<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-Q

(Mark One)

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

     For the quarterly period ended: June 30, 2006

[ ]  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.
             (Exact Name of Registrant as Specified in Its Charter)

<TABLE>
<S>                                         <C>
               New Jersey                                22-3103129
     (State of Other Jurisdiction of        (I.R.S. Employer Identification No.)
     Incorporation or Organization)
</TABLE>

<TABLE>
<S>                                                      <C>
     25 Upton Drive, Wilmington, MA                         01887
(Address of Principal Executive Offices)                 (Zip Code)
</TABLE>

                                 (978) 657-7500
              (Registrant's Telephone Number, Including Area Code)

              (Former Name, Former Address and Former Fiscal Year,
                          if Changed Since Last Report)

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 whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer" in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer [ ]   Accelerated Filer [X]   Non-accelerated Filer [ ]

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).

Yes [ ] No [X]

As of August 3, 2006, the registrant had 19,449,442 shares of Common Stock, no
par value per share, outstanding.

<PAGE>

                           DUSA PHARMACEUTICALS, INC.
                         TABLE OF CONTENTS TO FORM 10-Q

<TABLE>
<CAPTION>
                                                                           PAGE
                                                                          NUMBER
                                                                          ------
<S>                                                                       <C>
                          PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements                                                3
         -   Condensed Consolidated Balance Sheets at June 30, 2006 and
             December 31, 2005 (Unaudited)
         -   Condensed Consolidated Statements of Operations for the
             three and six-month periods ended June 30, 2006 and 2005
             (Unaudited)
         -   Condensed Consolidated Statements of Cash Flows for the
             three and six-month periods ended June 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                                          18

Item 3.  Quantitative and Qualitative Disclosures About Market Risk         32

Item 4.  Controls and Procedures                                            33

                           PART II. OTHER INFORMATION

Item 1.  Legal Proceedings                                                  33

Item 1A. Risk Factors                                                       36

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds        47

Item 3.  Defaults Upon Senior Securities                                    47

Item 4.  Submission of Matters to a Vote of Security Holders                48

Item 5.  Other Information                                                  48

Item 6.  Exhibits                                                           49

         SIGNATURES                                                         50
Exhibit Index                                                               51
EX-10(a) Patent License Agreement
EX-31.1  SECTION 302 CERTIFICATION OF THE C.E.O.
EX-31.2  SECTION 302 CERTIFICATION OF THE C.F.O.
EX-32.1  SECTION 906 CERTIFICATION OF THE C.E.O.
EX-32.2  SECTION 906 CERTIFICATION OF THE C.F.O.
EX-99    Press Release
</TABLE>


                                        2
<PAGE>

PART I.

ITEM 1. FINANCIAL STATEMENTS

DUSA PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                  June 30,     DECEMBER 31,
                                                                                    2006           2005
                                                                                ------------   ------------
<S>                                                                             <C>            <C>
ASSETS
CURRENT ASSETS
   Cash and cash equivalents                                                    $  5,615,118   $  4,210,675
   Marketable securities                                                          14,584,968     30,579,486
   Accrued interest receivable                                                       200,175        353,449
   Accounts receivable, net                                                        2,062,456        373,130
   Inventory                                                                       2,909,201      1,860,793
   Deferred acquisition costs                                                             --        831,875
   Prepaids and other current assets                                               1,399,989        776,293
                                                                                ------------   ------------
      TOTAL CURRENT ASSETS                                                        26,771,907     38,985,701
   Restricted cash                                                                   154,286        144,541
   Property, plant and equipment, net                                              2,857,456      2,971,869
   Intangible assets                                                              16,620,652             --
   Goodwill                                                                        5,772,505             --
   Deferred charges and other assets                                                 889,704        228,520
                                                                                ------------   ------------
TOTAL ASSETS                                                                    $ 53,066,510   $ 42,330,631
                                                                                ============   ============

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
   Accounts payable                                                             $    522,438   $    934,694
   Accrued compensation                                                              810,410      1,071,677
   Other accrued expenses                                                          3,541,683      1,995,679
   Deferred revenue                                                                1,066,700         94,283
                                                                                ------------   ------------
      TOTAL CURRENT LIABILITIES                                                    5,941,231      4,096,333
   Other liabilities                                                                 205,785        205,570
                                                                                ------------   ------------
TOTAL LIABILITIES                                                                  6,147,016      4,301,903
                                                                                ------------   ------------
COMMITMENTS AND CONTINGENCIES (NOTE 13)
SHAREHOLDERS' EQUITY
   Capital Stock
      Authorized: 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 June 30,
      2006 and December 31, 2005, respectively                                   142,870,571    125,626,163
   Additional paid-in capital                                                      3,005,846      2,035,783
   Accumulated deficit                                                           (98,831,732)   (89,537,470)
   Accumulated other comprehensive loss                                             (125,191)       (95,748)
                                                                                ------------   ------------
TOTAL SHAREHOLDERS' EQUITY                                                        46,919,494     38,028,728
                                                                                ------------   ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                      $ 53,066,510   $ 42,330,631
                                                                                ============   ============
</TABLE>

See the accompanying Notes to the Condensed Consolidated Financial Statements.


                                        3

<PAGE>

DUSA PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
                                                  THREE MONTHS ENDED           SIX MONTHS ENDED
                                                       JUNE 30,                    JUNE 30,
                                              -------------------------   -------------------------
                                                  2006          2005          2006          2005
                                              -----------   -----------   -----------   -----------
<S>                                           <C>           <C>           <C>           <C>
Product Revenues                              $ 6,619,109   $ 2,228,116   $11,369,630   $ 5,596,730
Cost of Product Revenues and Royalties          2,995,163     1,470,528     4,785,922     3,474,156
                                              -----------   -----------   -----------   -----------
   GROSS MARGIN                                 3,623,946       757,588     6,583,708     2,122,574
Operating Costs
   Research and Development                     1,527,523     1,799,149     3,038,254     3,394,866
   In-process Research and Development                 --            --     1,600,000            --
   Marketing and Sales                          3,176,523     2,295,914     5,867,207     5,081,316
   General and Administrative                   3,753,796     1,841,239     5,824,087     3,523,718
                                              -----------   -----------   -----------   -----------
TOTAL OPERATING COSTS                           8,457,842     5,936,302    16,329,548    11,999,900
                                              -----------   -----------   -----------   -----------
LOSS FROM OPERATIONS                           (4,833,896)   (5,178,714)   (9,745,840)   (9,877,326)
OTHER INCOME
   Other income, net                              179,942       352,596       451,578       719,593
                                              -----------   -----------   -----------   -----------
NET LOSS                                      $(4,653,954)  $(4,826,118)  $(9,294,262)  $(9,157,733)
                                              ===========   ===========   ===========   ===========
BASIC AND DILUTED NET LOSS PER COMMON SHARE   $     (0.24)  $     (0.29)  $     (0.50)  $     (0.54)
                                              ===========   ===========   ===========   ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
   OUTSTANDING, BASIC AND DILUTED              19,448,824    16,921,318    18,544,084    16,914,870
                                              ===========   ===========   ===========   ===========
</TABLE>

See the accompanying Notes to the Condensed Consolidated Financial Statements.


                                        4
<PAGE>

DUSA PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

<TABLE>
<CAPTION>
                                                                  SIX MONTHS ENDED JUNE 30,
                                                                 --------------------------
                                                                     2006          2005
                                                                 -----------   ------------
<S>                                                              <C>           <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
   Net loss                                                      $(9,294,262)  $ (9,157,733)
   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                  44,422        306,274
      Realized gain on sale of marketable securities,
         available for sale                                          (14,015)        (6,371)
      Depreciation and amortization                                2,002,994        522,308
      In-process research and development charge                   1,600,000             --
      Stock-based compensation                                       970,064         19,444
   Changes in other assets and liabilities impacting cash
      flows from operations (net of impact of acquisition):
      Accrued interest receivable                                    153,274        135,808
      Accounts receivable                                             22,841         80,091
      Inventory                                                     (143,335)      (967,415)
      Prepaid and other current assets                              (666,173)      (310,907)
      Deferred charges and other assets                             (726,132)            --
      Accounts payable                                            (1,015,086)      (254,607)
      Accrued compensation and other accrued expenses               (539,494)      (233,683)
      Deferred revenue                                               972,417        121,569
      Other liabilities                                                  215          8,178
                                                                 -----------   ------------
NET CASH USED IN OPERATING ACTIVITIES                             (6,632,270)    (9,737,044)
                                                                 -----------   ------------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
   Cash paid for acquisition, net of cash received                (7,767,006)            --
   Purchases of marketable securities                             (1,059,725)   (24,095,511)
   Proceeds from maturities and sales of marketable securities    16,994,393     32,554,812
   Restricted cash                                                    (9,745)          (225)
   Purchases of property, plant and equipment                       (162,160)      (391,219)
                                                                 -----------   ------------
NET CASH PROVIDED BY INVESTING ACTIVITIES                          7,995,757      8,067,857
                                                                 -----------   ------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
   Proceeds from exercise of options                                  40,956        184,567
                                                                 -----------   ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS               1,404,443     (1,484,620)
                                                                 -----------   ------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                   4,210,675      2,928,143
                                                                 -----------   ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                       $ 5,615,118   $  1,443,523
                                                                 ===========   ============
</TABLE>

See the accompanying Notes to the Condensed Consolidated Financial Statements.


                                        5

<PAGE>

DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1) BASIS OF PRESENTATION

The Condensed Consolidated Balance Sheet as of June 30, 2006, and the Condensed
Consolidated Statements of Operations for the three and six months ended June
30, 2006 and 2005, and Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 2006 and 2005 of DUSA Pharmaceuticals, Inc. (the
"Company" or "DUSA") have been prepared in accordance with accounting principles
generally accepted in the United States of America ("U.S. GAAP"). These
condensed consolidated financial statements are unaudited but include all normal
recurring adjustments, which management of the Company believes to be necessary
for fair presentation of the periods presented. The results of the Company's
operations for any interim period are not necessarily indicative of the results
of the Company's operations for any other interim period or for a full year.

Certain information and footnote disclosures normally included in financial
statements prepared in accordance with U.S. GAAP have been condensed or omitted.
These condensed consolidated financial statements should be read in conjunction
with the Consolidated Financial Statements and Notes to the Consolidated
Financial Statements included in our Annual Report on Form 10-K for the year
ended December 31, 2005 filed with the Securities and Exchange Commission. The
balance sheet as of December 31, 2005 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by U.S. GAAP for complete financial statements.

2) SIGNIFICANT ACCOUNTING POLICIES

REVENUE RECOGNITION AND PROVISIONS FOR ESTIMATED REDUCTIONS TO GROSS REVENUES

Photodynamic Therapy (PDT) Drug and Device Products.

Revenues on the Kerastick(R) and BLU-U(R) product sales are recognized when
persuasive evidence of an arrangement exists, the price is fixed and
determinable, delivery has occurred, and collection is probable. Product sales
made through distributors, historically, have been recorded as deferred revenue
until the product was sold by the distributors to the end users because we did
not have sufficient history with our distributors to be able to reliably
estimate returns. Beginning in the first quarter of 2006, we began recognizing
revenue as product is sold to distributors because we believe we have sufficient
history to reliably estimate returns from distributors as of January 1, 2006.
This change in estimate was not material to the Company's revenues or results of
operations. Certain device units are held by physicians for a trial period. No
revenue is recognized on these units until the physician elects to purchase the
equipment and all other revenue recognition criteria are met.

Non-PDT Drug Products.

We recognize revenue for these products in accordance with SAB No. 101, "Revenue
Recognition in Financial Statements", as amended by SAB No. 104, "Revenue
Recognition." Our accounting policy for revenue recognition has a substantial
impact on our reported results and relies on certain estimates that require
difficult, subjective and complex judgments on the part of management. We
recognize revenue for sales when substantially all the risks and rewards of
ownership have transferred to the customer, which generally occurs on the date
of shipment to wholesale customers, with the exceptions described below. Revenue
is recognized net of revenue reserves, which consists of allowances for
discounts, returns, rebates chargebacks and fees paid to wholesalers under
distribution service agreements.

In the case of sales made to wholesalers as a result of incentives and that are
in excess of the wholesaler's ordinary course of business inventory level,
substantially all the risks and rewards of ownership do not transfer upon
shipment and, accordingly, such sales are recorded as deferred revenue and the
related costs as deferred cost of revenue until the product is sold through to
the wholesalers' customers on a FIFO basis.

We evaluate inventory levels at our wholesale customers, which account for the
vast majority of our sales in the Non-PDT Drug Products segment, through an
analysis that considers, among other things, wholesaler purchases, wholesaler
shipments to retailers, available end-user prescription data purchased from
third parties and on-hand inventory data received directly from our two largest
wholesale customers. We believe that our evaluation of wholesaler inventory
levels, as described in the preceding sentence, allows us to make reasonable
estimates for our applicable revenue related reserves. Additionally, our
products are sold to wholesalers with a product shelf life that


                                       6

<PAGE>

allows sufficient time for our wholesaler customers to sell our products in
their inventory through to the retailers and, ultimately, to the end-user
consumer prior to product expiration. We have agreements with certain
wholesalers that require us to pay the wholesalers a fee based on a percentage
of their net sales. These fees are contractual and are known at the time of
sale. The Company records these fees at the time of sale and they are accounted
for as a reduction of revenues.

Returns and allowances - Our provision for returns and allowances consists of
our estimates of future sales returns, rebates and chargebacks.

     Sales Returns- We account for sales returns in accordance with SFAS No. 48
     by establishing an accrual in an amount equal to our estimate of sales
     recorded for which the related products are expected to be returned. We
     determine the estimate of the sales return accrual primarily based on
     historical experience regarding sales returns, but also by considering
     other factors that could impact sales returns. These factors include levels
     of inventory in the distribution channel, estimated shelf life, product
     recalls, product discontinuances, price changes of competitive products,
     introductions of generic products and introductions of competitive new
     products. It is our policy to accept returns of Non-PDT Drug products when
     product is within six months of expiration. We consider all of these
     factors and adjust the accrual periodically to reflect actual experience.

     Chargebacks and Rebates - Chargebacks typically occur when suppliers enter
     into contractual pricing arrangements with end-user customers, including
     certain federally mandated programs, who then purchase from wholesalers at
     prices below what the supplier charges the wholesaler. Since we only offer
     "preferred pricing" to end-user customers under federally mandated
     programs, chargebacks have not been significant to the Company. Our rebate
     programs can generally be categorized into the following two types:
     Medicaid rebates and consumer rebates. Medicaid rebates are amounts owed
     based on legal requirements with public sector benefit providers after the
     final dispensing of the product by a pharmacy to a benefit plan
     participant. Consumer rebates are amounts owed as a result of mail-in
     coupons that are distributed by health care providers to consumers at the
     time a prescription is written. Since only a small percentage of our
     prescriptions are reimbursed under Medicaid and the quantity of consumer
     coupon redemptions have not been substantial, rebates have not been
     significant to the Company.

We offer many of our customers a 2% prompt pay discount. We evaluate the amounts
accrued for prompt pay discounts by analyzing the unpaid invoices in our
accounts receivable aging subject to a prompt pay discount. Prompt pay discounts
are known within 15 to 30 days of sale, and therefore can be reliably estimated
based on actual and expected activity at each reporting date. The Company
records these discounts at the time of sale and they are accounted for as a
reduction of revenues.

GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and intangible assets with indefinite lives are no longer amortized but
are reviewed annually for impairment or more frequently if impairment indicators
arise. Separable intangible assets that are not deemed to have indefinite lives
will continue to be amortized over their useful lives. The Company has adopted
December 1st as the date of the annual impairment test for goodwill.

STOCK-BASED COMPENSATION

Prior to January 1, 2006, we used the intrinsic value-based method to account
for employee stock option awards under the provisions of Accounting Principles
Board Opinion ("APB") No. 25, and to provide disclosures based on the fair value
method in the Notes to the Consolidated Financial Statements as permitted by
Statement of Financial Accounting Standards ("SFAS") No. 123, as amended. Stock
or other equity-based compensation for non-employees is accounted for under the
fair value-based method as required by SFAS No. 123 and Emerging Issues Task
Force ("EITF") No. 96-18, "Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services" and other related interpretations. Under this method, the equity-based
instrument is valued at either the fair value of the consideration received or
the equity instrument issued on the date of grant. The resulting compensation
cost is recognized and charged to operations over the service period which, in
the case of stock options, is generally the vesting period.


                                        7

<PAGE>

In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123R, "Share-Based Payment," a revision of SFAS Statement No. 123. We
adopted SFAS 123R effective January 1, 2006, using the modified prospective
application method, and beginning in 2006, we measure all employee share-based
compensation awards using a fair value based method and record share-based
compensation expense in our financial statements if the requisite service to
earn the award is provided.

3) BUSINESS ACQUISITION

On March 10, 2006, the Company acquired all of the outstanding common stock of
Sirius Laboratories, Inc. (Sirius) in exchange for 2,396,245 shares of
unregistered DUSA common stock and $8 million in cash. Pursuant to the terms of
the Merger Agreement, the actual number of shares that were issued in the
transaction was derived by dividing $17 million by the average closing price of
the Company's shares over the 20 trading day period prior to the close, or
$7.094 per share. For accounting purposes, these shares are valued at $7.30 per
share, the average market price of the Company's common stock over the 5 day
period beginning two days prior and ending two days subsequent to the public
announcement of the signing of the First Amendment to the Merger Agreement.
Sirius was a dermatology specialty pharmaceuticals company founded in 2000 with
a primary focus on the treatment of acne vulgaris and acne rosacea. The purchase
of Sirius was intended to enable DUSA to expand its product portfolio,
capitalize on cross-selling and marketing opportunities, increase its sales
force size; as well as, provide a pipeline of new products. The aggregate
purchase price, net of cash received of $0.5 million, was approximately $26.8
million, which consisted of $17.2 million in shares of common stock, net of
estimated registration costs of $0.3 million, $7.5 million in cash, $0.3 million
outstanding balance on line of credit, and transaction costs of $1.8 million,
which primarily consisted of fees for legal and financial advisory services. Of
the 2,396,245 shares issued in the acquisition, 422,892 shares have been placed
in an escrow account established to secure the indemnification obligations of
the shareholders of Sirius as set forth in the Merger Agreement. The escrow
account is established for a period of two years and will be used to satisfy
liability claims, if any, made by the Company. No amounts may be distributed
from the liability escrow account unless and until any individual claim exceeds
$25,000 and cumulative claims exceed $100,000.

The Company has agreed to pay additional consideration in future periods, based
upon the attainment of defined operating objectives, including new product
approvals or launches and the achievement of pre-determined total cumulative
sales milestones for the Sirius products over the period ending 42 months from
the date of close. The pre-determined cumulative sales milestones for the Sirius
products and the related milestone payments are, as follows:

<TABLE>
<CAPTION>
Cumulative           Additional
Sales Milestone:   Consideration
----------------   -------------
<S>                <C>
$25.0 million       $1.5 million
 35.0 million       $1.0 million
 45.0 million       $1.0 million
                    ------------
   Total            $3.5 million
                    ============
</TABLE>

In addition, there are three milestones related to new product approvals and/or
launches each in the amount of $500,000 per milestone, or $1.5 million in the
aggregate, that will be paid if the milestones are achieved. As of June 30, 2006
none of the milestones had been achieved.

