##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For the quarterly period ended: March 31, 2008
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 001-31533
 DUSA PHARMACEUTICALS, INC.
  New Jersey
    
    22-3103129(State of Other Jurisdiction of
    
    (I.R.S. Employer Identification No.)Incorporation or Organization)25 Upton Drive, Wilmington, MA
    
    01887(Address of Principal Executive Offices)
    
    (Zip Code)
 
 
  þ o
  Large accelerated filer
o
    
    Accelerated filer
þ
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ




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##### 



DUSA PHARMACEUTICALS, INC.
TABLE OF CONTENTS TO FORM 10-Q
 PageNumberPART I. FINANCIAL INFORMATIONItem 1. Financial Statements-
Condensed Consolidated Balance Sheets at March 31, 2008 and
December 31, 2007 (Unaudited)
    
    
    3- Condensed Consolidated Statements of Operations for the
three month periods ended March 31, 2008 and 2007 (Unaudited)
    
    
    4- Condensed Consolidated Statements of Cash Flows for the
three-month periods ended March 31, 2008 and 2007 (Unaudited)
    
    
    5- Notes to the Condensed Consolidated Financial Statements (Unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    18Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    31Item 4. Controls and Procedures
    
    
    32PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    33Item 1A. Risk Factors
    
    
    34Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    48Item 3. Defaults Upon Senior Securities
    
    
    48Item 4. Submission of Matters to a Vote of Security Holders
    
    
    48Item 5. Other Information
    
    
    48Item 6. Exhibits
    
    
    48SIGNATURESExhibit IndexEX-31(A) SECTION 302 CERTIFICATION OF THE C.E.O.EX-31(B) SECTION 302 CERTIFICATION OF THE C.F.O.EX-32(A) SECTION 906 CERTIFICATION OF THE C.E.O.EX-32(B) SECTION 906 CERTIFICATION OF THE C.F.O.EX-99.1 Press ReleaseEX-31.A: CERTIFICATIONEX-31.B: CERTIFICATIONEX-32.A: CERTIFICATIONEX-32.B: CERTIFICATIONEX-99.1: PRESS RELEASE
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##### Table of Contents



PART I.
 
 ITEM 1. FINANCIAL STATEMENTS
 DUSA PHARMACEUTICALS, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 March 31,
    
    December 31,2008
    
    2007ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    4,385,770
    
    
    $
    4,713,619Marketable securities
    
    
    18,521,941
    
    
    
    18,311,650Accrued interest receivable
    
    
    133,226
    
    
    
    97,243Accounts receivable, net of allowance for doubtful accounts
of $133,000 and $158,000 in 2008 and 2007, respectively
    
    
    3,167,139
    
    
    
    2,667,178Inventory
    
    
    2,895,417
    
    
    
    2,672,105Prepaid and other current assets
    
    
    1,834,764
    
    
    
    1,843,873TOTAL CURRENT ASSETS
    
    
    30,938,257
    
    
    
    30,305,668Restricted cash
    
    
    171,587
    
    
    
    170,510Property, plant and equipment, net
    
    
    2,111,361
    
    
    
    2,142,658Deferred charges and other assets
    
    
    259,186
    
    
    
    273,404TOTAL ASSETS
    
    $
    33,480,391
    
    
    $
    32,892,240LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIESAccounts payable
    
    $
    945,791
    
    
    $
    1,213,867Accrued compensation
    
    
    690,688
    
    
    
    491,529Other accrued expenses
    
    
    3,165,398
    
    
    
    3,322,642Deferred revenue
    
    
    2,274,249
    
    
    
    1,256,494TOTAL CURRENT LIABILITIES
    
    
    7,076,126
    
    
    
    6,284,532Deferred revenues
    
    
    3,150,457
    
    
    
    2,918,850Warrant liability
    
    
    1,607,142
    
    
    
    1,262,600Other liabilities
    
    
    321,385
    
    
    
    319,736TOTAL LIABILITIES
    
    
    12,155,110
    
    
    
    10,785,718COMMITMENTS AND CONTINGENCIES (NOTE 17)SHAREHOLDERS EQUITYCapital StockAuthorized: 100,000,000 shares; 40,000,000 shares designated
as common stock, no par, and 60,000,000 shares issuable in
Series or classes; and 40,000 junior Series A preferred shares.
24,078,610 common shares issued and 24,078,452 common shares
outstanding at March 31, 2008; and 24,076,110 common shares
issued and outstanding, at December 31, 2007
    
    
    151,652,943
    
    
    
    151,648,943Additional paid-in capital
    
    
    6,216,991
    
    
    
    5,885,353Accumulated deficit
    
    
    (136,884,625
    )
    
