##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-Q
 (Mark
One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended: September 30, 2006
 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 Incorporation 
or Organization)
    
    (I.R.S. Employer Identification No.)25 Upton Drive, Wilmington, MA
    
    01887(Address of Principal Executive Offices)
    
    (Zip Code)
  
  þ o
  o þ o
 o þ
    1




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DUSA Pharmaceuticals, Inc.
TABLE OF CONTENTS TO FORM 10-Q
 PAGENUMBERPART I. FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    3Condensed Consolidated Balance Sheets at September 30, 2006 and December 31, 2005 (Unaudited)Condensed Consolidated Statements of Operations for the three and nine-month periods ended September 30, 2006 and 2005 (Unaudited)Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2006 and 2005 (Unaudited)Notes to the Condensed Consolidated Financial Statements (Unaudited)Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    35Item 4. Controls and Procedures
    
    
    36PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    37Item 1A. Risk Factors
    
    
    39Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    51Item 3. Defaults Upon Senior Securities
    
    
    51Item 4. Submission of Matters to a Vote of Security Holders
    
    
    51Item 5. Other Information
    
    
    51Item 6. Exhibits
    
    
    52SIGNATURES
    
    
    53Exhibit Index
    
    
    54EX-10(a)
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT FOR RICHARD C. CHRISTOPHEREX-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.
  2




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PART I.
 
 ITEM 1. FINANCIAL STATEMENTS
 DUSA PHARMACEUTICALS, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 SEPTEMBER 30,
    
    DECEMBER 31,2006
    
    2005ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    5,139,183
    
    
    $
    4,210,675Marketable securities
    
    
    13,414,499
    
    
    
    30,579,486Accrued interest receivable
    
    
    111,952
    
    
    
    353,449Accounts receivable, net
    
    
    1,826,197
    
    
    
    373,130Inventory
    
    
    2,158,886
    
    
    
    1,860,793Deferred acquisition costs
    
    
    
    
    
    
    831,875Prepaids and other current assets
    
    
    1,463,945
    
    
    
    776,293TOTAL CURRENT ASSETS
    
    
    24,114,662
    
    
    
    38,985,701Restricted cash
    
    
    160,836
    
    
    
    144,541Property, plant and equipment, net
    
    
    2,691,425
    
    
    
    2,971,869Intangible assets
    
    
    16,183,342
    
    
    
    Goodwill
    
    
    5,772,505
    
    
    
    Deferred charges and other assets
    
    
    956,654
    
    
    
    228,520TOTAL ASSETS
    
    $
    49,879,424
    
    
    $
    42,330,631LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIESAccounts payable
    
    $
    227,224
    
    
    $
    934,694Accrued compensation
    
    
    1,277,799
    
    
    
    1,071,677Other accrued expenses
    
    
    3,469,518
    
    
    
    1,995,679Deferred revenue
    
    
    1,066,326
    
    
    
    94,283TOTAL CURRENT LIABILITIES
    
    
    6,040,867
    
    
    
    4,096,333Other liabilities
    
    
    205,893
    
    
    
    205,570TOTAL LIABILITIES
    
    
    6,246,760
    
    
    
    4,301,903COMMITMENTS AND CONTINGENCIES (NOTE 13)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. Issued
and outstanding: 19,449,442 and
17,041,197 shares of common stock, no
par, at September 30, 2006 and December
31, 2005, respectively142,870,571
    
    
    
    125,626,163Additional paid-in capital
    
    
    3,448,899
    
    
    
    2,035,783Accumulated deficit
    
    
    (102,618,371
    )
    
    
    (89,537,470
    )Accumulated other comprehensive loss
    
    
    (68,435
    )
    
    
    (95,748
    )TOTAL SHAREHOLDERS EQUITY
    
    
    43,632,664
    
    
    
    38,028,728TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    49,879,424
    
    
    $
    42,330,631
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DUSA PHARMACEUTICALS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 THREE MONTHS ENDED
    
    NINE MONTHS ENDEDSEPTEMBER 30,
    
    SEPTEMBER 30,2006
    
    2005
    
    2006
    
    2005Product Revenues
    
    $
    6,062,720
    
    
    $
    2,392,244
    
    
    $
    17,432,350
    
    
    $
    7,988,974Cost of Product Revenues and Royalties
    
    
    2,849,485
    
    
    
    1,307,433
    
    
    
    7,635,407
    
    
    
    4,781,589GROSS MARGIN
    
    
    3,213,235
    
    
    
    1,084,811
    
    
    
    9,796,943
    
    
    
    3,207,385Operating CostsResearch and Development
    
    
    1,343,880
    
    
    
    1,414,428
    
    
    
    4,382,134
    
    
    
