|                        
|                         | Exercise of stock options                               |                      |                      |         |          |   |            |           |       |   |             | 3,842,209  |           
|                        
|                        
|                        
|                        
|                         | Tax effect of stock options exercised                   |                      |                      |         |          |   |            |           |       |   |             | 4,329,969  |           
|                        
|                        
|                        
|                        
|                         | Options issued in lieu of payment for services rendered |                      |                      |         |          |   |            |           |       |   |             | 15,000     |           
|                         |                                                         |                      |                      |          |          |   |            |            |       |   |             |           
|Balance at June 30, 1999 |                                                         |                      |                     |          |          |   |            |            |       |   | 373,748,416 |           
|                        
|                        
|                        
|                        
|Comprehensive income:    |                                                         |                      |                      |          |          |   |            |            |       |   |             |           
|                        
|                        
|                        
|                        
|                         | Net income                                              |                      |                      |          |          |   |            |            |       |   |             | 42,994,182 |           
|                        
|                        
|                        
|                        
|                         | Net unrealized gains on available-for-sale securities   |                      |                      |         |          |   |            |           |       |   |             | 790,228    |           
|                        
|                        
|                        
|                        
|                         | Net unrealized losses on foreign currency translation   |                      |                      |         |          |   |            |           |       |   |             | (17,034    | )         
|                        
|                        
|                        
|                        
|                         |                                                         |                      | Comprehensive income |          |          |   |            |            |       |   |             |            |            | 43,767,376 | 
|                        
|                        
|                        
|                        
|                         | Exercise of stock options                               |                      |                      |         |          |   |            |           |       |   |             | 10,174,017 |           
|                        
|                        
|                        
|                        
|                         | Tax effect of stock options exercised                   |                      |                      |         |          |   |            |           |       |   |             | 9,728,440  |           
|                        
|                        
|                        
|                        
|                         | Options issued in lieu of payment for services rendered |                      |                      |         |          |   |            |           |       |   |             | 21,000     |           
|                         |                                                         |                      |                      |          |          |   |            |            |       |   |             |           
|Balance at June 30, 2000 |                                                         |                      |                     |          |          |   |           |            |       |   | 437,439,249 |           
|                        
|                        
|                        
|                        
|Comprehensive income:    |                                                         |                      |                      |          |          |   |            |            |       |   |             |           
|                        
|                        
|                        
|                        
|                         | Net income                                              |                      |                      |         |          |   |            |           |       |   |             | 40,419,685 |           
|                        
|                        
|                        
|                        
|                         | Net unrealized gains on available-for-sale securities   |                      |                      |         |          |   |            |           |       |   |             | 261,331    |           
|                        
|                        
|                        
|                        
|                         | Net unrealized losses on foreign currency translation   |                      |                      |         |          |   |            |           |       |   |             | (129,523   | )         
|                        
|                        
|                        
|                        
|                         |                                                         |                      | Comprehensive income |          |          |   |            |            |       |   |             |            |            | 40,551,493 | 
|                        
|                        
|                        
|                        
|                         | Exercise of stock options                               |                      |                      |         |          |   |            |           |       |   |             | 22,474,661 |           
|                        
|                        
|                        
|                        
|                         | Tax effect of stock options exercised                   |                      |                      |         |          |   |            |           |       |   |             | 12,886,174 |           
|                        
|                        
|                        
|                        
|                         | Options issued in lieu of payment for services rendered |                      |                      |         |          |   |            |           |       |   |             | 28,500     |           
|                        
|                        
|                        
|                        
|                         | Purchase of treasury stock                              |                      |                      | (299,600 | )        |   |            | (9,926,455 | )     |   |             | (9,926,455 | )         
|                         |                                                         |                      |                      |          |          |   |            |            |       |   |             |           
|Balance at June 30, 2001 |                                                         |                      | (299,600             | )        |          | $ | (9,926,455 | )          |       | $ | 503,453,622 |           
|                         |                                                         |                      |                      |          |          |   |            |            |       |   |             |           

See accompanying notes.