    
    (135,600,484
    )Accumulated other comprehensive income
    
    
    339,972
    
    
    
    172,710TOTAL SHAREHOLDERS EQUITY
    
    
    21,325,281
    
    
    
    22,106,522TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    33,480,391
    
    
    $
    32,892,240
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DUSA PHARMACEUTICALS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 Three Months EndedMarch 31,2008
    
    2007Product revenues
    
    $
    7,929,500
    
    
    $
    6,676,840Cost of product revenues and royalties
    
    
    1,700,317
    
    
    
    2,156,152GROSS MARGIN
    
    
    6,229,183
    
    
    
    4,520,688Operating costs:Research and development
    
    
    2,186,209
    
    
    
    1,526,104Marketing and sales
    
    
    3,057,201
    
    
    
    3,530,707General and administrative
    
    
    2,367,824
    
    
    
    3,023,449Net gain from settlement of litigation
    
    
    (235,600
    )
    
    
    TOTAL OPERATING COSTS
    
    
    7,375,634
    
    
    
    8,080,260LOSS FROM OPERATIONS
    
    
    (1,146,451
    )
    
    
    (3,559,572
    )Other income
    
    
    206,852
    
    
    
    188,644Loss on change in fair value of warrants
    
    
    (344,542
    )
    
    
    NET LOSS
    
    $
    (1,284,141
    )
    
    $
    (3,370,928
    )BASIC AND DILUTED NET LOSS PER COMMON SHARE
    
    $
    (0.05
    )
    
    $
    (0.17
    )WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING, BASIC AND DILUTED
    
    
    24,078,418
    
    
    
    19,480,067
  4




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DUSA PHARMACEUTICALS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 Three months endedMarch 31,2008
    
    2007CASH FLOWS FROM OPERATING ACTIVITIESNet loss
    
    $
    (1,284,141
    )
    
    $
    (3,370,928
    )Adjustments to reconcile net loss to net cash used in
operating activities:Amortization of premiums and discounts on
marketable securities
    
    
    (77,362
    )
    
    
    (53,796
    )Realized (gain)/loss on sales of marketable
securities
    
    
    (2,364
    )
    
    
    711Share-based compensation
    
    
    331,638
    
    
    
    242,184Depreciation and amortization
    
    
    154,241
    
    
    
    166,465Loss on change in fair value of warrants
    
    
    344,542
    
    
    
    Deferred revenues recognized
    
    
    (401,575
    )
    
    
    Changes in other assets and liabilities
impacting cash flows used in operationsAccrued interest receivable
    
    
    (35,983
    )
    
    
    96,591Accounts receivable
    
    
    (499,961
    )
    
    
    (517,772
    )Inventory
    
    
    (223,312
    )
    
    
    (248,842
    )Prepaid and other current assets
    
    
    9,109
    
    
    
    396,907Deferred charges and other assets
    
    
    14,218
    
    
    
    (2,658
    )Accounts payable
    
    
    (268,076
    )
    
    
    24,903Accrued compensation and other accrued expenses
    
    
    291,915
    
    
    
    730,346Deferred revenues
    
    
    1,650,937
    
    
    
    1,300,499Other liabilities
    
    
    1,649
    
    
    
    9,585NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
    
    
    5,475
    
    
    
    (1,225,805
    )CASH FLOWS FROM INVESTING ACTIVITIESCash paid for acquisition
    
    
    (250,000
    )
    
    
    (484,337
    )Purchases of marketable securities
    
    
    (7,936,363
    )
    
    
    (4,581,532
    )Proceeds from maturing and sales of
marketable securities
    
    
    7,973,061
    
    
    
    8,669,288Restricted cash
    
    
    (1,077
    )
    
    
    (1,991
    )Purchases of property, plant and equipment
    
    
    (122,945
    )
    
    
    (81,989
    )NET CASH (USED IN) PROVIDED BY INVESTING
ACTIVITIES
    
    
    (337,324
    )
    
    
    3,519,439CASH FLOWS FROM FINANCING ACTIVITIESProceeds from exercise of options
    
    
    4,000
    
    
    
    NET CASH PROVIDED BY FINANCING ACTIVITIES
    
    
    4,000
    
    
    
    NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS
    
    
    (327,849
    )
    
    
    2,293,634CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD
    
    
    4,713,619
    
    
    
    3,267,071CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    4,385,770
    
    
    $
    5,560,705
 
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##### Table of Contents



DUSA PHARMACEUTICALS, INC.
 