    4,809,294In-process Research and Development
    
    
    
    
    
    
    
    
    
    
    1,600,000
    
    
    
    Marketing and Sales
    
    
    3,246,886
    
    
    
    1,804,439
    
    
    
    9,114,093
    
    
    
    6,885,755General and Administrative
    
    
    2,603,237
    
    
    
    1,663,697
    
    
    
    8,427,324
    
    
    
    5,187,415Restructuring
    
    
    
    
    
    
    150,917
    
    
    
    
    
    
    
    150,917TOTAL OPERATING COSTS
    
    
    7,194,003
    
    
    
    5,033,481
    
    
    
    23,523,551
    
    
    
    17,033,381LOSS FROM OPERATIONS
    
    
    (3,980,768
    )
    
    
    (3,948,670
    )
    
    
    (13,726,608
    )
    
    
    (13,825,996
    )OTHER INCOMEOther income, net
    
    
    194,129
    
    
    
    340,389
    
    
    
    645,707
    
    
    
    1,059,982NET LOSS
    
    $
    (3,786,639
    )
    
    $
    (3,608,281
    )
    
    $
    (13,080,901
    )
    
    $
    (12,766,014
    )BASIC AND DILUTED NET LOSS PER COMMON
SHARE
    
    $
    (0.19
    )
    
    $
    (0.21
    )
    
    $
    (0.77
    )
    
    $
    (0.75
    )WEIGHTED-AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING, BASIC AND DILUTED
    
    
    19,449,442
    
    
    
    16,930,746
    
    
    
    17,041,197
    
    
    
    16,920,220
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DUSA PHARMACEUTICALS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 NINE MONTHS ENDED SEPTEMBER 30,2006
    
    2005CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIESNet loss
    
    $
    (13,080,901
    )
    
    $
    (12,766,014
    )Adjustments to reconcile net loss to net cash used in operating activities:Amortization of premiums and accretion of discounts on marketable
securities available-for-sale
    
    
    38,766
    
    
    
    401,221Realized gain on sale of marketable securities,
available-for-sale
    
    
    (14,015
    )
    
    
    (72,195
    )Stock-based compensation
    
    
    1,413,116
    
    
    
    19,444In-process research and development charge
    
    
    1,600,000
    
    
    
    Depreciation and amortization
    
    
    3,302,624
    
    
    
    755,593Changes in other assets and liabilities impacting cash flows from
operations (net of impact of acquisition):Accrued interest receivable
    
    
    241,497
    
    
    
    220,170Accounts receivable
    
    
    259,100
    
    
    
    7,153Inventory
    
    
    (79,271
    )
    
    
    (651,578
    )Prepaid and other current assets
    
    
    (730,129
    )
    
    
    (611,338
    )Deferred charges and other assets
    
    
    (793,082
    )
    
    
    Accounts payable
    
    
    (1,310,300
    )
    
    
    (291,654
    )Accrued compensation and other accrued expenses
    
    
    (143,590
    )
    
    
    (180,045
    )Deferred revenue
    
    
    971,443
    
    
    
    188,700Other liabilities
    
    
    323
    
    
    
    12,267NET CASH USED IN OPERATING ACTIVITIES
    
    
    (8,324,419
    )
    
    
    (12,968,276
    )CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIESCash paid for acquisition, net of cash received
    
    
    (7,767,006
    )
    
    
    Purchases of marketable securities
    
    
    (4,008,844
    )
    
    
    (40,683,061
    )Proceeds from maturities and sales of marketable securities
    
    
    21,176,393
    
    
    
    52,901,367Restricted cash
    
    
    (16,295
    )
    
    
    (2,589
    )Purchases of property, plant and equipment
    
    
    (172,277
    )
    
    
    (406,217
    )NET CASH PROVIDED BY INVESTING ACTIVITIES
    
    
    9,211,971
    
    
    
    11,809,500CASH FLOWS PROVIDED BY FINANCING ACTIVITIESProceeds from exercise of options
    
    
    40,956
    
    
    
    232,035NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    928,508
    
    
    
    (926,741
    )CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    4,210,675
    
    
    
    2,928,143CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    5,139,183
    
    
    $
    2,001,402
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DUSA PHARMACEUTICALS, INC.
 