F-6





---



MEDICIS PHARMACEUTICAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                  |                                                       |                                 |                                                     |            |                     |             |              |           |             |            |              |             |             |             |  
|--------------------------------------------------------------------------------- | ----------------------------------------------------- | ------------------------------- | --------------------------------------------------- | ---------- | ------------------- | ----------- | ------------ | --------- | ----------- | ---------- | ------------ | ----------- | ----------- | ----------- | -
|                                                                                  |                                                       |                                 |                                                     |            | YEAR ENDED JUNE 30,
|                                                                                  |                                                       |                                 |                                                     |            |                    
|                                                                                  |                                                       |                                 |                                                     |            | 2001                |             | 2000         |           | 1999       
|                                                                                  |                                                       |                                 |                                                     |            |                     |             |              |           |            
|Operating Activities:                                                             |                                                       |                                 |                                                     |            |                     |             |              |           |             |            |              |            
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Net income                                                                        |                                                       | $                               | 40,419,685                                          |            |                     | $           | 42,994,182   |           |             | $          | 41,437,226   |            
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Adjustments to reconcile net income to net cash
provided by operating activities: |                                                       |                                 |                                                     |            |                     |             |              |           |             |            |              |            
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | In-process research and development                   |                                 |                                                     |           |                     |             |              |          |             |            |              | 9,500,000   |            
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Gain on sale of assets                                |                                 |                                                     |           |                     |             |              |          |             |            |              | (17,650,903 | )          
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Depreciation and amortization                         |                                 |                                                     | 8,260,938  |                     |             |              | 7,374,534 |             |            |              | 5,810,288   |            
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | (Gain) loss on sale of available-for-sale investments |                                 |                                                     | (1,324,558 | )                   |             |              | (483,038  | )           |            |              | 14,658      |            
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Other non-cash expenses                               |                                 |                                                     | 28,500     |                     |             |              | 21,000    |             |            |              | 15,000      |            
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Deferred income tax (benefit) expense                 |                                 |                                                     | (607,180   | )                   |             |              | 2,947,647 |             |            |              | (9,792,229  | )          
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Provision for doubtful accounts and returns           |                                 |                                                     | 860,000    |                     |             |              | 375,000   |             |            |              | 989,000     |            
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Accretion of premium on investments                   |                                 |                                                     | 178,486    |                     |             |              | 508,323   |             |            |              | 179,649     |            
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Accretion of discount on contract obligation          |                                 |                                                     | 1,246,407  |                     |             |              | 2,197,147 |             |            |              | 1,801,885   |            
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Changes in operating assets and liabilities (net of
acquired amounts):            |                                                       |                                 |                                                     |            |                     |             |              |           |             |            |              |            
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                       | Accounts receivable             |                                                     |            | (4,221,433          | )           |              |           | (1,956,157  | )          |              |             | (13,285,268 | )          
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                       | Inventories                     |                                                     |            | 1,251,257           |             |              |           | (1,338,576  | )          |              |             | 2,298,397   |            
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                       | Other current assets            |                                                     |            | 4,378,238           |             |              |           | (2,502,530  | )          |              |             | (4,134,323  | )          
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                       | Accounts payable                |                                                     |            | 1,976,272           |             |              |           | 1,208,740   |            |              |             | 2,975,103   |            
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                       | Income taxes payable            |                                                     |            | 262,620             |             |              |           | (10,659,944 | )          |              |             | 5,732,786   |            
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                       | Tax benefit of option exercises |                                                     |            | 12,886,174          |             |              |           | 9,728,440   |            |              |             | 4,329,969   |            
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                       | Other current liabilities       |                                                     |            | 5,025,069           |             |              |           | (9,176,278  | )          |              |             | (4,796,891  | )          
|                                                                                  |                                                       |                                 |                                                     |            |                     |             |              |           |             |            |              |            
|                                                                                  |                                                       |                                 | Net cash provided by operating activities           |            |                     | 70,620,475  |              |           |             | 41,238,490 |              |             |             | 25,424,347  |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Investing Activities:                                                             |                                                       |                                 |                                                     |            |                     |             |              |           |             |            |              |            
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Purchase of property and equipment                                                |                                                       |                                 | (849,686                                            | )          |                     |             | (628,941     | )         |             |            | (725,165     | )          
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Proceeds from sale of product rights                                              |                                                       |                                 |                                                    |            |                     |             | 39,100,000   |           |             |            | 10,712,402   |            
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Acquisition of businesses, net of cash acquired                                   |                                                       |                                 |                                                    |            |                     |             | (5,974,973   | )         |             |            | (14,278,840  | )          
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Payments for purchase of product rights                                           |                                                       |                                 | (35,711,055                                         | )          |                     |             | (36,723,130  | )         |             |            | (25,110,371  | )          
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Purchase of available-for-sale investments                                        |                                                       |                                 | (200,515,584                                        | )          |                     |             | (159,776,955 | )         |             |            | (202,169,056 | )          
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Sale of available-for-sale investments                                            |                                                       |                                 | 50,807,177                                          |            |                     |             | 29,937,533   |           |             |            | 52,644,964   |            
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Maturity of available-for-sale investments                                        |                                                       |                                 | 104,183,000                                         |            |                     |             | 147,170,951  |           |             |            | 89,711,000   |            
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Change in other assets                                                            |                                                       |                                 | 33,948                                              |            |                     |             | 282,382      |           |             |            | 355,712      |            
|                                                                                  |                                                       |                                 |                                                     |            |                     |             |              |           |             |            |              |            
|                                                                                  |                                                       |                                 | Net cash (used in) provided by investing
activities |            |                     | (82,052,200 | )            |           |             | 13,386,867 |              |             |             | (88,859,354 | )
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Financing Activities:                                                             |                                                       |                                 |                                                     |            |                     |             |              |           |             |            |              |            
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Payment of notes payable                                                          |                                                       |                                 |                                                    |            |                     |             | (100,000     | )         |             |            | (105,920     | )          
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Change in other non-current liabilities                                           |                                                       |                                 |                                                    |            |                     |             | (130,278     | )         |             |            | 6,163        |            
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Purchase of treasury stock                                                        |                                                       |                                 | (9,926,455                                          | )          |                     |             |             |           |             |            |             |            
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Proceeds from the exercise of options                                             |                                                       |                                 | 22,474,661                                          |            |                     |             | 10,174,017   |           |             |            | 3,842,209    |            
|                                                                                  |                                                       |                                 |                                                     |            |                     |             |              |           |             |            |              |            
|                                                                                  |                                                       |                                 | Net cash provided by financing activities           |            |                     | 12,548,206  |              |           |             | 9,943,739  |              |             |             | 3,742,452   |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Effect of foreign currency exchange rate on cash and
cash equivalents             |                                                       |                                 | (129,523                                            | )          |                     |             | (17,034      | )         |             |            | 146          |            
|                                                                                  |                                                       |                                 |                                                     |            |                     |             |              |           |             |            |              |            
|Net increase (decrease) in cash and cash equivalents                              |                                                       |                                 | 986,958                                             |            |                     |             | 64,552,062   |           |             |            | (59,692,409  | )          
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Cash and cash equivalents at beginning of year                                    |                                                       |                                 | 152,270,780                                         |            |                     |             | 87,718,718   |           |             |            | 147,411,127  |            
|                                                                                  |                                                       |                                 |                                                     |            |                     |             |              |           |             |            |              |            
|Cash and cash equivalents at end of year                                          |                                                       | $                               | 153,257,738                                         |            |                     | $           | 152,270,780  |           |             | $          | 87,718,718   |            
|                                                                                  |                                                       |                                 |                                                     |            |                     |             |              |           |             |            |              |            

See accompanying notes.

F-7



---



MEDICIS PHARMACEUTICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2001

NOTE 1. FORMATION AND DEVELOPMENT OF THE COMPANY

Medicis Pharmaceutical Corporation and its wholly owned subsidiaries
(Medicis or the Company) is a specialty pharmaceutical company and the
leading independent pharmaceutical company in the United States focusing
primarily on the treatment of dermatological conditions. Medicis offers
prescription products and an over-the-counter (OTC) product, emphasizing the
clinical effectiveness, quality, affordability and cosmetic elegance of its
products. Medicis develops and markets leading products for major segments
within dermatology, including acne, fungal infections, rosacea,
hyperpigmentation, photoaging, psoriasis, eczema, skin and skin-structure infections,
seborrheic dermatitis, head lice and cosmesis (improvement in the texture and
appearance of skin). Medicis has built its business by successfully executing a
four-part growth strategy. The Companys growth strategy includes: (1)
expanding sales of existing brands; (2) launching new products from research
and development efforts; (3) acquiring complementary strategic products,
technologies, and businesses; and (4) collaborating with other companies.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

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

Cash and Cash Equivalents

At June 30, 2001, cash and cash equivalents included highly liquid
investments invested in money market accounts consisting of government
securities and high-grade commercial paper. These investments are stated at
cost, which approximates fair value. The Company considers all highly liquid
investments purchased with a remaining maturity of three months or less to be
cash equivalents.

