10-K

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-K

                  FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
           SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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

     FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005

[ ]  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)

           NEW JERSEY                                   22-3103129
(State or other jurisdiction of                     (I.R.S. Employer
 Incorporation or organization)                    Identification No.)

25 Upton Drive, Wilmington, MA
                                                          01887
(Address of principal executive offices)                (Zip Code)

               REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
                                 (978) 657-7500

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
                                (TITLE OF CLASS)
                                      NONE

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                                (TITLE OF CLASS)
                           COMMON STOCK, NO PAR VALUE

      Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes [ ] No [X]

      Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act Yes [ ] No [X]

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

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

      Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer (as defined in Rule
12b-2 of the Act).

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 March 6, 2006, the registrant had 17,046,197 shares of Common Stock, no
par value, outstanding.

Based on the last reported sale price of the Company's common stock on the
NASDAQ National Market on June 30, 2005 ($9.30) (the last business day of the
registrant's most recently completed second fiscal quarter), the aggregate
market value of the voting stock held by non-affiliates of the registrant was
approximately $100,843,825.

                       DOCUMENTS INCORPORATED BY REFERENCE



                  Document Description                          10-K Part III
- --------------------------------------------------------    --------------------
                                                         
Portions of the Registrant's proxy statement to be filed    Items 10, 11, 12, 13
pursuant to Regulation 14A within 120 days after                   and 14
Registrant's fiscal year end of December 31, 2005 are
incorporated by reference into Part III of this report.




                                     PART I

      This Annual Report on Form 10-K 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. Such forward-looking statements are based on current expectations,
estimates and projections about DUSA's industry, management's beliefs and
certain assumptions made by our management. 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 those set forth herein under "Risk Factors" on
pages 26 through 38, 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 the Quarterly Reports
on Form 10-Q and any Current Reports on Form 8-K.

                                        2


ITEM 1. BUSINESS

GENERAL

      DUSA Pharmaceuticals, Inc. (referred to as "DUSA," "we," and "us") is a
pharmaceutical company engaged primarily in the research, development and
marketing of our first drug in combination with light devices to treat or detect
a variety of conditions in processes known as photodynamic therapy or
photodetection. 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.

      Our products, the 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.

      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 objectives include
increasing the sales of our approved products in the U.S. and Canada, continuing
our efforts of exploring partnership opportunities for Levulan(R) PDT for
dermatology in Europe and/or other countries outside of the U.S., Canada and
Latin America, and continuing our clinical development programs for our facial
photodamage and moderate to severe acne indications. In January 2006, we entered
into a marketing and distribution agreement with Stiefel Laboratories, Inc.
granting Stiefel an exclusive right to distribute the Levulan(R) Kerastick(R) in
Mexico, Central and South America.

      We have also 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. See sections entitled "Business
- - Internal Indications" and "Business - Distribution".

      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 our drug and related processes and
improvements. In the United States, DUSA(R), DUSA Pharmaceuticals, Inc.(R),
Levulan(R), Kerastick(R) and BLU-U(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. See
sections entitled "Business - Licenses; and - Patents and Trademarks".

      On December 30, 2005, we entered into a merger agreement, (the "Merger
Agreement"), to acquire all of the common stock of Sirius Laboratories, Inc. of
Vernon Hills, Illinois in exchange for cash and common stock of DUSA worth up to
$30,000,000. Of the up to $30,000,000, $8,000,000 less certain expenses will be
paid in cash upon closing, $17,000,000 will be paid in shares of DUSA's common
stock

                                        3


also upon closing, and up to $5,000,000 in cash or common stock may be paid
based on a combination of new product approvals or launches, and achievement of
certain pre-determined total cumulative sales milestones for Sirius products.
The products acquired in this transaction, called the Sirius Merger, focus
primarily on the treatment of acne vulgaris and acne rosacea. We expect that the
DUSA shares will be issued pursuant to Regulation D.

      Further, the Merger Agreement provides for certain conditions precedent to
closing, including, but not limited to, (i) the approval of the transaction and
the terms and conditions of the Merger Agreement by the Sirius shareholders,
(ii) the receipt by DUSA of audited financial statements of Sirius for the
fiscal years ended 2003, 2004 and 2005, and (iii) the determination by DUSA that
the third party manufacturing and distribution facilities used by Sirius to
manufacture or distribute its products, as the case may be, are in material
compliance with all applicable legal requirements and that the third party
manufacturing facilities have the reasonable capability of continuing to
manufacture Sirius' products in compliance with cGMP. In addition, the Merger
Agreement provides DUSA, Sirius and certain Sirius shareholders with the right
to terminate the Merger Agreement under certain circumstances. The parties have
also made customary representations, warranties and covenants in the Merger
Agreement. The closing of the transaction is expected during the first quarter
of 2006, subject to the terms and conditions in the Merger Agreement.

      We were incorporated on February 21, 1991, under the laws of the State of
New Jersey. Our principal executive offices are located at 25 Upton Drive,
Wilmington, Massachusetts 01887 (telephone: (978) 657-7500). On March 3, 1994,
we formed DUSA Pharmaceuticals New York, Inc., a wholly owned subsidiary located
in Valhalla, New York, to coordinate our research and development efforts. We
have financed our operations to date, primarily from sales of our products,
sales of securities in public offerings, private and offshore transactions that
are exempt from registration under the Securities Act of 1933, as amended, (the
"Act"), including a private placement under Regulation D of the Act which was
consummated on February 27, 2004, and from payments received as part of the
agreement with our former marketing collaborator. See sections entitled
"Management's Discussion and Analysis of Financial Condition - Overview; -
Results of Operations; and - Liquidity and Capital Resources".

BUSINESS STRATEGY

      The key elements of our strategy include the following:

      o     Expand the Marketing and Sales of our Products. In 2005, DUSA
            expanded its direct sales force to 24 representatives by year-end
            and launched various marketing initiatives, which increased
            revenues.

      o     Physician Education Support. DUSA supports various physician
            education activities, including financial support for independent
            medical education programs, participation in dermatological
            conferences, and support for independent investigator studies that
            could lead to new scientific papers and/or presentations.

      o     Leveraging our Levulan(R) PDT/PD Platform to Develop Additional
            Products. During 2005, we conducted Phase II multi-center clinical
            trials in the United States to determine the safety and efficacy of
            Levulan(R) PDT in the treatment of facial photodamage and moderate
            to severe inflammatory acne. If we are able to obtain FDA approval,
            there may be significant additional market opportunities for our
            products. We are also actively marketing the BLU-U(R) without
            Levulan(R), to treat moderate inflammatory acne vulgaris, which
            supports a multi-use capability of our BLU-U(R), in addition to its
            use in our

                                        4


            approved AK therapy. Outside of dermatology, we are developing
            Levulan(R) products for the treatment of high-grade dysplasia in
            patients with Barrett's esophagus, both independently and in
            co-operation with the NCI DCP, and for oral cavity dysplasia
            treatment (with the NCI DCP) See sections entitled "Internal
            Indications - Barrett's Esophagus Dysplasia; and - Oral Cavity
            Dysplasia".

      o     Enter into Additional Strategic Alliances. If we determine that the
            development program for a given indication may be beyond our own
            resources or may be advanced to market more rapidly by collaborating
            with a corporate partner, we may seek opportunities to license,
            market or co-promote our products. 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 are also continuing to
            seek to acquire and/or license additional dermatology products that
            complement our current products, that would provide our sales force
            with additional synergistic products to sell in the near term.

      o     Use the Results of Independent Researchers to Identify New
            Applications. We continue to work closely with and support research
            by independent investigators so that we have the benefit of the
            resulting `anecdotal' human data for use in evaluating potential
            indications for corporate development. We also continue to monitor
            independent research in order to identify other potential new
            indications.

      o     Improve Third-party Reimbursement for our Products. DUSA plans to
            continue to support activities to improve and/or pursue third-party
            reimbursement for our products.

PDT/PD OVERVIEW

      In general, both photodynamic therapy and photodetection are two-step
processes:

      o     The first step is the application of a drug known as a
            "photosensitizer," or a pre-cursor of this type of drug, which tends
            to collect in specific cells.

      o     The second step is activation of the photosensitizer by controlled
            exposure to a selective light source in the presence of oxygen.

      During this process, energy from the light activates the photosensitizer.
In PDT, the activated photosensitizer transfers energy to oxygen molecules found
in cells, converting the oxygen into a highly energized form known as "singlet
oxygen," which destroys or alters the sensitized cells. In PD, the activated
photosensitizer emits energy in the form of light, making the sensitized cells
fluoresce, or "glow".

      The longer the wavelength of visible light, the deeper into tissue it
penetrates. Different wavelengths, or colors of light, including red and blue
light, may be used to activate photosensitizers. The selection of the
appropriate color of light for a given indication is primarily based on two
criteria:

      o     the desired depth of penetration of the light into the target
            tissue, and

      o     the efficiency of the light in activating the photosensitizer.

                                        5


      Blue light does not penetrate deeply into tissues, so it is generally
better suited for treating superficial lesions. However, it is also a potent
activator of some photosensitizers, including ours. Red light penetrates more
deeply into tissues, and is therefore generally better suited for treating
cancers and deeper tissues. However, it is generally not as strong an activator
of photosensitizers, including ours. Different photosensitizers do not absorb
all wavelengths (colors) of visible light in the same manner. For any given
photosensitizer, some colors are more strongly absorbed than others.

      Another consideration in selecting a light source is the location of the
target tissue. Lesions on the skin which are easily accessible can be treated
with either laser or non-laser light sources. Internal indications, which are
often more difficult to access, usually require lasers in order to focus light
into small fiber optic delivery systems that can be passed through an endoscope
or into hollow organs.

      PDT can be a highly selective treatment that targets specific tissues
while minimizing damage to normal surrounding tissues. It also can allow for
multiple courses of therapy. The most common side effect of photosensitizers
that are applied topically or taken systemically is temporary skin sensitivity
to bright light. Patients undergoing PDT and PD treatments are usually advised
to avoid direct sunlight and/or to wear protective clothing during this period.
Patients' indoor activities are generally unrestricted except that they are told
to avoid bright lights. The degree of selectivity and period of skin
photosensitivity varies among different photosensitizers and is also related to
the drug dose given. Unless activated by light, photosensitizers have no direct
PDT/PD effects.

OUR LEVULAN(R) PDT/PD PLATFORM

      OUR LEVULAN(R) BRAND OF ALA

      We have a unique approach to PDT and PD, using the human cell's own
natural processes. Levulan(R) PDT takes advantage of the fact that ALA is the
first product in a natural biosynthetic pathway present in virtually all living
human cells. In normal cells, the production of ALA is tightly regulated through
a feedback inhibition process. In our PDT/PD system, excess ALA (as Levulan(R))
is added from outside the cell, bypassing this normal feedback inhibition. The
ALA is then converted through a number of steps into a potent natural
photosensitizer named protoporphyrin IX, or PpIX. This is the compound that is
activated by light during Levulan(R) PDT/PD, especially in fast growing cells.
Any PpIX that remains after treatment is eliminated naturally by the same
biosynthetic pathway.