The Company will not accrue contingent consideration obligations prior to the
attainment of the objectives. At June 30, 2006, the maximum potential future
consideration pursuant to such arrangements, to be resolved over the period
ending 42 months from the date of close, is $5.0 million. If attained, a portion
of the contingent consideration is payable in cash and a portion is payable in
either common stock or cash, at the Company's sole discretion. Any payments will
result in increases in goodwill at time of payment.


                                       8

<PAGE>

The acquisition was accounted for using the purchase method of accounting and
the results of operations of the acquired business since March 10, 2006, the
date of acquisition, were included in the results of the Company. The purchase
price allocation is preliminary and a final determination of required purchase
accounting adjustments will be made when all necessary information is obtained
and final allocations are made. Goodwill may change as a result of final
allocations. The Company may incur costs in the future related to manufacturing
concerns that were identified with the manufacturing of one of Sirius' product
lines. There is also a risk that inventory of some of these products could
become in short supply while such concerns are being addressed. The Company may
seek indemnification for these potential costs and lost revenues through the
liability escrow agreement, and may also seek indemnification from the
manufacturer under the terms of the supply and development agreement. The total
purchase consideration was allocated to the assets acquired and liabilities
assumed at their estimated fair values as of the date of acquisition, as
determined by management and, with respect to identified intangible assets, by
management with the assistance of an appraisal provided by a third-party
valuation firm. The excess of the purchase price over the amounts allocated to
assets acquired and liabilities assumed has been recorded as goodwill. The
goodwill is not deductible for tax purposes. The value of the goodwill from this
acquisition can be attributed to a number of business factors including, but not
limited to, expanded product portfolio, cross selling and marketing
opportunities, increased sales force and a pipeline of new products.

The following table summarizes the estimated fair value of the assets acquired
and liabilities assumed at the date of acquisition:

<TABLE>
<CAPTION>
                                                                       (IN THOUSANDS)
                                                                       --------------
<S>                                                                    <C>
Total consideration:

Common stock issued, net of estimated registration costs of $295,000       $17,203
Cash paid to stockholders                                                    8,000
Balance on line-of-credit                                                      251
Transaction costs accrued                                                      377
Transaction costs paid                                                       1,494
                                                                           -------
Total purchase consideration                                                27,325
                                                                           =======
Allocation of the purchase consideration
Current assets (including cash of $485), exclusive of inventory              2,513
Inventory                                                                    1,983
Fixed assets                                                                   109
Long-term assets                                                                14
Identifiable intangible assets                                              17,160
In-process research and development                                          1,600
Goodwill                                                                     5,772
                                                                           -------
Total assets acquired                                                       29,151

Fair value of liabilities assumed                                           (1,826)
                                                                           -------
Fair value of assets acquired and liabilities assumed                      $27,325
                                                                           =======
</TABLE>


                                        9

<PAGE>

The following are identified intangible assets acquired and the respective
estimated periods over which the assets will be amortized:

<TABLE>
<CAPTION>
                                               WEIGHTED AVERAGE
                                AMOUNT       AMORTIZATION PERIOD
                            (IN THOUSANDS)        (IN YEARS)
                            --------------   -------------------
<S>                         <C>              <C>
Core/Developed Technology       $17,160              3.78
In-process Research &
   Development                  $ 1,600                --
</TABLE>

The core/developed technology, comprised of the combined value of Sirius'
product lines and related patents, trademarks/trade names, as applicable, is
being amortized over its useful life, based upon the pattern in which the
expected benefits will be realized, or on a straight-line basis, whichever is
greater. The core/developed technologies all belong to the same therapeutic
category, "non-photodynamic therapy dermatological treatment of acne and
rosacea" and are considered a single asset group for purposes of measuring
impairment. The values of the intangible assets acquired were determined using
projections of revenues and expenses specifically attributed to the intangible
assets. The income streams were then discounted to present value using estimated
risk adjusted discount rates. The intangible assets were valued using the income
approach, specifically the excess earnings method. The key assumptions used in
valuing the intangible assets are discount rates of 17% for core/developed
technology and 18% for in-process research and development and an assumed tax
rate of 40%. The in-process research and development represents the estimated
fair value based on risk-adjusted cash flows related to product development
projects. At the date of acquisition, the development of these projects had not
yet reached technological feasibility and the research and development in
progress had no alternative future uses. Accordingly, these costs were expensed
as of the acquisition date.

The results of operations of Sirius have been included in the financial
statements of the Company since March 10, 2006, the date of acquisition. The
following table reflects unaudited pro forma results of operations of the
Company for the three and six months ended June 30, 2006 and 2005 assuming that
the Sirius acquisition had occurred on January 1, 2005 (in thousands, expect per
share data):

<TABLE>
<CAPTION>
                         THREE MONTHS ENDED            SIX MONTHS ENDED
                              JUNE 30,                     JUNE 30,
                     -------------------------   ---------------------------
                         2006          2005          2006           2005
                     -----------   -----------   ------------   ------------
<S>                  <C>           <C>           <C>            <C>
Revenues             $ 6,616,109   $ 4,923,300   $ 14,287,289   $ 10,127,972
Net loss              (3,771,736)   (4,846,106)    (6,084,841)   (10,230,698)
Net loss per share   $     (0.19)  $     (0.25)  $      (0.31)  $      (0.53)
</TABLE>

The pro-forma net loss and net loss per share for the three and six months ended
June 30, 2006 and 2005 excludes the impact of a $1.6 million charge related to
purchased in-process research and development from the Sirius acquisition and
increased cost of goods sold resulting from the purchase accounting fair value
adjustment to inventory due to their non-recurring nature.

4) GOODWILL AND INTANGIBLE ASSETS

Under Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No 142"), goodwill and certain intangible assets are
deemed to have indefinite lives and are no longer amortized, but are reviewed at
least annually for impairment. Other identifiable intangible assets are
amortized over their estimated useful lives. SFAS No. 142 requires that goodwill
be tested for impairment annually, utilizing the "fair value" methodology. The
Company has adopted December 1st as the date of the annual impairment test for
goodwill.


                                       10

<PAGE>

The following is a summary of goodwill and intangible assets as of June 30, 2006
(in thousands):

<TABLE>
<CAPTION>
                                   GROSS
                                 CARRYING    ACCUMULATED   NET BOOK
                                   VALUE    AMORTIZATION     VALUE
                                 --------   ------------   --------
<S>                              <C>        <C>            <C>
Goodwill                          $ 5,773         --        $ 5,773
Amortizable intangible assets:
Core/Developed Technology          17,160       (539)        16,621
                                  -------      -----        -------
Total                             $22,933      $(539)       $22,394
                                  =======      =====        =======
</TABLE>

All goodwill is associated with the Non-PDT Drug Products operating segment (see
Note 11). Amortization expense, included in cost of product revenues and
royalties in the accompanying Condensed Consolidated Statements of Operations,
related to intangible assets was $437,000 and $539,000 for the three and six
month periods ended June 30, 2006. Amortization expense related to intangible
assets is expected to be approximately $0.9 million for the remainder of 2006
and approximately $2.8 million, $3.3 million, $3.4 million, $3.2 million and
$1.3 million for the years ending December 31, 2007, 2008, 2009, 2010 and 2011,
respectively.

5) MARKETABLE SECURITIES

The Company's investment securities consist of securities of the U.S. government
and its agencies, and investment grade corporate bonds, all classified as
available for sale. As of June 30, 2006, current yields range from 2.51% to
7.48% and maturity dates range from July 1, 2006 to June 15, 2008. The estimated
fair value and cost of marketable securities at June 30, 2006 and December 31,
2005 are as follows:

<TABLE>
<CAPTION>
                                                              JUNE 30, 2006
                                           ---------------------------------------------------
                                                            GROSS        GROSS
                                            AMORTIZED    UNREALIZED   UNREALIZED       FAIR
                                               COST         GAINS       LOSSES        VALUE
                                           -----------   ----------   ----------   -----------
<S>                                        <C>           <C>          <C>          <C>
United States government securities        $ 8,606,317      $ --       ($93,276)   $ 8,513,041
Corporate securities                         6,103,842       838        (32,753)     6,071,927
                                           -----------      ----      ---------    -----------
   Total marketable securities available
      for sale                             $14,710,159      $838      ($126,029)   $14,584,968
                                           ===========      ====      =========    ===========
</TABLE>

<TABLE>
<CAPTION>
                                                               DECEMBER 31, 2005
                                             ---------------------------------------------------
                                                             GROSS         GROSS
                                             AMORTIZED     UNREALIZED   UNREALIZED       FAIR
                                               COST          GAINS        LOSSES        VALUE
                                             -----------   ----------   ----------   -----------
<S>                                          <C>           <C>          <C>          <C>
United States government debt securities     $19,857,171     $ 3,732     ($72,243)   $19,788,660
Investment grade corporate debt securities    10,818,063      15,136      (42,373)    10,790,826
                                             -----------     -------    ---------    -----------
   Total marketable securities available
      for sale                               $30,675,234     $18,868    ($114,616)   $30,579,486
                                             ===========     =======    =========    ===========
</TABLE>

Net unrealized gains and losses on such securities for the three and six months
ended June 30, 2006 were $(338) and $29,443, respectively, as compared to
$(18,793) and $(246,609) for the three and six months ended June 30, 2005. These
amounts have been recorded in accumulated other comprehensive income, which is
reported as part of shareholder's equity in the Condensed Consolidated Balance
Sheets.

Realized gains and losses on sales of marketable securities for the three and
six months ended June 30, 2006 were $0 and $14,000 for the three and six months
ended June 30, 2006, respectively, as compared to $(4,000) and $1,000 for the
three and six months ended June 30, 2005. Because the Company has the ability
and intent to hold its investments until a recovery of fair value, which may be
maturity, the Company does not consider investments with unrealized losses to be
other-than-temporarily impaired at June 30, 2006.


                                       11
<PAGE>

6) CONCENTRATION OF CREDIT RISK

The Company invests cash in accordance with a policy objective that seeks to
preserve both liquidity and safety of principal. The Company manages the credit
risk associated with its investments in marketable securities by investing in
U.S. government securities and investment grade corporate bonds.

The Company is also exposed to concentration of credit risk related to accounts
receivable that are generated from its customers consisting of wholesalers,
distributors and direct customers. To manage credit risk, the Company performs
regular credit evaluations of its customers' and provides allowances for
potential credit losses, when applicable. Concentrations of credit risk in the
Company's total revenues for the three and six months ended June 30, 2006 and
2005, and accounts receivable as of June 30, 2006 and December 31, 2005 are as
follows:

<TABLE>
<CAPTION>
                      % OF REVENUE          % OF REVENUE           % OF ACCOUNTS
                   THREE MONTHS ENDED     SIX MONTHS ENDED        RECEIVABLE AS OF
                  -------------------   -------------------   -----------------------
                  JUNE 30,   JUNE 30,   JUNE 30,   JUNE 30,   JUNE 30,   DECEMBER 31,
                    2006       2005       2006       2005       2006         2005
                  --------   --------   --------   --------   --------   ------------
<S>               <C>        <C>        <C>        <C>        <C>        <C>
Customer A                      19%        --         16%        --           --
Customer B            7%        17%         8%        15%        11%           6%
Customer C           15%        --         10%        --         26%          --
Customer D           17%        --         15%        --         27%          --
Customer E            7%        --          5%        --         11%
Other customers      54%        64%        62%        69%        25%          94%
   Total            100%       100%       100%       100%       100%         100%
</TABLE>

The Company is dependent upon sole-source suppliers for a number of its
products. There can be no assurance that these suppliers will be able to meet
the Company's future requirements for such products or parts or that they will
be available at favorable terms. Any extended interruption in the supply of any
such products or parts or any significant price increase could have a material
adverse effect on the Company's operating results in any given period.

7) INVENTORY

Inventory consisted of the following:

<TABLE>
<CAPTION>
                             JUNE 30,    DECEMBER 31,
                               2006          2005
                            ----------   ------------
<S>                         <C>          <C>
Finished goods              $1,760,797    $1,004,772
BLU-U(R) evaluation units      219,592       292,129
Work in process                413,801        60,805
Raw materials                  515,011       503,087
                            ----------    ----------
                            $2,909,201    $1,860,793
                            ==========    ==========
</TABLE>

BLU-U(R) commercial light sources placed in physicians' offices for an initial
evaluation period are included in inventory until all revenue recognition
criteria are met. The Company amortizes the cost of the evaluation units during
the evaluation period to cost of product revenues using an estimated useful life
for the equipment of 3 years.

8) OTHER ACCRUED EXPENSES

Other accrued expenses consisted of the following:

<TABLE>
<CAPTION>
                                     JUNE 30,    DECEMBER 31,
                                       2006          2005
                                    ----------   ------------
<S>                                 <C>          <C>
Research and development costs      $  196,822    $  347,220
Marketing and sales costs              267,206       173,092
Product related costs                  954,369       667,388
Legal and other professional fees    1,633,169       488,401
Employee benefits                      363,836       225,628
Other expenses                         126,281        93,950
                                    ----------    ----------
                                    $3,541,683    $1,995,679
                                    ==========    ==========
</TABLE>


                                       12

<PAGE>

9) STOCK-BASED COMPENSATION

Under the Company's 2006 Equity Compensation Plan (the "2006 Plan"), the Company
may grant stock-based awards in amounts not to exceed the lesser of: (i) 20% of
the total number of shares of the Company's common stock issued and outstanding
at any given time less the number of shares issued and outstanding under any
other equity compensation plan of the Company at such time; or (ii) 3,888,488
shares less the number of shares issued and outstanding under any other equity
compensation plan of the Company from time to time. The maximum number of shares
of common stock that may be granted to any individual during any calendar year
is 300,000.

The 2006 Plan is administered by the Compensation Committee of the Board of
Directors (the "Committee"). The 2006 Plan provides for the grant of incentive
stock options ("ISO"), nonqualified stock options ("NSO"), stock awards, and
stock appreciation rights to (i) employees, consultants, and advisors; (ii) the
employees, consultants, and advisors of the Company's parents, subsidiaries, and
affiliates; and (iii) and the Company's non-employee directors.

Non-Qualified Stock Options - All the NSOs granted under the 2006 Plan have an
expiration period not exceeding seven years and are issued at a price not less
than the market value of the common stock on the grant date. The Committee may
establish such vesting and other conditions with respect to options as it deems
appropriate. In addition, the Company initially grants each individual who
agrees to become a director 15,000 NSO to purchase common stock of the Company.
Thereafter, each director reelected at an Annual Meeting of Shareholders will
automatically receive an additional 10,000 NSO on June 30 of each year. Grants
to directors immediately vest on the date of the grant.

Incentive Stock Options - ISOs granted under the 2006 Plan have an expiration
period not exceeding seven years (five years for ISOs granted to employees who
are also ten percent shareholders) and are issued at a price not less than the
market value of the common stock on the grant date. The Committee may establish
such vesting and other conditions with respect to options as it deems
appropriate.

The 2006 Plan replaced the Company's 1996 Omnibus Plan (the "1996 Plan"), which
expired on June 6, 2006. A summary of stock option transactions in both the 1996
Plan and the 2006 Plan follows:

<TABLE>
<CAPTION>
                                                          WEIGHTED
                                             NUMBER        AVERAGE
                                            OF SHARES     EXERCISE
                                         (IN THOUSANDS)     PRICE
                                         --------------   --------
<S>                                      <C>              <C>
OUTSTANDING AT DECEMBER 31, 2005           2,850,250       $11.85
   Options granted                           415,500         6.65
   Options cancelled/forfeited/expired      (372,312)        8.48
   Options exercised                         (12,000)        3.41
OUTSTANDING AT JUNE 30, 2006               2,881,438       $11.58
EXERCISABLE AT JUNE 30, 2006               2,002,381       $12.84
</TABLE>

The weighted average remaining contractual term was approximately 6.12 years for
stock options outstanding and approximately 4.9 years for stock options
exercisable as of June 30, 2006.

The total intrinsic value (the excess of the market price over the exercise
price) was approximately $1,257,000 and $1,055,000 for stock options outstanding
and exercisable, respectively, as of June 30, 2006. The total intrinsic value
for stock options exercised in 2006 was approximately $45,000. At June 30, 2006,
total unrecognized estimated compensation cost related to non-vested stock
options granted prior to that date was $3,900,000, which was expected to be
recognized over a weighted average period of 2.3 years.

The amount of cash received from the exercise of stock options in 2006 was
approximately $41,000 and the related tax deduction was approximately $14,000 in
2006.


                                       13

<PAGE>

SHARE-BASED COMPENSATION INFORMATION UNDER FAS 123R

The fair value of stock options granted was estimated on the date of grant using
a Black-Scholes option valuation model that uses the assumptions in the
following table. The Company's employee stock options have various restrictions
that reduce option value, including vesting provisions and restrictions on
transfer and hedging, among others, and are often exercised prior to their
contractual maturity.

The weighted-average estimated fair value of employee stock options granted
during the six months ended June 30, 2006 was $4.62 per share using the
Black-Scholes option valuation model with the following weighted-average
assumptions (annualized percentages):

<TABLE>
<CAPTION>
                                         SIX MONTHS
                                           ENDED
                                       JUNE 30, 2006
                                       -------------
<S>                                    <C>
Volatility                               63.7%
Risk-free interest rate                  5.10%
Expected dividend yield                     0%
Expected life-directors and officers      8.0 years
Expected life-non-officer employees       6.3 years
</TABLE>

The Company used a combination of historical and implied volatility of
market-traded options in the Company's stock for the expected volatility
assumption input to the Black-Scholes model, consistent with the guidance in FAS
123R and the Securities and Exchange Commission's Staff Accounting Bulletin No.
107. Prior to the first quarter of fiscal 2006, the Company had used its
historical stock price for purposes of its pro forma information. The decision
to use a combination of historical and implied volatility data to estimate
expected volatility was based upon the availability of actively traded options
on the Company's stock and the Company's assessment that this is more
representative of future stock price trends than historical volatility alone.

The risk-free interest rate assumption is based upon observed interest rates
appropriate for the term of the Company's employee stock options. The expected
life is based on the Company's historical option cancellation and employee
exercise information. The expected life of employee stock options represents the
weighted-average period the stock options are expected to remain outstanding
post-vesting. In calculating the expected life of the options for 2006, the
Company classified its grantee population into two groups, directors and
officers and non-officer employees. As share-based compensation expense
recognized in the Consolidated Statements of Operations for fiscal 2006 is based
on awards ultimately expected to vest, it is reduced for estimated forfeitures.
FAS 123R requires forfeitures to be estimated at the time of grant and revised,
if necessary, in subsequent periods if actual forfeitures differ from those
estimates. In 2006, departure rates, defined as the annual percentage of options
forfeited or exercised early due to departure, were estimated to be
approximately 2.96% for officers and directors and 10.53% for non-officer
employees based on historical experience. Prior to 2006, the Company had used a
company-wide weighted average expected life of five years for grants in 2005,
2004 and 2003 and seven years for grants in 2002.