  1) BASIS OF PRESENTATION
   2) NEW ACCOUNTING PRONOUNCEMENTS
 Recently
Adopted
 Accounting for Nonrefundable Advance Payments for Goods or Services to Be
Used in Future Research and Development Activities
 Future
Adoption
 Business Combinations
 Noncontrolling Interests in Consolidated
Financial Statements, an amendment of ARB No. 51
 Disclosures about Derivative Instruments
and Hedging Activities Accounting for Derivative Instruments and
Hedging Activities
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DUSA PHARMACEUTICALS, INC.
   Accounting for Collaborative Arrangements Reporting Revenue Gross as a
Principal versus Net as an Agent
 3) FAIR VALUE MEASUREMENTS
 Fair
Value Measurement
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DUSA PHARMACEUTICALS, INC.
   
     Level 1
    
    Level 2
    
    TotalAssets:United States Government Securities
    
    $
    15,824,000
    
    
    
    
    
    
    $
    15,824,000Corporate debt securities
    
    
    
    
    
    $
    2,698,000
    
    
    
    2,698,000Total
    
    $
    15,824,000
    
    
    $
    2,698,000
    
    
    $
    18,522,000Liabilities:Warrant liability
    
    
    
    
    
    
    1,607,000
    
    
    
    1,607,000Total
    
    $
    
    
    
    $
    1,607,000
    
    
    $
    1,607,000
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##### Table of Contents



DUSA PHARMACEUTICALS, INC.
  4) WARRANTS
  December 31,March 31, 2008
    
    2007Expected volatility
    
    
    68.0
    %
    
    
    67.3
    %Remaining contractual term (years)
    
    
    5.08
    
    
    
    5.33Risk-free interest rate
    
    
    2.46
    %
    
    
    3.45
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %Common stock price
    
    $
    2.52
    
    
    $
    2.07
 5) MARKETABLE SECURITIES
  March 31, 2008GrossAmortized
    
    Unrealized
    
    FairCost
    
    Gains
    
    ValueUnited States government securities
    
    $
    15,508,604
    
    
    $
    315,330
    
    
    $
    15,823,934Corporate securities
    
    
    2,673,364
    
    
    
    24,643
    
    
    
    2,698,007Total marketable securities available-for-sale
    
    $
    18,181,968
    
    
    $
    339,973
    
    
    $
    18,521,941
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DUSA PHARMACEUTICALS, INC.
  December 31, 2007GrossAmortized
    
    Unrealized
    
    FairCost
    
    Gains
    
    ValueUnited States government securities
    
    $
    16,429,249
    
    
    $
    162,619
    
    
    $
    16,591,868Corporate securities
    
    
    1,709,691
    
    
    
    10,091
    
    
    
    1,719,782Total marketable securities available-for-sale
    
    $
    18,138,940
    
    
    $
    172,710
    
    
    $
    18,311,650
  6) BUSINESS ACQUISITION
  AdditionalCumulative Sales Milestone:
    
    Consideration:$25.0 million
    
    $1.5 million35.0 million
    
    $1.0 million45.0 million
    
    $1.0 millionTotal
    
    $3.5 million
  7) CONCENTRATIONS
  10




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DUSA PHARMACEUTICALS, INC.
   % of revenuethree months ended
    
    % of accounts receivableMarch 31,
    
    March 31,
    
    March 31,
    
    December 31,2008
    
    2007
    
    2008
    
    2007Customer A
    
    
    2
    %
    
    
    4
    %
    
    
    2
    %
    
    
    5
    %Customer B
    
    
    12
    %
    
    
    11
    %
    
    
    16
    %
    
    
    10
    %Customer C
    
    
    8
    %
    
    
    15
    %
    
    
    10
    %
    
    
    12
    %Customer D
    
    
    5
    %
    
    
    4
    %
    
    
    5
    %
    
    
    7
    %Customer E
    
    
    5
    %
    
    
    
    
    
    
    33
    %
    
    
    26
    %Other Customers
    
    
    68
    %
    
    
    66
    %
    
    
    34
    %
    
    
    40
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
  ® ® ®
 8) INVENTORY
  March 31,
    
    December 31,2008
    
    2007Finished goods
    
    $
    1,823,397
    
    
    $
    1,624,502BLU-U® evaluation units
    
    
    139,527
    
    
    
    130,985Work in process
    
    
    317,237
    
    
    
    409,465Raw materials
    
    
    615,256
    
    
    
    507,153Total
    
    $
    2,895,417
    
    
    $
    2,672,105
 ®
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DUSA PHARMACEUTICALS, INC.
  9) OTHER ACCRUED EXPENSES
  March 31,
    
    December 31,2008
    
    2007Research and development costs
    
    $
    198,297
    
    
    $
    293,136Marketing and sales costs
    
    
    238,665
    
    
    
    334,178Reserve for sales returns and allowances
    
    
    407,271
    
    
    
    545,982Accrued FDA fees
    
    
    589,000
    
    
    