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 1) BASIS OF PRESENTATION
   2) SIGNIFICANT ACCOUNTING POLICIES
 REVENUE RECOGNITION AND PROVISIONS FOR ESTIMATED REDUCTIONS TO GROSS REVENUES
  ® ®
   6




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GOODWILL AND OTHER INTANGIBLE ASSETS




7



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STOCK-BASED COMPENSATION
   3) BUSINESS ACQUISITION
   8




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Cumulative
    
    AdditionalSales Milestone
    
    Consideration$25.0 million
    
    $1.5 million35.0 million
    
    $1.0 million45.0 million
    
    $1.0 millionTotal
    
    $3.5 million
     (IN THOUSANDS)Total consideration:Common stock issued, net of estimated registration costs of $295,000
    
    $
    17,203Cash paid to stockholders
    
    
    8,000Balance on line-of-credit
    
    
    251Transaction costs accrued
    
    
    346Transaction costs paid
    
    
    1,525Total purchase consideration
    
    
    27,325Allocation of the purchase considerationCurrent assets (including cash of $485), exclusive of inventory
    
    
    2,198Inventory
    
    
    1,983Fixed assets
    
    
    109Long-term assets
    
    
    14Identifiable intangible assets
    
    
    17,160
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(IN THOUSANDS)In-process research and development
    
    
    1,600Goodwill
    
    
    5,773Total assets acquired
    
    
    28,837Fair value of liabilities assumed
    
    
    (1,512
    )Fair value of assets acquired and liabilities assumed
    
    $
    27,325
  WEIGHTED AVERAGEAMOUNT
    
    AMORTIZATION PERIOD(IN THOUSANDS)
    
    (IN YEARS)Core/Developed Technology
    
    $
    17,160
    
    
    
    3.78In-process
Research and
Development
    
    $
    1,600
    
    
    
    
   THREE MONTHS ENDED
    
    NINE MONTHS ENDEDSEPTEMBER 30,
    
    SEPTEMBER 30,2006
    
    2005
    
    2006
    
    2005Revenues
    
    $
    6,062,720
    
    
    $
    4,603,800
    
    
    $
    20,350,009
    
    
    $
    14,731,772Net loss
    
    
    (3,100,781
    )
    
    
    (4,078,334
    )
    
    
    (9,185,622
    )
    
    
    (14,309,032
    )Net loss per share
    
    $
    (0.16
    )
    
    $
    (0.21
    )
    
    $
    (0.47
    )
    
    $
    (0.74
    )
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4) GOODWILL AND INTANGIBLE ASSETS
   GROSSCARRYING
    
    ACCUMULATED
    
    NET BOOKVALUE
    
    AMORTIZATION
    
    VALUEGoodwill
    
    $
    5,773
    
    
    
    
    
    
    $
    5,773Amortizable intangible assets:Core/Developed Technology
    
    
    17,160
    
    
    
    (977
    )
    
    
    16,183Total
    
    $
    22,933
    
    
    $
    (977
    )
    
    $
    21,956
  5) MARKETABLE SECURITIES
  SEPTEMBER 30, 2006GROSS
    
    GROSSAMORTIZED
    
    UNREALIZED
    
    UNREALIZED
    
    FAIRCOST
    
    GAINS
    
    LOSSES
    
    VALUEUnited States government securities
    
    $
    9,568,645
    
    
    $
    2,061
    
    
    $
    (56,799
    )
    
    $
    9,513,907Corporate securities
    
    
    3,914,289
    
    
    
    
    
    
    
    (13,697
    )
    
    
    3,900,592Total
marketable securities available-for-sale
    
    $
    13,482,934
    
    
    $
    2,061
    
    
    $
    (70,496
    )
    
    $
    13,414,499
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DECEMBER 31, 2005GROSS
    
    GROSSAMORTIZED
    
    UNREALIZED
    
    UNREALIZED
    
    FAIRCOST
    
    GAINS
    
    LOSSES
    
    VALUEUnited States government debt securities
    
    $
    19,857,171
    
    
    $
    3,732
    
    
    $
    (72,243
    )
    
    $
    19,788,660Investment grade corporate debt securities
    
    
    10,818,063
    
    
    
    15,136
    
    
    
    (42,373
    )
    
    
    10,790,826Total marketable securities available
for sale
    
    $
    30,675,234
    
    
    $
    18,868
    
    
    $
    (114,616
    )
    
    $
    30,579,486
   6) CONCENTRATION OF CREDIT RISK
   % OF REVENUE
    
    % OF REVENUE
    
    % OF ACCOUNTSTHREE MONTHS ENDED
    
    NINE MONTHS ENDED
    
    RECEIVABLE AS OFSEPTEMBER 30,
    
    SEPTEMBER 30,
    
    SEPTEMBER 30,
    
    SEPTEMBER 30,
    
    SEPTEMBER 30,
    
    DECEMBER 31,2006
    
    2005
    
    2006
    
    2005
    
    2006
    
    2005Customer A
    
    
    
    
    
    
    17
    %
    
    
    
    
    
    
    17
    %
    
    
    
    
    