      We believe that Levulan(R) is unique among PDT/PD agents. It has the
following features:

      o     Naturally Occurring. ALA is a naturally occurring substance found in
            virtually all living human cells.

      o     Small Molecule. Levulan(R) is a small molecule that is easily
            absorbed whether delivered topically, orally, or intravenously.

      o     Highly Selective. Levulan(R) is not itself a photosensitizer, but is
            a pro-drug that is converted through a cell-based process into the
            photosensitizer PpIX. The combination of topical application, tissue
            specific uptake, conversion into PpIX and targeted light delivery
            make this a highly selective process. Therefore, under appropriate
            conditions, we can achieve selective clinical effects in targeted
            tissues with minimal effects in normal surrounding and underlying
            tissues.

      o     Controlled Activation. Levulan(R) has no PDT effect without exposure
            to light at specific wavelengths, so the therapy is easily
            controlled.

                                        6


      Scientists believe that the accumulation of PpIX following the application
of Levulan(R) is more pronounced in:

      o     rapidly growing diseased tissues, such as precancerous and cancerous
            lesions,

      o     conditions characterized by rapidly proliferating cells such as
            those found in psoriasis and certain microbes, and

      o     in certain normally fast-growing tissues, such as hair follicles,
            sebaceous glands, esophageal mucosa and the lining of the uterus.

      OUR KERASTICK(R) BRAND APPLICATOR

      We designed our proprietary Kerastick(R) specifically for use with
Levulan(R). It is a single-use, disposable applicator, which allows for the
rapid preparation and uniform application of Levulan(R) topical solution in
standardized doses. The Kerastick(R) has two separate glass ampoules, one
containing Levulan(R) powder and one containing a liquid vehicle, both enclosed
within a single plastic tube and an outer cardboard sleeve. There is a filter
and a metered dosing tip at one end. Prior to application, the doctor or nurse
crushes the ampoules and shakes the Kerastick(R) according to directions to mix
the contents into a solution. The Kerastick(R) tip is then dabbed onto the
individual AK lesions, releasing a predetermined amount of Levulan(R) 20%
topical solution.

      OUR LIGHT SOURCES

      Customized light sources are critical to successful Levulan(R) PDT/PD
because the effectiveness of Levulan(R) therapy depends on delivering light at
an appropriate wavelength and intensity. We intend to continue to develop
combination drug and light device systems, in which the light sources:

      o     are compact and tailored to fit specific medical needs,

      o     are pre-programmed and easy to use, and

      o     provide cost-effective therapy.

      Our proprietary BLU-U(R) is a continuous-wave (non-pulsed) fluorescent
light source that can treat the entire face or scalp at one time. The light
source is reasonably sized and can be moved from room to room if necessary. It
can be used in a physician's office, requires only a moderate amount of floor
space, and plugs into a standard electrical outlet. The BLU-U(R) also
incorporates a proprietary regulator that controls the optical power of the
light source to within specified limits. It has a simple control panel
consisting of an on-off key switch and digital timer which turns off the light
automatically at the end of the treatment. The BLU-U(R) is also compliant with
CE marking requirements.

      We believe non-laser, non-pulsed light sources in comparison to lasers and
high-intensity pulsed light sources, are:

      o     safer,

      o     simpler to use,

      o     more reliable, and

      o     far less expensive.

                                        7


      For treatment of AKs, our BLU-U(R) uses blue light which is a potent
activator of PpIX and does not penetrate deeply into the skin. Longer red
wavelengths penetrate more deeply into tissue but are not as potent activators
of PpIX. Therefore, for treatment of superficial lesions of the skin, such as
AKs, we are using our relatively low intensity, non-laser, non-pulsed BLU-U,
which is designed to treat areas such as the face or scalp. For treatment of
diseases that may extend several millimeters into the skin or other tissues,
including many forms of cancer; high-powered red light is usually preferable. We
have also received clearance from the FDA to market the BLU-U(R) without
Levulan(R) for the treatment of moderate inflammatory acne vulgaris and general
dermatological conditions. We are also evaluating whether to develop and/or
license additional light devices for use with Levulan(R).

      During 2005, we studied the use of Levulan(R) with three different light
devices, including our BLU-U for the repair of facial photodamage. Also in 2005,
we continued the study of our new proprietary endoscopic light delivery system
in a small Phase II single-center clinical study of the efficacy and safety of
Levulan(R) PDT for the treatment of high grade dysplasia in patients with
Barrett's esophagus. Our new system is designed to ease the process by which
physicians place fiber optics used for endoscopic light delivery within hollow
target organs such as the esophagus. See sections entitled "Business-Dermatology
Indications, Facial Photodamage and Internal Indications, Barrett's Esophagus
Dysplasia".

OUR PRODUCTS

      The following table outlines our Levulan(R) and BLU-U(R) products and
currently planned product candidates. Our product sales for the last three years
were $11,337,461 in 2005, $7,987,656 in 2004, and $970,109 in 2003. Our research
and development expenses for the last three years were $5,587,599 in 2005,
$6,489,723 in 2004, and $5,403,961 in 2003.



                                                                      STATUS OF
                                                                     REGULATORY
INDICATION/PRODUCT                                                    STUDIES
- ------------------                                           --------------------------
                                                          
DERMATOLOGY
Levulan(R) Kerastick(R) and BLU-U(R) for PDT of AKs                  Approved
Levulan(R) PDT for Photodamaged Skin                                Phase II(1)
Levulan(R) PDT for Moderate to Severe Acne Vulgaris                 Phase II(2)
BLU-U(R) Treatment of Moderate Inflammatory Acne Vulgaris
  and general dermatological conditions Without Levulan(R)      Market Clearance(3)

OTHER INDICATIONS
Levulan(R) PDT for Barrett's Esophagus Dysplasia using
DUSA(R) Endoscopic Light Delivery System                         Phase I/II(4), (5)
Levulan(R) Induced Fluorescence Guided Resection for
  Brain Cancer                                               European Phase III(6), (7)
Levulan(R) Oral Cavity Dysplasia                                   Phase I/II(8)


- ----------
1     Phase II clinical trial interim results were released in the first quarter
      of 2006

2     Phase II clinical trial results were released in the first quarter of 2006

3     In September 2003, the FDA provided market clearance

4     Phase II single-center clinical trial initiated in second quarter 2004
      using DUSA's new endoscopic light delivery device. All patients have been
      accrued and treated and follow-up is continuing.

5     Phase II clinical trial planned to be initiated with the NCI DCP in 2005
      is still in process of protocol finalization. Initiation is expected in
      2006.

6     Licensed from photonamic GmbH & Co. KG

7     European Phase III clinical trial results are not expected to be suitable
      for NDA filing in the United States.

                                        8


8     Phase I/II clinical trial planned to be initiated with the NCI DCP in
      2005. Protocol finalization continuing and initiation is expected during
      2006.

DERMATOLOGY INDICATIONS

      We have been responsible for our Levulan(R) dermatology research and
development programs since reacquiring our product rights in late 2002 from a
former strategic alliance partner. We have focused on completing our AK post
approval development program, and have commenced Phase II clinical programs
examining the safety and efficacy of Levulan(R) PDT for the treatment of
photodamaged skin and moderate to severe acne vulgaris which, if successfully
developed through FDA approval, could lead to additional dermatological
indications and significant market opportunities. The results of our Phase II
trials were announced in early 2006. DUSA also continues to support a wide range
of independent investigator studies using the Levulan(R) Kerastick(R) that could
lead to additional new indications for future development.

      Actinic Keratoses. AKs are superficial precancerous skin lesions usually
appearing in sun-exposed areas as rough, scaly patches of skin with some
underlying redness. The traditional methods of treating AKs are cryotherapy, or
the deep freezing of skin, using liquid nitrogen; 5-fluorouracil cream, or 5-FU;
and surgery, for especially thick or suspicious lesions. In recent years,
imiquimod and diclofenac have also been used for the treatment of AKs. Although
any of these methods can be effective, each has limitations and can result in
significant side effects. Cryotherapy is non-selective, is usually painful at
the site of freezing and can cause blistering and loss of skin pigmentation,
leaving permanent white spots. In addition, because there is no standardized
treatment protocol, results are not uniform. 5-FU can be highly irritating and
requires twice-a-day application by the patient for approximately 2 to 4 weeks,
resulting in inflammation, redness and erosion or rawness of the skin. Following
the treatment, an additional 1 to 2 weeks of healing is required. Surgery is
generally most useful for one or a few individual lesions, but not large numbers
of lesions, and leaves permanent scars. Imiquimod or diclofenac require extended
applications of cream, lasting up to 3 or 4 months, during which the skin is
often very red and inflamed. Our approved treatment method involves applying
Levulan(R) 20% topical solution using the Kerastick(R) to individual AK lesions,
followed 14 to 18 hours later with exposure to our BLU-U(R) for approximately 17
minutes. In our Phase III trials, using this overnight drug application, our
treatment was painful, but generally well tolerated. Resulting redness and/or
inflammation generally resolved within days without any change in pigmentation.

      Facial Photodamaged Skin. Photodamaged skin, which is skin damaged by the
sun, occurs primarily in fair-skinned individuals after many years of sun
exposure. Signs of photodamaged skin include roughness, wrinkles and brown
spots. AKs also occur frequently in areas of photodamaged skin. There are
numerous consumer cosmetic and herbal products which claim to lessen or relieve
the symptoms of photodamaged skin. In most cases, there is little scientific
data to support these claims. The FDA has approved only one prescription drug,
Renova(R)(1), to treat this common skin condition. Patients generally use the
product for between six and 24 weeks before improvement may be observed. There
are also a number of FDA approved laser and light-based treatments being used in
the treatment of photodamaged skin.

      As part of our AK clinical trials, we conducted a Phase II safety and
efficacy study, testing 64 patients with 3 to 7 AK lesions of the face or scalp
within an area of photodamaged skin. The physician

- ----------
(1)   Renova(R) is a registered trademark of Johnson & Johnson.

                                        9


investigators applied Levulan(R) 20% topical solution over the entire area
including the photodamaged skin. After 14 to 18 hours, the patients were treated
with blue light at differing light doses. Investigators noted marked improvement
in skin roughness in the treated areas in two-thirds of the patients after
treatment with Levulan(R) PDT as well as some degree of improvement of wrinkles
and brown spots. However, 10 of the 64 patients found that the burning and
stinging of the PDT therapy was too uncomfortable and as a result the treatment
was either terminated early or the light power was reduced. No patients reported
a serious treatment-related adverse event.