    Reserve for chargebacks and rebates
    
    
    120,000
    
    
    
    200,000Other product related costs
    
    
    881,005
    
    
    
    873,326Legal and other professional fees
    
    
    304,979
    
    
    
    483,867Employee benefits
    
    
    265,920
    
    
    
    235,642Other expenses
    
    
    160,261
    
    
    
    356,511Total
    
    $
    3,165,398
    
    
    $
    3,322,642
 10) SHARE-BASED COMPENSATION
  Three months ended
    
    Three months endedMarch 31, 2008
    
    March 31, 2007Cost of product revenues
    
    $
    24,204
    
    
    $
    26,015Research and development
    
    
    121,300
    
    
    
    93,518Selling and marketing
    
    
    (60,666
    )
    
    
    (56,839
    )General and administrative
    
    
    246,800
    
    
    
    179,490Total
    
    $
    331,638
    
    
    $
    242,184
  Three months endedMarch 31, 2007Volatility
    
    
    62.2
    %Risk-free interest rate
    
    
    4.47
    %Expected dividend yield
    
    
    0
    %Expected life-directors and officers
    
    5.9 yearsExpected life-non-officer employees
    
    5.5 years
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DUSA PHARMACEUTICALS, INC.
       Three-month period
    
    Weighted averageended March 31, 2008
    
    exercise priceOutstanding, beginning of period
    
    
    2,855,125
    
    
    $
    10.76Options-forfeited
    
    
    (3,750
    )
    
    
    9.99Options expired
    
    
    (30,125
    )
    
    
    18.54Options exercised
    
    
    (2,500
    )
    
    
    1.60Outstanding, end of period
    
    
    2,818,750
    
    
    
    10.69Exercisable, end of period
    
    
    2,284,189
    
    
    $
    11.81Options vested and expected to vest, end of period
    
    
    2,753,398
    
    
    $
    10.82
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DUSA PHARMACEUTICALS, INC.
   11) BASIC AND DILUTED NET LOSS PER SHARE
  12) SEGMENT REPORTING
  Three-month period ended2008
    
    2007REVENUESPDT Drug and Device Product Revenues
    
    $
    5,830,000
    
    
    $
    4,557,000Non-PDT Drug Product Revenues
    
    
    2,100,000
    
    
    
    2,120,000Total Revenues
    
    
    7,930,000
    
    
    
    6,677,000COSTS OF REVENUESPDT Drug and Device Cost of Product Revenues
    
    
    1,274,000
    
    
    
    1,309,000Non-PDT Drug Cost of Product Revenues
    
    
    427,000
    
    
    
    847,000Total Costs of Product Revenues
    
    
    1,701,000
    
    
    
    2,156,000GROSS MARGINPDT Drug and Device Product Gross Margin
    
    
    4,556,000
    
    
    
    3,246,000Non-PDT Drug Product Gross Margin
    
    
    1,673,000
    
    
    
    1,273,000Total Gross Margin
    
    $
    6,229,000
    
    
    $
    4,521,000
  2008
    
    2007United States
    
    
    92
    %
    
    
    96
    %Canada
    
    
    2
    %
    
    
    4
    %Korea
    
    
    5
    %
    
    
    Other
    
    
    1
    %
    
    
    Total
    
    
    100
    %
    
    
    100
    %
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DUSA PHARMACEUTICALS, INC.
   13) COMPREHENSIVE LOSS
  March 31,
    
    March 31,2008
    
    2007NET LOSS
    
    $
    (1,284,141
    )
    
    $
    (3,370,928
    )Change in net unrealized gains on
marketable securities available-for-sale
    
    
    167,262
    
    
    
    20,679COMPREHENSIVE LOSS
    
    $
    (1,116,879
    )
    
    $
    (3,350,249
    )
 14) STIEFEL AGREEMENT
 ®
 15) DAEWOONG AGREEMENT
 ®
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DUSA PHARMACEUTICALS, INC.
   16) DEFERRED COMPENSATION PLAN
  17) COMMITMENTS AND CONTINGENCIES
 LEGAL MATTERS:
 RIVERS EDGE LITIGATION SETTLEMENT
 ® ® ® ® ® ® ®
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DUSA PHARMACEUTICALS, INC.
  ®
  Excess prescriptions of NIC 750 filled
    
    $
    235,600Net gain from settlement of litigation
    
    $
    235,600
  
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 OVERVIEW
 ® ® ® ®
 ® ® ® ® ® ® ® ® ®
 ® ® ® ® ®
 ®
 ® ® ® ® ® ® ®
 ® ®
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® ® ® ®
  ® ® ® ® ® ® ® ® ® ® ®
  CRITICAL ACCOUNTING POLICIES
  RESULTS OF OPERATIONS THREE MONTHS ENDING MARCH 31, 2008 VERSUS MARCH 31, 2007
 REVENUES
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##### Table of Contents