    
    6
    %Customer B
    
    
    4
    %
    
    
    13
    %
    
    
    6
    %
    
    
    14
    %
    
    
    6
    %Customer C
    
    
    14
    %
    
    
    
    
    
    
    11
    %
    
    
    
    
    
    
    24
    %
    
    
    Customer D
    
    
    27
    %
    
    
    
    
    
    
    19
    %
    
    
    
    
    
    
    32
    %
    
    
    Customer E
    
    
    7
    %
    
    
    
    
    
    
    6
    %
    
    
    
    
    
    
    9
    %Other customers
    
    
    48
    %
    
    
    70
    %
    
    
    58
    %
    
    
    69
    %
    
    
    29
    %
    
    
    94
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
  12




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7) INVENTORY
  SEPTEMBER 30,
    
    DECEMBER 31,2006
    
    2005Finished goods
    
    $
    987,119
    
    
    $
    1,004,772BLU-U® evaluation
units
    
    
    183,183
    
    
    
    292,129Work in-process
    
    
    269,112
    
    
    
    60,805Raw materials
    
    
    719,472
    
    
    
    503,087$
    2,158,886
    
    
    $
    1,860,793
 ®
 8) OTHER ACCRUED EXPENSES
  SEPTEMBER 30,
    
    DECEMBER 31,2006
    
    2005Research and development costs
    
    $
    325,001
    
    
    $
    347,220Marketing and sales costs
    
    
    256,858
    
    
    
    173,092Product related costs
    
    
    981,481
    
    
    
    667,388Legal and other professional fees
    
    
    1,567,629
    
    
    
    488,401Employee benefits
    
    
    297,994
    
    
    
    225,628Other expenses
    
    
    40,555
    
    
    
    93,950$
    3,469,518
    
    
    $
    1,995,679
 9) STOCK-BASED COMPENSATION
   13




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WEIGHTED
    
    WEIGHTEDNUMBER
    
    AVERAGEOF SHARES
    
    EXERCISE(IN THOUSANDS)
    
    PRICEOUTSTANDING AT DECEMBER 31, 2005
    
    
    2,850,250
    
    
    $
    11.85Options granted
    
    
    415,500
    
    
    
    6.65Options cancelled/forfeited/expired
    
    
    (443,437
    )
    
    
    8.50Options exercised
    
    
    (12,000
    )
    
    
    3.41OUTSTANDING AT SEPTEMBER 30, 2006
    
    
    2,810,313
    
    
    $
    11.65EXERCISABLE AT SEPTEMBER 30, 2006
    
    
    1,998,318
    
    
    $
    12.86
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NINE MONTHSENDEDSEPTEMBER 30, 2006Volatility
    
    
    63.7
    %Risk-free interest rate
    
    
    5.10
    %Expected dividend yield
    
    
    0
    %Expected life-directors and officers
    
    8.0
    yearsExpected life-non-officer employees
    
    6.3
    years
    THREE MONTHS ENDED
    
    
    NINE MONTHS ENDEDSEPTEMBER 30, 2006
    
    
    SEPTEMBER 30, 2006Cost of product revenues
    
    $
    24,000
    
    
    $
    61,000Research and development
    
    
    101,000
    
    
    
    263,000Selling and marketing
    
    
    123,000
    
    
    
    270,000General & administrative
    
    
    195,000
    
    
    
    819,000Share-based compensation expense
    
    $
    443,000
    
    
    $
    1,413,000
  15




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THREE MONTHS ENDED
    
    NINE MONTHS ENDEDSEPTEMBER 30, 2005
    
    SEPTEMBER 30, 2005Net loss, as reported
    
    $
    (3,608,281
    )
    
    $
    (12,766,014
    )Add: stock-based compensation expense included in
reported
net loss
    
    
    
    
    
    
    19,444Deduct: Share-based employee compensation expense
determined under the fair value based method for all
awards
    
    
    (339,471
    )
    
    
    (1,439,514
    )Pro forma net loss
    
    $
    (3,947,752
    )
    
    $
    (14,186,084
    )Loss per common share:
    
    $
    (0.21
    )
    
    $
    (0.75
    )Basic and diluted loss per share as reported
    
    $
    (0.02
    )
    
    $
    (0.09
    )Basic and diluted loss per share  pro forma
    
    $
    (0.23
    )
    
    $
    (0.84
    )
  Volatility
    
    
    69.4
    %Risk-free interest rate
    
    
    3.72
    %Dividend yield
    
    
    0.0
    %Expected life (years)
    