      During 2003, DUSA-supported independent investigator studies for
photodamaged skin were completed, including short incubation studies using
different light sources: a BLU-U(R), pulsed dye lasers, and intense pulsed light
sources. Data from some of the independent investigator studies were used to
help determine the method of treatment for the Phase II study mentioned below.
According to peer-reviewed publications, these studies reported that, when
Levulan(R) is applied to the entire face for as little as one hour followed by
treatment with the BLU-U(R), or pulsed light sources, efficacy in removing AKs
is similar to that of our Phase III trials, which used spot application on each
AK and overnight incubation. Additionally, these studies report that patients'
skin have showed improvements in various photodamaged skin parameters, including
skin quality, sallowness, roughness, fine wrinkling, and Griffiths score, a
photonumeric scale for the assessment of skin photodamage. Investigator studies
have been published reporting that IPL plus Levulan(R) results in a
"photodynamic photorejuvenation" which enhances the results of IPL alone.
Published investigator studies have also reported that the LPDL together with
Levulan(R) can successfully remove AKs, and improve photodamage as well as treat
sebaceous gland hyperplasia (indications which the LPDL alone was unable to
treat). The positive results of an independent investigator prospective,
randomized, controlled split face clinical study using Levulan(R) photodynamic
therapy, together with intense pulsed light for the treatment of photodamaged
skin, were published in the October 2005 issue of the American Medical
Association Journal Archives of Dermatology.

      In February, 2006 we reported the interim analysis results from our 80
patient, multi-center Phase II split-face clinical study of photodynamic therapy
(PDT) in the treatment of photodamaged skin using the Levulan(R) (aminolevulinic
acid HCl, ALA) Kerastick(R) in combination with either the Company's BLU-U(R),
an Intense Pulsed Light (`IPL'), or a Long Pulsed Dye Laser (`LPDL'). Each
patient served as his or her own control, using a `split-face' design. Following
skin cleansing with an acetone solution, and approximately 60 minutes of drug
and/or vehicle incubation, light treatment with a fixed dose was given using one
of the three light sources. Up to 3 treatments were given, 3 weeks apart.
Interim results were assessed at Weeks 9 and 12. The protocol includes
additional follow-up visits scheduled for Weeks 26 and 52.

      The goal of the study was to guide selection of light source(s) for future
development in the treatment of photodamaged skin, using the Company's
proprietary Levulan PDT technology. The study was not designed to detect
differences between the light sources.

      At Week 12, Levulan PDT with BLU-U light demonstrated material improvement
in photodamaged skin, in comparison to BLU-U and vehicle. Statistical
significance in net changes from baseline scores was achieved in 2 parameters of
photodamage, namely mottled pigmentation (p=0.0348) and tactile roughness
(p=0.0455). In addition, the trend toward improvement in a number of parameters
was notably greater at Week 12 than Week 9, without any additional treatments
with Levulan, which suggests that other parameters may also reach statistical
significance over time. Specifically, Levulan with BLU-U showed greater
improvements in mottled pigmentation, tactile roughness, fine wrinkling,
sallowness and Global Photodamage Score (i.e. all the parameters that were
measured except for telangiectasia (small blood vessels in the skin)), compared
with areas treated with BLU-U and vehicle. BLU-U by itself is not known to have
any effects on photodamaged skin.

                                       10


      These results support the conclusions of a prior independent study by
Touma et al (2004), using Levulan with BLU-U versus BLU-U alone, that achieved
statistical significance with the addition of Levulan in all photodamage
parameters measured, other than deep wrinkles. In that study, the investigators
treated more severely sun-damaged patients, each with a minimum of 4 actinic
keratoses. They also used twice the dose of blue light compared to the current
study (10 vs. 5 Joules/cm2), and drug incubation times ranging from 1-3 hours.

      IPL by itself has previously been shown in independent studies to
significantly improve photodamage, predominantly by targeting brown
discoloration and red blood vessels. Therefore, as would be expected, at Week
12, significant improvement in photodamage was seen with IPL and vehicle,
especially with respect to mottled pigmentation and telangiectasia. With the
addition of Levulan, there was a trend toward even greater improvement in all
parameters of photodamage except for mottled pigmentation, although these trends
did not achieve statistical significance. However, similar to the BLU-U results,
the trend toward improvement was notably greater at Week 12 than Week 9 without
any additional treatments with Levulan, and additional follow up is scheduled at
weeks 26 and 52.

      These results support the conclusions of prior independent studies by
Dover et al (2005), Alster et al (2005), and Gold et al (in press) using Levulan
with IPL versus IPL alone for photodamage. All of these studies reported
significant benefits from the addition of Levulan to IPL, especially in patients
with significant photodamage. In addition, although IPL itself does not treat
pre-cancerous cell damage, such as actinic keratoses, when combined with Levulan
(ALA) to produce a PDT effect, IPL has been reported to effectively remove these
lesions (Avram and Goldman, 2004, Ruiz-Rodrigues, 2002).

      With LPDL, as would be expected, there was significant improvement in
photodamaged skin with LPDL and vehicle, especially with respect to
telangiectasia, the primary target of this device. However, with LPDL, the
addition of Levulan for the treatment of photodamage did not lead to any
discernable differences in photodamage parameters between the two groups, as
suggested by the results of an earlier study (Smith et al, 2004).

      In general, safety was excellent in all groups, but treatment using
Levulan with BLU-U was better tolerated than treatment with IPL or LPDL (with or
without Levulan) i.e. the frequency and severity of stinging and burning during
treatment was greater with IPL and LPDL (with or without Levulan) compared to
Levulan with BLU-U, and for BLU-U with vehicle. Levulan with BLU-U was also easy
to use and less operator dependent.

      Acne. Acne is a common skin condition caused by the blockage and/or
inflammation of sebaceous (oil) glands. Traditional treatments for mild to
moderate facial inflammatory acne include over-the-counter topical medications
for mild cases, and prescription topical medications or oral antibiotics for
mild to moderate cases. For nodulo-cystic acne, an oral retinoid drug called
Accutane(R)(2) is the most commonly prescribed treatment. It is also commonly
used for moderate to severe inflammatory acne. Over-the-counter treatments are
not effective for many patients and can result in side effects including drying,
flaking and redness of the skin. Prescription antibiotics lead to improvement in
many cases, but patients must often take them on a long-term basis, with the
associated risks of increased antibiotic resistance. With Levulan(R) PDT therapy
for moderate to severe acne vulgaris we are seeking to improve or clear
patients' acne without the need for long-term oral therapy and with fewer side
effects than current therapies.

- ----------
(2)   Accutane(R) is a registered trademark of Hoffmann-La Roche, Inc.

                                       11


      DUSA has clearance from the FDA to market the BLU-U(R) without Levulan(R)
PDT for the treatment of moderate inflammatory acne vulgaris and general
dermatological conditions.


      During the fourth quarter of 2004, we initiated a DUSA-sponsored Phase II
study which we recently completed. This 72 patient, investigator blinded study
was designed to examine various safety and efficacy parameters as a function of
varying Levulan/vehicle incubation times, namely 15, 60 and 120 minutes.
Patients were randomized within each incubation group so that 18 subjects
received `Levulan BLU-U' and six received `BLU-U alone'. There were no formal
placebo arms in this study. Up to four PDT treatments were given at 2-week
intervals. The primary efficacy parameters were the percent change in total acne
lesion count for inflammatory, non-inflammatory, and total lesions at 4 and 8
weeks after the final PDT session. Acne severity scores (grades 0 - 4) were also
assessed. Safety and tolerability were also followed throughout the study. The
results of the study indicate that both `Levulan BLU-U' and `BLU-U alone' appear
to effectively reduce the number of both inflammatory and non-inflammatory acne
lesions. Given the higher than anticipated `BLU-U alone' response rate using
this protocol, the study was not powered (sized) to discern differences between
these arms. Using an intent-to-treat analysis, at the Week 8 time point, the
median percent decrease in total lesion count, (inflammatory plus
non-inflammatory) for `Levulan BLU-U' and `BLU-U alone' was 61% and 80%,
respectively. In the overall `Acne Severity Assessment' at the Week 8 time
point, the `Levulan BLU-U' group showed 7/18 (39%) of subjects had at least 2
grades of improvement in their acne, compared with 4/6 (67%) in the `BLU-U
alone' group. In the group of 28 patients with the most severe (Grade 4) acne,
which included those with the highest number of inflammatory lesions at baseline
(> or = 60 lesions), the total lesion count at Week 8 decreased in the `Levulan
BLU-U' group, whereas total lesion count at Week 8 increased in the `BLU-U
alone' group. Treatment was well tolerated in both arms of the study with no
unanticipated adverse events being reported. Side effects were minimal. In the
15-minute Levulan BLU-U group, no PDT treatments were discontinued due to pain,
and at the Week 8 time-point, there were no significant differences between the
groups in erythema, edema or hyperpigmentation. The results of this study
suggest that for future development of the acne indication for Levulan PDT,
those patients with the most severe form(s) of acne should receive the greatest
benefit.

      During September 2005, the FDA issued draft guidance for the
pharmaceutical industry regarding the development of new drugs for acne vulgaris
treatment. As a result of this newly issued guidance in combination with the
results of our own Phase II clinical study on inflammatory acne, additional
Phase II work will definitely be required before we commence Phase III acne
trials.

OTHER POTENTIAL DERMATOLOGY INDICATIONS

      We believe that there are numerous other potential uses for Levulan(R)
PDT/PD in dermatology, and we continue to support, research in several of these
areas, with corporate-sponsored trials, pilot trials, and/or
investigator-sponsored studies, based on pre-clinical, clinical, regulatory and
marketing criteria we have established through our strategic planning processes.
Some of the additional potential uses for Levulan(R) in dermatology include
treatment of skin conditions such as psoriasis, onychomycosis, warts, molluscum
contagiosum, oily skin, acne rosacea, cystic acne, inflamed or infected sweat
glands (hidradenitis suppurativa), and cancers, such as squamous cell carcinomas
and cutaneous T-cell lymphomas. Of these potential indications, we have
supported investigator-sponsored studies for psoriasis, hidradenitis
suppurativa, acne vulgaris, basal cell carcinoma, and acne rosacea and are
currently supporting investigator-sponsored studies for psoriasis, non-melanoma
skin cancer, and inflammatory acne.

                                       12


INTERNAL INDICATIONS

      Barrett's Esophagus Dysplasia. Barrett's esophagus is an acquired
condition in which the normal tissue lining of the esophagus is replaced by
abnormal tissue in response to chronic exposure to stomach acid. Over time, the
area of the esophagus affected can develop dysplastic (precancerous) cells. As
the dysplasia progresses from low-grade to high-grade, the risk of esophageal
cancer increases significantly, such that patients with confirmed high-grade
dysplasia often undergo major surgery to remove the affected portion of the
esophagus. The condition is often undetected until the disease reaches later
stages.

      Medical treatment of the condition has commonly included lifelong
anti-reflux therapy with drugs called proton pump inhibitors to reduce stomach
acid, while treatment for more advanced, precancerous, Barrett's esophagus
dysplasia involves surgery to remove affected areas of the esophagus. The role
of anti-reflux surgery, and/or medical devices is also being evaluated by the
medical community. In August 2003, a competitor received approval for its PDT
therapy for Barrett's esophagus. See section entitled "Business - Competition".

      Independent European studies have reported that in late-stage Barrett's
esophagus the high-grade dysplasia can be destroyed by ALA PDT. In a randomized,
controlled European investigator study supported by DUSA, the investigators
reported that Levulan(R) PDT allowed the conversion of early-stage Barrett's
esophagus with low-grade dysplasia and portions of non-dysplastic Barrett's back
to a normal esophageal lining.