Investments

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

Inventories

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

F-8



---



Inventories are as follows:

|                  |  |          |           |      |  |   |            | 
|----------------- |  | -------- | --------- | ---- |  | - | ---------- | 
|                  |  | June 30,
|                  |  |         
|                  |  | 2001     |           | 2000
|                  |  |          |           |     
|Raw materials     |  | $        | 3,066,582 |      |  | $ | 2,700,695  | 
|                 
|                 
|                 
|                 
|Finished goods    |  |          | 5,683,892 |      |  |   | 7,301,036  | 
|                  |  |          |           |      |  |   |            | 
|Total inventories |  | $        | 8,750,474 |      |  | $ | 10,001,731 | 
|                  |  |          |           |      |  |   |            | 

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:

|                                  |  |          |            |      |  |   |           |  
|--------------------------------- |  | -------- | ---------- | ---- |  | - | --------- | -
|                                  |  | June 30,
|                                  |  |         
|                                  |  | 2001     |            | 2000
|                                  |  |          |            |     
|Furniture, fixtures and equipment |  | $        | 2,896,202  |      |  | $ | 2,225,969 |  
|                                 
|                                 
|                                 
|                                 
|Leasehold improvements            |  |          | 502,611    |      |  |   | 480,970   |  
|                                  |  |          |            |      |  |   |           |  
|                                  |  |          | 3,398,813  |      |  |   | 2,706,939 |  
|                                 
|                                 
|                                 
|                                 
|Less: accumulated depreciation    |  |          | (1,434,417 | )    |  |   | (947,993  | )
|                                  |  |          |            |      |  |   |           |  
|                                  |  | $        | 1,964,396  |      |  | $ | 1,758,946 |  
|                                  |  |          |            |      |  |   |           |  

Intangible Assets

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

Other Current Liabilities

Other current liabilities are as follows:

|                       |  |          |            |      |  |   |           | 
|---------------------- |  | -------- | ---------- | ---- |  | - | --------- | 
|                       |  | June 30,
|                       |  |         
|                       |  | 2001     |            | 2000
|                       |  |          |            |     
|Accrued incentives     |  | $        | 4,132,927  |      |  | $ | 3,066,000 | 
|                      
|                      
|                      
|                      
|Other accrued expenses |  |          | 7,323,759  |      |  |   | 3,365,617 | 
|                       |  |          |            |      |  |   |           | 
|                       |  | $        | 11,456,686 |      |  | $ | 6,431,617 | 
|                       |  |          |            |      |  |   |           | 

Revenue Recognition

The Company recognizes revenue pursuant to Staff Accounting Bulletin No.
101 Revenue Recognition in Financial Statements (SAB 101). Accordingly,
revenue is recognized when all four of the following criteria are met: (i)
persuasive evidence that arrangement exists; (ii) delivery of the products
and/or services has occurred; (iii) the selling price is both fixed and
determinable and; (iv) collectibility is reasonably probable.

Revenue from product sales is recognized upon shipment, net of discounts,
rebates and estimated allowances for chargebacks and returns. The Company
principally authorizes returns for damaged products and

F-9



---



exchanges for expired products in accordance with its Return Goods Policy
and Procedures, and establishes reserves for such amounts at the time of sale.
The Company has not experienced significant returns of damaged or expired
products.

Advertising

The Company expenses advertising as incurred. Advertising expenses for the
fiscal years ended June 30, 2001 (fiscal 2001), June 30, 2000 (fiscal 2000)
and June 30, 1999 (fiscal 1999) were approximately $15,016,000, $11,521,000
and $11,922,000, respectively.

Stock-Based Compensation

The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants to employees in accordance
with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees (APB No. 25) and, accordingly, recognizes no compensation
expense for employee stock option grants. 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
(EITF) Issue No. 96-18, Accounting for Equity Instruments that are Issued to
Other than Employees.

Shipping Costs

Substantially all costs of shipping products to customers are included in
selling, general and administrative expense.

Research and Development Costs

All research and development costs, including payments related to products
under development and research consulting agreements, are expensed as incurred.
The Company records expenses for up-front, non-refundable research and
development payments in the period they are paid, given that there is no
recourse provision against the collaboration partner for failing to continue to
move the product toward commercialization. The timing of these payments will
vary depending upon collaboration opportunities available to Medicis. Due to
the uncertainty of when these opportunities may be available, Medicis cannot
determine in which quarter these future payments may be made.

Income Taxes

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

Earnings 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 (SFAS No. 128).

Statements of Cash Flows

Non-cash investing and financing activities were as follows:

|                                        |  |          |  |      |  |      |   |  |  |   |   |  |  |   |            | 
|--------------------------------------- |  | -------- |  | ---- |  | ---- | - |  |  | - | - |  |  | - | ---------- | 
|                                        |  | JUNE 30,
|                                        |  |         
|                                        |  | 2001     |  | 2000 |  | 1999
|                                        |  |          |  |      |  |     
|Note receivable from the sale of assets |  |          |  |      |  | $    |  |  |  | $ |  |  |  | $ | 39,100,000 | 

F-10



---



Use of Estimates

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

Fair Value of Financial Instruments

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

Segment Information

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

Recently Issued Accounting Standards

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, (SFAS No. 133), Accounting for
Derivative Instruments and Hedging Activities. This statement provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. In July 1999, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No.
137, which deferred the effective date of SFAS No. 133 for one year. In June
2000, the FASB issued Statement of Financial Accounting Standards No. 138,
(SFAS No. 138), Accounting for Certain Derivative Instruments and Certain
Hedging Activities  an amendment to FASB Statement No. 133. This statement
amended certain provisions of SFAS No. 133. The Company adopted SFAS No. 133 in
the first quarter of fiscal 2001 with no effect to the Companys financial
position or results of operations.