    
    5.0
  10) BASIC AND DILUTED NET LOSS PER SHARE
  11) SEGMENT REPORTING
  16




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THREE MONTHS ENDED
    
    NINE MONTHS ENDEDSEPTEMBER 30,
    
    SEPTEMBER 30,
    
    SEPTEMBER 30,
    
    SEPTEMBER 30,2006
    
    2005
    
    2006
    
    2005REVENUESPDT Drug & Device Product Revenues
    
    $
    3,235,000
    
    
    $
    2,392,000
    
    
    $
    10,929,000
    
    
    $
    7,989,000Non-PDT Drug Product Revenues
    
    
    2,828,000
    
    
    
    
    
    
    
    6,503,000
    
    
    
    Total Revenues
    
    
    6,063,000
    
    
    
    2,392,000
    
    
    
    17,432,000
    
    
    
    7,989,000COSTS OF REVENUESPDT Drug & Device Cost of ProductRevenues and Royalties
    
    
    1,243,000
    
    
    
    1,307,000
    
    
    
    3,971,000
    
    
    
    4,782,000Non-PDT Drug Cost of ProductRevenues and Royalties
    
    
    1,606,000
    
    
    
    
    
    
    
    3,664,000
    
    
    
    Total Costs of Product Revenues and
Royalties
    
    
    2,849,000
    
    
    
    1,307,000
    
    
    
    7,635,000
    
    
    
    4,782,000GROSS MARGINSPDT Drug and Device Product Gross Margin
    
    
    1,992,000
    
    
    
    1,085,000
    
    
    
    6,958,000
    
    
    
    3,207,000Non-PDT Drug Product Gross Margin
    
    
    1,222,000
    
    
    
    
    
    
    
    2,839,000
    
    
    
    Total Gross Margins
    
    $
    3,214,000
    
    
    $
    1,085,000
    
    
    $
    9,797,000
    
    
    $
    3,207,000
  Three Months Ending September 30,
    
    Nine Months Ending September 30,2006
    
    2005
    
    2006
    
    2005United States
    
    
    96
    %
    
    
    87
    %
    
    
    94
    %
    
    
    86
    %Canada
    
    
    4
    %
    
    
    13
    %
    
    
    6
    %
    
    
    14
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
  12) COMPREHENSIVE LOSS
  THREE MONTHS ENDED
    
    NINE MONTHS ENDEDSEPTEMBER 30,
    
    SEPTEMBER 30,2006
    
    2005
    
    2006
    
    2005NET LOSS
    
    $
    (3,786,639
    )
    
    $
    (3,608,281
    )
    
    $
    (13,080,901
    )
    
    $
    (12,766,014
    )Change in net unrealized gains
and losses on marketable
securities available-for-sale
    
    
    (56,756
    )
    
    
    (166,714
    )
    
    
    (27,313
    )
    
    
    (413,323
    )COMPREHENSIVE LOSS
    
    $
    (3,843,395
    )
    
    $
    (3,774,995
    )
    
    $
    (13,108,214
    )
    
    $
    (13,179,337
    )
 17




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13) COMMITMENTS AND CONTINGENCIES
 LEGAL MATTERS:
 RIVERS EDGE
 ® ® ®
  ®
  14) RECENT ACCOUNTING PRONOUNCEMENTS
   18




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##### Table of Contents



15) SUBSEQUENT EVENT
  
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 OVERVIEW
 ® ® ® ® ® ® ® ® ®
 ® ® ® ® ® ® ®
 ® ® ® ® ®
  ® ®
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® ® ® ® ® ®
 ® ®
 ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ®
 ®
   20




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® ®
 ® ® ® ®
 ® ® ® ® ®
   21




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®
 ® ® ®
  ®
 22




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® ® ®
 ® ® ® ®
  CRITICAL ACCOUNTING POLICIES
  REVENUE RECOGNITION AND PROVISIONS FOR ESTIMATED REDUCTIONS TO GROSS REVENUES
 Photodynamic Therapy (PDT) Drug and Device Products.
 ® ®
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Non-PDT Drug Products.
     FOR THE THREE-MONTH PERIODENDED SEPTEMBER 30, 2006:PROVISION
    
    PROVISION
    
    ACTUALRELATED TO
    
    FOR
    
    RETURNSSALES MADE
    
    SALES
    
    OR CREDITSBALANCE
    
    IN THE
    
    MADE IN
    
    IN THE
    
    BALANCEAT JULY 1,
    
    CURRENT
    
    PRIOR
    
    CURRENT
    
    AT SEPTEMBER2006
    
    PERIOD
    
    PERIODS
    
    PERIOD
    
    30, 2006Accrued Expenses:Returns and allowances
    
    $
    252,000
    
    
    $
    304,000
    
    
    $
    
    
    
    $
    (236,000
    )
    