      During the second half of 2001, we started two Phase I/II studies for the
treatment of early and late-stage Barrett's esophagus, respectively, using
systemic Levulan(R) followed by red laser light in varying light doses. Patients
were randomized to receive various light doses, with retreatment if required,
and follow-up for 24 months after the initial treatment. In our clinical trial
in which the primary efficacy goal was the ablation of high-grade dysplasia, or
HGD, in Barrett's esophagus (late stage Barrett's esophagus), six patients with
HGD were treated with Levulan(R) PDT. Of the six patients treated, 5 had
complete clearing of their areas of high-grade dysplasia, and 4 of those
patients have now been followed for 24 months and remain free of HGD, which
indicates a durable response for complete HGD ablation. One patient dropped from
follow-up at the 2-month visit. No esophageal scarring or ruptures were noted in
the course of this study. HGD ablation continues in the patients followed. In
our low-grade dysplasia (early stage) clinical trial in which the primary
efficacy goal was the conversion of Barrett's esophagus to normal esophagus, 11
patients were treated with Levulan(R) PDT, and 4 were followed for 12 months
while six were followed for 24 months (n=6). Complete Barrett's esophagus
mucosal ablation after one or two Levulan(R) PDT treatment remained stable in
5/10 (50%) of patients for up to 2 years. Of those patients followed for 2
years, 4/6 (67%) remained clear for that time. There was 1 patient in this study
that had mild circumferential esophageal scarring without symptoms. The most
common adverse events in both studies were mild to moderate nausea and vomiting.
In order to control ongoing research and development costs, we chose not to
enroll any additional patients to these studies after 2002, but continued to
follow the patients that have already been treated.

      Currently, for the treatment of HGD in BE, insertion of a fiber optic is
done by placement of a balloon catheter system, which requires approximately
three insertions into the patient's esophagus, with `blind' light treatment by
the physician (the endoscope is removed before light treatment and then replaced
afterwards). DUSA's proprietary endoscopic light delivery allows fiber optic
placement and light treatment to the esophagus to be performed under direct
visualization, utilizing a single insertion. The goal of this device is to allow
the endoscopic light treatment to be performed more rapidly, under direct
visualization, and with greater comfort for the patient. In preparation for a
larger Phase II clinical trial, in the second quarter of 2004 we initiated a
small single-center pilot Phase II clinical trial for enrollment of up to six
patients at a single site using DUSA's proprietary endoscopic light delivery
device

                                       13


for the treatment of HGD. The protocol was amended to lower the light dosage and
to allow in-hospital observation for the remaining 3 patients commencing in
March 2005. As of the end of 2005, six patients received at least one Levulan(R)
PDT treatment in this single-center study, and 5 are evaluable for acute
efficacy. Four out of five (4/5, 80%) are currently free of HGD after treatment
and continue to be followed.

      In addition, we are working with the National Cancer Institute Division of
Cancer Prevention (NCI DCP), for the clinical development of Levulan(R) PDT for
the treatment of high-grade dysplasia within Barrett's Esophagus. The Phase I/II
trial design is being finalized and the NCI DCP has identified two clinical
sites from its extramural expert clinical investigator consortium. The NCI DCP
will use its resources to file its own Investigational New Drug, or IND,
application. DUSA will provide Levulan(R), device(s) and the necessary training
for the investigators involved in the studies. DUSA will maintain full ownership
of its existing intellectual property, has options on new intellectual property,
and, subject to successful Phase II and III clinical trial results, intends to
seek FDA approval in due course. DUSA anticipates that the NCI DCP will begin
the clinical trial during 2006.

      Oral Cavity Dysplasia. We have also signed a clinical trial agreement with
the NCI DCP for the clinical development of Levulan(R) PDT for the treatment of
oral cavity dysplasia. During 2005, DUSA and the NCI DCP collaborated to develop
the protocol for a Phase I study in subjects with oral leukoplakia (a
premalignant lesion) using NCI's Phase I/II Cancer Prevention Clinical Trials
Consortia to perform the studies. As of the end of 2005, the NCI DCP had
selected consortia for consideration as clinical trial sites. DUSA also expects
this study to begin during 2006.

      Brain Cancer. Despite standard therapies that include surgical tumor
removal, radiation therapy, and chemotherapy, adult patients with the most
aggressive high-grade malignant brain tumor type, glioblastoma multiforme,
generally survive only 1 year. Independent European investigators have reported
that systemic ALA dosing before surgical resection of tumors resulted in
selective fluorescence of only the tumors. The normal white matter of the brain
showed no fluorescence. These investigators used ALA-induced fluorescence in a
study involving 52 patients with glioblastoma multiforme as a guide for the more
complete removal of tumors than would be possible using white light alone. This
technique is called fluorescence-guided resection.

      In December 2002, we entered into a License and Development Agreement with
photonamic GmbH & Co. KG, a subsidiary of medac GmbH, a German pharmaceutical
company. This agreement provides for the licensing to us of photonamic's
proprietary technology related to ALA for systemic dosing in the field of brain
cancer. The technology provides DUSA with access to a systemic formulation of
ALA, and a significant amount of pre-clinical data, both of which could be
useful and are licensed to DUSA for certain other indications, including
Barrett's esophagus dysplasia. photonamic completed its European Phase III
clinical trial in which ALA-induced fluorescence was used to guide surgical
tumor resection in patients suffering from glioblastoma multiforme. DUSA
believes that the European Phase III clinical trial results, although they might
meet the primary efficacy parameters of the protocol as written, might require
the support of additional clinical trials which would take years to complete in
order to meet the regulatory requirements for approval in the United States. We
do not intend, at this time, to repeat this study or to carry out additional
studies in this indication in the United States. However, we have agreed to
accompany photonamics to the FDA should it wish to request a Pre-IND meeting
with the FDA for this indication. See section entitled "Business - Licenses".

THIRD-PARTY REIMBURSEMENT

      We have continued to 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

                                       14


Academy of Dermatology Association, or AADA, on matters related to the PDT
procedure fee and the separate drug reimbursement fee. Doctors 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 AKs' 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 (i.e. it will be unchanged from 2005 levels). DUSA had
expected reimbursement under the CPT code to increase on January 1, 2006;
however, we now believe that the increase will not be effective until January 1,
2007 based on information from CMS and the AADA. We are aware that some
physicians believe that reimbursement levels do not fully reflect the required
efforts to routinely execute our therapy in their practices. We believe that the
issues related to reimbursement have negatively impacted the economic
competitiveness of our therapy with other AK therapies and have hindered its
adoption in the past. DUSA continues to support ongoing efforts that might lead
to further increases in reimbursement in the future; and intends 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.

SUPPLY PARTNERS

      National Biological Corporation. In November 1998, we entered into a
purchase and supply agreement with National Biological Corporation, or NBC, for
the manufacture of some of our light sources, including the BLU-U(R). We agreed
to order from NBC all of our supply needs of these light sources for the United
States and Canada, and NBC agreed to supply us with the quantities we order. If
an opportunity arises, the parties have agreed to negotiate the terms under
which NBC would supply us with light sources for sale in countries other than
the current territories. On June 21, 2004, DUSA signed an Amended and Restated
Purchase and Supply Agreement with NBC, which provides for the elimination of
certain exclusivity clauses, permits DUSA to order on a purchase order basis
without minimums, grants DUSA an exclusive irrevocable worldwide and fully-paid
up license to manufacture, or have the BLU-U(R) manufactured by any third party
subcontractor, and other modifications which provide both parties greater
flexibility related to the development and manufacture of light sources, and the
associated technology within the field of PDT. The agreement maintains the
original term, which will expire in November 2008, subject to earlier
termination for breach or insolvency or for convenience. However, a termination
for convenience requires 12 months' prior written notice.

      Sochinaz SA. Under an agreement dated December 24, 1993, Sochinaz SA
manufactures and supplies our requirements of Levulan(R) from its FDA approved
facility in Switzerland. The agreement expires on December 31, 2009. While we
can obtain alternative supply sources in certain circumstances, any new supplier
would have to be inspected and qualified by the FDA.

      medac GmbH. In December 2002, we entered into a supply agreement with
medac GmbH in connection with the photonamic license agreement mentioned above.
We have a license to market and sell the formulation exclusively in the United
States and in several other countries and non-exclusively in the rest of the
world subject to certain field limitations. The supply agreement covers medac's
current systemic dosage formulation for use in brain cancer, Barrett's
esophagus, as well as for other mutually agreed upon indications. The agreement
provides for minimum purchase requirements following our first commercial sale
and has a term of 10 years from the date of our first commercial sale, subject
to earlier termination rights, as well as successive one-year renewal terms.

                                       15


LICENSES

      PARTEQ Research and Development Innovations. We license (or, in the case
of the patents in Australia, were assigned) the patents underlying our
Levulan(R) PDT/PD systems under a license agreement with PARTEQ Research and
Development Innovations, or PARTEQ, the licensing arm of Queen's University,
Kingston, Ontario. Under the agreement, which became effective August 27, 1991,
we have been granted an exclusive worldwide license, with a right to sublicense,
under PARTEQ's patent rights, to make, have made, use and sell products which
are precursors of PpIX, including ALA. The agreement also covers any
improvements discovered, developed or acquired by or for PARTEQ, or Queen's
University, to which PARTEQ has the right to grant a license. A non-exclusive
right is reserved to Queen's University to use the subject matter of the
agreement for non-commercial educational and research purposes. A right is
reserved to the Department of National Defense Canada to use the licensed rights
for defense purposes including defense procurement but excluding sales to
third-parties.

      When we are selling our products directly, we have agreed to pay to PARTEQ
royalties of 6% and 4% on 66% of the net selling price in countries where patent
rights do and do not exist, respectively. In cases where we have a sublicensee,
we will pay 6% and 4% when patent rights do and do not exist, respectively, on
our net selling price less the cost of goods for products sold to the
sublicensee, and 6% of royalty payments we receive on sales of products by the
sublicensee. We are also obligated to pay 5% of any lump sum sublicense fees
paid to us, such as milestone payments, excluding amounts designated by the
sublicensee for future research and development efforts. The agreement is
effective for the life of the latest United States patents and becomes perpetual
and royalty-free when no United States patent subsists. Annual minimum royalties
to PARTEQ must total at least CDN $100,000 (U.S. $85,793 as of December 31,
2005) in order to retain the license. For 2005, royalties exceeded this minimum.
We have the right to terminate the PARTEQ agreement with or without cause upon
90 days notice. See "Note 13(a) to the Company's Notes to the Consolidated
Financial Statements".