2008
    
    2007
    
    Increase/(Decrease)PDT PRODUCT REVENUESLEVULAN® KERASTICK® PRODUCT REVENUESUnited States
    
    $
    4,774,000
    
    
    $
    3,724,000
    
    
    $
    1,050,000Canada
    
    
    159,000
    
    
    
    201,000
    
    
    
    (42,000
    )Korea
    
    
    365,000
    
    
    
    
    
    
    
    365,000Rest of world
    
    
    56,000
    
    
    
    
    
    
    
    56,000Subtotal Levulan® Kerastick® product revenues
    
    
    5,354,000
    
    
    
    3,925,000
    
    
    
    1,429,000BLU-U® PRODUCT REVENUESUnited States
    
    
    476,000
    
    
    
    567,000
    
    
    
    (91,000
    )Canada
    
    
    
    
    
    
    65,000
    
    
    
    (65,000
    )Subtotal BLU-U® product revenues
    
    
    476,000
    
    
    
    632,000
    
    
    
    (156,000
    )TOTAL PDT PRODUCT REVENUES
    
    
    5,830,000
    
    
    
    4,557,000
    
    
    
    1,273,000TOTAL NON-PDT DRUG PRODUCT REVENUES
    
    
    2,100,000
    
    
    
    2,120,000
    
    
    
    (20,000
    )TOTAL PRODUCT REVENUES
    
    $
    7,930,000
    
    
    $
    6,677,000
    
    
    $
    (1,253,000
    )
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® ® ®
 ® ® ® ® ® ®
 ® ® ® ® ®
 ® ® ® ® ®
 ® ® ®
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® ®
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COST OF PRODUCT REVENUES
 Increase/2008
    
    2007
    
    (Decrease)Levulan ® Kerastick® Cost of Product Revenues and RoyaltiesDirect Levulan® Kerastick® Product costs
    
    $
    638,000
    
    
    $
    556,000
    
    
    $
    82,000Other Levulan® Kerastick® production costs
including internal costs assigned to support
products, net
    
    
    10,000
    
    
    
    58,000
    
    
    
    (48,000
    )Royalty and supply fees (1)
    
    
    248,000
    
    
    
    180,000
    
    
    
    68,000Subtotal Levulan® Kerastick® Cost of Product
Revenues and Royalties
    
    
    896,000
    
    
    
    794,000
    
    
    
    102,000BLU-U® Cost of Product RevenuesDirect BLU-U® Product Costs
    
    
    201,000
    
    
    
    262,000
    
    
    
    (61,000
    )Other BLU-U® Product Costs including internal
costs assigned to support products; as well as,
costs incurred to ship, install and service the
BLU-U® in physicians offices
    
    
    177,000
    
    
    
    253,000
    
    
    
    (76,000
    )Subtotal BLU-U® Cost of Product Revenues
    
    
    378,000
    
    
    
    515,000
    
    
    
    (137,000
    )TOTAL PDT DRUG AND DEVICE COST OF PRODUCT REVENUES
AND ROYALTIES
    
    
    1,274,000
    
    
    
    1,309,000
    
    
    
    (35,000
    )Non-PDT Drug Cost of Product Revenues and
Royalties
    
    
    427,000
    
    
    
    847,000
    
    
    
    (420,000
    )TOTAL COST OF PRODUCT REVENUES AND ROYALTIES
    
    $
    1,701,000
    
    
    $
    2,156,000
    
    
    $
    (455,000
    )
 
 1)
    
    Royalty and supply fees reflect amounts paid to our licensor, PARTEQ Research and
Development Innovations, the licensing arm of Queens University, Kingston, Ontario,
and amortization of an upfront fee and ongoing royalties paid to Draxis Health, Inc.,
on sales of the Levulan® Kerastick® in Canada. MARGINS
 Increase/2008
    
    
    
    
    
    
    2007
    
    
    
    
    
    
    (Decrease)Levulan® Kerastick® Gross Margin
    
    $
    4,458,000
    
    
    
    83
    %
    
    $
    3,131,000
    
    
    
    80
    %
    
    $
    1,327,000BLU-U® Gross Margin
    
    
    98,000
    
    
    
    21
    %
    
    
    117,000
    
    
    
    18
    %
    
    
    (19,000
    )Total PDT Drug and Device Gross Margin
    
    $
    4,556,000
    
    
    
    78
    %
    
    $
    3,248,000
    
    
    
    71
    %
    
    $
    1,308,000Total Non-PDT Drug Gross Margin
    
    
    1,673,000
    
    
    