In December 1999, the Securities and Exchange Commission (SEC) issued SAB
101. SAB 101 provides guidance related to revenue recognition based upon
interpretations and practices followed by the SEC. For the Company, SAB 101 was
effective the quarter ended June 30, 2001. The adoption of SAB 101 did not have
an impact on the financial position or results of operations of the Company.

In June 2001, the 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 is currently reviewing the impact of SFAS No. 141 and
SFAS No. 142. The Company is required to adopt SFAS No. 141 for business
combinations commencing after July 1, 2001, and is required to adopt SFAS No.
142 on July 1, 2002. The Company is evaluating the provisions of SFAS No. 142
and the interpretations being developed to determine whether the Company will
implement SFAS No. 142 as of July 1, 2001, which is permitted under the
standard. The Company has not yet determined the potential impact of the
standard and whether the Company will adopt the provision early.

F-11



---



NOTE 3. STRATEGIC COLLABORATIONS

On May 10, 2001, Abbott Laboratories, Inc. (Abbott) and Medicis entered
into an exclusive agreement for Medicis to promote OMNICEF® (cefdinir)
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
from prescriptions generated in these categories. Abbott will continue to
promote OMNICEF® to primary care physicians and pediatricians.

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. 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. Medicis also recorded $788,000 in
research and development expenses related to this development,
commercialization and license agreement. Medicis will continue to seek
opportunities such as the Corixa collaboration to enhance its research and
development pipeline. The Company records expenses for up-front, non-refundable
research and development payments in the period they are paid, given that there
is no recourse provision against the collaboration partner for failing to
continue to move the product toward commercialization. The timing of these
payments will vary depending upon collaboration opportunities available to
Medicis. Due to the uncertainty of when these opportunities may be available,
Medicis cannot determine in which quarter these future payments may be made.

NOTE 4. PRODUCT LINE AND BUSINESS ACQUISITIONS AND DIVESTITURES

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 $2.0 million in contingent payments in April
2000. Additionally, the Company is making royalty payments and may be obligated
to make additional milestone payments conditioned upon the occurrence of
certain events.

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

On April 19, 1999, the Company acquired 100% of the common stock of
Ucyclyd Pharma, Inc. (Ucyclyd), a privately held pharmaceutical company based
in Baltimore, Maryland, for net cash of approximately $14.3 million. Ucyclyds
primary product, the orphan drug BUPHENYL®, is indicated in the treatment of
Urea Cycle Disorder. Under terms of the agreement, the Company paid $15.1
million at the close of the transaction, paid an additional $5.7 million in
contingent payments in April 2000, and may be required to pay an additional
$2.7 million upon regulatory approval of a product line extension. The business
acquired was not significant under Securities and Exchange Commission rules.

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

On November 29, 1998, the Company agreed to license, with an option to
purchase, the LOPROX®, TOPICORT® and A/T/S® products from Aventis Pharma
(Aventis) as successor-in-interest to Hoechst Marion Roussel (HMR). The
Company, using cash reserves, paid $22.0 million at the close of the
transaction, made one

F-12



---



payment of $22.0 million in November 1999 and another payment of $22.0
million in November 2000. The Company has the option to purchase the products
for $16.5 million in November 2001. The purchase price is recorded at its
discounted value as a short-term obligation and the discount is being recorded
as interest expense over the related period. For accounting purposes, the
Company recorded the transaction as an acquisition. In conjunction with this
acquisition, the Company recorded a charge to operations of $9.5 million, based
upon an independent valuation, relating to acquired in-process research and
development for projects that are in various stages of development, have not
reached technological feasibility, and have no known alternative future uses.

The efforts required to develop the acquired in-process research and
development into commercially viable products include completion of the
development stages of the commercially viable products, clinical-trial testing,
FDA approval and commercialization. Due to the nature of the pharmaceutical
development process, the Company anticipates incurring additional costs to
develop these products. However, there is no certainty that any of these
development efforts will result in commercially viable products. During fiscal
2001, the Company incurred development costs of approximately $1.6 million
related to the acquired in-process research and development, and should all of
the remaining projects continue to move toward commercialization, the Company
estimates that future expenditures could approximate $7.0 million over the next
few years.

NOTE 5. SHORT-TERM INVESTMENTS

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

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

|                          |  |               |             |       |  |            |           |            |  |       |        |  |  |   |             | 
|------------------------- |  | ------------- | ----------- | ----- |  | ---------- | --------- | ---------- |  | ----- | ------ |  |  | - | ----------- | 
|                          |  | June 30, 2001
|                          |  |              
|                          |  |               |             |       |  | Gross      |           | Gross      |  | Gross
|                          |  |               |             |       |  | Unrealized |           | Unrealized |  | Fair 
|                          |  | Cost          |             | Gains |  | Losses     |           | Value     
|                          |  |               |             |       |  |            |           |           
|U.S. corporate securities |  | $             | 22,579,882  |       |  | $          | 160,837   |            |  | $     | 1,150  |  |  | $ | 22,739,569  | 
|                         
|                         
|                         
|                         
|Other debt securities     |  |               | 157,206,517 |       |  |            | 970,415   |            |  |       | 17,082 |  |  |   | 158,159,850 | 
|                          |  |               |             |       |  |            |           |            |  |       |        |  |  |   |             | 
|Total securities          |  | $             | 179,786,399 |       |  | $          | 1,131,252 |            |  | $     | 18,232 |  |  | $ | 180,899,419 | 
|                          |  |               |             |       |  |            |           |            |  |       |        |  |  |   |             | 

|                          |  |               |             |       |  |            |           |            |  |       |         |  |  |   |             | 
|------------------------- |  | ------------- | ----------- | ----- |  | ---------- | --------- | ---------- |  | ----- | ------- |  |  | - | ----------- | 
|                          |  | June 30, 2000
|                          |  |              
|                          |  |               |             |       |  | Gross      |           | Gross      |  | Gross
|                          |  |               |             |       |  | Unrealized |           | Unrealized |  | Fair 
|                          |  | Cost          |             | Gains |  | Losses     |           | Value     
|                          |  |               |             |       |  |            |           |           
|U.S. corporate securities |  | $             | 32,807,598  |       |  | $          | 962,892   |            |  | $     | 157,011 |  |  | $ | 33,613,479  | 
|                         
|                         
|                         
|                         
|Other debt securities     |  |               | 99,886,342  |       |  |            | 45,621    |            |  |       | 78,833  |  |  |   | 99,853,130  | 
|                          |  |               |             |       |  |            |           |            |  |       |         |  |  |   |             | 
|Total securities          |  | $             | 132,693,940 |       |  | $          | 1,008,513 |            |  | $     | 235,844 |  |  | $ | 133,466,609 | 
|                          |  |               |             |       |  |            |           |            |  |       |         |  |  |   |             | 