      Together with PARTEQ and Draxis Health, Inc., our former parent, we
entered into an agreement, known as the ALA Assignment Agreement, effective
October 7, 1991. According to the terms of this agreement we assigned to Draxis
our rights and obligations under the PARTEQ license agreement to the extent they
relate to Canada. On February 24, 2004, we reacquired these rights and agreed to
pay an upfront fee and a 10% royalty on sales of the Levulan(R) Kerastick(R) in
Canada over a five-year term following the first commercial sale in Canada. We
are now responsible for any royalties which would be due to PARTEQ for Canadian
sales. Draxis also agreed to assign to us the Canadian regulatory approvals for
the Levulan(R) Kerastick(R) with PDT for AKs. We also hold Canadian regulatory
approval for the BLU-U(R). During 2004, we appointed a Canadian distributor who
launched our Levulan(R) Kerastick(R) and BLU-U(R) in Canada. See sections
entitled "Distribution" and "Note 13(b) to the Company's Notes to the
Consolidated Financial Statements".

      photonamic GmbH & Co. KG. In December 2002, we entered into a license and
development agreement with photonamic GmbH & Co. KG, a subsidiary of medac GmbH,
a German pharmaceutical company. This agreement provides for the licensing to us
of photonamic's proprietary technology related to aminolevulinic acid (ALA), the
compound we use in our Levulan(R) PDT and photodetection (PD).

      Under the terms of the agreement, we received a license for the United
States and several other countries, to use photonamic's technology, including
pre-clinical and clinical data, related to ALA for systemic dosing in the field
of brain cancer, and for indications which the parties may jointly develop
during the term of their collaboration. Additionally, we are entitled to use the
pre-clinical data for indications which we may develop on our own. See section
entitled "Our Products". We paid a $500,000 up-front license fee, and will be
obligated to pay certain regulatory milestones of $1,250,000 upon FDA acceptance
of a registration application for a brain cancer product in the United States,
an additional

                                       16


$1,250,000 upon registration of the product, and royalties of 12.5% on net sales
under the terms of the license and development agreement and royalties on net
sales of any brain cancer product which utilizes the photonamic technology.
Although we do not believe that the results from medac's European Phase III
clinical study will be acceptable to the FDA, we have agreed to ask FDA for a
pre-IND meeting if medac determines that it wishes to proceed. Should
photonamic's clinical study be acceptable to the FDA, we will be obligated to
proceed with development of the product in the United States in order to retain
the license for the use of the technology in the treatment of brain cancer. The
agreement has a term of 10 years from the date of first approval of a product
using photonamic's technology, subject to earlier termination rights, as well as
one-year renewal terms.

      We have also entered into a clinical trial agreement with photonamic to
fund an independent investigator study using oral Levulan(R) for the treatment
of psoriasis. A protocol for this study was established in 2005.

      Stiefel Laboratories, Inc. On January 12, 2006, we entered into an
exclusive marketing, distribution and supply agreement with Stiefel
Laboratories, Inc. The agreement covers current and future uses of our
Levulan(R) Kerastick(R) PDT in dermatology. The agreement, which has an initial
term of ten years, grants Stiefel the right to market and distribute our product
in Mexico, Central and South America. We have completed the portion of the
Brazilian regulatory submission for the use of Levulan PDT for actinic
keratoses. Stiefel will complete final integration and submission of the data to
the Brazilian regulatory agency with market launch expected in late 2006 or
early 2007. Stiefel will prepare and file the regulatory applications in other
countries in the territory subject to the terms of the Agreement, perhaps first
launching in a country other than Brazil. All regulatory filings and
registrations for approval will be owned by DUSA, unless otherwise agreed by
DUSA. Stiefel will make up to $3,000,000 in milestone payments, based upon
receipt of final pricing approval of the product from Brazilian regulatory
authorities and achievement of certain minimum purchase levels in the territory,
subject to certain terms and conditions. We will manufacture the Kerastick(R)
for Stiefel in our manufacturing facility in Wilmington, Massachusetts. Stiefel
will pay to DUSA a percentage of Stiefel's final selling price to third-parties
subject to a certain minimum purchase price per unit and to other terms and
conditions. Steifel has certain minimum purchase obligations. The parties have
certain rights to terminate the Agreement prior to the end of the initial term,
and Stiefel has an option to extend the term for an additional ten years on
mutually agreeable terms and conditions.

      PATENTS AND TRADEMARKS

      We actively seek, when appropriate, to protect our products and
proprietary information through United States and foreign patents, trademarks
and contractual arrangements. In addition, we rely on trade secrets and
contractual arrangements to protect certain aspects of our proprietary
information and products.

      Our ability to compete successfully depends, in part, on our ability to
defend our patents that have issued, obtain new patents, protect trade secrets
and operate without infringing the proprietary rights of others. We have no
product patent protection for the compound ALA itself, as our basic patents are
for methods of detecting and treating various diseased tissues using ALA or
related compounds called precursors, in combination with light. Even where we
have patent protection, there is no guarantee that we will be able to enforce
our patents. Patent litigation is expensive, and we may not be able to afford
the costs. We own or exclusively license patents and patent applications related
to the following:

      o     methods of using ALA and its unique physical forms in combination
            with light,

      o     compositions and apparatus for those methods, and

      o     unique physical forms of ALA.

                                       17


      These patents expire no earlier than 2009, and certain patents are
entitled to terms beyond that date. Effective September 29, 2003, the United
States Patent and Trademark Office extended the term of U.S Patent No.
5,079,262, with respect to our approved AK indication for Levulan(R), until
September 29, 2013.

      Under the license agreement with PARTEQ, we hold an exclusive worldwide
license to certain patent rights in the United States and a limited number of
foreign countries. See section entitled "Business - Licenses". All United States
patents and patent applications licensed from PARTEQ relating to ALA are method
of treatment patents. Method of treatment patents limit direct infringement to
users of the methods of treatment covered by the patents. We currently have
patents and/or pending patent applications in the United States and in a number
of foreign countries covering unique physical forms of ALA, compositions
containing ALA, as well as ALA applicators, light sources for use with ALA, and
other technology. We cannot guarantee that any pending patent applications will
mature into issued patents.

      We have limited 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
under the European Patent Convention. See sections entitled "Risk Factors -
Risks Related to DUSA" and "Legal Proceedings".

      We can provide no assurance that a third-party or parties will not claim,
with or without merit, that we have infringed or misappropriated their
proprietary rights. A number of entities have obtained, and are attempting to
obtain patent protection for various uses of ALA. We can provide no assurance as
to whether any issued patents, or patents that may later issue to third-parties,
may affect the uses on which we are working or whether such patents can be
avoided, invalidated or licensed if they cannot be avoided or invalidated. If
any third-party were to assert a claim for infringement, as one party has
already done, we can provide no assurance that we would be successful in the
litigation or that such litigation would not have a material adverse effect on
our business, financial condition and results of operation. Furthermore, we may
not be able to afford the expense of defending against any such additional
claim.

      In addition, we cannot guarantee that our patents, whether owned or
licensed, or any future patents that may issue, will prevent other companies
from developing similar or functionally equivalent products. Further, we cannot
guarantee that we will continue to develop our own patentable technologies or
that our products or methods will not infringe upon the patents of
third-parties. In addition, we cannot guarantee that any of the patents that may
be issued to us will effectively protect our technology or provide a competitive
advantage for our products or will not be challenged, invalidated, or
circumvented in the future.

      We also attempt to protect our proprietary information as trade secrets.
Generally agreements with employees, licensing partners, consultants,
universities, pharmaceutical companies and agents contain provisions designed to
protect the confidentiality of our proprietary information. However, we can
provide no assurance that these agreements will provide effective protection for
our proprietary information in the event of unauthorized use or disclosure of
such information. Furthermore, we can provide no assurance that our competitors
will not independently develop substantially equivalent proprietary information
or otherwise gain access to our proprietary information, or that we can
meaningfully protect our rights in unpatentable proprietary information.

      Even in the absence of composition of matter patent protection for ALA, we
may receive financial benefits from: (i) patents relating to the use of such
products (like PARTEQ's patents); (ii) patents relating to special compositions
and formulations; (iii) limited marketing exclusivity that may be available
under the Hatch-Waxman Act and any counterpart protection available in foreign
countries and (iv) patent term extension under the Hatch-Waxman Act. See section
entitled "Business - Government

                                       18


Regulation". Effective patent protection also depends on many other factors such
as the nature of the market and the position of the product in it, the growth of
the market, the complexities and economics of the process for manufacture of the
active ingredient of the product and the requirements of the new drug provisions
of the Food, Drug and Cosmetic Act, or similar laws and regulations in other
countries.

      We seek registration of trademarks in the United States, and other
countries where we may market our products. To date, we have been issued 27
trademark registrations, and other applications are pending.

MANUFACTURING

      On July 14, 2003, we received approval from the FDA to manufacture the
Levulan(R) Kerastick(R) at our Wilmington, Massachusetts manufacturing facility.
In February 2004, we began commercial production of our Levulan(R) Kerastick(R)
after having terminated the former third-party contract manufacturing
arrangement. We plan to maintain a reasonable level of Kerastick(R) inventory
based on sales projections. During the third quarter of 2005, we received FDA
approval to manufacture our BLU-U(R) brand light source in our Wilmington,
Massachusetts facility. However, at this time, we expect to utilize our own
facility only as a back-up to our current third-party manufacturer or for
repairs. Our drug, Levulan(R), and the BLU-U(R) brand light source are each
manufactured by single third-party suppliers.

DISTRIBUTION

      We have been a direct distributor of the BLU-U(R) since its launch.
Effective January 1, 2006, we have increased our own distribution capacity and
have become the sole distributor for our Levulan(R) Kerastick(R) in the United
States. In March 2004, we signed an exclusive Canadian marketing and
distribution agreement for the Levulan(R) Kerastick(R) and BLU-U(R) with
Coherent-AMT Inc., or Coherent, a leading Canadian medical device and laser
distribution company. Coherent began marketing the BLU-U(R) in April 2004 and
the Kerastick(R) in June 2004, following receipt of the applicable regulatory
approval from Health Canada. The agreement has a three-year term, which can be
automatically renewed for additional one-year terms, unless either party
notifies the other party prior to a term expiration that it does not intend to
renew the agreement. Coherent has the right for a period of time following
termination of its agreement to return inventory of product.

      In January 2006, we entered into a marketing and distribution agreement
for the Levulan(R) Kerastick(R) with Stiefel Laboratories, Inc. Under the
agreement, Stiefel was granted an exclusive right to distribute Levulan(R)
Kerastick(R) in Mexico, Central and South America. The Agreement has an initial
term of ten years. DUSA has completed its portion of the Brazilian regulatory
submission for the use of Levulan PDT for actinic keratoses. Effective with the
signing of the Agreement, Stiefel will complete final integration and submission
of the data to the Brazilian regulatory agency with market launch expected in
late 2006 or early 2007. Stiefel may launch the product in Mexico or other
countries in the territory prior to a launch in Brazil. See section entitled
"Business - Licenses, Stiefel Laboratories, Inc."

MARKETING AND SALES

      DUSA markets its approved dermatology products in the United States. We
have appointed Coherent-AMT as marketing partner for our products in Canada and
Stiefel for our Levulan(R) Kerastick(R) in Mexico, Central and South America.

      As a result of reacquiring our product rights in late 2002 from a former
marketing partner, we commenced marketing and sales activities for our products
in 2003, including the launch of our sales force in October 2003. Initially the
sales force was comprised of six direct representatives, various

                                       19


independent representatives, and an independent sales distributor, designed to
focus on most of our key geographic markets in the United States. During 2005,
we continued our efforts to penetrate the market by expanding our sales coverage
in key geographic locations. As of December 31, 2005, we have further increased
the size of our sales force to 24 sales representatives deployed nationally.