    $
    320,000Accounts receivable:Prompt payment discounts
    
    $
    26,000
    
    
    $
    67,000
    
    
    $
    
    
    
    $
    (65,000
    )
    
    $
    28,000
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FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2006:PROVISION
    
    
    
    
    
    ACTUALBALANCE
    
    RELATED TO
    
    PROVISION
    
    RETURNSACQUIRED AS
    
    SALES MADE
    
    FOR SALES
    
    OR CREDITSPART OF
    
    IN THE
    
    MADE IN
    
    IN THE
    
    BALANCE ATBALANCE AT
    
    SIRIUS
    
    CURRENT
    
    PRIOR
    
    CURRENT
    
    SEPTEMBERJANUARY 1, 2006
    
    ACQUISITION
    
    PERIOD
    
    PERIODS
    
    PERIOD
    
    30, 2006Accrued Expenses:Returns and
allowances
    
    $
    
    
    
    $
    357,000
    
    
    $
    594,000
    
    
    $
    
    
    
    $
    (631,000
    )
    
    $
    320,000Accounts receivable:Prompt payment
discounts
    
    $
    
    
    
    $
    
    
    
    $
    151,000
    
    
    $
    
    
    
    $
    ($123,000
    )
    
    $
    28,000
      INVENTORY
  25




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VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS
   STOCK-BASED COMPENSATION
   RECENT ACCOUNTING PRONOUNCEMENTS
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RESULTS OF OPERATIONS  THREE MONTHS ENDED SEPTEMBER 30, 2006 VERSUS SEPTEMBER 30, 2005
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THREE MONTHS ENDED SEPTEMBER 30,
    
    NINE MONTHS ENDED SEPTEMBER 30,(UNAUDITED)
    
    INCREASE/
    
    (UNAUDITED)
    
    INCREASE/2006
    
    2005
    
    (DECREASE)
    
    2006
    
    2005
    
    (DECREASE)PDT PRODUCT REVENUESKERASTICK® PRODUCT REVENUESUnited States
    
    $
    2,490,000
    
    
    $
    1,630,000
    
    
    $
    860,000
    
    
    $
    8,212,000
    
    
    $
    5,389,000
    
    
    $
    2,823,000Canada
    
    
    176,000
    
    
    
    176,000
    
    
    
    
    
    
    
    939,000
    
    
    
    693,000
    
    
    
    246,000Subtotal Kerastick® product revenues
    
    
    2,666,000
    
    
    
    1,806,000
    
    
    
    860,000
    
    
    
    9,151,000
    
    
    
    6,082,000
    
    
    
    3,069,000BLU-U® PRODUCT REVENUESUnited States
    
    
    516,000
    
    
    
    462,000
    
    
    
    54,000
    
    
    
    1,633,000
    
    
    
    1,489,000
    
    
    
    144,000Canada
    
    
    53,000
    
    
    
    124,000
    
    
    
    (71,000
    )
    
    
    145,000
    
    
    
    418,000
    
    
    
    (273,000
    )Subtotal BLU-U® product revenues
    
    
    569,000
    
    
    
    586,000
    
    
    
    (17,000
    )
    
    
    1,778,000
    
    
    
    1,907,000
    
    
    
    (129,000
    )TOTAL PDT PRODUCT REVENUES
    
    
    3,235,000
    
    
    
    2,392,000
    
    
    
    843,000
    
    
    
    10,929,000
    
    
    
    7,989,000
    
    
    
    2,940,000TOTAL NON-PDT DRUG PRODUCT REVENUES
    
    
    2,828,000
    
    
    
    
    
    
    
    2,828,000
    
    
    
    6,503,000
    
    
    
    
    
    
    
    6,503,000TOTAL PRODUCT REVENUES
    
    $
    6,063,000
    
    
    $
    2,392,000
    
    
    $
    3,671,000
    
    
    $
    17,432,000
    
    
    $
    7,989,000
    
    
    $
    9,443,000
 ® ®
 ® ® ® ®
 ® ® ®
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® ® ® ® ® ®
 ® ®
 ®
 ® ®
  Three Months Ended September 30,(Unaudited)Increase/2006
    
    
    2005
    
    
    (Decrease)Kerastick®Cost of Product Revenues and RoyaltiesDirect Kerastick® Product costs
    
    $
    380,000
    
    
    $
    369,000
    
    
    $
    11,000Other Kerastick®Product costs including internal costs assigned to support products
    
    
    224,000
    
    
    
    354,000
    
    
    
    (130,000
    )Royalty and supply fees (1)
    
    
    126,000
    
    
    
    93,000
    
    
    
    33,000
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Three Months Ended September 30,(Unaudited)Increase/2006
    