Total estimated share-based compensation expense, related to all of the
Company's share-based awards, recognized for the three and six months ended June
30, 2006 was comprised as follows:

<TABLE>
<CAPTION>
                                        THREE MONTHS ENDED   SIX MONTHS ENDED
                                           JUNE 30, 2006       JUNE 30, 2006
                                        ------------------   ----------------
<S>                                     <C>                  <C>
Cost of product revenues                     $ 17,000            $ 36,000
Research and development                       81,000             162,000
Selling and marketing                          78,000             147,000
General & administrative                      476,000             625,000
                                             --------            --------
Share-based compensation expense             $652,000            $970,000
Net share-based compensation expense,
   per common share:
Basic and diluted                            $   0.03            $   0.05
</TABLE>


                                       14
<PAGE>

PRO FORMA INFORMATION UNDER FAS 123 FOR PERIODS PRIOR TO FISCAL 2006

Prior to adopting the provisions of FAS 123R, the Company recorded estimated
compensation expense for employee stock options based upon their intrinsic value
on the date of grant pursuant to Accounting Principles Board Opinion 25 (APB
25), "Accounting for Stock Issued to Employees" and provided the required pro
forma disclosures of FAS 123. Because the Company established the exercise price
based on the fair market value of the Company's stock at the date of grant, the
stock options had no intrinsic value upon grant, and therefore no estimated
expense was recorded prior to adopting FAS 123R.

For purposes of pro forma disclosures under FAS 123 for the three and six months
ended June 30, 2005, the estimated fair value of the stock options was amortized
to expense over the stock options' vesting periods. The pro forma effects of
recognizing estimated compensation expense under the fair value method on net
loss and loss per common share for the three and six months ended June 30, 2005
were as follows:

<TABLE>
<CAPTION>
                                                             THREE MONTHS ENDED   SIX MONTHS ENDED
                                                               JUNE 30, 2005        JUNE 30, 2005
                                                             ------------------   ----------------
<S>                                                          <C>                  <C>
Net loss, as reported                                           $(4,826,118)        $ (9,157,733)
                                                                -----------         ------------
Add: stock-based compensation expense included in reported
   net loss                                                                               19,444
Deduct: Share-based employee compensation expense
   determined under the fair value based method for all
   awards                                                          (758,427)          (1,100,043)
                                                                -----------         ------------
Pro forma net loss                                              $(5,584,545)        $(10,238,332)
Loss per common share:                                          $     (0.29)        $      (0.54)
Basic and diluted loss per share-- as reported                  $     (0.04)        $      (0.07)
Basic and diluted loss per share -- pro forma                   $     (0.33)        $      (0.61)
</TABLE>

The pro forma effects of estimated share-based compensation expense on net loss
and loss per common share for the six months ended June 30, 2005 were estimated
at the date of grant using the Black-Scholes option-pricing model based on the
following assumptions (annualized percentages):

<TABLE>
<S>                       <C>
Volatility                69.4%
Risk-free interest rate   3.72%
Dividend yield             0.0%
Expected life (years)      5.0
</TABLE>

The Black-Scholes weighted average estimated fair value of stock options granted
during the six months ended June 30, 2005 was $6.73 per share.

10) BASIC AND DILUTED NET LOSS PER SHARE

Basic net loss per common share is based on the weighted-average number of
shares outstanding during each period. For the periods ended June 30, 2006, and
2005, stock options, warrants and rights totaling approximately 3,181,000 and
3,490,000 shares, respectively, have been excluded from the computation of
diluted net loss per share as the effect would be antidilutive. The 2,396,245
shares issued in the Sirius acquisition, which includes 422,892 shares placed
into the liability escrow account, are included in the weighted average number
of shares outstanding from the date of issuance, March 10, 2006.


                                       15

<PAGE>

11) SEGMENT REPORTING

Beginning in the first quarter of 2006 with the acquisition of Sirius
Laboratories, the Company has two reportable segments, Photodynamic Therapy
(PDT) Drug and Device Products and Non-Photodynamic Therapy (Non-PDT) Drug
Products. Prior to the beginning of the first quarter of 2006, the Company was a
single reportable segment entity. Operating segments are defined as components
of the Company for which separate financial information is available to manage
resources and evaluate performance regularly by the chief operating decision
maker. The table below presents the revenues, costs of revenues and gross
margins attributable to these reportable segments for the periods presented. The
Company does not allocate research and development, selling and marketing and
general and administrative expenses to its reportable segments, because these
activities are managed at a corporate level.

<TABLE>
<CAPTION>
                                              THREE MONTHS ENDED         SIX MONTHS ENDED
                                           -----------------------   ------------------------
                                            JUNE 30,     JUNE 30,      JUNE 30,     JUNE 30,
                                              2006         2005         2006          2005
                                           ----------   ----------   -----------   ----------
<S>                                        <C>          <C>          <C>           <C>
REVENUES
   PDT Drug & Device Product Revenues      $3,842,000   $2,228,000   $ 7,695,000   $5,597,000
   Non-PDT Drug Product Revenues            2,777,000           --     3,675,000           --
                                           ----------   ----------   -----------   ----------
Total Revenues                              6,619,000    2,228,000    11,370,000    5,597,000
COSTS OF REVENUES
   PDT Drug & Device Cost of Product
      Revenues and Royalties                1,220,000    1,471,000     2,728,000    3,474,000
   Non-PDT Drug Cost of Product
      Revenues and Royalties                1,775,000           --     2,058,000           --
                                           ----------   ----------   -----------   ----------
Total Costs of Product Revenues and
   Royalties                                2,995,000    1,471,000     4,786,000    3,474,000
GROSS MARGINS
PDT Drug and Device Product Gross Margin    2,622,000      758,000     4,967,000    2,123,000
Non-PDT Drug Product Gross Margin           1,002,000           --     1,617,000           --
                                           ----------   ----------   -----------   ----------
Total Gross Margins                        $3,624,000   $  758,000   $ 6,584,000   $2,123,000
</TABLE>

During the three and six months ended June 30, 2006 and 2005, the Company
derived revenues from the following geographies (as a percentage of product
revenues):

<TABLE>
<CAPTION>
                 THREE MONTHS ENDED     SIX MONTHS ENDED
                -------------------   -------------------
                JUNE 30,   JUNE 30,   JUNE 30,   JUNE 30,
                  2006       2005       2006       2005
                --------   --------   --------   --------
<S>             <C>        <C>        <C>        <C>
United States      94%        89%        92%        91%
Canada              6%        11%         8%         9%
                  ---        ---        ---        ---
   Total          100%       100%       100%       100%
</TABLE>

Asset information by reportable segment is not reported to or reviewed by the
chief operating decision makers and, therefore, we have not disclosed asset
information for each reportable segment.

12) COMPREHENSIVE LOSS

For the three and six months ended June 30, 2006 and 2005, comprehensive loss
consisted of the following:


                                       16

<PAGE>

<TABLE>
<CAPTION>
                                          THREE MONTHS ENDED           SIX MONTHS ENDED
                                              JUNE 30,                    JUNE 30,
                                      -------------------------   -------------------------
                                          2006          2005          2006          2005
                                      -----------   -----------   -----------   -----------
<S>                                   <C>           <C>           <C>           <C>
NET LOSS                              $(4,653,954)  $(4,826,118)  $(9,294,262)  $(9,157,733)
   Change in net unrealized gains
      and losses on marketable
      securities available for sale           338       (18,793)      (29,443)     (246,609)
                                      -----------   -----------   -----------   -----------
COMPREHENSIVE LOSS                    $(4,653,616)  $(4,844,911)  $(9,323,705)  $(9,404,342)
                                      ===========   ===========   ===========   ===========
</TABLE>

Accumulated other comprehensive income consists of net unrealized gains and
losses on marketable securities available-for-sale, which is reported as part of
shareholders' equity in the Condensed Consolidated Balance Sheets.

13) COMMITMENTS AND CONTINGENCIES

LEGAL MATTERS:

RIVER'S EDGE

On March 28, 2006, a lawsuit was filed by River's Edge Pharmaceuticals, LLC
against us alleging, among other things, that, prior to the merger, the former
Sirius Laboratories, Inc. agreed to authorize River's Edge to market a generic
version of Nicomide(R), and that the United States patent covering Nicomide(R)
issued to Sirius in December, 2005 is invalid. Nicomide(R) is one of the key
products DUSA acquired from Sirius in our merger. The declaratory judgment suit
was filed in the United States District Court for the Northern District of
Georgia, Gainesville Division.

River's Edge has also filed an application with the U.S. Patent and Trademark
Office requesting reexamination of the Nicomide patent. We have notified the
Patent Office that we do not object to the reexamination process and we expect
the Patent Office to notify the parties about its decision to accept or deny the
patent reexamination process shortly.

On April 20, 2006, we filed a patent infringement suit in the United States
District Court in Trenton, New Jersey alleging that a River's Edge niacinamide
product infringes U.S. patent 6,979,468, and on April 26, 2006 we filed a Motion
to Dismiss the Georgia action. In response to a motion put forward with the
filing by us, the New Jersey court granted an expedited hearing date of May 5,
2006 in order to hear arguments on a motion for preliminary injunction to enjoin
River's Edge from selling its alternative product to Nicomide(R). On May 12,
2006, the New Jersey court granted our motion and entered an order for
preliminary injunction, effective May 15, 2006, enjoining River's Edge from
selling its niacinamide formula drug as a generic substitute for Nicomide(R). On
June 19, 2006, the Georgia court dismissed River's Edge complaint. The parties
are in the discovery stage of the New Jersey litigation, however, on July 28,
2006, we filed a Motion to Stay this litigation in light of River's Edge's
pending request for reexamination of the Nicomide patent. An unfavorable ruling
in the Patent Office or in the New Jersey litigation with respect to the
validity of the Nicomide patent would allow generic manufacturers to compete
directly with us and could have a material impact on the Company's revenues,
results of operations and liquidity.

The Company has not accrued any amounts for potential contingencies as of June
30, 2006, as these amounts are neither probable nor estimable.

14) RECENT ACCOUNTING PRONOUNCEMENTS


                                       17
<PAGE>

In June 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109, Accounting for Income Taxes. The
interpretation prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or
expected to be taken, in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties accounting in interim
periods, disclosure and transition. The interpretation is effective for fiscal
years beginning after December 15, 2006. The Company is in the process of
determining the effects that adoption of FIN 48 will have on the Company's
financial position, cash flows and results of operations.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

DUSA is an integrated dermatology specialty pharmaceutical company focused
primarily on the development and marketing of our Levulan(R) Photodynamic
Therapy (PDT) technology platform, and complementary dermatology products. Our
current marketed products include Levulan(R) Kerastick(R)20% Topical Solution
with PDT, the BLU-U(R) brand light source, Nicomide(R), Nicomide-T(R) and the
AVAR(R) line of products. We acquired Nicomide(R), Nicomide-T(R), the AVAR(R)
line of products, among others, and certain product candidates in early stages
of development, which target the treatment of acne vulgaris and acne rosacea, as
well as psoriasis, in connection with our recent merger with Sirius
Laboratories, Inc., or Sirius, which was completed on March 10, 2006.

Our drug, Levulan(R) brand of aminolevulinic acid HCl, or ALA, is being used
with light, for use in a broad range of medical conditions. When we use
Levulan(R) and follow it with exposure to light to treat a medical condition, it
is known as Levulan(R) photodynamic therapy, or Levulan(R) PDT. When we use
Levulan(R) and follow it with exposure to light to detect medical conditions it
is known as Levulan(R) photodetection, or Levulan(R) PD.

Two of our products, Levulan(R) Kerastick(R) 20% Topical Solution with PDT and
the BLU-U(R) brand light source were launched in the United States, or U.S., in
September 2000 for the treatment of actinic keratoses, or AKs, of the face or
scalp. AKs are precancerous skin lesions caused by chronic sun exposure that can
develop over time into a form of skin cancer called squamous cell carcinoma. In
addition, in September 2003 we received clearance from the U.S. Food and Drug
Administration, or FDA, to market the BLU-U(R) without Levulan(R) PDT for the
treatment of moderate inflammatory acne vulgaris and general dermatological
conditions.

Sirius, a dermatology specialty pharmaceuticals company, was founded in 2000
with a primary focus on the treatment of acne vulgaris and acne rosacea. We
believe this acquisition has allowed us to expand our product portfolio,
capitalize on cross-selling and marketing opportunities, increased our sales
force size, as well as providing a pipeline of new products.

Nicomide(R) is an oral prescription vitamin supplement, and Nicomide-T(R) is a
topical cosmetic product. Both products target the acne and acne rosacea
markets. Acne rosacea is a condition that primarily affects the skin of the face
and typically first appears between the ages of 30 and 60 as a transient
flushing or blushing on the nose, cheeks, chin or forehead, progressing in many
patients to a papulopustular form clinically similar to acne vulgaris
(inflammatory acne). Given its resemblance to inflammatory acne, and the general
public's limited knowledge of rosacea, the condition is frequently mistaken by
patients as adult acne. If untreated, rosacea has the tendency to worsen over
time, although it can also wax and wane. The AVAR line of products includes a
number of leave-on and cleanser formulations of sodium sulfacetamide and
sulphur, a drug combination long known to have anti-acne, anti-inflammatory
properties.


                                       18

<PAGE>

We are a vertically integrated company, primarily responsible for regulatory,
sales, marketing, customer service, manufacturing of our Kerastick(R), and other
related product activities. Our current objectives include increasing the sales
of our non-PDT products in the United States and our PDT products in the United
States, Canada and Latin America, integrating the operations of Sirius,
continuing our efforts of exploring partnership opportunities for Levulan(R) PDT
for non-dermatology indications, and for dermatology in Europe and elsewhere,
and continuing our clinical development programs for our Levulan(R) PDT facial
photodamage and moderate to severe acne indications. To further these
objectives, we entered into a marketing and distribution agreement with Stiefel
Laboratories, Inc. in January 2006 granting Stiefel an exclusive right to
distribute the Levulan(R) Kerastick(R) in Mexico, Central and South America.
During 2004 we signed clinical trial agreements with the National Cancer
Institute, or NCI, Division of Cancer Prevention, or DCP, for the clinical
development of Levulan(R) PDT for the treatment of high-grade dysplasia, or HGD,
within Barrett's Esophagus, or BE, and oral cavity dysplasia treatment, and are
working with the NCI DCP to advance the development of these programs. In
addition, we continue to support independent investigator trials to advance
research in the use and applicability of Levulan(R) PDT for other indications in
dermatology, and selected internal indications.

We are developing Levulan(R) PDT and PD under an exclusive worldwide license of
patents and technology from PARTEQ Research and Development Innovations, the
licensing arm of Queen's University, Kingston, Ontario, Canada. We also own or
license certain other patents relating to methods for using pharmaceutical
formulations which contain Levulan(R) and related processes and improvements.

In the United States, AVAR(R), AVAR Green(R), AVAR-e(R), AVAR-e Green(R), AVAR
Cleanser(R), BLU-U(R), DUSA(R), DUSA Pharmaceuticals, Inc. (R), Levulan(R),
Kerastick(R), Sirius Laboratories, Inc.(R), METED(R), Nicomide(R), Nicomide-T,
Psoriacap(R) and Psoriatec(R) are registered trademarks. Several of these
trademarks are also registered in Europe, Australia, Canada, and in other parts
of the world. Numerous other trademark applications are pending.

Historically, we devoted most of our resources to fund research and development
efforts in order to advance the Levulan(R)) PDT/PD technology platform. In
addition, we are continuing to evaluate and develop several potential products
that we acquired in our merger with Sirius which target patients with acne and
rosacea.

As of June 30, 2006, we had an accumulated deficit of approximately $98,832,000.
We expect to continue to incur operating losses until sales of our products
increase substantially. Achieving our goal of becoming a profitable operating
company is dependent upon greater acceptance of our PDT therapy by the medical
and consumer constituencies, and increasing sales of the Sirius products.

We operate in a highly regulated and competitive environment. Our competitors
include larger fully integrated pharmaceutical companies and biotechnology
companies. Many of the organizations competing with us have substantially
greater capital resources, larger research and development staffs and
facilities, greater experience in drug development and in obtaining regulatory
approvals, and greater manufacturing and sales and marketing capabilities than
we do. Particularly in the field of acne and rosacea, we compete with
well-established therapies, such as over-the-counter topical medications for
mild cases, and prescription topical medications or oral antibiotics for mild to
moderate cases, as well as various laser and non-laser light sources. The entry
of new products from time to time, including as recently as the quarter ended
June 30, 2006, could cause fluctuations in our product revenues in this market.

Marketing and sales activities since the October 2003 launch of our sales force
have resulted in significant additional revenues as well as expenses.
Kerastick(R) unit sales to end-users were 34,944 and 67,878 for the three and
six-month periods ended June 30, 2006, respectively, including 5,736 and 10,590,
respectively, sold in Canada. This represents an increase from 20,172 and 48,876
Kerastick(R) units sold in the three and six-month periods ended June 30, 2005,
respectively, including 3,666 and 7,470, respectively, sold in Canada.

The net number of BLU-U(R) units placed in doctors' offices during the three
months ended June 30, 2006 and 2005 was 38 and 72, respectively, including 10
and 24 placed in Canada, respectively. As of June 30, 2006 and December 31, 2005
there were 1,479 and 1,337 units in doctor's offices, consisting of 1,268 and
1,142 in the U.S. and 211 and 195 in Canada, respectively. In addition, during
2005 we began a BLU-U(R) marketing effort to allow prospective customers to
evaluate a BLU-U for a short period of time prior to making a purchase decision.
BLU-U(R) commercial light sources placed in physicians' offices pursuant to the
Company's BLU-U(R) evaluation program are classified as inventory in the
accompanying Consolidated Balance Sheets. The Company amortizes the cost of the
evaluation units during the evaluation period to cost of goods sold using an
estimated useful life for the equipment of 3 years.


                                       19

<PAGE>

Net revenues generated by the products acquired as part of our acquisition of
Sirius totaled $2,777,000 and $3,676,000 for the three-month period ended June
30, 2006 and the period March 10, 2006 (date of acquisition) through June 30,
2006, respectively. The substantial majority of these revenues were from sales
of Nicomide(R). We have continued our efforts to penetrate the market for both
PDT and non-PDT products by expanding our sales coverage in key geographic
locations, including areas not previously served by Sirius. We are encouraged
with the year-over-year increase in sales, as well as the positive feedback we
continue to receive from physicians across the country that believe Levulan(R)
PDT should become a routine part of standard dermatological practice. We are
currently exploring opportunities to develop, market, and distribute our
Levulan(R) PDT platform in Europe and/or other countries outside of the United
States, Canada and Latin America following our recently completed agreement with
Stiefel Laboratories, Inc. We cannot predict when product sales may offset the
costs associated with our efforts to penetrate the PDT market; however, based on
current revenue expectations we believe that we will approach positive cash flow
from operations more quickly than we otherwise would have without the Sirius
acquisition. We are aware that physicians have been using Levulan(R) with the
BLU-U(R) using drug incubation times shorter than our approved label specifies,
with light devices manufactured by other companies, and for uses other than our
FDA-approved use. While we are not permitted to market our products for
so-called 'off-label' uses, we believe that these activities are positively
affecting the sales of our products.