During the years ended June 30, 2001 and 2000, the gross realized gains on
sales of available-for-sale securities totaled $1,455,758 and $587,011,
respectively, and the gross realized losses totaled $131,200 and $103,973,
respectively. The net adjustment to unrealized gains during fiscal 2001 and
fiscal 2000 on available-for-sale securities included in stockholders equity
totaled $261,331 and $790,228, respectively. The amortized cost and estimated
fair value of the available-for-sale securities at June 30, 2001, by maturity,
are shown below. Expected maturities will differ from contractual maturities
because the issuers of the securities may have the right to prepay obligations
without prepayment penalties, and the Company views its available-for-sale
securities as available for current operations.

F-13



---



|                                     |  |               |             |            |  |           |             | 
|------------------------------------ |  | ------------- | ----------- | ---------- |  | --------- | ----------- | 
|                                     |  | JUNE 30, 2001
|                                     |  |              
|                                     |  |               |             |            |  | Estimated
|                                     |  | Cost          |             | Fair Value
|                                     |  |               |             |           
|Available-for-sale                  
|Due in one year or less              |  | $             | 134,109,532 |            |  | $         | 134,844,158 | 
|                                    
|                                    
|                                    
|                                    
|Due after one year through two years |  |               | 44,100,722  |            |  |           | 44,470,139  | 
|                                    
|                                    
|                                    
|                                    
|Due after two years                  |  |               | 1,576,145   |            |  |           | 1,585,122   | 
|                                     |  |               |             |            |  |           |             | 
|                                     |  | $             | 179,786,399 |            |  | $         | 180,899,419 | 
|                                     |  |               |             |            |  |           |             | 

NOTE 6. DEBT

The Company has a revolving line of credit facility of up to $25.0 million
from Wells Fargo Bank, N.A., formally known as Norwest Bank Arizona, N.A. The
facility may be drawn upon by the Company, at its discretion, and is
collateralized by principal assets of the Company. The outstanding balance of
the credit facility bears interest at a floating rate of 150 basis points in
excess of the 30-day London Interbank Offered Rate and expires in November
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.

NOTE 7. 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 $1,430,000, $1,024,500 and $564,000 in
fiscal 2001, 2000 and 1999, respectively. The Company relocated to its present
office space in Scottsdale, Arizona, in February 2000. At June 30, 2001,
approximate future lease payments under the operating lease are as follows:

|                     |  |   |            | 
|-------------------- |  | - | ---------- | 
|Year Ending June 30, |  |   |            | 
|                     |  |   |            | 
|2002                 |  | $ | 1,253,700  | 
|                    
|                    
|                    
|                    
|2003                 |  |   | 1,285,100  | 
|                    
|                    
|                    
|                    
|2004                 |  |   | 1,328,900  | 
|                    
|                    
|                    
|                    
|2005                 |  |   | 1,362,400  | 
|                    
|                    
|                    
|                    
|2006                 |  |   | 1,409,200  | 
|                    
|                    
|                    
|                    
|Thereafter           |  |   | 5,049,600  | 
|                     |  |   |            | 
|                     |  | $ | 11,688,900 | 
|                     |  |   |            | 

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 2002.

Research and Development and Consulting Contracts

The Company has, in the past, and may, in the future, enter into
agreements with various research organizations and individuals under which the
Company acquires certain patent and marketing rights for therapeutics developed
under such agreements in exchange for providing funding for collaborative
research. It is also anticipated that, before any commercial marketing can be
commenced, the Company will be required to secure certain regulatory approvals
on the technological processes involved.

The Company has various consulting agreements with certain scientists in
exchange for the assignment of certain rights and consulting services. In
addition, the Company has granted options to purchase shares of Class A Common
Stock that are included in the stock option plan described in Note 10. These
options vest annually over the

F-14



---



commitment periods. At June 30, 2001, 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.

Licensing, Marketing and Manufacturing Agreements

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

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.

Other

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

NOTE 8. 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:

|                                  |                                                              |         |           |           |   |         |            |            |   |   |           |           |   |   |            |            |   | 
|--------------------------------- | ------------------------------------------------------------ | ------- | --------- | --------- | - | ------- | ---------- | ---------- | - | - | --------- | --------- | - | - | ---------- | ---------- | - | 
|                                  |                                                              |         |           | JUNE 30, 
|                                  |                                                              |         |           |          
|                                  |                                                              |         |           | 2001      |   | 2000   
|                                  |                                                              |         |           |           |   |        
|                                  |                                                              | Current |           | Long-term |   | Current |            | Long-term 
|                                  |                                                              |         |           |           |   |         |            |           
|                                  | Deferred tax assets (liabilities):                           |         |           |           |   |         |            |            |   |   |           |           |   |   |            |            |  
|                                 
|                                 
|                                 
|                                 
|                                  | Net operating loss carry forwards                            |         | $         |          |   |         | $          | 95,000     |   |   | $         |          |   |   | $          | 256,000    |  
|                                 
|                                 
|                                 
|                                 
|                                  | Reserves and liabilities                                     |         |           | 5,161,000 |   |         |            |            |   |   |           | 3,642,000 |   |   |            |           |  
|                                 
|                                 
|                                 
|                                 
|                                  | Unrealized losses on securities                              |         |           | (356,000  | ) |         |            |           |   |   |           | (276,000  | ) |   |            |           |  
|                                  |                                                              |         |           |           |   |         |            |            |   |   |           |           |   |   |            |            |  
|                                 
|                                 
|                                 
|                                 
|                                  |                                                              |         | 4,805,000 |           |   |         | 95,000     |            |   |   | 3,366,000 |           |   |   | 256,000    |           
|                                 
|                                 
|                                 
|                                 
|                                  | Excess of net book value over tax basis
of intangible assets |         |           |          |   |         |            | (4,927,000 | ) |   |           |          |   |   |            | (4,256,000 | )
|                                  |                                                              |         |           |           |   |         |            |            |   |   |           |           |   |   |            |            |  
|                                 
|                                 
|                                 
|                                 
|Deferred tax assets (liabilities) |                                                              | $       | 4,805,000 |           |   | $       | (4,832,000 | )          |   | $ | 3,366,000 |           |   | $ | (4,000,000 | )         
|                                  |                                                              |         |           |           |   |         |            |            |   |   |           |           |   |   |            |            |  

During fiscal 2001, the Company recorded $80,000 of deferred taxes
relating to unrealized gains on available-for-sale securities presented in
other comprehensive income in stockholders equity. During fiscal 2000, the
Company recorded $448,000 of deferred taxes relating to unrealized gains on
available-for-sale securities.