      Following the receipt of marketing approval from the Health Protection
Branch - Canada in June 2004, we started to market and sell the Levulan(R)
Kerastick(R) with PDT using the BLU-U(R) for AKs of the face or scalp in Canada
through Coherent-AMT. We anticipate that Stiefel will complete final integration
and submission of the data to the Brazilian regulatory agency with market launch
expected in late 2006 or early 2007 and perhaps sooner in other countries in its
territory. See sections entitled "Business - Licenses and Distribution".

COMPETITION

      Commercial development of PDT agents other than Levulan(R) is currently
being pursued by a number of companies. These include: QLT Inc. (Canada); Axcan
Pharma Inc. (United States); Miravant, Inc. (United States); Pharmacyclics, Inc.
(United States); PhotoTherapeutics, Inc. (U.K.); medac GmbH and photonamic GmbH
& Co. KG (Germany); and PhotoCure ASA (Norway) who entered into a marketing
agreement with Galderma S.A. for countries outside of Nordic countries for
certain dermatology indications. Several of these companies are also
commercializing and/or conducting research with ALA or ALA-related compounds.

      PhotoCure has received marketing approval of its ALA precursor (ALA
methyl-ester) compound for PDT treatment of AK and basal cell carcinoma, called
BCC, in the European Union, New Zealand, Australia, and countries in
Scandinavia. In July 2004, PhotoCure received FDA approval in the United States
for its AK therapy. However, in December 2004 the FDA notified PhotoCure that
its new drug application, or NDA, for BCC was not approvable. If PhotoCure
enters into the marketplace with its AK therapy, its product will directly
compete with our products. In April 2002, we received a copy of a notice issued
by PhotoCure ASA to Queen's University at Kingston, Ontario, alleging that one
of the patents covered by our agreement with PARTEQ, Australian Patent No.
624985, relating to ALA, was invalid. As a consequence of this action, Queen's
University assigned the Australian patent to us so that we could participate
directly in this litigation. In April 2005, the Federal Court of Australia ruled
that the Australian patent assigned to DUSA by Queen's University which relates
to DUSA's aminolevulinic acid photodynamic therapy is valid and remains in full
force and effect. However, the Court also ruled that PhotoCure's product,
Metvix, does not infringe the claims in the Australian patent. We have been
negotiating a settlement with PhotoCure pertaining to certain of our patents and
we expect the agreement to be finalized in the first half of 2006. See section
entitled "Legal Proceedings".

      In August 2003, Axcan Pharma Inc. received FDA approval for the use of its
product, PHOTOFRIN(R)(3), for photodynamic therapy in the treatment of high
grade dysplasia associated with Barrett's esophagus. This approval enabled Axcan
to be the first company to market a PDT therapy for this indication which we are
also pursuing.

      There are also non-PDT products for the treatment of AKs, including
cryotherapy with liquid nitrogen, 5-fluorouracil (Efudex(R))(4), diclofenac
sodium (Solaraze(R))(5), and imiquimod (ALDARA(TM))(6). Other

- ----------
(3)   PHOTOFRIN(R) is a registered trademark of Axcan Pharma Inc.

(4)   Efudex(R) is a registered trademark of Valeant Pharmaceuticals
      International.

(5)   Solaraze(R) is a registered trademark of SkyePharma PLC.

(6)   ALDARA(TM) is a trademark of 3M Company.

                                       20


AK therapies are also known to be under development, by companies such as
Medigene (GmbH), Peplin (Australia) and others. The pharmaceutical industry is
highly competitive, and 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. Our competitors may
succeed in developing products that are safer or more effective than ours and in
obtaining regulatory marketing approval of future products before we do. Our
competitiveness may also be affected by our ability to manufacture and market
our products and by the level of reimbursement for the cost of our drug and
treatment by third-party payors, such as insurance companies, health maintenance
organizations and government agencies.

      We believe that comparisons of the properties of various photosensitizing
PDT drugs will also highlight important competitive issues. 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 photodynamic therapy; 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. New drugs or future developments in PDT,
laser products or in other drug technologies may provide therapeutic or cost
advantages for competitive products. No assurance can be given that developments
by other parties will not render our products uncompetitive or obsolete.

      DUSA also markets the BLU-U(R) without Levulan(R) for the treatment of
moderate inflammatory acne vulgaris and general dermatological conditions. Our
competition for the BLU-U(R) without Levulan(R) for moderate inflammatory acne
vulgaris is primarily oral antibiotics, topical antibiotics and other topical
prescription drugs, as well as various laser and non-laser light sources. As
blue light alone for acne is still a relatively new therapy compared to existing
therapies, reimbursement has not been established by private insurance
companies, which may also affect our competitive position versus traditional
therapies which are reimbursed.

      Our principal method of competition with existing therapies of AKs and
moderate inflammatory acne vulgaris is patient benefits, including rapid healing
and excellent cosmetic results. See section entitled "Business - Dermatology
Indications, Actinic Keratoses; Acne".

GOVERNMENT REGULATION

      The manufacture and sale of pharmaceuticals and medical devices in the
United States are governed by a variety of statutes and regulations. These laws
require, among other things:

      o     approval of manufacturing facilities, including adherence to current
            good manufacturing practices, laboratory and clinical practices
            during production and storage known as cGMP, QSR, GLP and GCP,

      o     controlled research and testing of products,

      o     applications for marketing approval containing manufacturing,
            preclinical and clinical data to establish the safety and efficacy
            of the product, and

      o     control of marketing activities, including advertising and labeling.

      The marketing of pharmaceutical products requires the approval of the FDA
in the United States, and similar agencies in other countries. The FDA has
established regulations and safety standards, which apply to the preclinical
evaluation, clinical testing, manufacture and marketing of pharmaceutical
products. The process of obtaining marketing approval for a new drug normally
takes several years and often involves significant costs. The steps required
before a new drug can be produced and marketed for human use in the United
States include:

                                       21


      o     preclinical studies

      o     the filing of an Investigational New Drug, or IND, application,

      o     human clinical trials, and

      o     the approval of a New Drug Application, or NDA.

      Preclinical studies are conducted in the laboratory and on animals to
obtain preliminary information on a drug's efficacy and safety. The time
required for conducting preclinical studies varies greatly depending on the
nature of the drug, and the nature and outcome of the studies. Such studies can
take many years to complete. The results of these studies are submitted to the
FDA as part of the IND application. Human testing can begin if the FDA does not
object to the IND application.

      The human clinical testing program involves three phases. Each clinical
study is typically conducted under the auspices of an Institutional Review
Board, or IRB, at the institution where the study will be conducted. An IRB will
consider among other things, ethical factors, the safety of human subjects, and
the possible liability of the institution. A clinical plan, or "protocol," must
be submitted to the FDA prior to commencement of each clinical trial. All
patients involved in the clinical trial must provide informed consent prior to
their participation. The FDA may order the temporary or permanent discontinuance
of a clinical trial at any time for a variety of reasons, particularly if safety
concerns exist. These clinical studies must be conducted in conformance with the
FDA's bioresearch monitoring regulations.

      In Phase I, studies are usually conducted on a small number of healthy
human volunteers to determine the maximum tolerated dose and any product-related
side effects of a product. Phase I studies generally require several months to
complete, but can take longer, depending on the drug and the nature of the
study. Phase II studies are conducted on a small number of patients having a
specific disease to determine the most effective doses and schedules of
administration. Phase II studies generally require from several months to 2
years to complete, but can take longer, depending on the drug and the nature of
the study. Phase III involves wide scale studies on patients with the same
disease in order to provide comparisons with currently available therapies.
Phase III studies generally require from six months to four years to complete,
but can take longer, depending on the drug and the nature of the study.

      Data from Phase I, II and III trials are submitted to the FDA with the
NDA. The NDA involves considerable data collection, verification and analysis,
as well as the preparation of summaries of the manufacturing and testing
processes and preclinical and clinical trials. Submission of an NDA does not
assure FDA approval for marketing. The application review process generally
takes 1 to 4 years to complete, although reviews of treatments for AIDS, cancer
and other life-threatening diseases may be accelerated, expedited or subject to
fast track treatment. The process may take substantially longer if, among other
things, the FDA has questions or concerns about the safety and/or efficacy of a
product. In general, the FDA requires properly conducted, adequate and
well-controlled clinical studies demonstrating safety and efficacy with
sufficient levels of statistical assurance. However, additional information may
be required. For example, the FDA may also request long-term toxicity studies or
other studies relating to product safety or efficacy. Even with the submission
of such data, the FDA may decide that the application does not satisfy its
regulatory criteria for approval and may disapprove the NDA. Finally, the FDA
may require additional clinical tests following NDA approval to confirm safety
and efficacy, often referred to as Phase IV clinical trials.

      Upon approval, a prescription drug may only be marketed for the approved
indications in the approved dosage forms and at the approved dosage with the
approved labeling. Adverse experiences with the product must be reported to the
FDA. In addition, the FDA may impose restrictions on the use of the drug that
may be difficult and expensive to administer. Product approvals may be withdrawn
if

                                       22


compliance with regulatory requirements is not maintained or if problems occur
or are discovered after the product reaches the market. After a product is
approved for a given indication, subsequent new indications, dosage forms, or
dosage levels for the same product must be reviewed by the FDA after the filing
and upon approval of a supplemental NDA. The supplement deals primarily with
safety and effectiveness data related to the new indication or dosage. Finally,
the FDA requires reporting of certain safety and other information, often
referred to as "adverse events" that become known to a manufacturer of an
approved drug. Safety information collected through this process can result in
changes to a product's labeling or withdrawal of a product from the market. If
an active ingredient of a drug product has been previously approved, drug
applications can be filed that may be less time-consuming and costly.

      On December 3, 1999, the FDA approved the marketing of our Levulan(R)
Kerastick(R) 20% Topical Solution with PDT for treatment of AKs of the face or
scalp. The commercial version of our BLU-U(R), used together with the
Kerastick(R) to provide PDT for the treatment of non-hyperkeratotic actinic
keratoses, or AKs, of the face or scalp, was approved on September 26, 2000. In
September 2003, we received clearance from the FDA to market the BLU-U(R)
without Levulan(R) PDT for the treatment of moderate inflammatory acne vulgaris
and general dermatological conditions.

      Other than the FDA-approved use of the Levulan(R) Kerastick(R) with PDT
for treatment of AKs, and the FDA clearance to market the BLU-U for moderate
inflammatory acne and other dermatologic conditions, our other potential
products still require significant development, including additional preclinical
and/or clinical testing, and regulatory marketing approval prior to
commercialization. The process of obtaining required approvals can be costly and
time consuming and there can be no guarantee that the use of Levulan(R) in any
future products will be successfully developed, prove to be safe and effective
in clinical trials, or receive applicable regulatory marketing approvals.