We believe that the activities of compounding pharmacies are negatively
impacting our sales growth. We believe that some compounding pharmacies are
exceeding the legal limits for their activities, including manufacturing and/or
selling quantities of ALA in circumstances which may be inducing purchasers to
infringe our intellectual property. Therefore in December 2004 and in January
2005, we filed lawsuits against two compounding pharmacies and several
physicians. Most of these lawsuits have been settled favorably to us. In April,
we announced that we had reached a settlement with New England Compounding
Center (NECC). NECC agreed that it will not infringe or induce others to
infringe the patents that were the subject of the lawsuit. As part of the
settlement with NECC, all claims against us were released. Recently, we filed
suits against additional physicians and a chemical supplier as part of our
ongoing strategy to protect our intellectual property. See section entitled
"Part II. Other Information, Item 1. Legal Proceedings".

In connection with our merger with Sirius, we have assumed a number of key
agreements relating to the manufacture and supply of the Sirius current and
potential products, and relating to the development of certain product
candidates. We intend to continue to use third-party manufacturers for such
products. The Sirius products are distributed through several major wholesalers
in the United States pursuant to customary industry arrangements. The foregoing
agreements are discussed later in this report.

Certain of the Sirius products acquired in connection with the merger must meet
certain minimum manufacturing and labeling standards established by the FDA and
applicable to products marketed without approved marketing applications. FDA
regulates such products under its compliance policy guide entitled, "Marketed
Unapproved Drugs - Compliance Policy Guide." Under this policy, FDA recognizes
that certain unapproved products, based on the introduction date of their active
ingredients and the lack of safety concerns, have been marketed for many years
and, at this time, will not be the subject of any enforcement action. We believe
that so long as we comply with applicable manufacturing and labeling standards
we will be consistent with FDA's current enforcement policy. There can be no
assurance that the FDA will continue this policy or not take a contrary position
with any individual products. If the FDA were to do so, we may be required to
seek FDA approval for these products, market these products as over-the-counter
products or as dietary supplements under applicable legislation, or withdraw
such products from the market. As a result of our due diligence efforts,
including inspection of the third-party manufacturers, we are working with the
supplier of the AVAR(R) line of products to address certain manufacturing
concerns that were identified. While we address these concerns, we expect that
inventory of some of these products, which in the aggregate represented
approximately 3% of net revenues for the three month period ended June 30, 2006,
will be temporarily depleted, or out-of-stock, for a short period of time. We do
not expect that this will have a material impact on our revenues or operating
results.

We are also continuing to seek to acquire and/or license additional dermatology
products that complement our current product portfolio that would provide our
sales force with additional complementary products to sell in the near to medium
term.

On March 28, 2006, a lawsuit was filed by River's Edge Pharmaceuticals, LLC
against us alleging, among other things, that, prior to the merger, the former
Sirius Laboratories, Inc. agreed to authorize River's Edge to market a generic
version of Nicomide(R), and that the United States patent covering Nicomide(R)
issued to Sirius in December,


                                       20

<PAGE>

2005 is invalid. Nicomide(R) is the key product DUSA acquired from
Sirius in our merger. The declaratory judgment suit was filed in the United
States District Court for the Northern District of Georgia, Gainesville
Division.

River's Edge has also filed an application with the U.S. Patent and Trademark
Office requesting reexamination of the Nicomide patent. We have notified the
Patent Office that we do not object to the reexamination process and we expect
the Patent Office to notify the parties about its decision to accept or deny the
patent reexamination process shortly.

On April 20, 2006, we filed a patent infringement suit in the United States
District Court in Trenton, New Jersey alleging that a River's Edge niacinamide
product infringes U.S. patent 6,979,468, and on April 26, 2006 we filed a motion
to dismiss the Georgia action. In response to a motion put forward with the
filing by us, the New Jersey court granted an expedited hearing date of May 5,
2006 in order to hear arguments on a motion for preliminary injunction to enjoin
River's Edge from selling its alternative product to Nicomide(R). On May 12,
2006, the New Jersey court granted our motion and entered an order for
preliminary injunction, which was effective May 15, 2006, enjoining River's Edge
from selling its niacinamide formula drug as a generic substitute for
Nicomide(R). We have posted $750,000 in lieu of a performance bond with the
Court which bears interest. On June 19, 2006, the Georgia court dismissed
River's Edge complaint. The parties are in the discovery stage of the New Jersey
litigation., however, on July 28, 2006 we filed a motion to stay this
litigation in light of River' Edge's pending request for reexamination of the
Nicomide patent. An unfavorable ruling in the Patent Office or in the New Jersey
litigation with respect to the validity of the Nicomide patent would allow
generic manufacturers to compete directly with us and could have a material
impact on the Company's revenues, results of operations and liquidity.

On May 30, 2006, we entered into a patent license agreement under which we
granted PhotoCure ASA a non-exclusive license under the patents we license from
PARTEQ for ALA esters. In addition, we granted a non-exclusive license to
PhotoCure for its existing formulations of Hexvix(R) and Metvix(R) (known in the
U.S. as Metvixia(R)) for any patent we own now or in the future. PhotoCure is
obligated to pay royalties on sales of its ester products to the extent they are
covered by our patents in the US and certain other territories. As part of the
agreement, PhotoCure paid us a prepaid royalty in the amount of $1 million,
which we received during the three-month period ended June 30, 2006.

We continue to believe that issues related to reimbursement have negatively
impacted the economic competitiveness of our therapy with other AK therapies and
have hindered its adoption. We are aware that some physicians believe that
current reimbursement levels do not fully reflect the efforts required to
routinely execute our therapy in their practices. We support efforts to improve
reimbursement levels to physicians. Such efforts included working with the
Centers for Medicare and Medicaid Services, or CMS, and the American Academy of
Dermatology, or AAD, on matters related to the PDT procedure fee and the
separate drug reimbursement fee. Physicians can also bill for any applicable
visit fees. Effective January 1, 2006, the CMS average national reimbursement
for the use of Levulan(R) PDT for AK's Ambulatory Patient Classifications code
("APC code") was increased. The APC code is used by many hospitals. The CMS
Current Procedural Terminology code ("CPT code"), which is used by private
physician clinics using Levulan(R) PDT for treating AKs was not increased for
2006 from 2005 levels as had originally been proposed by CMS. However, CMS
recently published proposed fees for January 1, 2007, and beyond, that include
increases to the CPT code used by private physician clinics using Levulan(R) PDT
for treating AKs. The proposed increases will be phased in over four years,
beginning January 1, 2007, and finishing January 1, 2010. We will continue to
support ongoing efforts that might lead to further increases in reimbursement in
the future; and intend to continue supporting efforts to seek reimbursement for
our FDA-cleared use of the BLU-U(R) alone in the treatment of mild to moderate
inflammatory acne of the face.

Most major private insurers have approved coverage for our AK therapy. We
believe that due to these efforts, plus future improvements, along with our
education and marketing programs, a more widespread adoption of our therapy
should occur over time. As of June 30, 2006, we had a staff of 85 full-time
employees and 2 part-time employees, as compared to 64 full-time employees and 2
part-time employees at the end of 2005, including marketing and sales,
production, maintenance, customer support, and financial operations personnel,
as well as those who support research and development programs for dermatology
and internal indications. During 2006 we expanded our sales capacity to 40 from
26 at the end of 2005. We may add and/or replace employees during 2006 as
business circumstances deem necessary.

CRITICAL ACCOUNTING POLICIES

Our accounting policies are disclosed in Note 2 to the Notes to the Consolidated
Financial Statements in our Annual Report on Form 10-K for the year ended
December 31, 2005. Since all of these accounting policies do not require


                                       21

<PAGE>

management to make difficult, subjective or complex judgments or estimates, they
are not all considered critical accounting policies. We have discussed these
policies and the underlying estimates used in applying these accounting policies
with our audit committee. We consider the following policies and estimates to be
critical to our financial statements.

REVENUE RECOGNITION AND PROVISIONS FOR ESTIMATED REDUCTIONS TO GROSS REVENUES

Photodynamic Therapy (PDT) Drug and Device Products.

Revenues on the Kerastick(R) and BLU-U(R) product sales are recognized when
persuasive evidence of an arrangement exists, the price is fixed and
determinable, delivery has occurred, and collection is probable. Product sales
made through distributors, historically, have been recorded as deferred revenue
until the product was sold by the distributors to the end users because we did
not have sufficient history with our distributor to be able to reliably estimate
returns. Beginning in 2006, we began recognizing revenue as product is sold to
distributors because we now believe have sufficient history to reliably estimate
returns from distributors. Certain device units are held by physicians for a
trial period. No revenue is recognized on these units until the physician elects
to purchase the equipment and all other revenue recognition criteria are met.

Non-PDT Drug Products.

We recognize revenue for these products in accordance with SAB No. 101, Revenue
Recognition in Financial Statements, as amended by SAB No. 104, Revenue
Recognition. Our accounting policy for revenue recognition has a substantial
impact on our reported results and relies on certain estimates that require
difficult, subjective and complex judgments on the part of management. We
recognize revenue for sales when substantially all the risks and rewards of
ownership have transferred to the customer, which generally occurs on the date
of shipment to wholesale customers, with the exceptions described below. Revenue
is recognized net of revenue reserves, which consists of allowances for
discounts, returns, rebates chargebacks and fees paid to wholesalers under
distribution service agreements.

In the case of sales made to wholesalers as a result of incentives and that are
in excess of the wholesaler's ordinary course of business inventory level,
substantially all the risks and rewards of ownership do not transfer upon
shipment and, accordingly, such sales are recorded as deferred revenue and the
related costs as deferred cost of revenue until the product is sold through to
the wholesalers' customers on a FIFO basis.

We evaluate inventory levels at our wholesale customers, which account for the
vast majority of our sales in the Non-PDT Drug Products segment, through an
analysis that considers, among other things, wholesaler purchases, wholesaler
shipments to retailers, available end-user prescription data purchased from
third parties and on-hand inventory data received directly from our two largest
wholesale customers. We believe that our evaluation of wholesaler inventory
levels, as described in the preceding sentence, allows us to make reasonable
estimates for our applicable revenue related reserves. Additionally, our
products are sold to wholesalers with a product shelf life that allows
sufficient time for our wholesaler customers to sell our products in their
inventory through to the retailers and, ultimately, to the end-user consumer
prior to product expiration. We have agreements with certain wholesalers that
require us to pay the wholesalers a fee based on a percentage of their net
sales. These fees are contractual and are known at the time of sale. The Company
records these fees at the time of sale and they are accounted for as a reduction
of revenues and are not reserved.

A summary of activity in the Company's gross revenue reserves follows for each
of the periods presented:


                                       22

<PAGE>

<TABLE>
<CAPTION>
                                              FOR THE THREE-MONTH PERIOD
                                                 ENDED JUNE 30, 2006:
                                         ------------------------------------
                                          PROVISION    PROVISION     ACTUAL
                                          RELATED TO      FOR        RETURNS
                                          SALES MADE     SALES     OR CREDITS
                               BALANCE      IN THE      MADE IN      IN THE      BALANCE
                              AT APRIL     CURRENT       PRIOR       CURRENT     AT JUNE
                               1, 2006      PERIOD      PERIODS      PERIOD     30, 2006
                              --------   -----------   ---------   ----------   --------
<S>                           <C>        <C>           <C>         <C>          <C>
Accrued Expenses:
   Returns and allowances     $630,000     $240,000        $--     $(304,000)   $566,000
Accounts receivable:
   Prompt payment discounts   $ 38,000     $ 63,000        $--     $ (75,000)   $ 26,000
</TABLE>

<TABLE>
<CAPTION>
                                                FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2006:
                                           ------------------------------------------------------
                                                          Provision
                                             Balance     related to                      Actual
                                           acquired as   sales made                    returns or
                              Balance at     part of       in the     Provision for    credits in   Balance at
                              January 1,      Sirius       current    sales made in   the current    June 30,
                                 2006      acquisition     period     prior periods      period        2006
                              ----------   -----------   ----------   -------------   -----------   ----------
<S>                           <C>          <C>           <C>          <C>             <C>           <C>
Accrued Expenses:
   Returns and allowances         $--        $671,000     $290,000         $--        $ (395,000)    $566,000
Accounts receivable:
   Prompt payment discounts       $--        $ 43,000     $ 83,000         $--        $($100,000)    $ 26,000
</TABLE>


Our provision for returns and allowances consists of our estimates of future
sales returns, rebates and chargebacks.

     Sales Returns- We account for sales returns in accordance with SFAS No. 48
     by establishing an accrual in an amount equal to our estimate of sales
     recorded for which the related products are expected to be returned. We
     determine the estimate of the sales return accrual primarily based on
     historical experience regarding sales returns, but also by considering
     other factors that could impact sales returns. These factors include levels
     of inventory in the distribution channel, estimated shelf life, product
     recalls, product discontinuances, price changes of competitive products,
     introductions of generic products and introductions of competitive new
     products. It is our policy to accept returns of Non-PDT Drug products when
     product is within six months of expiration. We consider all of these
     factors and adjust the accrual periodically to reflect actual experience.

     Chargebacks and Rebates - Chargebacks typically occur when suppliers enter
     into contractual pricing arrangements with end-user customers, including
     certain federally mandated programs, who then purchase from wholesalers at
     prices below what the supplier charges the wholesaler. Since we only offer
     "preferred pricing" to end-user customers under federally mandated
     programs, chargebacks have not been significant to the Company. Our rebate
     programs can generally be categorized into the following two types:
     Medicaid rebates and consumer rebates. Medicaid rebates are amounts owed
     based on legal requirements with public sector benefit providers after the
     final dispensing of the product by a pharmacy to a benefit plan
     participant. Consumer rebates are amounts owed as a result of mail-in
     coupons that are distributed by health care providers to consumers at the
     time a prescription is written. Since only a small percentage of our
     prescriptions are reimbursed under Medicaid and the quantity of consumer
     coupon redemptions have not been substantial, rebates have not been
     significant to the Company. Chargebacks and rebates in the aggregate were
     $87,000 and $90,000, for the three and six month periods ended June 30,
     2006, respectively.

We offer many of our customers a 2% prompt pay discount. We evaluate the amounts
accrued for prompt pay discounts by analyzing the unpaid invoices in our
accounts receivable aging subject to a prompt pay discount. Prompt pay discounts
are known within 15 to 30 days of sale, and therefore can be reliably estimated
based on actual and expected activity at each reporting date. The Company
records these discounts at the time of sale and they are accounted for as a
reduction of revenues.

Historically, our adjustments to actual have not been material. The sensitivity
of our estimates can vary by type of revenue reserve. Our estimate associated
with returns and allowances is evaluated based primarily on historical


                                       23
<PAGE>

returns experience relative to sales volumes, but also considers the length of
time from the sale to the lapse of the return right. There have been no material
adjustments to our accruals based on actual returns.

INVENTORY

Inventories are stated at the lower of cost or market value. Cost is determined
using the first-in, first-out method. Inventories are continually reviewed for
slow moving, obsolete and excess items. Inventory items identified as
slow-moving are evaluated to determine if an adjustment is required.
Additionally, our industry is characterized by regular technological
developments that could result in obsolete inventory. Although we make every
effort to assure the reasonableness of our estimates, any significant
unanticipated changes in demand, technological development, or significant
changes to our business model could have a significant impact on the value of
our inventory and our results of operations. We use sales projections to
estimate the appropriate level of inventory reserves, if any, that are necessary
at each balance sheet date.

VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS

We review our long-lived and intangible assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of a long-lived or
intangible asset may not be recoverable or that the useful lives of these assets
are no longer appropriate. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future
undiscounted net cash flows expected to be generated by the asset. When it is
determined that the carrying value of a long-lived asset is not recoverable, the
asset is written down to its estimated fair value on a discounted cash flow
basis.

Goodwill is deemed to have an indefinite life and is no longer amortized, but is
reviewed at least annually for impairment. utilizing the "fair value"
methodology. The Company has adopted December 1st as the date of the annual
impairment test for goodwill.

STOCK-BASED COMPENSATION

In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123R, "Share-Based Payment," a revision of SFAS Statement No. 123. We
adopted SFAS 123R effective January 1, 2006, using the modified prospective
application method, and beginning with the first quarter of 2006, we measure all
employee share-based compensation awards using a fair value based method and
record share-based compensation expense in our financial statements if the
requisite service to earn the award is provided. The pro forma results and
assumptions used in fiscal years 2005, 2004 and 2003 were based solely on
historical volatility of our common stock over the most recent period
commensurate with the estimated expected life of our stock options. The adoption
of SFAS No. 123R did not affect our net cash flow, but it did have a material
negative impact on our results of operations. In accordance with SFAS 123R, we
recognize the expense attributable to stock awards that are granted or vest in
periods ending subsequent to December 31, 2005 in the accompanying condensed
consolidated statements of operations.

In connection with our adoption of SFAS 123R, we refined our valuation
assumptions and the methodologies used to derive those assumptions; however, we
elected to continue using the Black-Scholes option valuation model. Concurrent
with our adoption of SFAS 123R, we determined that a combination of historical
and implied volatility for traded options on DUSA's stock would be a better
measure of market conditions and expected volatility than historical volatility
of our common stock alone. Previously, we used historical stock price volatility
as it was the most reliable source of volatility data. We estimate the
weighted-average expected life of our stock-option awards based on historical
cancellation and exercise data related to our stock-based awards as well as the
contractual term and vesting terms of the awards. In calculating the expected
life of the options for 2006, we classified our grantee population into two
groups, directors and officers and non-officer employees. Prior to the first
quarter of 2006, we had used a company-wide weighted average expected life of
five years for grants in 2005, 2004 and 2003 and seven years for grants in 2002.
Stock-based compensation expense related to stock options is recognized net of
estimated forfeitures. We estimated forfeitures based on our historical
experience. In the first quarter of 2006, departure rates, defined as the annual
percentage of options forfeited or exercised early due to departure, were
estimated to be approximately 2.96% for officers and directors and 10.53% for
non-officer employees.

In June 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109, Accounting for Income Taxes. The
interpretation prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or
expected to be taken, in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties accounting in interim
periods, disclosure and transition. The interpretation is effective for fiscal
years beginning after December 15, 2006. The Company is in the process of
determining the effects that adoption of FIN 48 will have on the Company's
financial position, cash flows and results of operations.