At June 30, 2001, the Company had net operating loss carry forwards for
federal income tax purposes of approximately $250,000. All of the net operating
loss carry forwards are attributable to Genderm Corporation, which the Company
acquired through a taxable stock acquisition during fiscal 1998. The annual
utilization of the net operating loss carryforward is limited for tax purposes
under both the separate return limitation year rules and Internal Revenue Code
sections 382 and 383.

During fiscal 2001, 2000 and 1999, the Company made tax payments of
$8,233,000, $14,180,000 and $19,837,000 respectively.

F-15



---



Components of the provision for income taxes are as follows:

|                 |  |          |            |      |  |      |            |  |  |   |            |  
|---------------- |  | -------- | ---------- | ---- |  | ---- | ---------- |  |  | - | ---------- | -
|                 |  | JUNE 30,
|                 |  |         
|                 |  | 2001     |            | 2000 |  | 1999
|                 |  |          |            |      |  |     
|Current          |  |          |            |      |  |      |            |  |  |   |            |  
|                
|                
|                
|                
|Federal          |  | $        | 18,503,000 |      |  | $    | 19,849,000 |  |  | $ | 30,561,000 |  
|                
|                
|                
|                
|State            |  |          | 986,000    |      |  |      | 1,564,000  |  |  |   | 3,415,000  |  
|                
|                
|                
|                
|Foreign          |  |          | 23,000     |      |  |      | 27,000     |  |  |   | 19,000     |  
|                 |  |          |            |      |  |      |            |  |  |   |            |  
|                 |  |          | 19,512,000 |      |  |      | 21,440,000 |  |  |   | 33,995,000 |  
|                 |  |          |            |      |  |      |            |  |  |   |            |  
|Deferred
Federal |  |          | (482,000   | )    |  |      | 2,768,000  |  |  |   | (9,048,000 | )
|                
|                
|                
|                
|State            |  |          | (125,000   | )    |  |      | 180,000    |  |  |   | (744,000   | )
|                 |  |          |            |      |  |      |            |  |  |   |            |  
|                 |  |          | (607,000   | )    |  |      | 2,948,000  |  |  |   | (9,792,000 | )
|                 |  |          |            |      |  |      |            |  |  |   |            |  
|Total            |  | $        | 18,905,000 |      |  | $    | 24,388,000 |  |  | $ | 24,203,000 |  
|                 |  |          |            |      |  |      |            |  |  |   |            |  

Income tax expense for the three years ended June 30, 2001, 2000 and 1999
differs from the amount computed, applying the federal statutory rates as
follows:

|                                       |  |          |      |      |  |      |      |   |  |  |      |  
|-------------------------------------- |  | -------- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                                       |  | JUNE 30,
|                                       |  |         
|                                       |  | 2001     |      | 2000 |  | 1999
|                                       |  |          |      |      |  |     
|Statutory federal income tax rate      |  |          | 35.0 | %    |  |      | 35.0 | % |  |  | 35.0 | %
|                                      
|                                      
|                                      
|                                      
|State tax rate, net of federal benefit |  |          | 0.9  |      |  |      | 1.7  |   |  |  | 2.5  |  
|                                      
|                                      
|                                      
|                                      
|Tax-exempt interest                    |  |          | (3.5 | )    |  |      | (2.3 | ) |  |  | (2.0 | )
|                                      
|                                      
|                                      
|                                      
|Other                                  |  |          | (0.5 | )    |  |      | 1.8  |   |  |  | 1.4  |  
|                                       |  |          |      |      |  |      |      |   |  |  |      |  
|                                       |  |          | 31.9 | %    |  |      | 36.2 | % |  |  | 36.9 | %
|                                       |  |          |      |      |  |      |      |   |  |  |      |  

NOTE 9. STOCK TRANSACTIONS

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

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 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.

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

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

F-16



---



NOTE 10. STOCK OPTION PLANS

The Company has three active Stock Option Plans (the 1998, 1996 and 1995
Plans or, collectively, the Plans). As of June 30, 2001, the 1998, 1996 and
1995 Plans had the following options outstanding: 2,986,900; 1,711,210; and
169,515, respectively. The Plans allow the Company to designate options as
qualified incentive or non-qualified on an as-needed basis. Qualified and
non-qualified stock options vest over a period determined at the time the
options are granted, ranging from one to five years. Options are granted at the
fair market value on the grant date. Options outstanding at June 30, 2001, vary
in price from $2.32 to $70.75, with a weighted average of $36.07 outlined in
the following chart:

|                |  |             |           |             |  |          |      |             |  |          |       |  |  |          |         |  |  |   |       | 
|--------------- |  | ----------- | --------- | ----------- |  | -------- | ---- | ----------- |  | -------- | ----- |  |  | -------- | ------- |  |  | - | ----- | 
|                |  |             |           |             |  | Weighted |      | Weighted    |  |          |       |  |  | Weighted
|                |  |             |           |             |  | Average  |      | Average     |  |          |       |  |  | Average 
|Range of        |  | Number      |           | Contractual |  | Exercise |      | Number      |  | Exercise
|Exercise Prices |  | Outstanding |           | Life        |  | Price    |      | Exercisable |  | Price   
|                |  |             |           |             |  |          |      |             |  |         
|$2.32 - $12.11  |  |             | 149,358   |             |  |          | 4.99 |             |  | $        | 11.41 |  |  |          | 67,467  |  |  | $ | 10.56 | 
|               
|               
|               
|               
|$15.39 - $22.00 |  |             | 1,419,544 |             |  |          | 7.98 |             |  | $        | 21.91 |  |  |          | 190,249 |  |  | $ | 21.39 | 
|               
|               
|               
|               
|$22.22 - $28.50 |  |             | 897,941   |             |  |          | 7.21 |             |  | $        | 24.51 |  |  |          | 281,118 |  |  | $ | 25.28 | 
|               
|               
|               
|               
|$28.59 - $55.05 |  |             | 579,632   |             |  |          | 6.92 |             |  | $        | 33.39 |  |  |          | 208,477 |  |  | $ | 31.82 | 
|               
|               
|               
|               
|$55.25 - $55.25 |  |             | 1,697,325 |             |  |          | 9.07 |             |  | $        | 55.25 |  |  |          | 0       |  |  | $ | 0.00  | 
|               
|               
|               
|               
|$56.25 - $70.75 |  |             | 123,825   |             |  |          | 9.27 |             |  | $        | 61.58 |  |  |          | 3,500   |  |  | $ | 57.10 | 

A summary of stock options granted within the Plans and related
information for the years ended June 30, 2001, 2000 and 1999 is as follows:

|                         |  |           |           |               |  |       |           |       |  |  |            |   |  |          |       | 
|------------------------ |  | --------- | --------- | ------------- |  | ----- | --------- | ----- |  |  | ---------- | - |  | -------- | ----- | 
|                         |  |           |           |               |  |       |           |       |  |  |            |   |  | Weighted
|                         |  |           |           |               |  |       |           |       |  |  |            |   |  | Average 
|                         |  | Qualified |           | Non-Qualified |  | Total |           | Price
|                         |  |           |           |               |  |       |           |      
|Balance at June 30, 1998 |  |           | 1,264,499 |               |  |       | 1,289,533 |       |  |  | 2,554,032  |   |  | $        | 15.70 | 
|                        
|                        
|                        
|                        
|Granted                  |  |           | 718,023   |               |  |       | 703,103   |       |  |  | 1,421,126  |   |  | $        | 25.47 | 
|                        
|                        
|                        
|                        
|Exercised                |  |           | (296,708  | )             |  |       | (222,224  | )     |  |  | (518,932   | ) |  | $        | 7.36  | 
|                        
|                        
|                        
|                        
|Terminated/expired       |  |           | (191,854  | )             |  |       | (15,525   | )     |  |  | (207,379   | ) |  | $        | 25.63 | 
|                         |  |           |           |               |  |       |           |       |  |  |            |   |  |          |       | 
|Balance at June 30, 1999 |  |           | 1,493,960 |               |  |       | 1,754,887 |       |  |  | 3,248,847  |   |  | $        | 20.76 | 
|                        
|                        
|                        
|                        
|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 | 
|                         |  |           |           |               |  |       |           |       |  |  |            |   |  |         

Options exercisable under the Plans at June 30, 2001 were 750,811 with an
average exercisable price of $24.94. During fiscal 2000 and 1999, 1,875 and
7,500 non-qualified stock options not subject to the Plans were exercised at a
price of $6.47.

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

F-17



---



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:

|                         |                              |   |            |      |      |   |            |      |  |   |            |      | 
|------------------------ | ---------------------------- | - | ---------- | ---- | ---- | - | ---------- | ---- |  | - | ---------- | ---- | 
|                         |                              |   | 2001       |      | 2000 |   | 1999      
|                         |                              |   |            |      |      |   |           
|Net income  as reported |                              | $ | 40,419,685 |      |      | $ | 42,994,182 |      |  | $ | 41,437,226 |     
|                        
|                        
|                        
|                        
|Net income  pro forma   |                              | $ | 26,840,839 |      |      | $ | 35,641,156 |      |  | $ | 36,930,216 |     
|                        
|                        
|                        
|                        
|Diluted earnings        
|                        
|                        
|                        
|                        
|                         | Per common share as reported |   | $          | 1.28 |      |   | $          | 1.41 |  |   | $          | 1.41 | 
|                        
|                        
|                        
|                        
|                         | Per common share pro forma   |   | $          | 0.85 |      |   | $          | 1.17 |  |   | $          | 1.25 | 

The weighted average fair value of options granted during fiscal 2001,
2000 and 1999 was $16.62, $11.95 and $12.03, 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:

|                                |  |         |     |         |  |         |     |   |  |  |     |  
|------------------------------- |  | ------- | --- | ------- |  | ------- | --- | - |  |  | --- | -
|                                |  | 2001    |     | 2000    |  | 1999   
|                                |  |         |     |         |  |        
|Expected dividend yield         |  |         | 0.0 | %       |  |         | 0.0 | % |  |  | 0.0 | %
|                               
|                               
|                               
|                               
|Expected stock price volatility |  |         | 0.5 |         |  |         | 0.5 |   |  |  | 0.5 |  
|                               
|                               
|                               
|                               
|Risk-free interest rate         |  |         | 5.0 | %       |  |         | 5.5 | % |  |  | 5.5 | %
|                               
|                               
|                               
|                               
|Expected life options           |  | 5 Years |     | 5 Years |  | 5 Years

F-18



---



NOTE 11. EARNINGS PER SHARE

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

|                                                    |                                |   |            |            |      |   |            |            |  |   |            |            | 
|--------------------------------------------------- | ------------------------------ | - | ---------- | ---------- | ---- | - | ---------- | ---------- |  | - | ---------- | ---------- | 
|                                                    |                                |   | June 30,  
|                                                    |                                |   |           
|                                                    |                                |   | 2001       |            | 2000 |   | 1999      
|                                                    |                                |   |            |            |      |   |           
|Numerator                                           |                                |   |            |            |      |   |            |            |  |   |            |           
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Net income                     |   | $          | 40,419,685 |      |   | $          | 42,994,182 |  |   | $          | 41,437,226 | 
|                                                    |                                |   |            |            |      |   |            |            |  |   |            |            | 
|Denominator for basic net income per common
share   |                                |   | 30,133,514 |            |      |   | 29,028,896 |            |  |   | 28,413,608 |           
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Effect of dilutive securities: |   |            |            |      |   |            |            |  |   |            |            | 
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Stock options                  |   |            | 1,560,188  |      |   |            | 1,469,880  |  |   |            | 1,048,703  | 
|                                                    |                                |   |            |            |      |   |            |            |  |   |            |            | 
|Denominator for diluted net income per common
share |                                |   | 31,693,702 |            |      |   | 30,498,776 |            |  |   | 29,462,311 |           
|                                                    |                                |   |            |            |      |   |            |            |  |   |            |            | 
|Basic net income per common share                   |                                | $ | 1.34       |            |      | $ | 1.48       |            |  | $ | 1.46       |           
|                                                    |                                |   |            |            |      |   |            |            |  |   |            |            | 
|Diluted net income per common share                 |                                | $ | 1.28       |            |      | $ | 1.41       |            |  | $ | 1.41       |           
|                                                    |                                |   |            |            |      |   |            |            |  |   |            |            | 

The earnings per share computation for 2001 excludes 108,457 shares of
stock because their effect would have been anti-dilutive.