      Medical devices, such as our light source device, are also subject to the
FDA's rules and regulations. These products are required to be tested,
developed, manufactured and distributed in accordance with FDA regulations,
including good manufacturing, laboratory and clinical practices. Under the Food,
Drug & Cosmetic Act, all medical devices are classified as Class I, II or III
devices. The classification of a device affects the degree and extent of the
FDA's regulatory requirements, with Class III devices subject to the most
stringent requirements and FDA review. Generally, Class I devices are subject to
general controls (for example, labeling and adherence to the cGMP requirement
for medical devices), and Class II devices are subject to general controls and
special controls (for example, performance standards, postmarket surveillance,
patient registries and FDA guidelines). Class III devices, which typically are
life-sustaining or life-supporting and implantable devices, or new devices that
have been found not to be substantially equivalent to a legally marketed Class I
or Class II "predicate device," are subject to general controls and also require
clinical testing to assure safety and effectiveness before FDA approval is
obtained. The FDA also has the authority to require clinical testing of Class I
and II devices. The BLU-U(R) is part of a combination product as defined by FDA
and therefore has been classified as a Class III device. We are developing an
endoscopic device for the Barrett's esophagus indication which we believe will
also be classified as Class III and be subject to the highest level of FDA
regulation. Approval of Class III devices require the filing of a premarket
approval, or PMA, application supported by extensive data, including preclinical
and clinical trial data, to demonstrate the safety and effectiveness of the
device. If human clinical trials of a device are required and the device
presents a "significant risk," the manufacturer of the device must file an
investigational device exemption or "IDE" application and receive FDA approval
prior to commencing human clinical trials. At present, our devices are being
studied in preclinical and clinical trials under our INDs.

      Following receipt of the PMA application, if the FDA determines that the
application is sufficiently complete to permit a substantive review, the agency
will accept it for filing and further review. Once the submission is filed, the
FDA begins a review of the PMA application. Under the

                                       23


Medical Device User Fee and Modernization Act, the FDA has 180 days to review a
PMA application and respond to the sponsor. The review of PMA applications more
often occurs over a significantly protracted time period, and the FDA may take
up to 2 years or more from the date of filing to complete its review. In
addition, a PMA for a device which forms part of a combination product will not
be approved unless and until the NDA for the corresponding drug is also
approved.

      The PMA process can be expensive, uncertain and lengthy. A number of other
companies have sought premarket approval for devices that have never been
approved for marketing. The review time is often significantly extended by the
FDA, which may require more information or clarification of information already
provided in the submission. During the review period, an advisory committee
likely will be convened to review and evaluate the PMA application and provide
recommendations to the FDA as to whether the device should be approved for
marketing. In addition, the FDA will inspect the manufacturing facility to
ensure compliance with cGMP requirements for medical devices prior to approval
of the PMA application. If granted, the premarket approval may include
significant limitations on the indicated uses for which the product may be
marketed, and the agency may require post-marketing studies of the device.

      Medical products containing a combination of drugs, including biologic
drugs, or devices may be regulated as "combination products". A combination
product generally is defined as a product comprised of components from 2 or more
regulatory categories (drug/device, device/biologic, drug/biologic, etc.). In
December 2002, the FDA established the Office of Combination Products, or OCP,
whose responsibilities, according to the FDA, will cover the entire regulatory
life cycle of combination products, including jurisdiction decisions as well as
the timeliness and effectiveness of pre-market review, and the consistency and
appropriateness of post-market regulation.

      In connection with our NDA for the Levulan(R) Kerastick(R) with PDT for
AKs, a combination filing (including a PMA for the BLU-U(R) light source device
and the NDA for the Levulan(R) Kerastick(R)) was submitted to the Center for
Drug Evaluation and Research. The PMA was then separated from the NDA submission
by the FDA and reviewed by the FDA's Center for Devices and Radiological Health.
Based upon this experience, we anticipate that any future NDAs for Levulan(R)
PDT/PD will be a combination filing accompanied by PMAs. There is no guarantee
that PDT products will continue to be regulated as combination products.

      The United States Drug Price Competition and Patent Term Restoration Act
of 1984 known as the Hatch-Waxman Act establishes a 5-year period of marketing
exclusivity from the date of NDA approval for new chemical entities approved
after September 24, 1984. Levulan(R) is a new chemical entity and market
exclusivity under this law expired on December 3, 2004. During this Hatch-Waxman
marketing exclusivity period, the FDA will not approve another application
submitted by a third-party for approval of a drug product which has the same
reference listed drug as Levulan(R), i.e., ALA as its active ingredient. After
the expiration of the Hatch-Waxman exclusivity period, any third-party who
submits an application for approval for a drug product containing ALA must
provide a certification that (i) no patent information has been filed; (ii) that
such patent has expired; (iii) marketing will not commence until the patent(s)
has expired; or (iv) that the patent is invalid or will not be infringed by the
manufacture, use, or sale of the third-party applicant.

      Any abbreviated or paper NDA applicant will be subject to the notification
provisions of the Hatch-Waxman Act, which should facilitate our notification
about potential infringement of our patent rights. The abbreviated or paper NDA
applicant must notify the NDA holder and the owner of any patent applicable to
the abbreviated or paper NDA product, of the application and intent to market
the drug that is the subject of the NDA.

                                       24


      In 2004, DUSA began marketing and selling our products in Canada.
Generally, we try to design our protocols for clinical studies so that the
results can be used in all the countries where we hope to market the product.
However, countries sometimes require additional studies to be conducted on
patients located in their country. Prior to marketing a product in other
countries, approval by that nation's regulatory authorities must be obtained.
Our former marketing partner had been responsible for applying for marketing
approvals outside the United States for Levulan(R) PDT for dermatology uses and
did file applications for approval in Austria, Australia, South Africa and
Brazil. However, our focus has been primarily on the North American markets
initially, and therefore we authorized our former partner to withdraw the
applications for regulatory approval of Levulan(R) PDT in Australia, Austria and
South Africa. In 2003, we also advised our former partner to withdraw the
applications for the Levulan(R) Kerastick(R) and BLU-U(R) in Brazil, even though
the Kerastick(R) had already been approved, as it was determined that such
rights cannot be transferred to us. We, together with Stiefel under our recently
completed agreement, are in the process of reapplying for approval in Brazil,
but have not determined if we will reapply in any of the other countries at this
time.

      With the enactment of the Drug Export Amendments Act of the United States
in 1986, products not yet approved by the FDA may be exported to certain foreign
markets if the product is approved by the importing nation and approved for
export by the United States government. We can provide no assurance that we will
be able to get approval for any of our potential products from any importing
nations' regulatory authorities or be able to participate in the foreign
pharmaceutical market.

      Our research and development activities have involved the controlled use
of certain hazardous materials, such as mercury in fluorescent tubes. We are
subject to various laws and regulations governing the use, manufacture, storage,
handling and disposal of hazardous materials and certain waste products. During
the design, construction and validation phases of our Kerastick(R) facility, we
have taken steps to ensure that appropriate environmental controls associated
with the facility comply with environmental laws and standards. We can provide
no assurance that we will not have to make significant additional expenditures
in order to comply with environmental laws and regulations in the future.
Furthermore, we cannot assure that current or future environmental laws or
regulations will not materially adversely effect our operations, business or
assets. Although we believe that our safety procedures for the handling and
disposal of such hazardous materials comply with the standards prescribed by
current environmental laws and regulations, the risk of accidental contamination
or injury from these materials cannot be completely eliminated. In the event of
such an accident, we could be held liable for any damages that result, and any
such liability could exceed our resources.

PRODUCT LIABILITY AND INSURANCE

      We are subject to the inherent business risk of product liability claims
in the event that the use of our technology or any prospective product is
alleged to have resulted in adverse effects during testing or following
marketing approval of any such product for commercial sale. We maintain product
liability insurance for coverage of our clinical trial activities and for our
commercial supplies. There can be no assurance that such insurance will continue
to be available on commercially reasonable terms or that it will provide
adequate coverage against all potential claims. See section entitled "Legal
Proceedings".

EMPLOYEES

      At the end of 2005, we had 64 full-time employees and two part-time
employees, which was an increase over the 2004 levels. We also retain numerous
independent consultants and temporary employees to support our business needs.

      We have employment agreements with all of our key executive officers.

                                       25


INTERNET INFORMATION

      Our internet site is located at www.dusapharma.com. Copies of our reports
filed pursuant to Section 13(a) or 15(d) of the Exchange Act, including Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form
8-K, may be accessed from our website, free of charge, as soon as reasonably
practicable after we electronically file such reports with, or furnish such
reports to, the Securities and Exchange Commission. Please note that our
internet address is being provided for reference only and no information
contained therein is incorporated by reference into our Exchange Act filings.

ITEM 1A. RISK FACTORS

      You should carefully consider and evaluate all of the information in, or
incorporated by reference in, this annual report on Form 10-K. 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 annual report on Form 10-K 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
APPROVED PRODUCTS, THE LEVULAN(R) KERASTICK(R) WITH THE BLU-U(R) BRAND LIGHT
SOURCE FOR THE TREATMENT OF AKS OF THE FACE OR SCALP, AND THE BLU-U(R) WITHOUT
LEVULAN(R) FOR THE TREATMENT OF MODERATE INFLAMMATORY ACNE.

      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 approved 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. Acquiring and retaining marketing and sales
force capabilities involves significant expense, and current sales levels are
not offsetting the expenses related to these efforts. If our sales and marketing
efforts fail, then sales of the Kerastick(R) and the BLU-U(R) will be adversely
affected.

                                       26


      IF WE CANNOT IMPROVE PHYSICIAN REIMBURSEMENT AND/OR CONVINCE MORE PRIVATE
      INSURANCE CARRIERS TO ADEQUATELY REIMBURSE PHYSICIANS FOR OUR THERAPY,
      SALES OF OUR LEVULAN(R) KERASTICK(R) FOR AKS 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.

      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) AND THE BLU-U(R), ANY SUPPLY OR MANUFACTURING
      PROBLEMS COULD NEGATIVELY IMPACT OUR SALES.

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

      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:

      o     product yields,

      o     quality control,

      o     component and service availability,

      o     compliance with FDA regulations, and

      o     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.

                                       27


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

      Both the manufacture and marketing of our products, the Levulan(R)
Kerastick(R) with the BLU-U(R) for AKs and the BLU-U(R) without Levulan(R) to
treat moderate inflammatory acne, 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:

      o     approval of manufacturing facilities, including adherence to good
            manufacturing and laboratory practices during production and
            storage,

      o     controlled research and testing of products even after approval, and

      o     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:

      o     send us warning letters,

      o     impose fines and other civil penalties on us,

      o     seize our products,

      o     suspend our regulatory approvals,

      o     refuse to approve pending applications or supplements to approved
            applications filed by us,

      o     refuse to permit exports of our products from the United States,

      o     require us to recall products,

      o     require us to notify physicians of labeling changes and/or product
            related problems,

      o     impose restrictions on our operations, and/or

      o     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

                                       28


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, 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.