                                       24

<PAGE>

RESULTS OF OPERATIONS -- THREE MONTHS ENDED JUNE 30, 2006 VERSUS JUNE 30, 2005

REVENUES -- Total revenues for the three and six month periods ended June 30,
2006 were $6,619,000 and 11,370,000, respectively, as compared to $2,228,000 and
5,597,000 in 2005, and were comprised of the following:

<TABLE>
<CAPTION>
                                THREE MONTHS ENDED JUNE 30,                 SIX MONTHS ENDED JUNE 30,
                                ---------------------------    INCREASE/    ------------------------    INCREASE/
                                     2006         2005        (DECREASE)        2006         2005      (DECREASE)
                                  ----------   ----------     ----------    -----------   ----------   ----------
<S>                             <C>            <C>            <C>           <C>           <C>          <C>
PDT DRUG & DEVICE PRODUCT
   REVENUES
KERASTICK(R) PRODUCT REVENUES
   United States                  $2,912,000   $1,510,000     $1,402,000    $ 5,722,000   $3,759,000   $1,963,000
   Canada                            420,000      256,000        164,000        763,000      517,000      246,000
                                  ----------   ----------     ----------    -----------   ----------   ----------
Subtotal Kerastick(R) product
   revenues                        3,332,000    1,766,000      1,566,000      6,485,000    4,276,000    2,209,000
BLU-U(R) PRODUCT REVENUES
   United States                     451,000      340,000        111,000      1,117,000    1,026,000       91,000
   Canada                             59,000      122,000        (63,000)        92,000      295,000     (203,000)
                                  ----------   ----------     ----------    -----------   ----------   ----------
Subtotal BLU-U(R) product
   revenues                          510,000      462,000         48,000      1,209,000    1,321,000     (112,000)
                                  ----------   ----------     ----------    -----------   ----------   ----------
   TOTAL PDT DRUG & DEVICE
      PRODUCT REVENUES             3,842,000    2,228,000      1,614,000      7,694,000    5,597,000    2,097,000

TOTAL NON-PDT DRUG PRODUCT
   REVENUES                        2,777,000           --      2,777,000      3,676,000           --    3,676,000
                                  ----------   ----------     ----------    -----------   ----------   ----------
TOTAL PRODUCT REVENUES            $6,619,000   $2,228,000     $4,391,000    $11,370,000   $5,597,000   $5,773,000
                                  ==========   ==========     ==========    ===========   ==========   ==========
</TABLE>

For the three and six month periods ended June 30, 2006 total PDT Drug and
Device Product Revenues were $3,842,000 and $7,694,000, respectively. This
represents an increase of $1,614,000 or 72%, and $2,097,000 or 37% over the
comparable 2005 totals of $2,228,000 and $5,597,000, respectively. The
incremental revenue on a year-to-date basis was driven by increased Kerastick(R)
revenues which were partially offset by decreased BLU-U(R) revenues.

For the three and six month periods ended June 30, 2006, Kerastick(R) revenues
were $3,332,000 and $6,485,000, respectively, representing a $1,566,000 or 89%,
and $2,209,000 or 52% increase over the comparable 2005 totals of $1,766,000 and
$4,276,000, respectively. Kerastick(R) unit sales to end-users were 34,944 and
67,878 for the three and six-month periods ended June 30, 2006, respectively,
including 5,736 and 10,590, respectively, sold in Canada. This represents an
increase from 20,172 and 48,876 Kerastick(R) units sold in the three and
six-month periods ended June 30, 2005, respectively, including 3,666 and 7,470,
respectively, sold in Canada. Our average net selling price for the Kerastick(R)
increased to $95.55 for the first six months of 2006 from $87.48 for the first
six months of 2005.

Our average net selling price for the Kerastick(R) includes sales made directly
to our end-user customers, as well as sales made to our distributors, both in
the United States during 2005 and Canada during 2006 and 2005. The increase in
2006 Kerastick(R) revenues was driven mainly by increased sales volumes, an
increase in our average unit


                                       25

<PAGE>

selling price, a reduction in our overall sales volume discount programs, and
increased levels of direct distribution to customers. Effective January 1, 2006,
DUSA became the sole US distributor of the Kerastick(R).

For the three and six month periods ended June 30, 2006, BLU-U(R) revenues were
$510,000 and $1,209,000, respectively, representing a $48,000, or 10%, increase
and $112,000, or 8%, decrease over the comparable 2005 totals of $462,000 and
$1,321,000, respectively. The increase in 2006 BLU-U(R) revenue in the second
quarter of 2006 versus the comparable 2005 period was driven by an increase in
our average selling price to $7,454 for the three-month period ended June 30,
2006 from $6,623 for the three-month period ended June 30, 2005. The decrease in
2006 year-to-date BLU-U(R) revenue was driven by lower overall sales volumes
which were partially offset by an increase in our average selling price. In the
three and six-month periods ended June 30, 2006, there were 66 and 158 units
sold, respectively, versus 69 units and 212 units in the comparable 2005
periods. The 2006 total consists of 142 units sold in the United States and 16
sold in Canada by Coherent-AMT. The 2005 total consists of 159 sold in the
United States and 53 sold in Canada. The decrease in BLU-U(R) units sold in the
three and six-month periods ended June 30, 2006 compared to the same periods in
2005 is due primarily to the implementation of a more focused sales strategy
aimed at increasing Kerastick(R) sales volumes in existing accounts; as well as,
a decrease in BLU-U(R) discounting programs.

During the fourth quarter of 2005, we introduced a BLU-U(R) evaluation program,
which, for a limited number of BLU-U(R) units, allows customers to take delivery
of a unit for a period of up to 4 months for private practitioners and up to one
year for hospital clinics, before a purchase decision is required. At June 30,
2006, there were approximately 59 units in the field pursuant to this evaluation
program. The units are classified as inventory in the financial statements and
are being amortized during the evaluation period to cost of goods sold using an
estimated life for the equipment of 3 years.

Non-PDT Drug Product Revenues reflect the revenues generated by the products
acquired as part of our March 10, 2006 acquisition of Sirius. Total revenues for
the three months ended June 30, 2006 and for the period March 10, 2006 through
June 30, 2006 were $2,777,000 and 3,676,000, respectively. The substantial
majority of the Non-PDT product revenues were from sales of Nicomide(R). The
products acquired from Sirius all belong to the same therapeutic category,
"non-photodynamic therapy dermatological treatment of acne and rosacea."

The increase in our total revenues results from the Sirius acquisition, as well
as the efforts of our sales force and related marketing and sales activities.
With respect to United States sales, we increased our average selling prices,
increased our direct selling efforts, became the sole US distributor of the
Kerastick(R), and reduced our overall sales volume discount programs, all of
which have had a positive impact on our average selling prices during 2006.
However, we must increase sales significantly from these levels in order for us
to become profitable. We expect that our marketing efforts (including our
strategy to minimize the impact of compounded ALA) should cause sales to
continue to increase through increased consumption of our products by our
existing customers, as well as the addition of new customers. However, should
one or more generic niacinamide products remain on the market for any
significant length of time, our revenues of Nicomide(R) could be significantly
eroded, which would make it more difficult to achieve profitability.

COST OF PRODUCT SALES AND ROYALTIES -Cost of product revenues and royalties for
the three and six-month periods ended June 30, 2006 were $2,995,000 and
$4,786,000, respectively, as compared to $1,471,000 and $3,474,000 in the
comparable periods in 2005. A summary of the components of cost of product
revenues and royalties is provided below:

<TABLE>
<CAPTION>
                                                                       THREE MONTHS ENDED JUNE 30,
                                                                 --------------------------------------
                                                                                             INCREASE/
                                                                    2006         2005       (DECREASE)
                                                                 ----------   ----------   ------------
<S>                                                              <C>          <C>          <C>
KERASTICK(R)  COST OF PRODUCT REVENUES AND ROYALTIES
   Direct Kerastick(R) Product Costs                             $  484,000   $  389,000   $     95,000
   Other Kerastick(R) Product costs including internal costs
      assigned to support products                                  100,000      359,000       (259,000)
   Royalty and supply fees (1)                                      174,000       98,000         76,000
                                                                 ----------   ----------   ------------
      Subtotal Kerastick(R) Cost of Product Revenues and
         Royalties                                               $  758,000   $  846,000       ($88,000)
                                                                 ----------   ----------   ------------
</TABLE>


                                       26

<PAGE>

<TABLE>
<S>                                                              <C>          <C>          <C>
BLU-U(R) COST OF PRODUCT REVENUES
   Direct BLU-U(R) Product costs                                 $  226,000   $  238,000       ($12,000)
   Other BLU-U(R) Product costs including internal
      costs assigned to support products; as well as costs
      incurred to ship, install and service the BLU-U(R) in
      physicians offices                                            236,000      387,000       (151,000)
                                                                 ----------   ----------   ------------
      Total Device cost of product revenues                      $  462,000   $  625,000      ($163,000)
                                                                 ----------   ----------   ------------

TOTAL PDT DRUG & DEVICE COST OF PRODUCT REVENUES AND ROYALTIES   $1,220,000   $1,471,000      ($251,000)
                                                                 ----------   ----------   ------------
TOTAL NON-PDT DRUG COST OF PRODUCT REVENUES AND ROYALTIES (2)    $1,775,000           --   $  1,775,000
                                                                 ----------   ----------   ------------
      TOTAL COST OF PRODUCT REVENUES AND ROYALTIES               $2,995,000   $1,471,000    ($1,524,000)
                                                                 ==========   ==========   ============
</TABLE>

<TABLE>
<CAPTION>
                                                                        SIX MONTHS ENDED JUNE 30,
                                                                 --------------------------------------
                                                                                             INCREASE/
                                                                    2006         2005       (DECREASE)
                                                                 ----------   ----------   ------------
<S>                                                              <C>          <C>          <C>
KERASTICK(R) COST OF PRODUCT REVENUES AND ROYALTIES
   Direct Kerastick(R) Product Costs                             $  938,000   $  969,000   $    (31,000)
   Other Kerastick(R) Product costs including internal costs
      assigned to support products                                  413,000      630,000       (217,000)
   Royalty and supply fees (1)                                      334,000      226,000        108,000
                                                                 ----------   ----------   ------------
      Subtotal Kerastick(R) Cost of Product Revenues and
         Royalties                                               $1,685,000   $1,825,000      ($140,000)
                                                                 ----------   ----------   ------------

BLU-U(R) COST OF PRODUCT REVENUES
   Direct BLU-U(R) Product costs                                 $  538,000   $  714,000      ($176,000)
   Other BLU-U(R) Product costs including internal costs
      assigned to support products; as well as costs incurred
      to ship, install and service the BLU-U(R) in
      physicians offices                                            505,000      935,000       (430,000)
                                                                 ----------   ----------   ------------
      Total Device cost of product revenues                      $1,043,000   $1,649,000      ($606,000)
                                                                 ----------   ----------   ------------

TOTAL PDT DRUG & DEVICE COST OF PRODUCT REVENUES AND ROYALTIES   $2,728,000   $3,474,000      ($746,000)
                                                                 ----------   ----------   ------------
TOTAL NON-PDT DRUG COST OF PRODUCT REVENUES AND ROYALTIES (2)    $2,058,000           --   $  2,058,000
                                                                 ----------   ----------   ------------
      TOTAL COST OF PRODUCT REVENUES AND ROYALTIES               $4,786,000   $3,474,000    ($1,312,000)
                                                                 ==========   ==========   ============
</TABLE>

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(R)
     Kerastick(R) 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.

**** The expected amortization expense related to the core/developed technology
     for the remainder of 2006 is $0.9 million.

MARGINS -- Total product margins for the three and six month periods ended June
30, 2006 were $3,624,000 and $6,583,000, respectively, as compared to $758,000
and $2,123,000 for the comparable 2005 periods, as shown below:


                                       27
<PAGE>

<TABLE>
<CAPTION>
                                                     SIX MONTHS ENDED JUNE 30,
                                          -----------------------------------------------
                                                                                INCREASE/
                                                2006              2005         (DECREASE)
                                          ---------------   ----------------   ----------
<S>                                       <C>          <C>  <C>         <C>    <C>
Kerastick(R) Gross Margin                 $2,574,000   77%  $ 920,000    52%   $1,654,000
BLU-U(R) Gross Margin                         48,000    9%   (162,000)  (35%)     210,000
                                          ----------        ---------          ----------
   Total PDT Drug & Device Gross Margin   $2,622,000   68%  $ 758,000    34%   $1,864,000
                                          ----------        ---------          ----------
   Total Non-PDT Drug Gross Margin        $1,002,000   36%         --    --    $1,002,000
                                          ----------        ---------          ----------
      TOTAL GROSS MARGIN                  $3,624,000   55%  $ 758,000    34%   $2,866,000
                                          ==========        =========          ==========
</TABLE>

<TABLE>
<CAPTION>
                                                     THREE MONTHS ENDED JUNE 30,
                                          ------------------------------------------------
                                                                                 INCREASE/
                                                2006               2005         (DECREASE)
                                          ---------------   -----------------   ----------
<S>                                       <C>          <C>  <C>          <C>    <C>
Kerastick(R) Gross Margin                 $4,800,000   74%  $2,451,000    57%   $2,349,000
BLU-U(R) Gross Margin                        166,000   14%    (328,000)  (25%)     494,000
                                          ----------        ----------          ----------
   Total PDT Drug & Device Gross Margin   $4,966,000   65%  $2,123,000    38%   $2,843,000
                                          ----------        ----------          ----------
   Total Non-PDT Drug Gross Margin         1,618,000   44%          --    --    $1,618,000
                                          ----------        ----------          ----------
      TOTAL GROSS MARGIN                  $6,584,000   58%  $2,123,000    38%   $4,461,000
                                          ==========        ==========          ==========
</TABLE>

For the three and six month periods ended June 30, 2006 total PDT Drug and
Device Product Margins were 68% and 65%, respectively, versus 34% and 38% for
the comparable 2005 periods. The incremental margin was driven by positive
margin gains on both the Kerastick(R) and BLU-U(R)

Kerastick(R) gross margins for the three and six month periods ended June 30,
2006 were 77% and 74%, respectively, versus 52% and 57% for the comparable 2005
periods. Similar to the increase in revenues, the increase in margin is mainly
attributable to an increase in our average unit selling price, increased levels
of direct distribution to customers eliminating the cost of distributors; as
well as a reduction in our overall sales volume discount programs. Our long-term
goal is to achieve higher gross margins on Kerastick(R) sales which will be
significantly dependent on increased volume.

BLU-U(R) margins for the three and six month periods ended June 30, 2006 were 9%
and 14%, respectively, versus (35)% and (25)% for the comparable 2005 periods.
The increase in margin is a result of an increase in the average selling price
per unit; as well as, lower overall costs incurred to support the product line.
Our short-term strategy is to at a minimum breakeven on device sales in an
effort to drive Kerastick(R) sales volumes.

Non-PDT Drug Product Margins reflect the margin generated by the products
acquired as part of our March 10, 2006 merger with Sirius Laboratories. Total
margin for the three-month period ended June 30, 2006 and the period March 10,
2006 (date of acquisition) through June 30, 2006 was 36% and 44%, respectively.
Non-PDT Drug Product Margins were negatively impacted by fair value accounting
for the inventory acquired as part of the acquisition.

RESEARCH AND DEVELOPMENT COSTS -- Research and development costs for the three
and six month periods ended June 30, 2006 were $1,527,000 and 3,038,000, as
compared to $1,799,000 and $3,395,000 in the comparable 2005 periods. The
decrease is due to decreased spending on our clinical programs. We completed
both our Phase II acne study and our interim analysis study on photodamaged skin
in the first quarter of 2006.The decrease was somewhat offset by the company
recording stock-based compensation expense of $81,000 and $162,000 for the
three-and six month periods ended June 30, 2006, respectively, resulting from
the adoption of FAS 123R.


                                       28

<PAGE>

As our Phase II clinical trials proceed for acne and photodamage, and especially
at such time as we may commence Phase III trials in these indications, research
and development expenses are expected to increase significantly. On September
27, 2004, DUSA signed a clinical trial agreement with the National Cancer
Institute, Division of Cancer Prevention, or NCI DCP, for the clinical
development of Levulan(R) PDT for the treatment of high-grade dysplasia within
Barrett's Esophagus. In addition, to further our objectives concerning treatment
of internal indications using Levulan(R) PDT, on November 4, 2004, we signed an
additional clinical trial agreement with the NCI DCP for the treatment of oral
cavity dysplasia. DUSA and the NCI DCP are working together to prepare overall
clinical development plans for Levulan(R) PDT in these indications, starting
with Phase I/II trials, and continuing through Phase III studies, if
appropriate. DUSA and the NCI DCP have prepared protocols for the initial Phase
I/II clinical studies in both indications. The NCI DCP is currently working with
DUSA and investigators to finalize the clinical trial designs. The NCI DCP will
use its resources to file its own Investigational New Drug applications with the
FDA. Our costs related to these studies will be limited to providing Levulan(R),
laser devices and our proprietary light device sheath and the necessary training
for the investigators involved. All other costs of these studies will be the
responsibility of the NCI DCP. We have options on new intellectual property and,
subject to successful clinical trial results, intend to seek FDA approvals in
due course. In preparation for new Phase II clinical trials for the treatment of
high-grade dysplasia associated with Barrett's esophagus, our small
single-center pilot Phase II clinical trial using our proprietary endoscopic
light delivery device is continuing.

As a result of the continuation of all these clinical programs, we expect
research and development costs to increase in 2006 as compared to 2005. We have
retained the services of a regulatory consultant to assist us with seeking
foreign marketing approvals for our products, which will also cause research and
development expenses to increase.

MARKETING AND SALES COSTS -- Marketing and sales costs for the three and
six-month periods ended June 30, 2006 were $3,176,000 and $5,867,000,
respectively, as compared to $2,296,000 and $5,081,000 for the comparable 2005
periods. These costs consist primarily of expenses such as salaries and benefits
for the marketing and sales staff, commissions, and related support expenses
such as travel, and telephone, totaling $2,416,000 and $4,012,000 for the three
and six-month periods ended June 30, 2006, compared to $1,857,000 and $3,694,000
in the comparable periods in 2005. The increase in this category is due to
increased headcount in 2006 in comparison to 2005, primarily as the result of
the Sirius acquisition. The remaining expenses consist of tradeshows,
miscellaneous marketing and outside consultants totaling $763,000 and $1,855,000
for the three and six month periods ended June 30, 2006, respectively, compared
to $439,000 and $1,387,000 for the comparable 2005 periods. We expect that our
salary and related expenses will remain elevated during the second half of 2006
reflecting the expansion of our sales capacity and the addition of executive
sales management; however, these expenses should be somewhat offset by lower
tradeshow spending for the remainder of the year, as the major conferences took
place during the first half of 2006. The Company also recorded compensation
expense of $78,000 and $147,000 for the three-and six month periods ended June
30, 2006, respectively, resulting from the adoption of FAS 123R. We anticipate
that the level of marketing and sales expenses and related support functions
will continue to increase in 2006 as we integrate the members of the Sirius
sales force and seek to expand our sales coverage as a result of the initial
success of our sales initiatives.