    80
    %
    
    $
    1,273,000
    
    
    
    60
    %
    
    
    400,000TOTAL GROSS MARGIN
    
    $
    6,229,000
    
    
    
    79
    %
    
    $
    4,521,000
    
    
    
    68
    %
    
    $
    1,708,000
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® ®
 ® ®
 ® ® ®
 RESEARCH AND DEVELOPMENT COSTS
 ® ®
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MARKETING AND SALES COSTS
 GENERAL AND ADMINISTRATIVE COSTS
 NET GAIN FROM SETTLEMENT OF LITIGATION ® ®
 OTHER INCOME, NET
 GAIN ON CHANGE IN FAIR VALUE OF WARRANTS
 NET LOSS
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LIQUIDITY AND CAPITAL RESOURCES
    AdditionalCumulative Sales Milestone:
    
    Consideration:$25.0 million
    
    $1.5 million35.0 million
    
    $1.0 million45.0 million
    
    $1.0 millionTotal
    
    $3.5 million
  ® ® ®
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®
 Contractual Obligations and Other Commercial Commitments
 ALTANA, INC.
  ACTAVIS TOTOWA, LLC
 ® ® ® ® ® ®
 L. PERRIGO COMPANY
  27




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##### Table of Contents



MERGER WITH SIRIUS LABORATORIES, INC.
  PHOTOCURE ASA
 ® ® ® ® ® ® ® ® ®
 WINSTON LABORATORIES, INC.
 ® ®
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PARTEQ AGREEMENT
 ®
  NATIONAL BIOLOGICAL CORPORATION AMENDED AND RESTATED PURCHASE AND SUPPLY AGREEMENT
 ®
 SOCHINAZ SA
 ®
 LEASE AGREEMENTS
  RESEARCH AGREEMENTS
   29




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Total
    
    
    1 Yr or less
    
    
    2-3 Years
    
    
    4-5 Years
    
    
    After 5Operating lease obligations
    
    $
    2,103,000
    
    
    $
    463,000
    
    
    $
    901,000
    
    
    $
    739,000
    
    
    $
    0Purchase obligations (1, 2)
    
    
    3,782,000
    
    
    
    3,469,000
    
    
    
    313,000
    
    
    
    
    
    
    
    Minimum royalty obligations (3)
    
    
    1,227,000
    
    
    
    348,000
    
    
    
    634,000
    
    
    
    196,000
    
    
    
    49,000Total obligations
    
    $
    7,112,000
    
    
    $
    4,280,000
    
    
    $
    1,848,000
    
    
    $
    935,000
    
    
    $
    49,000
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##### Table of Contents



1)
    
    Research and development projects include various commitments including
obligations for our Phase II clinical study for moderate to severe acne.2)
    
    In addition to the obligations disclosed above, we have contracted with Therapeutics, Inc., a
clinical research organization, to manage the clinical development of our products in the field of
dermatology. This organization has the opportunity for additional stock grants, bonuses, and other
incentives for each product indication ranging from $250,000 to $1,250,000, depending on the
regulatory phase of development of products under Therapeutics management.3)
    
    Minimum royalty obligations relate to our agreements with PARTEQ, Winston and Perrigo
described above.  INFLATION
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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ITEM 4. CONTROLS AND PROCEDURES
   Forward-Looking Statements Safe Harbor
 ® ® ® ® ® ® ® ® ® ® ®
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® ® ®
 
 PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS.
 RIVERS EDGE
 ® ® ® ® ® ®
 ®
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##### Table of Contents



ITEM 1A. RISK FACTORS
    Risks Related To DUSA
 We Are Not Currently Profitable And May Not Be Profitable In The Future Unless We Can Successfully
Market And Sell Significantly Higher Quantities Of Our Products.
 If Product Sales Do Not Increase Significantly, We May Not Be Able To Advance Development Of
Our Other Potential Products As Quickly As We Would Like To, Which Would Delay The Approval
Process And Marketing Of New Potential Products.
  Nicomide ® Will Likely Lose Significant Market Share If Another Generic Product
Enters the Market And Our Ability To Become Profitable Will Be More Difficult.
 ® ® ® ®
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® ®
 Any Failure To Comply With Ongoing Governmental Regulations In The United States And
Elsewhere Will Limit Our Ability To Market Our Products and Become Profitable.
  
    
    approval of manufacturing facilities, including adherence to good
manufacturing and laboratory practices during production and storage,
    
    controlled research and testing of some of these products even after
approval, and
    
    control of marketing activities, including advertising and labeling.
  