NOTE 12. SIGNIFICANT CUSTOMERS

For fiscal 2001, three customers accounted for approximately 22.2%, 18.0%
and 10.3% of net revenues. For fiscal 2000, four customers accounted for
approximately 21.0%, 18.1%, 11.3% and 10.2% of net revenues. For fiscal 1999,
two customers accounted for approximately 18.0% and 14.1% of net revenues.

NOTE 13. 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, 2001 and 2000, three customers comprised approximately 54.5%
and 57.8%, 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, 2001.

NOTE 14. DEFINED CONTRIBUTION PLAN

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

F-19



---



NOTE 15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The table below lists the quarterly financial information for fiscal 2001
and 2000. All figures are in thousands, except per share data, and certain
amounts do not total the annual amounts due to rounding.

|                                    |  |                          |        |                   |  |                |        |               |  |   |        |  |  |   |        | 
|----------------------------------- |  | ------------------------ | ------ | ----------------- |  | -------------- | ------ | ------------- |  | - | ------ |  |  | - | ------ | 
|                                    |  | YEAR ENDED JUNE 30, 2001
|                                    |  | (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   | 

|                                    |  |                          |        |                   |  |                |        |               |  |   |        |  |  |   |        | 
|----------------------------------- |  | ------------------------ | ------ | ----------------- |  | -------------- | ------ | ------------- |  | - | ------ |  |  | - | ------ | 
|                                    |  | YEAR ENDED JUNE 30, 2000
|                                    |  | (FOR THE QUARTERS ENDED)
|                                    |  | SEPTEMBER 30, 1999       |        | DECEMBER 31, 1999 |  | MARCH 31, 2000 |        | JUNE 30, 2000
|                                    |  |                          |        |                   |  |                |        |              
|Net revenues                        |  | $                        | 31,644 |                   |  | $              | 33,379 |               |  | $ | 35,049 |  |  | $ | 39,027 | 
|                                   
|                                   
|                                   
|                                   
|Gross profit                        |  |                          | 25,858 |                   |  |                | 26,940 |               |  |   | 28,726 |  |  |   | 31,664 | 
|                                   
|                                   
|                                   
|                                   
|Net income                          |  |                          | 9,640  |                   |  |                | 10,481 |               |  |   | 11,063 |  |  |   | 11,810 | 
|                                   
|                                   
|                                   
|                                   
|Basic net income
per common share   |  | $                        | 0.34   |                   |  | $              | 0.36   |               |  | $ | 0.38   |  |  | $ | 0.40   | 
|                                   
|                                   
|                                   
|                                   
|Diluted net income
per common share |  | $                        | 0.33   |                   |  | $              | 0.35   |               |  | $ | 0.36   |  |  | $ | 0.38   | 

Gross
profit does not include amortization of the related intangibles.

F-20



---



SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS

|                                                      |                      |            |  |              |           |                |  |            |         |         |  |   |   |                |  |   |   |  |  |   |           | 
|----------------------------------------------------- | -------------------- | ---------- |  | ------------ | --------- | -------------- |  | ---------- | ------- | ------- |  | - | - | -------------- |  | - | - |  |  | - | --------- | 
|                                                      |                      |            |  | Balance at   |           | Charged to     |  |            |         |         |  |   |   |                |  |   |   | 
|                                                      |                      |            |  | beginning of |           | costs and      |  | Charged to |         |         |  |   |   | Balance at end
|Description                                           |                      | year       |  | expenses     |           | other accounts |  | Deductions |         | of year
|                                                      |                      |            |  |              |           |                |  |            |         |        
|Year
Ended June 30, 2001Deducted from Asset Accounts: |                      |            |  |              |           |                |  |            |         |         |  |   |   |                |  |   |   |  |  |  
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Accounts Receivable: |            |  |              |           |                |  |            |         |         |  |   |   |                |  |   |   |  |  |   |          
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                      | Allowances |  | $            | 4,190,000 |                |  | $          | 860,000 |         |  | $ |  |                |  | $ |  |  |  | $ | 5,050,000 | 
|                                                     
|                                                     
|                                                     
|                                                     
|Year
Ended June 30, 2000Deducted from Asset Accounts: |                      |            |  |              |           |                |  |            |         |         |  |   |   |                |  |   |   |  |  |  
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Accounts Receivable: |            |  |              |           |                |  |            |         |         |  |   |   |                |  |   |   |  |  |   |          
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                      | Allowances |  |              | 3,815,000 |                |  |            | 375,000 |         |  |   |  |                |  |   |  |  |  |   | 4,190,000 | 
|                                                     
|                                                     
|                                                     
|                                                     
|Year Ended June 30, 1999Deducted from Asset Accounts: |                      |            |  |              |           |                |  |            |         |         |  |   |   |                |  |   |   |  |  |  
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Accounts Receivable: |            |  |              |           |                |  |            |         |         |  |   |   |                |  |   |   |  |  |   |          
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                      | Allowances |  |              | 2,826,000 |                |  |            | 989,000 |         |  |   |  |                |  |   |  |  |  |   | 3,815,000 | 

S-1



---



EXHIBIT INDEX

|            |  |                                                                                                                                                                                                                                                   |  | 
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
|EXHIBIT NO. |  | DESCRIPTION                                                                                                                                                                                                                                      
|            |  |                                                                                                                                                                                                                                                  
|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.
|23.1        |  | Consent of Ernst & Young LLP, Independent Auditors