GENERAL AND ADMINISTRATIVE COSTS -- General and administrative costs for the
three and six-month periods ended June 30, 2006 were $3,754,000 and $5,824,000,
respectively, as compared to $1,841,000 and $3,524,000 for the comparable 2005
periods. The increase is mainly attributable to compensation expense of $476,000
and $625,000 for the three-and six month periods ended June 30, 2006, resulting
from the adoption of FAS 123R, incremental costs incurred since the acquisition
of Sirius, and increased legal fees, primarily related to the River's Edge
litigation. General and administrative expenses are highly dependent on our
legal and other professional fees, which can vary significantly from period to
period particularly in light of our litigation strategy to protect our
intellectual property.

OTHER INCOME, NET -- Other income for the three and six-month periods ended June
30, 2006 decreased to $180,000 and $452,000, respectively, from $353,000 and
$720,000 during the comparable 2005 periods. This decrease is primarily
attributable to a decrease in the balance of marketable securities as we have
used these resources to fund our operations and to partially fund our March 10,
2006 acquisition of Sirius.

NET LOSSES - For the three and six months ended June 30, 2006, we incurred net
losses of $(4,654,000), or $(0.24) per share, and $(9,294,000), or $(0.50) per
share, respectively, as compared to net losses of $(4,826,000), or $(0.29) per
share, and $(9,158,000), or $(0.54) per share, for the comparable periods in
2005. Net losses are expected to continue until end-user sales offset the cost
of launching our sales force and marketing initiatives, and the costs for other
business support functions.


                                       29

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

We believe that we have sufficient cash to continue to fund our sales
and marketing expenses at current levels, planned research and development
activities for our Levulan(R) PDT/PD platform, and to fund operations and
capital expenditures for the foreseeable future. We have invested our funds in
liquid investments, so that we will have ready access to these cash reserves, as
needed, for the funding of development plans on a short-term and long-term
basis. At June 30, 2006, we had approximately $20,190,000 of total cash
resources, comprised of $5,615,000 of cash and cash equivalents and marketable
securities available for sale totaling $14,585,000. As of June 30, 2006, these
securities had yields ranging from 2.51% to 7.48% and maturity dates ranging
from July 1, 2006 to June 15, 2008.

As of June 30, 2006, working capital (total current assets minus total current
liabilities) was $20,830,000, as compared to $34,889,000 as of December 31,
2005. Total current assets decreased by $12.2 million during the six months
ended June 30, 2006, due primarily to $9.3 million spent on the acquisition of
Sirius, including $1.8 million of acquisition costs, as well as the continued
funding of our operating loss. Total current liabilities increased by $1.8
million during the same period due primarily to an increase in accrued expenses
and an increase in deferred revenue resulting from a prepaid royalty received
under our patent license agreement with PhotoCure ASA pursuant to which
PhotoCure will pay royalties on sales of its Metvix(R) and Hexvix(R) ester
products as well as new products as long as we hold patents in the United States
of America and certain other territories,

As stated above, we acquired all of the outstanding common stock of Sirius in
March 2006 in exchange for 2,396,245 shares of DUSA common stock and cash. At
closing, we paid $8.0 million less certain expenses, in cash, and 1,973,353
unregistered shares of DUSA's common stock, no par value per share (the "Common
Stock") to the shareholders of Sirius and issued an additional 422,892
unregistered shares to an escrow agent to be held for up to two years subject to
certain indemnification provisions of the Merger Agreement. We have filed a
registration statement covering these shares during the quarter. See Note 3 to
the Notes to the Condensed Consolidated Financial Statements for the effect of
purchase method accounting on the value of the acquisition. We have agreed to
pay additional consideration in future periods, based upon the attainment of
defined operating objectives, including new product approvals or launches and
the achievement of pre-determined total cumulative sales milestones for the
Sirius products. The pre-determined cumulative sales milestones for the Sirius
products and the related milestone payments are, as follows:

<TABLE>
<CAPTION>
Cumulative Sales Milestone:   Additional Consideration:
---------------------------   -------------------------
<S>                           <C>
       $25.0 million                 $1.5 million
        35.0 million                 $1.0 million
        45.0 million                 $1.0 million
                                     ------------
           Total                     $3.5 million
                                     ============
</TABLE>

In addition, there are three milestones related to new product approvals and/or
launches each in the amount of $500,000 per milestone, or $1.5 million in the
aggregate, that will be paid if the milestones are achieved. If attained, a
portion of the contingent consideration is payable in cash and a portion is
payable in either common stock or cash, at the Company's sole discretion, any
such payments will result in increases in goodwill at the time of the payment.
As of June 30, 2006 none of these milestones had been achieved.

We are still actively seeking to further expand or enhance our business by using
our resources to acquire by license, purchase or other arrangements, additional
businesses, new technologies, or products in the field of dermatology. For 2006,
we are focusing primarily on increasing the sales of the Levulan(R) Kerastick(R)
and the BLU-U(R), as well as the Non Photodynamic Therapy Drug Products,
advancing our Phase II studies for use of Levulan(R) PDT in photodamaged skin
and acne, and continuing to pursue our product development pipeline.

DUSA has no off-balance sheet financing arrangements.

CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS

ALTANA, INC.

In June 2005, the former Sirius entered into a development and product license
agreement with Altana, Inc. relating to a reformulated dermatology product. The
agreement was assigned to us by virtue of the Sirius merger. According to the
agreement, we will pay for all development costs. Should development efforts be
successful, Altana will manufacture the product for us and we will be obligated
to pay royalties, including certain minimum royalties on net sales of the
product. The agreement expires six years after the first commercial sale of the
product.


                                       30

<PAGE>

AMIDE PHARMACEUTICALS, INC.

Under an agreement dated May 18, 2001, and amended on February 8, 2006, the
former Sirius entered into an arrangement for the supply of Nicomide(R) with
Amide Pharmaceuticals, Inc. The agreement was assigned to us as part of the
Sirius merger. Currently, Amide supplies all of our requirements; however, we
have the right to use a second source for a significant portion of our needs if
we choose to do so. The agreement expires on February 8, 2009.

HARMONY LABS, INC.

Under an agreement dated September 18, 2001, and amended on February 16, 2006
and March 10, 2006, the former Sirius entered unto an arrangement for the
manufacturing and supply of the AVAR(R) line of products and Nicomide-T(R) with
Harmony Labs, Inc. The agreement was assigned to us as part of the Sirius
merger. Currently, Harmony supplies all of our requirements; however, we have
the right to use a second source for a significant portion of its needs if we
choose to do so. The agreement expires on February 16, 2009.

L. PERRIGO COMPANY

On October 25, 2005, the former Sirius entered into a supply agreement with L.
Perrigo Company for the exclusive manufacture and supply of a proprietary
device/drug kit designed by Sirius pursuant to an approved ANDA owned by
Perrigo. The agreement was assigned to us as part of the Sirius merger. We are
responsible for all development costs and for obtaining all necessary regulatory
approvals. Perrigo is entitled to royalties on net sales of the product,
including certain minimum annual royalties which commenced May 1, 2006 in the
amount of $250,000. The initial term of the agreement expires in July, 2011 and
may be renewed based on certain minimum purchase levels and other terms and
conditions.

WINSTON LABORATORIES, INC.

On or about January 30, 2006 Winston Laboratories, Inc. and the former Sirius
entered into a license agreement relating to a Sirius product, Psoriatec(R)
(known by Winston as Micanol) revising a former agreement. Winston Laboratories,
Inc. is controlled by Dr. Joel Bernstein, a principal shareholder of the former
Sirius. This agreement was assigned to us as part of the Sirius Merger. The 2006
agreement grants an exclusive license, with limitation on rights to sublicense,
to all property rights, including all intellectual property and improvements,
owned or controlled by Winston to manufacture, sell and distribute products
containing anthralin, in the United States. We will pay royalties on net sales
of the product, and certain minimum royalties are due each year to maintain the
license. We have an option to purchase the product from Winston at certain times
during the two-year term of the agreement. The agreement is due to expire on
January 31, 2008, subject to rights to extend or terminate the agreement
earlier. Minimum royalties to Winston Laboratories are $300,000 per year ending
January 31, 2008.


                                       31

<PAGE>

Our contractual obligations and other commercial commitments to make future
payments under contracts, including lease agreements, research and development
contracts, manufacturing contracts, or other related agreements, are as follows
at June 30, 2006:

<TABLE>
<CAPTION>
                          TOTAL     1 YEAR OR LESS   2-3 YEARS   4-5 YEARS    AFTER 5
                       ----------   --------------   ---------   ---------   --------
<S>                    <C>          <C>              <C>         <C>         <C>
Operating lease
   obligations         $3,005,000     $  684,000      $935,000    $896,000   $490,000

Purchase obligations
   (1,2)                2,769,000      1,977,000       707,000      85,000         --

Minimum royalty
   obligations         $2,486,000        615,000      $922,000    $672,000   $277,000
</TABLE>

1)   Research and development projects include various commitments including
     obligations for our Phase II clinical studies for photodamaged skin and
     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

Although inflation rates have been comparatively low in recent years, inflation
is expected to apply upward pressure on our operating costs. We have included an
inflation factor in our cost estimates. However, the overall net effect of
inflation on our operations is expected to be minimal.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk for changes in interest rates relates primarily to
our investment portfolio. We do not use derivative financial instruments in our
investment portfolio. Our investment policy specifies credit quality standards
for our investments and limits the amount of credit exposure to any single
issue, issuer or type of investment. Our investments consist of United States
government securities and high grade corporate bonds. All investments are
carried at market value, which approximates cost.

As of June 30, 2006, the weighted average rate of return on our investments was
4.04%. If market interest rates were to change immediately and uniformly by 100
basis points from levels as of June 30, 2006, the fair market value of the
portfolio would change by $93,000. Declines in interest rates could, over time,
reduce our interest income.


                                       32
<PAGE>

ITEM 4. CONTROLS AND PROCEDURES

We carried out an evaluation, under the direction of our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)). Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective as of June 30, 2006.

There have been no changes in our internal control over financial reporting that
occurred during the quarter ended June 30, 2006 that have materially affected,
or are reasonably likely to materially affect, DUSA's internal control over
financial reporting.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including the Management's Discussion
and Analysis, and certain written and oral statements incorporated herein
by reference of DUSA Pharmaceuticals, Inc. (referred to as "DUSA," "we,"
and "us") contain forward-looking statements that have been made pursuant
to the provisions of the Private Securities Litigation Reform Act of 1995 and
Section 27A of the Securities Act of 1933, as amended. Such forward-looking
statements are based on current expectations, estimates, beliefs and projections
about future events, including, without limitation statements regarding our use
of estimates and assumptions in the preparation of our financial statements and
policies, including certain pro forma financial statements and the impact on us
of the adoption of certain accounting standards, belief concerning the impact of
compounding pharmacies, our obligation to make certain milestone and royalty
payments to third parties, our beliefs and intent regarding the third-party
manufacture of our products and the availability of inventory of our products
and expectation for time and impact of being out-of-stock, the outcome and costs
of litigation to which we are a party, our beliefs regarding our recent merger
with Sirius Laboratories, Inc. and the benefits, effects, impact and risks
thereof, for off-label uses, our goal of achieving profitability and the impact
of potential generic products, our beliefs regarding our sales and marketing
efforts, competition with other companies, beliefs regarding attainment of
positive cash flow, the adoption of our products, and the outcome of such
efforts, our beliefs regarding the use of our products and technologies for
off-label uses, by third parties, our beliefs regarding our compliance with
applicable laws, rules and regulations and possible need to seek FDA approval,
expectations for the reexamination process of the Nicomide patent, and beliefs
concerning the loss of patent protection or the River's Edge litigation, our
beliefs and intentions regarding available reimbursement for our products and
changes to applicable CPT codes, belief concerning adoption of our AK therapy,
the possibility of adding employee, belief regarding estimates for reserves,
expectation for amortization on core/developed technology, our expectation
regarding the margins on our products, our beliefs regarding the current and
future clinical development and testing of our potential products and
technologies and the costs thereof, our expectations and beliefs regarding our
future expenses and losses, the sufficiency of our capital resources and our
needs for additional capital, expectations of royalties from PhotoCure, and the
possibility of the holders of options and warrants to purchase our common stock
exercising these securities. Words such as "anticipates," "expects," "intends,"
"plans," "believes," "seeks," "estimates," or variations of such words and
similar expressions, are intended to identify such forward-looking statements.
These statements are not guarantees of future performance and are subject to
certain risks, uncertainties and assumptions that are difficult to predict
particularly in the highly regulated pharmaceutical industry in which we
operate. Therefore, actual results may differ materially from those expressed or
forecasted in any such forward-looking statements. Such risks and uncertainties
include changing market, regulatory and marketplace conditions, actual clinical
results of our trials, our ability to sell, market and develop our products and
product candidates, the potential need to hire additional personnel or retain
existing personnel, the impact of competitive products and pricing, the timely
development, FDA approval, and market acceptance of our products, the
maintenance of our patent portfolio, changes in our long and short term goals,
financial and operational risks associated with our recent merger with Sirius
Laboratories, Inc., the litigation process, the ability to obtain competitive
levels of reimbursement by third-party payors, and other risks noted herein and
in our other SEC filings from time to time and those set forth herein under
"Risk Factors" on pages 36 through 47, as well as those noted in the documents
incorporated herein by reference. Unless required by law, we undertake no
obligation to update publicly any forward-looking statements, whether as a
result of new information, future events or otherwise. However, readers should
carefully review the statements set forth in other reports or documents we file
from time to time with the Securities and Exchange Commission, particularly our
Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

PHOTOCURE ASA

In April 2002, we received a copy of a notice issued by PhotoCure ASA to Queen's
University at Kingston, Ontario, alleging that Australian Patent No. 624985 was
invalid. Australian Patent No. 624985 is one of the patents covered by our
agreement with PARTEQ Research & Development Innovations, the technology
transfer arm of Queen's


                                       33

<PAGE>

University, relating to 5-aminolevulinic acid technology. PhotoCure instituted
this proceeding on April 12, 2002 in the Federal Court of Australia, Victoria
District Registry. As a consequence of this action, Queen's University assigned
the Australian patent to us so that we could participate directly in this
litigation. On April 6, 2005, the Federal Court of Australia ruled that the
patent is valid and remains in full force and effect. However, the Court also
ruled that PhotoCure's product does not infringe the claims in the Australian
patent. On May 30, 2006, we entered into a patent license agreement with
PhotoCure ASA whereby we granted a non-exclusive license to PhotoCure under the
patents we license from PARTEQ, the licensing arm of Queens University,
Kingston, Ontario Canada for esters of aminolevulinic acid ("ALA"). Furthermore,
we granted a non-exclusive license to PhotoCure for its existing formulations of
its Hexvix(R) and Metvix(R) (known in the United States as Metvixia(R)) products
for any patents that may issue or that we may license in the future. PhotoCure
received FDA approval to market Metvixia for treatment of AKs in July 2004 and
it would be directly competitive with our Levulan Kerastick product should
PhotoCure decide to begin marketing this product. While we are entitled to
royalties from PhotoCure on its net sales of Metvixia, this product may
adversely affect our ability to maintain or increase our market.

NECC

In December 2004, we filed a lawsuit against New England Compounding Center of
Framingham, Massachusetts alleging violations of U.S. patent law in the U.S.
District Court in Boston, Massachusetts. On April 10, 2006, we announced that we
and NECC had settled our respective claims against each other. Under the terms
of the settlement agreement, NECC does not admit any wrongdoing but has agreed
that it will not infringe or induce others to infringe the two patents that were
the subject of the lawsuit, and all claims against us were released.

LEVULAN(R) SUITS

During 2005 and 2006, we filed lawsuits against physicians in several states to
prevent their continued use of versions of our Levulan (R) brand of
aminolevulinic acid HCl (ALA) produced, by third-parties for use in our patented
photodynamic therapy (PDT) treatment for actinic keratosis, basal cell
carcinoma, acne and other dermatological conditions. The suits allege that ALA
obtained from sources other than DUSA is being used by these physicians for
patient treatments that are covered under patents exclusively licensed by DUSA,
resulting in direct infringement of these patent(s). Additionally, some doctors
are also being sued for misuse of DUSA's trademarks and for violations of the
Lanham Act for using the Levulan (R) brand name on their web sites and
promotional materials, but performing patient treatments with ALA obtained from
other sources. Seven of the original eight physicians originally sued have
entered Consent Judgments in which they admit the infringement and provide DUSA
with the right to review their books and records. One of the original lawsuits
and five recently filed lawsuits are currently on-going.

More recently, we have sued a chemical supplier in United States District Court
for the District of Arizona alleging that it induces physicians to infringe
patents licensed to us, among other things. While we believe that certain
actions of compounding pharmacies and others go beyond the activities which are
permitted under the Food, Drug and Cosmetic Act and have advised the FDA and
local health authorities of our concerns, we cannot be certain that our lawsuits
will be successful in curbing the practices of these companies or that
regulatory authorities will intervene to stop their activities. In addition,
there may be other compounding pharmacies which are following FDA guidelines, or
others conducting illegal activities of which we are not aware, which may be
negatively impacting our sales revenues.

RIVER'S EDGE

On March 28, 2006, a lawsuit was filed by River's Edge Pharmaceuticals, LLC
against us alleging, among other things, that, prior to the merger, the former
Sirius Laboratories, Inc. agreed to authorize River's Edge to market a generic
version of Nicomide(R), and that the United States patent covering Nicomide(R)
issued to Sirius in December, 2005 is invalid. Nicomide(R) is one of the key
products DUSA acquired from Sirius in our merger. The declaratory judgment suit
was filed in the United States District Court for the Northern District of
Georgia, Gainesville Division.

River's Edge has also filed an application with the U.S. Patent and Trademark
Office requesting reexamination of the Nicomide patent. We have notified the
Patent Office that we do not object to the reexamination process and we expect
the Patent Office to notify the parties about its decision to accept or deny the
patent reexamination process shortly.

On April 20, 2006, we filed a patent infringement suit in the United States
District Court in Trenton, New Jersey alleging that a River's Edge niacinamide
product infringes U.S. patent 6,979,468, and on April 26, 2006 we filed a Motion
to Dismiss the Georgia action. In response to a motion put forward with the
filing by us, the New Jersey court granted an expedited hearing date of May 5,
2006 in order to hear arguments on a motion for preliminary


                                       34

<PAGE>

injunction to enjoin River's Edge from selling its alternative product to
Nicomide(R). On May 12, 2006, the New Jersey court granted our motion and
entered an order for preliminary injunction, which was effective May 15, 2006,
enjoining River's Edge from selling its niacinamide formula drug as a generic
substitute for Nicomide(R). We have posted $750,000 in lieu of a performance
bond with the Court which bears interest. On June 19, 2006, the Georgia court
dismissed River's Edge complaint. The parties are in the discovery stage of the
New Jersey litigation, however, on July 28, 2006 we filed a motion to stay this
litigation in light of River' Edge's pending request for reexamination of the
Nicomide patent. An unfavorable ruling in the Patent Office or in the New Jersey
litigation with respect to the validity of the Nicomide patent would allow
generic manufacturers to compete directly with us and could have a material
impact on the Company's revenues, results of operations and liquidity.