    
    send warning letters, as recently received by the manufacturer of our
BLU-U®,
    
    impose fines and other civil penalties on us,
    
    seize our products,
    
    suspend our regulatory approvals,
    
    cease the manufacture of our products, as Actavis Totowa is doing with
Nicomide®,
    
    refuse to approve pending applications or supplements to approved
applications filed by us,
    
    refuse to permit exports of our products from the United States,
    
    require us to recall products,
    
    require us to notify physicians of labeling changes and/or product related
problems,
    
    impose restrictions on our operations, and/or
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
    
    criminally prosecute us.
  ® ® ® ® ® ® ® ®
 ® ®
 ® ®
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Patent Litigation Is Expensive And We May Not Be Able To Afford The Costs.
   If We Are Unable To Obtain The Necessary Capital To Fund Our Operations, We Will Have To Delay Our
Development Programs And May Not Be Able To Complete Our Clinical Trials.
   Since We Now Operate The Only FDA Approved Manufacturing Facility For The
Kerastick ® And
Continue To Rely Heavily On Sole Suppliers For The Manufacture Of Levulan ® , The
BLU-U ® , Nicomide ® , Meted ® , Psoriacap ® And
Psoriatec ® , Any Supply Or Manufacturing Problems Could Negatively Impact Our Sales.
 ® ®
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® ® ® ® ®
 ® ® ® ® ® ® ®
  
    
    product yields,
    
    quality control,
    
    component and service availability,
    
    compliance with FDA regulations, and
    
    the need for further FDA approval if manufacturers make material changes to
manufacturing processes and/or facilities.
  We Have Only Limited Experience Marketing And Selling Pharmaceutical Products And, As A Result, Our
Revenues From Product Sales May Suffer.
  38




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® ® ® ®
 The Commercial Success Of Any Products That We May Develop Will Depend Upon The Degree Of Market
Acceptance Of Our Products Among Physicians, Patients, Health Care Payors, Private Health Insurers
And The Medical Community.
  
    
    the effectiveness, or perceived effectiveness, of our products in comparison
to competing products;
    
    the existence of any significant side effects, as well as their severity in
comparison to any competing products;
    
    potential advantages over alternative treatments;
    
    the ability to offer our products for sale at competitive prices;
    
    relative convenience and ease of administration;
    
    the strength of marketing and distribution support; and
    
    sufficient third-party coverage or reimbursement.
 If We Cannot Improve Physician Reimbursement And/Or Convince More Private Insurance Carriers To
Adequately Reimburse Physicians For Our Product Sales May Suffer.
 ® ®
 ®
 We Have Significant Losses And Anticipate Continued Losses
  39




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We Have Limited Patent Protection, And If We Are Unable To Protect Our Proprietary Rights,
Competitors Might Be Able To Develop Similar Products To Compete With Our Products And Technology.
 ®
 
    
    methods of using ALA and its unique physical forms in combination with
light,
    
    compositions and apparatus for those methods, and
    
    unique physical forms of ALA.
  ®
 ® ® ® ®
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®
 ® ® ® ® ®
  
    
    these persons or entities might breach the agreements,
    
    we might not have adequate remedies for a breach, and/or
    
    our competitors will independently develop or otherwise discover our trade
secrets;
  We Have Only Three Therapies That Have Received Regulatory Approval Or Clearance, And We Cannot
Predict Whether We Will Ever Develop Or Commercialize Any Other Levulan ® Products.
 Our Potential Products Are In Early Stages Of Development And May Never Result In Any
Commercially Successful Products.
 ® ® ®
 
    
    delays in product development, clinical testing or manufacturing,
    
    unplanned expenditures in product development, clinical testing or
manufacturing,
    
    failure in clinical trials or failure to receive regulatory approvals,
    
    emergence of superior or equivalent products,
    
    inability to market products due to third-party proprietary rights, and
    
    failure to achieve market acceptance.
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®
 We Must Receive Separate Approval For Each Of Our Potential Products Before We Can Sell Them
Commercially In The United States Or Abroad.
 ® ® ®
 ®
 ®
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® ® ® ® ® ® ®
 Because Of The Nature Of Our Business, The Loss Of Key Members Of Our Management Team Could Delay
Achievement Of Our Goals.
  Collaborations With Outside Scientists May Be Subject To Restriction And Change.
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Risks Related To Our Industry
 Product Liability And Other Claims Against Us May Reduce Demand For Our Products Or Result In
Damages.
 We Are Subject To Risk From Potential Product Liability Lawsuits Which Could Negatively
Affect Our Business.
  Our Business Involves Environmental Risks And We May Incur Significant Costs Complying With
Environmental Laws And Regulations.
 ®
 We May Not Be Able To Compete Against Traditional Treatment Methods Or Keep Up With Rapid Changes
In The Biotechnology And Pharmaceutical Industries That Could Make Some Or All Of Our Products
Non-Competitive Or Obsolete.
 Competing Products And Technologies Based On Traditional Treatment Methods May Make Some Or
All Of Our Programs Or Potential Products Noncompetitive Or Obsolete.
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
    