    
    2005
    
    
    (Decrease)Subtotal Kerastick Cost of Product Revenues and Royalties
    
    
    730,000
    
    
    
    816,000
    
    
    
    (86,000
    )BLU-U®Cost of Product RevenuesDirect BLU-U® Product Costs
    
    
    263,000
    
    
    
    284,000
    
    
    
    (21,000
    )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
    
    
    250,000
    
    
    
    207,000
    
    
    
    43,000Subtotal BLU-U® Cost of Product Revenues
    
    
    513,000
    
    
    
    491,000
    
    
    
    22,000TOTAL PDT DRUG & DEVICE COST OF PRODUCT REVENUES AND ROYALTIES
    
    
    1,243,000
    
    
    
    1,307,000
    
    
    
    (64,000
    )TOTAL NON-PDT DRUG COST OF PRODUCT REVENUES AND ROYALTIES (2)
    
    
    1,606,000
    
    
    
    
    
    
    
    1,606,000TOTAL COST OF PRODUCT REVENUES AND ROYALTIES
    
    $
    2,849,000
    
    
    $
    1,307,000
    
    
    $
    1,542,000
 Nine Months Ended September 30,(Unaudited)Increase/2006
    
    
    2005
    
    
    (Decrease)Kerastick®Cost of Product Revenues and RoyaltiesDirect Kerastick® Product costs
    
    $
    1,318,000
    
    
    $
    1,339,000
    
    
    
    ($21,000
    )Other Kerastick®Product costs including internal costs assigned to support products
    
    
    636,000
    
    
    
    985,000
    
    
    
    (349,000
    )Royalty and supply fees (1)
    
    
    461,000
    
    
    
    318,000
    
    
    
    143,000Subtotal Kerastick® Cost of Product Revenues and Royalties
    
    
    2,415,000
    
    
    
    2,642,000
    
    
    
    (227,000
    )BLU-U®Cost of Product RevenuesDirect BLU-U® Product Costs
    
    
    802,000
    
    
    
    998,000
    
    
    
    (196,000
    )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
    
    
    754,000
    
    
    
    1,142,000
    
    
    
    (388,000
    )Subtotal BLU-U® Cost of Product Revenues
    
    
    1,556,000
    
    
    
    2,140,000
    
    
    
    (584,000
    )TOTAL PDT DRUG & DEVICE COST OF PRODUCT REVENUES AND ROYALTIES
    
    
    3,971,000
    
    
    
    4,782,000
    
    
    
    (811,000
    )TOTAL NON-PDT DRUG COST OF PRODUCT REVENUES AND ROYALTIES (2)
    
    
    3,664,000
    
    
    
    
    
    
    
    3,664,000TOTAL COST OF PRODUCT REVENUES AND ROYALTIES
    
    $
    7,635,000
    
    
    $
    4,782,000
    
    
    $
    2,853,000
 
 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.2)
    
    Non-PDT Drug Cost of Product Revenues and Royalties reflect the costs associated with the
products acquired as part of our March 10, 2006 merger with Sirius.  30




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Three Months Ended September 30,(Unaudited)Increase/2006
    
    
    2005
    
    
    (Decrease)Kerastick® Gross Margin
    
    $
    1,935,000
    
    
    
    73
    %
    
    $
    990,000
    
    
    
    55
    %
    
    $
    945,000BLU-U® Gross Margin
    
    
    57,000
    
    
    
    10
    %
    
    
    95,000
    
    
    
    16
    %
    
    
    (38,000
    )Total PDT Drug & Device Gross Margin
    
    $
    1,992,000
    
    
    
    62
    %
    
    $
    1,085,000
    
    
    
    45
    %
    
    $
    907,000Total Non-PDT Drug Gross Margin
    
    
    1,222,000
    
    
    
    43
    %
    
    
    
    
    
    
    
    
    
    
    1,222,000TOTAL GROSS MARGIN
    
    $
    3,214,000
    
    
    
    53
    %
    
    $
    1,085,000
    
    
    
    45
    %
    
    $
    2,129,000
 Nine Months Ended September 30,(Unaudited)Increase/2006
    
    
    2005
    
    
    (Decrease)Kerastick® Gross Margin
    
    $
    6,736,000
    
    
    
    74
    %
    
    $
    3,440,000
    
    
    
    57
    %
    
    $
    3,296,000BLU-U® Gross Margin
    
    
    222,000
    
    
    
    13
    %
    
    
    (233,000
    )
    
    
    (12
    %)
    
    
    455,000Total PDT Drug & Device Gross Margin
    
    $
    6,958,000
    
    
    
    64
    %
    
    $
    3,207,000
    
    
    