                                       35

<PAGE>

ITEM 1A. RISK FACTORS.

A description of the risk factors associated with our business is set forth
below. This description includes any material changes to and supersedes the
description of the risk factors associated with our business previously
disclosed in Item 1.A. of our 2005 Annual Report on Form 10-K for the year ended
December 31, 2005.

You should carefully consider and evaluate all of the information in, or
incorporated by reference in, this Current Report on Form 10-Q. The following
are among the risks we face related to our business, assets and operations. They
are not the only ones we face. Any of these risks could materially and adversely
affect our business, results of operations and financial condition, which in
turn could materially and adversely affect the value of the securities being
offered by this report.

This section of the Quarterly Report on Form 10-Q contains forward-looking
statements of our plans, objectives, expectations and intentions. We use words
such as "anticipate," "believe," "expect," future" and "intend" and similar
expressions to identify forward-looking statements. Our actual results could
differ materially from those anticipated in these forward-looking statements for
many reasons, including the risks factors described below and elsewhere in this
report. You should not place undue reliance on these forward-looking statements,
which apply only as of the date of this report.

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 are unable to successfully market and sell sufficient quantities of
our products, revenues from product sales will be lower than anticipated and our
financial condition may be adversely affected. We are responsible for marketing
our dermatology products in the United States and the rest of the world, except
Canada, and Mexico and Central and South America, where we have distributors. We
are doing so without the experience of having marketed pharmaceutical products
prior to 2000. In October 2003, DUSA began hiring a small direct sales force and
we increased the size of our sales force to market our products in the United
States. In addition, our sales personnel have only recently begun to sell and
market the Sirius products. If our sales and marketing efforts fail, then sales
of the Kerastick(R), the BLU-U(R) and the Sirius Products -- Nicomide(R),
Nicomide-T(R), the AVAR(R) line of products, METED(R), Psoriacap(R) and
Psoriatec(R) will be adversely affected.

IF WE CANNOT IMPROVE PHYSICIAN REIMBURSEMENT AND/OR CONVINCE MORE PRIVATE
INSURANCE CARRIERS TO ADEQUATELY REIMBURSE PHYSICIANS FOR OUR PRODUCT SALES MAY
SUFFER.

     Without adequate levels of reimbursement by government health care programs
and private health insurers, the market for our Levulan(R) Kerastick(R) for AK
therapy will be limited. While we continue to support efforts to improve
reimbursement levels to physicians and are working with the major private
insurance carriers to improve coverage for our therapy, if our efforts are not
successful, adoption of our therapy and sales of our products could be
negatively impacted. Although 2005 reimbursement changes related to AK were
made, some physicians still believe that reimbursement levels do not fully
reflect the required efforts to routinely execute our therapy in their
practices.

     If insurance companies do not cover, or stop covering products which are
currently covered, our sales could be dramatically reduced.

SINCE WE NOW OPERATE THE ONLY FDA APPROVED MANUFACTURING FACILITY FOR THE
KERASTICK(R) AND CONTINUE TO RELY HEAVILY ON SOLE SUPPLIERS FOR THE MANUFACTURE
OF LEVULAN(R), THE BLU-U(R) AND THE SIRIUS PRODUCTS -- NICOMIDE(R),
NICOMIDE-T(R), THE AVAR(R) LINE OF PRODUCTS, METED(R), PSORIACAP(R) AND
PSORIATEC(R), ANY SUPPLY OR MANUFACTURING PROBLEMS COULD NEGATIVELY IMPACT OUR
SALES.

     If we experience problems producing Kerastick(R) units in our facility, or
if any of our contract suppliers fail to supply our requirements for products,
our business, financial condition and results of operations would suffer.
Although we have received approval by the FDA to manufacture the BLU-U(R) and
the Kerastick(R) in our Wilmington, Massachusetts facility, at this time with
respect to the BLU-U, we expect to utilize our own facility only as a back-up to
our current third party manufacturer or for repairs.


                                       36

<PAGE>

     We are working with the supplier of the AVAR(R) line of products to address
certain manufacturing concerns. We now expect that inventory of some of these
products will be temporarily depleted for a few months while such concerns are
being addressed and could negatively affect revenues from these products which
accounted for approximately 3% of revenues for the quarter ended June 30, 2006.

     Manufacturers and their subcontractors often encounter difficulties when
commercial quantities of products are manufactured for the first time, or large
quantities of new products are manufactured, including problems involving:

     -    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 cannot guarantee that problems will not arise with production yields,
costs or quality as we and our suppliers seek to increase production. Any
manufacturing problems could delay or limit our supplies which would hinder our
marketing and sales efforts.

     If our facility, any facility of our contract manufacturers, or any
equipment in those facilities is damaged or destroyed, we may not be able to
quickly or inexpensively replace it. Likewise, if there are any quality or
supply problems with any components or materials needed to manufacturer our
products, we may not be able to quickly remedy the problem(s). Any of these
problems could cause our sales to suffer.

ANY FAILURE TO COMPLY WITH ONGOING GOVERNMENTAL REGULATIONS IN THE UNITED STATES
AND ELSEWHERE WILL LIMIT OUR ABILITY TO MARKET OUR PRODUCTS.

     The manufacture and marketing of our products, the Levulan(R) Kerastick(R)
with the BLU-U(R) for AKs, the BLU-U(R) without Levulan(R) to treat moderate
inflammatory acne and the Sirius products -- Nicomide(R), Nicomide-T(R), the
AVAR(R) line of products, METED(R), Psoriacap(R) and Psoriatec(R), are subject
to continuing FDA review as well as comprehensive regulation by the FDA and by
state and local regulatory authorities. These laws require, among other things:

     -    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.

     If we, or any of our contract manufacturers, fail to comply with these
requirements, we may be limited in the jurisdictions in which we are permitted
to sell our products. Additionally, if we or our manufacturers fail to comply
with applicable regulatory approval requirements, a regulatory agency may also:

     -    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,


                                       37

<PAGE>

     -    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.

     We and our manufacturers must continue to comply with the FDA's Good
Manufacturing Practice, commonly known as cGMP, and Quality System Regulation,
or QSR, and equivalent foreign regulatory requirements. The cGMP requirements
govern quality control and documentation policies and procedures. In complying
with cGMP and foreign regulatory requirements, we and our third-party
manufacturers will be obligated to expend time, money and effort in production,
record keeping and quality control to assure that our products meet applicable
specifications and other requirements.

     As part of our FDA approval for the Levulan(R) Kerastick(R) for AK, we were
required to conduct two Phase IV follow-up studies. We successfully completed
the first study; and submitted our final report on the second study to the FDA
in January 2004. The FDA could request additional information and/or studies.
Additionally, if previously unknown problems with the product, a manufacturer or
its facility are discovered in the future, changes in product labeling
restrictions or withdrawal of the product from the market may occur.

     Manufacturing facilities are subject to ongoing periodic inspection by the
FDA, including unannounced inspections. We cannot guarantee that our third-party
supply sources, or our own Kerastick(R) facility, will continue to meet all
applicable FDA regulations. If we, or any of our manufacturers, including
without limitation, the manufacture of the AVAR(R) products, fail to maintain
compliance with FDA regulatory requirements, it would be time consuming and
costly to remedy the problem(s) or to qualify other sources. These consequences
could have an adverse effect on our financial condition and operations.

     Certain of the Sirius products acquired in connection with the merger must
meet certain minimum manufacturing and labeling standards established by the FDA
and applicable to products marketed without approved marketing applications. FDA
regulates such products under its marketed unapproved drugs compliance policy
guide entitled, "Marketed New Drugs without Approved NDAs or ANDAs." Under this
policy, FDA recognizes that certain unapproved products, based on the
introduction date of their active ingredients and the lack of safety concerns,
have been marketed for many years and, at this time, will not be the subject of
any enforcement action. We believe that so long as we comply with applicable
manufacturing and labeling standards we will be consistent with FDA's current
enforcement policy. There can be no assurance that the FDA will continue this
policy or not take a contrary position with any individual products. If the FDA
were to do so, we may be required to seek FDA approval for these products,
market these products as over-the-counter products or as dietary supplements
under applicable legislation, or withdraw such products from the market.

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.

     If we do not generate sufficient revenues from our approved products, we
may be forced to delay or abandon some or all of our product development
programs. The pharmaceutical development and commercialization process is time
consuming and costly, and any delays might result in higher costs which could
adversely affect our financial condition. Without sufficient product sales, we
might be required to seek additional funding. There is no guarantee that
adequate funding sources could be found to continue the development of all our
potential products. We might be required to commit substantially greater capital
than we have available to research and development of such products and we may
not have sufficient funds to complete all or any of our development programs.

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.

     Our ability to commercialize any products that we may develop will be
highly dependent upon the extent to which these products gain market acceptance
among physicians, patients, health care payors, such as Medicare and


                                       38

<PAGE>

Medicaid, private health insurers, including managed care organizations and
group purchasing organizations, and the medical community. If these products do
not achieve an adequate level of acceptance, we may not generate material
product revenues, and we may not become profitable. The degree of market
acceptance of our product candidates, if approved for commercial sale, will
depend on a number of factors, including:

     -    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.

WE HAVE SIGNIFICANT LOSSES AND ANTICIPATE CONTINUED LOSSES

     We have a history of operating losses. We expect to have continued losses
until sales of our products increase substantially. We incurred net losses of
$4,640,309 for the quarter ended March 31, 2006. We incurred net losses of
$14,998,709 for the year ended December 31, 2005 and $15,628,980 for the year
ended December 31, 2004. As of June 30, 2006, our accumulated deficit was
approximately $98,832,000. We cannot predict whether any of our products will
achieve significant enough market acceptance or generate sufficient revenues to
enable us to become profitable.

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.

     Our ability to compete successfully depends, in part, on our ability to
defend patents that have issued, obtain new patents, protect trade secrets and
operate without infringing the proprietary rights of others. We have no compound
patent protection for our Levulan(R) brand of the compound ALA. Our basic ALA
patents are for methods of detecting and treating various diseased tissues using
ALA (or related compounds called precursors), in combination with light. We own
or exclusively license ALA patents and patent applications related to the
following:

     -    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.

     We have limited ALA patent protection outside the United States, which may
make it easier for third-parties to compete there. Our basic method of treatment
patents and applications have counterparts in only six foreign countries, and
certain countries under the European Patent Convention. Even where we have
patent protection, there is no guarantee that we will be able to enforce our
patents. Additionally, enforcement of a given patent may not be practicable or
an economically viable alternative.

     Some of the indications for which we are developing therapies may not be
covered by the claims in any of our existing patents. Even with the issuance of
additional patents to DUSA, other parties are free to develop other uses of ALA,
including medical uses, and to market ALA for such uses, assuming that they have
obtained appropriate regulatory marketing approvals. ALA in the chemical form
has been commercially supplied for decades, and is not itself subject to patent
protection. There are reports of third-parties conducting clinical studies with
ALA in countries outside the United States where PARTEQ, the licensor of our ALA
patents, does not have patent


                                       39

<PAGE>

protection. In addition, a number of third-parties are seeking patents for uses
of ALA not covered by our patents. These other uses, whether patented or not,
and the commercial availability of ALA, could limit the scope of our future
operations because ALA products could come on the market which would not
infringe our patents but would compete with our Levulan(R) products even though
they are marketed for different uses.

     While we attempt to protect our proprietary information as trade secrets
through agreements with each employee, licensing partner, consultant,
university, pharmaceutical company and agent, we cannot guarantee that these
agreements will provide effective protection for our proprietary information. It
is possible that:

     -    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.

     Nicomide is covered by a U.S. patent which issued in December 2005. River's
Edge Pharmaceuticals LLC has filed an application with the U.S. Patent and
Trademark Office for the reexamination of the patent. If the USPTO finds that
the patent is invalid, River's Edge and other generics will be able to compete
with Nicomide. Recently two new products have been launched that could compete
with Nicomide(R).

     PATENT LITIGATION IS EXPENSIVE, AND WE MAY NOT BE ABLE TO AFFORD THE COSTS.

     The costs of litigation or any proceeding relating to our intellectual
property rights could be substantial even if resolved in our favor. Some of our
competitors have far greater resources than we do and may be better able to
afford the costs of complex patent litigation. For example, third-parties may
infringe one or more of our patents, and we are spending significant resources
to enforce our patent rights. Also, in a lawsuit against a third-party for
infringement of our patents in the United States, that third-party has
challenged the validity of our patent(s). We cannot guarantee that a third-party
will not claim, with or without merit, that we have infringed their patent(s) or
misappropriated their proprietary material. Defending this type of legal action
involves considerable expense and could negatively affect our financial results.

     Additionally, if a third-party were to file a United States patent
application in the United States, or be issued a patent claiming technology also
claimed by us in a pending United States application(s), we may be required to
participate in interference proceedings in the United States Patent and
Trademark Office to determine the priority of the invention. A third-party could
also request the declaration of a patent interference between one of our issued
United States patents and one of its patent applications. Any interference
proceedings likely would require participation by us and/or PARTEQ, could
involve substantial legal fees and result in a loss or lessening of our patent
protection.


                                       40
<PAGE>

     On March 28, 2006, a lawsuit was filed by River's Edge Pharmaceuticals, LLC
against us alleging, among other things, that, prior to the merger, Sirius
Laboratories, Inc. agreed to authorize River's Edge to market a generic version
of Nicomide(R), and that the United States patent covering Nicomide(R) issued to
Sirius in December, 2005 is invalid. The declaratory judgment suit was filed in
the United States District Court for the Northern District of Georgia,
Gainesville Division which has been dismissed. Nicomide is one of the key
products DUSA acquired from Sirius in its merger. On April 20, 2006, we filed a
patent infringement suit in the United States District Court in Trenton, New
Jersey alleging that a River's Edge niacinamide product infringes U.S. Patent
No. 6,979,468, the patent that covers Nicomide(R). On May 12, 2006, the United
States District Court issued a preliminary injunction against River's Edge
enjoining River's Edge from selling its niacinamide formula drug as a generic
substitute for Nicomide(R). However, if we do not ultimately prevail in our
lawsuit, or the Nicomide(R) patent is found to be invalid, our revenues from
sales of Nicomide(R) could decrease significantly.

     During 2005 and 2006, we filed several lawsuits against a chemical
supplier, compounding pharmacies and physicians alleging violations of patent
law. While we have been successful in obtaining a default judgment against one
compounding pharmacy, settled another suit, and have obtained consent judgments
from several physicians, we do not know whether these lawsuits will prevent
others from infringing our patents or whether we will be successful in stopping
these activities which we believe are negatively affecting our revenues.

     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.

EXCEPT FOR THE LEVULAN(R) KERASTICK(R) WITH THE BLU-U(R) TO TREAT AKS, THE USE
OF THE BLU-U(R) ALONE TO TREAT MODERATE INFLAMMATORY ACNE, AND THE SIRIUS
PRODUCTS -- NICOMIDE(R), NICOMIDE-T(R), THE AVAR(R) LINE OF PRODUCTS, METED(R),
PSORIACAP(R) AND PSORIATEC(R), ALL OF OUR POTENTIAL PRODUCTS ARE IN EARLY STAGES
OF DEVELOPMENT AND MAY NEVER RESULT IN ANY COMMERCIALLY SUCCESSFUL PRODUCTS.

     We do not know if the Levulan(R) Kerastick(R), the BLU-U(R) products will
ever be commercially successful. To be profitable, we must successfully
research, develop, obtain regulatory approval for, manufacture, introduce,
market and distribute our products. Except for Levulan(R) PDT for AKs, the
BLU-U(R) for acne and the currently marketed Sirius products, all of our other
potential Levulan(R) and other potential product candidates which we acquired in
our merger with Sirius, are at an early stage of development and subject to the
risks of failure inherent in the development of new pharmaceutical products and
products based on new technologies. These risks include:

     -    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 cannot predict how long the development of our investigational stage
products will take or whether they will be medically effective. We cannot be
sure that a successful market will continue to develop for our Levulan(R) drug
technology.

WE MUST RECEIVE SEPARATE APPROVAL FOR EACH OF OUR POTENTIAL PRODUCTS BEFORE WE
CAN SELL THEM COMMERCIALLY IN THE UNITED STATES OR ABROAD.

     All of our potential Levulan(R) products will require the approval of the
FDA before they can be marketed in the United States. If we fail to obtain the
required approvals for these products our revenues will be limited. Before an
application to the FDA seeking approval to market a new drug, called an NDA, can
be filed, a product must undergo, among other things, extensive animal testing
and human clinical trials. The process of obtaining FDA approvals can be
lengthy, costly, and time-consuming. Following the acceptance of an NDA, the
time required for regulatory approval can vary and is usually 1 to 3 years or
more. The FDA may require additional animal studies and/or human clinical trials
before granting approval. Our Levulan(R) PDT products are based on relatively
new technology. To the best of our knowledge, the FDA has approved only 3 drugs
for use in photodynamic therapy,


                                       41

<PAGE>

including Levulan(R). This factor may lengthen the approval process. We face
much trial and error and we may fail at numerous stages along the way.

     We cannot predict whether we will obtain approval for any of our potential
products. Data obtained from preclinical testing and clinical trials can be
susceptible to varying interpretations which could delay, limit or prevent
regulatory approvals. Future clinical trials may not show that Levulan(R) PDT or
photodetection, known as PD, is safe and effective for any new use we are
studying. In addition, delays or disapprovals may be encountered based upon
additional governmental regulation resulting from future legislation or
administrative action or changes in FDA policy. During September 2005, the FDA
issued guidance for the pharmaceutical industry regarding the development of new
drugs for acne vulgaris treatment. We are developing Levulan(R) PDT for acne. As
a result, it is likely that the costs and time to approval associated with
seeking regulatory approval of this indication will be increased. The FDA may
issue additional guidance in the future, which may result on additional costs
and delays. We must also obtain foreign regulatory clearances before we can
market any potential products in foreign markets. The foreign regulatory
approval process includes all of the risks associated with obtaining FDA
marketing approval and may impose substantial additional costs.

     Certain of the Sirius products acquired in connection with our merger must
meet certain minimum manufacturing and labeling standards established by the FDA
and applicable to products marketed without approved marketing applications. FDA
regulates such products under its marketed unapproved drugs compliance policy
guide entitled, "Marketed New Drugs without Approved NDAs or ANDAs." Under this
policy, FDA recognizes that certain unapproved products, based on the
introduction date of their active ingredients and the lack of safety concerns,
have been marketed for many years and, at this time, will not be the subject of
any enforcement action. We believe that so long as we comply with applicable
manufacturing and labeling standards we will be consistent with FDA's current
enforcement policy. There can be no assurance that the FDA will continue this
policy or not take a contrary position with any individual products. If the FDA
were to do so, we may be required to seek FDA approval for these products,
market these products as over-the-counter products or as dietary supplements
under applicable legislation, or withdraw such products from the market.