    price reductions,
    
    lower levels of third-party reimbursements,
    
    failure to achieve market acceptance, and
    
    loss of market share, any of which could adversely affect our business.
Further, we cannot give any assurance that developments by our competitors or
future competitors will not render our technology obsolete
 ® ® ® ® ®
 We Have Learned That Some Compounding Pharmacies Are Producing A Form Of Aminolevulinic Acid
Hcl And Are Marketing It To The Medical Community.
 ®
 Generic Manufacturers May Launch Products at Risk of Patent Infringement.
 ® ®
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Our Competitors In The Biotechnology And Pharmaceutical Industries May Have Better Products,
Manufacturing Capabilities Or Marketing Expertise.
 ®
 ®
 ®
  
    
    the ease of administration of our method of PDT,
    
    the degree of generalized skin sensitivity to light,
    
    the number of required doses,
    
    the selectivity of our drug for the target lesion or tissue of interest, and
    
    the type and cost of our light systems.
 ®
 Risks Related To Our Stock
 If The Shares Of Common Stock Held By Former Sirius Shareholders Or Our New Investors Are Sold, The
Price Of Our Shares Could Become Depressed.
  46




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If Outstanding Options, Warrants And Rights Are Converted, The Value Of Those Shares Of Common
Stock Outstanding Just Prior To The Conversion Will Be Diluted.
  Our Results Of Operations And General Market Conditions For Specialty Pharmaceutical And
Biotechnology Stocks Could Result In Sudden Changes In The Market Value Of Our Stock.
  
    
    quarterly levels of product sales;
    
    clinical trial results;
    
    general market conditions;
    
    patent litigation;
    
    increased marketing activities or press releases; and
    
    changes in third-party payor reimbursement for our therapy.
  Significant Fluctuations In Orders For Our Products, On A Monthly And Quarterly Basis, Are Common
Based On External Factors And Sales Promotion Activities. These Fluctuations Could Increase The
Volatility Of Our Stock Price.
  Effecting A Change Of Control Of DUSA Would Be Difficult, Which May Discourage Offers For Shares Of
Our Common Stock.
  47




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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
  
 ITEM 5. OTHER INFORMATION.
  
 ITEM
6. EXHIBITS.
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EXHIBIT NO.
    
    DESCRIPTION OF EXHIBIT3(a.1)
    
    Certificate of Incorporation, as amended, filed as Exhibit 3(a) to the
Registrants Form 10-K for the fiscal year ended December 31,
1998, and is incorporated herein by reference.3(a.2)
    
    Certificate of Amendment to the Certificate of Incorporation, as
amended, dated October 28, 2002 and filed as Exhibit 99.3 to the
Registrants Quarterly Report on Form 10-Q for the fiscal quarter
ended September 30, 2002, filed November 12, 2002, and is
incorporated herein by reference.3(b)
    
    By-laws of the Registrant, filed as Exhibit 3.1 to the Registrants
current report on Form 8-K, filed on November 2, 2007, and is
incorporated herein by reference.31(a)
    
    Certification pursuant to Rule 13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934.31(b)
    
    Certification pursuant to Rule 13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934.32(a)
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32(b)
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.99.1
    
    Press Release dated May 7, 2008.
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SIGNATURES
  DUSA Pharmaceuticals, Inc.By:
    /s/ Robert F. DomanRobert DomanPresident and Chief

Executive Officer

(principal executive officer)  By:
    /s/ Richard C. ChristopherRichard C. ChristopherVice President, Finance and Chief

Financial Officer

(principal financial officer)  50




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EXHIBIT INDEX
 3(a.1)
    
    Certificate of Incorporation, as amended, filed as Exhibit 3(a) to
the Registrants Form 10-K for the fiscal year ended
December 31,
1998, and is incorporated herein by reference.3(a.2)
    
    Certificate of Amendment to the Certificate of Incorporation, as
amended, dated October 28, 2002 and filed as Exhibit 99.3 to
the
Registrants Quarterly Report on Form 10-Q for the fiscal
quarter
ended September 30, 2002, filed November 12, 2002, and is
incorporated herein by reference.3(b)
    
    By-laws of the Registrant, filed as Exhibit 3.1 to the Registrants
current report on Form 8-K, filed on November 2, 2007, and is
incorporated herein by reference.31(a)
    
    Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities
Exchange Act of 1934.31(b)
    
    Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities
Exchange Act of 1934.32(a)
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.32(b)
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.99.1
    
    Press Release dated May 7, 2008.
 51