    40
    %
    
    
    3,751,000Total Non-PDT Drug Gross Margin
    
    
    2,839,000
    
    
    
    44
    %
    
    
    
    
    
    
    
    
    
    
    2,839,000TOTAL GROSS MARGIN
    
    $
    9,797,000
    
    
    
    56
    %
    
    $
    3,207,000
    
    
    
    40
    %
    
    $
    6,590,000
 ® ®
 ® ®
 ® ®
   31




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® ® ® ®
    32




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LIQUIDITY AND CAPITAL RESOURCES
 ®
 ® ®
  Cumulative Sales Milestone:
    
    Additional 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
 ®
 HARMONY LABS, INC.
 ® ®
 L. PERRIGO COMPANY
  WINSTON LABORATORIES, INC.
  34




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®
  Total
    
    1 Yr or less
    
    2-3 Years
    
    4-5 Years
    
    After 5Operating lease obligations
    
    $
    2,826,000
    
    
    $
    683,000
    
    
    $
    864,000
    
    
    $
    904,000
    
    
    $
    375,000Purchase obligations (1,2)
    
    
    2,183,000
    
    
    
    1,326,000
    
    
    
    857,000
    
    
    
    
    
    
    
    Minimum royalty obligations
    
    $
    2,273,000
    
    
    $
    636,000
    
    
    $
    772,000
    
    
    $
    672,000
    
    
    $
    193,000
 
 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. INFLATION
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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ITEM 4. CONTROLS AND PROCEDURES
  Changes
In Internal Control Over Financial Reporting
  FORWARD-LOOKING STATEMENTS
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PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS.
 PHOTOCURE ASA
 ® ® ®
 LEVULAN ® SUITS
 ® ®
   RIVERS EDGE
  37




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® ® ®
  ®
 38




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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.
 We Have Only Limited Experience Marketing And Selling Pharmaceutical Products And, As A Result, Our
Revenues From Product Sales May Suffer.
 ® ® ®
 If We Cannot Improve Physician Reimbursement And/Or Convince More Private Insurance Carriers To
Adequately Reimburse Physicians For Our Product Sales May Suffer.
 ® ®
 ®
 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 ® , Nicomide-T ® , the AVAR ® line of
products, 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.
   Any Failure To Comply With Ongoing Governmental Regulations In The United States And Elsewhere Will
Limit Our Ability To Market Our Products.
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##### Table of Contents




    
    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 us warning letters,
    
    impose fines and other civil penalties on us,
    
    seize our products,
    
    suspend our regulatory approvals,
    
    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
    
    criminally prosecute us.
  ® ®
 ®
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##### Table of Contents



®
  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.
  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;
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##### Table of Contents




    
    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.
 We Have Significant Losses And Anticipate Continued Losses
  If We Are Unable To Protect Our Proprietary Technology, Trade Secrets Or Know-How, We May Not Be
Able To Operate Our Business Profitably.
 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.
 Patent Litigation Is Expensive, And We May Not Be Able To Afford The Costs.
   ® ® ® ® ® ®
  44




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We Have Only 2 Therapies That Have Received Regulatory Approval Or Clearance And We Cannot
Predict Whether We Will Ever Develop Or Commercialize Any Other 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.
 ®
 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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##### Table of Contents



®
  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.
   Because Of The Nature Of Our Business, The Loss Of Key Members Of Our Management Team Could Delay
Achievement Of Our Goals.
  46




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Our Collaborations With Outside Scientists May Be Subject To Restriction And Change.
  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.
  47




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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.
 ® ® ® ®
 Our Products May Lose Market Share If New Manufacturers Begin Producing Competing Products That Are
Able To Penetrate Our Market.
 We Have Learned That Compounding Pharmacies Are Producing A Form Of Aminolevulinic Acid HCl And Are
Marketing It To The Medical Community.
 ®
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##### Table of Contents



®
  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.
 ® ®
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##### Table of Contents



Risks Related To Our Stock
 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.
  Results Of Our 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; 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.
  50




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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.
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ITEM 6. EXHIBITS
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SIGNATURES
  DUSA PHARMACEUTICALS, INC.Date: November 6, 2006
    By:
    /s/ D. Geoffrey ShulmanD. Geoffrey ShulmanDirector, Chairman and Chief
Executive Officer
(principal executive officer)Date: November 6, 2006
    By:
    /s/ Richard C. ChristopherRichard C. ChristopherVice President, Finance and Chief
Financial Officer (principal
financial officer) 53




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EXHIBIT INDEX
 10(a) Amendment No. 1 to Employment Agreement for
Richard C. Christopher.31(a) Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.31(b) Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.32(a) Certification of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley
Act of 2002; and32(b) Certification of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
 54