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 our current sales goals for our products may not be met in the
future, we may need substantial additional funds to fully develop, manufacture,
market and sell our other potential products. We may obtain funds through other
public or private financings, including equity financing, and/or through
collaborative arrangements. We cannot predict whether any financing will be
available at all or on acceptable terms.

     Dependent on the extent of available funding, we may delay, reduce in scope
or eliminate some of our research and development programs. We may also choose
to license rights to third parties to commercialize products or technologies
that we would otherwise have attempted to develop and commercialize on our own
which could reduce our potential revenues.

WE ARE EXPOSED TO RISKS ASSOCIATED WITH ACQUISITIONS.

     On March 10, 2006, we acquired Sirius Laboratories, Inc. We may in the
future make other acquisitions of, or significant investments in, businesses
with complementary products, services and/or technologies. Acquisitions involve
numerous risks, including, but not limited to:

     -    difficulties and increased costs in connection with integration of the
          personnel, operations, technologies and products of acquired
          companies;

     -    diversion of management's attention from other operational matters;

     -    the potential loss of key employees;

     -    the potential loss of key collaborators;

     -    lack of synergy, or the inability to realize expected synergies,
          resulting from the acquisition;

     -    acquired intangible assets becoming impaired as a result of
          technological advancements or worse-than-expected performance of the
          acquired company;


                                       42

<PAGE>

     -    the potential for unexpected liabilities; and

     -    use of cash which could be difficult to replace on reasonable terms.

     Mergers and acquisitions are inherently risky, and the inability to
effectively manage these risks could materially and adversely affect our
business, financial condition and results of operations. In addition, there may
be liabilities that we fail, or are unable, to discover in the course of
performing due diligence investigations on any company that we may acquire, or
have recently acquired. Also, there may be additional costs relating to
acquisitions including, but not limited to, possible purchase price adjustments.
Any of our rights to indemnification from sellers to us, even if obtained, may
not be enforceable, collectible or sufficient in amount, scope or duration to
fully offset the possible liabilities associated with the business or property
acquired. Any such liabilities, individually or in the aggregate, could have a
material adverse effect on our business.

     The merger between DUSA and Sirius may be more difficult, costly or time
consuming than expected, and we may not be able to successfully integrate our
business with Sirius' business.

     Upon completion of our merger with Sirius, we began to integrate our
operations with those of Sirius. Although we have not experienced significant
difficulties to date, as the integration process continues, it is possible that
we may face difficulties which may result in, among other things, disruptions in
our ongoing operations. For example, we may experience differences in the two
companies' business procedures, controls or personnel policies, and there could
be problems that affect our ongoing relationships with our customers or that
affect our ability to realize all anticipated benefits of the merger. Some of
these difficulties include, without limitation, the loss of key employees and
customers, the disruption of ongoing business relationships, and possible
inconsistencies in standards, controls, procedures and policies. The success of
our merger with Sirius depends on our ability to successfully merge corporate
cultures and operational and financial systems, integrate and retain the
customer base of the acquired business, realize cost reduction synergies; and as
necessary, retain key management members and technical personnel of acquired
companies. If we fail to integrate Sirius' business and operations successfully,
that failure could have a material adverse effect on our business.

BECAUSE OF THE NATURE OF OUR BUSINESS, THE LOSS OF KEY MEMBERS OF OUR MANAGEMENT
TEAM COULD DELAY ACHIEVEMENT OF OUR GOALS.

     We are a small company with only 87 employees, including 2 part-time
employees as of June 30, 2006. We are highly dependent on several key
officer/employees with specialized scientific and technical skills without whom
our business, financial condition and results of operations would suffer,
especially in the photodynamic therapy portion of our business. The photodynamic
therapy industry is still quite small and the number of experts is limited. The
loss of these key employees could cause significant delays in achievement of our
business and research goals since very few people with their expertise could be
hired. Our growth and future success will depend, in large part, on the
continued contributions of these key individuals as well as our ability to
motivate and retain other qualified personnel in our specialty drug and light
device areas.

OUR COLLABORATIONS WITH OUTSIDE SCIENTISTS MAY BE SUBJECT TO RESTRICTION AND
CHANGE.

     We work with scientific and clinical advisors and collaborators at academic
and other institutions that assist us in our research and development efforts.
These scientists and advisors are not our employees and may have other
commitments that limit their availability to us. Although our advisors and
collaborators generally agree not to do competing work, if a conflict of
interest between their work for us and their work for another entity arises, we
may lose their services. In addition, although our advisors and collaborators
sign agreements not to disclose our confidential information, it is possible
that valuable proprietary knowledge may become publicly known through them.

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.


                                       43

<PAGE>

     The development, manufacture and sale of medical products exposes us to
product liability claims related to the use or misuse of our products. Product
liability claims can be expensive to defend and may result in significant
judgments against us. A successful claim in excess of our insurance coverage
could materially harm our business, financial condition and results of
operations. Additionally, we cannot guarantee that continued product liability
insurance coverage will be available in the future at acceptable costs. If the
cost is too high, we may have to self-insure.

OUR BUSINESS INVOLVES ENVIRONMENTAL RISKS AND WE MAY INCUR SIGNIFICANT COSTS
COMPLYING WITH ENVIRONMENTAL LAWS AND REGULATIONS.

     We have used various hazardous materials, such as mercury in fluorescent
tubes in our research and development activities. We are subject to federal,
state and local laws and regulations which govern the use, manufacture, storage,
handling and disposal of hazardous materials and specific waste products. Now
that we have established our own production line for the manufacture of the
Kerastick(R), we are subject to additional environmental laws and regulations.
We believe that we are in compliance in all material respects with currently
applicable environmental laws and regulations. However, we cannot guarantee that
we will not incur significant costs to comply with environmental laws and
regulations in the future. We also cannot guarantee that current or future
environmental laws or regulations will not materially adversely affect our
operations, business or assets. In addition, although we believe our safety
procedures for handling and disposing of these materials comply with federal,
state and local laws and regulations, we cannot completely eliminate the risk of
accidental contamination or injury from these materials. In the event of such an
accident, we could be held liable for any resulting damages, and this liability
could exceed our resources.

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.

     Well-known pharmaceutical, biotechnology and medical device companies are
marketing well-established therapies for the treatment of many of the same
conditions that we are seeking to treat, including AKs, acne, rosacea,
photodamaged skin and Barrett's esophagus. Doctors may prefer to use familiar
methods, rather than trying our products. Reimbursement issues affect the
economic competitiveness of our products as compared to other more traditional
therapies.

     Many companies are also seeking to develop new products and technologies,
and receiving approval for medical conditions for which we are developing
treatments. Our industry is subject to rapid, unpredictable and significant
technological change. Competition is intense. Our competitors may succeed in
developing products that are safer or more effective than ours. Many of our
competitors have substantially greater financial, technical and marketing
resources than we have. In addition, several of these companies have
significantly greater experience than we do in developing products, conducting
preclinical and clinical testing and obtaining regulatory approvals to market
products for health care.

     We cannot guarantee that new drugs or future developments in drug
technologies will not have a material adverse effect on our business. Increased
competition could result in:

     -    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.

     On May 30, 2006, we entered into a patent license agreement with PhotoCure
ASA whereby DUSA granted a non-exclusive license to PhotoCure under the patents
DUSA licenses from PARTEQ, the licensing arm of Queens University, Kingston,
Ontario Canada for esters of aminolevulinic acid ("ALA"). ALA is the active


                                       44

<PAGE>

ingredient in DUSA's Levulan(R) products. Furthermore, DUSA granted a
non-exclusive license to PhotoCure for its existing formulations of its
Hexvix(R) and Metvix(R) (known in the United States as Metvixia(R)) products for
any DUSA patents that may issue or be licensed by DUSA in the future. PhotoCure
received FDA approval to market Metvixia for treatment of AKs in July 2004 and
it would be directly competitive with our Levulan Kerastick product should
PhotoCure decide to begin marketing this product. While we are entitled to
royalties from PhotoCure on its net sales of Metvixia, this product may
adversely affect our ability to maintain or increase our market.

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.

     We are aware that there are compounding pharmacies that market compounded
versions of aminolevulinic acid HCl as an alternative to our Levulan(R) product.
On January 31, 2005, we filed a lawsuit in the United States District Court for
the District of Arizona against The Cosmetic Pharmacy of Tucson, Arizona
alleging violations of the Lanham Act for false advertising and trademark
infringement and of United States patent law. A motion for default judgment was
granted on July 25, 2005 in our favor for failure of The Cosmetic Pharmacy of
Tucson to appear, together with injunctive relief and attorney fees and costs in
the amount of approximately $20,700. On December 27, 2004, we filed a lawsuit in
United States District Court for the District of Massachusetts against New
England Compounding Pharmacy, Inc. of Framingham, Massachusetts alleging
violations of United States patent law which has now settled. More recently, we
have sued a chemical supplier, Spectrum Pharmacy Products, in United States
District Court for the District of Arizona alleging that it induces physicians
to infringe patents licensed to us, among other things. While we believe that
certain actions of compounding pharmacies and others go beyond the activities
which are permitted under the Food, Drug and Cosmetic Act and have advised the
FDA and local health authorities of our concerns, we cannot be certain that our
lawsuits will be successful in curbing the practices of these companies or that
regulatory authorities will intervene to stop their activities. In addition,
there may be other compounding pharmacies which are following FDA guidelines, or
others conducting illegal activities of which we are not aware, which may be
negatively impacting our sales revenues.

     We also learned that River's Edge was marketing an alternative niacinamide
product and we filed a lawsuit against them alleging that the River's Edge
product infringes our patent. On May 12, 2006, the United States District Court
in Trenton, New Jersey, issued a preliminary injunction against River's Edge
enjoining River's Edge from selling its niacinamide formula drug as a generic
substitute for Nicomide(R).

     If generic manufacturers launch products to compete with Nicomide in spite
of our patent position, or if a court or the United States Patent and Trademark
Office determine that our patent is invalid, these manufacturers may erode our
market and negatively impact our sales revenues, liquidity and operations.

OUR COMPETITORS IN THE BIOTECHNOLOGY AND PHARMACEUTICAL INDUSTRIES MAY HAVE
BETTER PRODUCTS, MANUFACTURING CAPABILITIES OR MARKETING EXPERTISE.

     We anticipate that we will face increased competition as the scientific
development of PDT and PD advances and new companies enter our markets. Several
companies are developing PDT agents other than Levulan(R). These include: QLT
Inc. (Canada); Axcan Pharma Inc. (U.S.); Miravant, Inc. (U.S.); and
Pharmacyclics, Inc. (U.S.). We are also aware of several companies
commercializing and/or conducting research with ALA or ALA-related compounds,
including: medac GmbH and photonamic GmbH & Co. KG (Germany); PhotoTherapeutics,
Inc. (U.K.) and PhotoCure ASA (Norway) which entered into a marketing agreement
with Galderma S.A. for countries outside of Nordic countries for certain
dermatology indications. There are many pharmaceutical companies that compete
with us in the field of dermatology, particularly in the acne and rosacea
markets.

     PhotoCure has received marketing approval of its ALA precursor (ALA
methyl-ester) compound for PDT treatment of AKs and basal cell carcinoma in the
European Union, New Zealand, Australia and countries in Scandinavia. We believe
that PhotoCure's marketing partner will begin to market its product in direct
competition with Levulan(R) in the U.S. under the terms of our recently entered
patent license agreement and we may lose market share.


                                       45

<PAGE>

     Axcan Pharma Inc. has received FDA approval for the use of its product,
PHOTOFRIN(R), for PDT in the treatment of high grade dysplasia associated with
Barrett's esophagus. Axcan is the first company to market a PDT therapy for this
indication, which we are also pursuing.

     We expect that our principal methods of competition with other PDT
companies will be based upon such factors as:

     -    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.

     Our primary competition in the acne and rosacea markets include oral and
topical antibiotics, other topical prescription and over-the-counter products,
as well as various laser and non-laser light treatments. The market is highly
competitive and other large and small companies have more experience than we do
which could make it difficult for us to penetrate the market. We are also aware
of new products that were launched recently which will compete with Nicomide(R)
and the AVAR(R) line of products which could negatively impact our market share.

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.

     As of June 30, 2006 there were outstanding options and warrants to purchase
3,181,438 shares of common stock, with exercise prices ranging from U.S. $1.60
to $31.00 per share, and of CDN $6.79 per share, respectively. The holders of
the options and warrants have the opportunity to profit if the market price for
the common stock exceeds the exercise price of their respective securities,
without assuming the risk of ownership. The holders are likely to exercise their
securities when we would probably be able to raise capital from the public on
terms more favorable than those provided in these securities.

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.

     The price of our common stock has been highly volatile. These fluctuations
create a greater risk of capital losses for our shareholders as compared to less
volatile stocks. From January 1, 2005 to August 7, 2006, the price of our stock
has ranged from a low of $3.87 to a high of $16.30. Factors that contributed to
the volatility of our stock during this period included:

     -    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.


     The significant general market volatility in similar stage pharmaceutical
and biotechnology companies made the market price of our common stock even more
volatile.


                                       46

<PAGE>

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.

     The price of our common stock may be affected by the amount of quarterly
shipments of our products to end-users. Since our PDT products are still in the
early stages of adoption, and sales volumes are still low, a number of factors
could affect product sales levels and growth rates in any period. These could
include the timing of medical conferences, sales promotion activities, and large
volume purchases by our higher usage customers. In addition, seasonal
fluctuations in the number of patients seeking treatment at various times during
the year could impact sales volumes. These factors could, in turn, affect 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.

     Our certificate of incorporation authorizes the board of directors to issue
up to 100,000,000 shares of stock, 40,000,000 of which are common stock. The
board of directors has the authority to determine the price, rights, preferences
and privileges, including voting rights, of the remaining 60,000,000 shares
without any further vote or action by the shareholders. The rights of the
holders of our common stock will be subject to, and may be adversely affected
by, the rights of the holders of any preferred stock that may be issued in the
future.

     On September 27, 2002, we adopted a shareholder rights plan at a special
meeting of DUSA's board of directors. The rights plan could discourage, delay or
prevent a person or group from acquiring 15% or more (or 20% or more in the case
of certain parties) of our common stock, thereby limiting, perhaps, the ability
of our shareholders to benefit from such a transaction.

     The rights plan provides for the distribution of one right as a dividend
for each outstanding share of our common stock to holders of record as of
October 10, 2002. Each right entitles the registered holder to purchase one
one-thousandths of a share of preferred stock at an exercise price of $37.00 per
right. The rights will be exercisable subsequent to the date that a person or
group either has acquired, obtained the right to acquire, or commences or
discloses an intention to commence a tender offer to acquire, 15% or more of our
outstanding common stock (or 20% of the outstanding common stock in the case of
a shareholder or group who beneficially held in excess of 15% at the record
date), or if a person or group is declared an "Adverse Person", as such term is
defined in the rights plan. The rights may be redeemed by DUSA at a redemption
price of one one-hundredth of a cent per right until ten days following the date
the person or group acquires, or discloses an intention to acquire, 15% or 20%
or more, as the case may be, of DUSA, or until such later date as may be
determined by the our board of directors.

     Under the rights plan, if a person or group acquires the threshold amount
of common stock, all holders of rights (other than the acquiring person or
group) may, upon payment of the purchase price then in effect, purchase shares
of common stock of DUSA having a value of twice the purchase price. In the event
that we are involved in a merger or other similar transaction where DUSA is not
the surviving corporation, all holders of rights (other than the acquiring
person or group) shall be entitled, upon payment of the purchase price then in
effect, to purchase common stock of the surviving corporation having a value of
twice the purchase price. The rights will expire on October 10, 2012, unless
previously redeemed. Our board of directors has also adopted certain amendments
to DUSA's certificate of incorporation consistent with the terms of the rights
plan.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.


                                       47

<PAGE>

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

Matters submitted to a vote of security holders of the Corporation at the Annual
Meeting of Shareholders held June 15, 2006 included the election of eight (8)
directors, and the ratification of the selection of Deloitte & Touche LLP as the
independent registered public accounting firm for the Corporation for 2006.

The following persons were elected to serve as directors of the Corporation:

<TABLE>
<CAPTION>
                                       Votes Cast                 Broker
                      Votes Cast For     Against    Abstained   Non-votes
                      --------------   ----------   ---------   ---------
<S>                   <C>              <C>          <C>         <C>
D. Geoffrey Shulman     14,513,075      2,310,286      -0-         -0-
John H. Abeles          14,531,329      2,292,032      -0-         -0-
David Bartash           12,117,801      4,705,560      -0-         -0-
Jay Haft                12,117,182      4,706,179      -0-         -0-
Richard C. Lufkin       14,532,106      2,291,255      -0-         -0-
Magnus Moliteus         12,117,351      4,706,010      -0-         -0-
Neal Penneys            16,754,185         69,176      -0-         -0-
Robert Doman            14,512,519      2,310,842      -0-         -0-
</TABLE>

b)   Shareholders ratified the selection of Deloitte & Touche LLP as the
     independent registered public accounting firm for the Corporation for 2006
     as follows:

<TABLE>
<CAPTION>
                                         Votes Cast                 Broker
                        Votes Cast For     Against    Abstained   Non-votes
                        --------------   ----------   ---------   ---------
<S>                     <C>              <C>          <C>         <C>
Deloitte & Touche LLP     16,324,811       32,493      466,057       -0-
</TABLE>

c)   Shareholders approved the 2006 Equity Plan as follows:

<TABLE>
<CAPTION>
                                         Votes Cast                 Broker
                        Votes Cast For     Against    Abstained   Non-votes
                        --------------   ----------   ---------   ---------
<S>                     <C>              <C>          <C>         <C>
2006 Equity
   Compensation Plan       7,783,043      5,025,706     52,798    3,961,814
</TABLE>

ITEM 5. OTHER INFORMATION.

None.


                                       48

<PAGE>

ITEM 6. EXHIBITS

10(a)   Patent License Agreement between the Company and PhotoCure ASA, dated
        May 30,2006, portions of which have been omitted pursuant to a request
        for confidential treatment under Rule 24(b)-2 of the Securities Exchange
        Act of 1934, as amended.

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; and

32(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.

99(a)   Press Release of the Company dated August 8, 2006.


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<PAGE>

                                   SIGNATURES

Pursuant to the requirements 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.

                                        DUSA PHARMACEUTICALS, INC.


Date: August 8, 2006                    By: /s/ D. Geoffrey Shulman
                                            ------------------------------------
                                            D. Geoffrey Shulman
                                            Director, Chairman and Chief
                                            Executive Officer
                                            (principal executive officer)


Date: August 8, 2006                    By: /s/ Richard C. Christopher
                                            ------------------------------------
                                            Richard C. Christopher
                                            Vice President, Finance and Chief
                                            Financial Officer (principal
                                            financial officer)


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<PAGE>

                                  EXHIBIT INDEX

10(a)   Patent License Agreement between the Company and PhotoCure ASA, dated
        May 30,2006, portions of which have been omitted pursuant to a request
        for confidential treatment under Rule 24(b)-2 of the Securities Exchange
        Act of 1934, as amended.

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; and

32(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.

99(a)   Press Release of the Company dated August 8, 2006.


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