      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 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:

      o     the effectiveness, or perceived effectiveness, of our products in
            comparison to competing products;

      o     the existence of any significant side effects, as well as their
            severity in comparison to any competing products;

      o     potential advantages over alternative treatments;

      o     the ability to offer our products for sale at competitive prices;

      o     relative convenience and ease of administration;

      o     the strength of marketing and distribution support; and

      o     sufficient third-party coverage or reimbursement.

                                       29


      WE HAVE SIGNIFICANT LOSSES AND ANTICIPATE CONTINUED LOSSES FOR THE
      FORESEEABLE FUTURE.

      We have a history of operating losses. We expect to have continued losses
through at least 2006 as we attempt to increase sales of our approved products
in the marketplace and continue research and development of potential new
products. We incurred net losses of $15,628,980 for the year ended December 31,
2004 and net losses of $14,998,709 for the year ended December 31, 2005. As of
December 31, 2005, our accumulated deficit was approximately $89,537,000. 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
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 patents and patent applications related to the following:

      o     methods of using ALA and its unique physical forms in combination
            with light,

      o     compositions and apparatus for those methods, and

      o     unique physical forms of ALA.

      We have limited 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.

      In 2002, we received notice of a lawsuit filed in Australia by PhotoCure
ASA alleging that Australian Patent No. 624985, which is one of the patents
licensed to us by PARTEQ Research & Development Innovations, the technology
transfer arm of Queen's University at Kingston, Ontario, relating to our ALA
technology, is invalid. As a consequence of this action, Queen's University
assigned the Australian patent to DUSA so that we could participate directly in
the 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. The parties signed a Mediation Agreement in August 2004 to attempt to
settle their disputes and those discussions are ongoing. If the parties are
unable to amicably resolve matters, patent litigation could ensue in the United
States and there can be no guarantee that we would prevail.

      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

                                       30


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
does not have patent 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:

      o     these persons or entities might breach the agreements,

      o     we might not have adequate remedies for a breach, and/or

      o     our competitors will independently develop or otherwise discover our
            trade secrets.

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

      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-party
competitors may infringe one or more of our patents, and we could be required to
spend significant resources to enforce our patent rights. Also, if we were to
sue a third-party for infringement of our patents in the United States, that
third-party could challenge 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.

      During 2005 and into 2006, we filed several lawsuits against compounding
pharmacies and physicians alleging violations of patent law. While we have been
successful in obtaining a default judgment against one compounding pharmacy 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.

                                       31


      WE HAVE ONLY TWO 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, AND
      THE USE OF THE BLU-U(R) ALONE TO TREAT MODERATE INFLAMMATORY ACNE, 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) or 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 DUSA's two approved therapies,
all of our other potential Levulan(R) and BLU-U(R) products 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:

      o     delays in product development, clinical testing or manufacturing,

      o     unplanned expenditures in product development, clinical testing or
            manufacturing,

      o     failure in clinical trials or failure to receive regulatory
            approvals,

      o     emergence of superior or equivalent products,

      o     inability to market products due to third-party proprietary rights,
            and

      o     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, 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

                                       32


guidance for the pharmaceutical industry regarding the development of new drugs
for acne vulgaris treatment. 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.

      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 December 30, 2005 we entered into a Merger Agreement with Sirius
Laboratories, Inc. The transaction is expected to close during the first quarter
of 2006, subject to the terms and conditions in the Merger Agreement. 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:

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

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

      o     the potential loss of key employees;

      o     the potential loss of key collaborators;

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

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

      o     the potential for unexpected liabilities; and

      o     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.

                                       33


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 66 employees, including 2 part-time
employees as of December 31, 2005. 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. 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.

      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

                                       34


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, 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.

      If PhotoCure enters the United States marketplace with its PDT product,
our sales revenues may decline.

      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:

      o     price reductions,

      o     lower levels of third-party reimbursements,

      o     failure to achieve market acceptance, and

      o     loss of market share,

any of which could adversely affect our business. Further, we cannot give any
assurance that developments by our competitors or future competitors will not
render our technology obsolete.

OUR PRODUCTS MAY LOSE MARKET SHARE IF NEW MANUFACTURERS BEGIN PRODUCING
COMPETING PRODUCTS THAT ARE ABLE TO PENETRATE OUR MARKET.

      WE HAVE LEARNED THAT COMPOUNDING PHARMACIES ARE PRODUCING A FORM OF
      AMINOLEVULINIC ACID HCL AND ARE MARKETING IT TO THE MEDICAL COMMUNITY.

      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

                                       35


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. Also,
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. New
England Compounding Pharmacy has filed an answer, including a defense alleging
invalidity of our patents, and several counterclaims against us, and we have
filed our response. The parties are now in the discovery stage of this
litigation and we have been unable to predict the outcome of the lawsuit at this
time. A tentative trial date has been set by the court for January 2007. We
cannot be certain whether we will be successful in defending such counterclaims,
however, we have not accrued any amounts for settlement at this time. While we
believe that certain actions of these pharmacies 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 pharmacies 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.

      OUR PDT/PD 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/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.

      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. In July
2004, PhotoCure received FDA approval in the United States for its AK therapy.
If PhotoCure enters into the marketplace based on receiving approval, its
product will represent direct competition for our products.

      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:

      o     the ease of administration of our method of PDT,

      o     the degree of generalized skin sensitivity to light,

      o     the number of required doses,

                                       36


      o     the selectivity of our drug for the target lesion or tissue of
            interest, and

      o     the type and cost of our light systems.

                           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 March 1, 2006 there were outstanding options and warrants to
purchase 2,867,875 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 March 1, 2006, the price of our stock
has ranged from a low of $6.57 to a high of $16.30. Factors that contributed to
the volatility of our stock during the last 12 months included:

      o     quarterly levels of product sales;

      o     clinical trial results;

      o     general market conditions;

      o     increased marketing activities; and

      o     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.

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 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.

                                       37


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 1B. UNRESOLVED STAFF COMMENTS

      None.

ITEM 2. PROPERTIES

      In May 1999, we entered into a five year lease for 16,000 sq. ft. of
office/warehouse space to be used for offices and manufacturing in Wilmington,
Massachusetts. In December 2001 we entered into a 15 year lease covering the
entire building through November 2016. We have the ability to terminate the
Wilmington lease after the 10th year (2011) of the lease by providing the
landlord with notice at least 7 and one-half months prior to the date on which
the termination would be effective. In October 2002, we entered into a five-year
lease commitment for approximately 2,000 sq. ft., for our wholly-owned
subsidiary, DUSA Pharmaceuticals New York, Inc., replacing the space DUSA
previously occupied.

                                       38


Commencing in August 2002, we entered into a five year lease for office space
for our Toronto location which accommodates the Toronto office of our Chief
Executive Officer and shareholder services representative. See "Note 12(c) to
the Company's Notes to the Consolidated Financial Statements".

ITEM 3. LEGAL PROCEEDINGS

      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 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. Since these claims are unique to the Australian
patent and Australian law differs from patent law in other jurisdictions, we do
not expect that this decision is determinative of the validity of any other
patents licensed by us from Queen's University or of whether PhotoCure's product
infringes claims in such other patents, including the United States patent. None
of the parties have appealed the decision and the date to do so has expired. The
parties, including PhotoCure's marketing partner, Galderma S.A., signed a
Mediation Agreement in August 2004 to attempt to settle their disputes. The
parties are negotiating a settlement agreement which is expected to be finalized
in the first half of 2006.

      In December 2004, we filed a lawsuit against New England Compounding
Center of Framingham, Massachusetts alleging violations of United States patent
law in the United States Federal District Court in Boston, Massachusetts. On
March 17, 2005, New England Compounding Pharmacy filed an answer against us,
including a defense that our patents are invalid and several counterclaims
against us, and we filed our response on April 5, 2005. The parties are now in
the discovery stage of this litigation. A tentative trial date has been set by
the court for January 2007. We are seeking injunctive relief, monetary damages
and costs.

      In January 2005, we filed a lawsuit 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 in the United States
District Court for the District of Arizona. 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.

      In November of 2005 and January of 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 compounding
pharmacies, 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. Most of the physicians have
entered Consent Judgments in which they admit the infringement and provide DUSA
with the right to review their books and records. Two lawsuits are currently
on-going.

                                       39


      For other patent matters, see section entitled "Risk Factors - If we are
unable to protect our proprietary technology, trade secrets or know-how, we may
not be able to operate our business profitably".

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

      None.

                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
         ISSUER PURCHASES OF EQUITY SECURITIES

      Our common stock is traded on the NASDAQ National Market under the symbol
"DUSA." The following are the high and low sales prices for the common stock
reported for the quarterly periods shown.

Price range per common share by quarter, 2004:



            First      Second     Third      Fourth
           -------    -------    -------    -------
                                
NASDAQ
High       $ 14.87    $ 13.50    $ 12.20    $ 14.41
Low           5.02       8.46       8.23       9.95


Price range per common share by quarter, 2005:



            First      Second     Third      Fourth
           -------    -------    -------    -------
                                
NASDAQ
High       $ 16.30    $ 11.68    $ 11.33    $ 10.80
Low           8.70       8.33       8.50       8.67


      On March 1, 2006, the closing price of our common stock was $7.42 per
share on the NASDAQ National Market. On March 1, 2006, there were 634 holders of
record of our common stock.

      We have never paid cash dividends on our common stock and have no present
plans to do so in the foreseeable future.

                                       40


ITEM 6. SELECTED FINANCIAL DATA

      The following information should be read in conjunction with our
Consolidated Financial Statements and the Notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included elsewhere in this report. The selected financial data set forth below
has been derived from our audited consolidated financial statements.

CONSOLIDATED STATEMENTS OF
OPERATIONS DATA



                                                                                  YEAR ENDED DECEMBER 31,
                                                       ----------------------------------------------------------------------------
                                                           2005             2004            2003         2002 (1)          2001
                                                       -------------   -------------   -------------   ------------   -------------
                                                                                                       
Revenues (1)                                           $ 11,337,461    $  7,987,656    $    970,109    $ 25,483,238   $  5,390,736
Net income (loss)                                       (14,998,709)    (15,628,980)    (14,826,854)      5,762,518     (7,358,096)
Basic and diluted net income (loss) per
   common share                                        $      (0.89)   $      (0.96)   $      (1.06)   $       0.42   $      (0.53)


CONSOLIDATED BALANCE SHEETS
DATA



                                                                                     AS OF DECEMBER 31,
                                                       ----------------------------------------------------------------------------
                                                           2005             2004            2003           2002           2001
                                                       -------------   -------------   -------------   ------------   -------------
                                                                                                       
Total assets                                           $  42,330,631   $  56,650,888   $  44,697,488   $ 60,949,973   $  75,864,221
Long-term obligations                                              -               -       1,247,500      1,517,500               -
Shareholders' equity                                      38,028,728      52,507,018      40,232,049     56,057,730      49,834,537


- ----------
(1)   2002 includes the recognition of approximately $20,990,000 in revenues,
      $2,638,000 in cost of product sales and $639,000 in research and
      development costs as a result of the termination of our former dermatology
      collaboration arrangement. These amounts were previously deferred and were
      being amortized into operations over periods ranging from 1 to 12.5 years.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

      When you read this section of this report, it is important that you also
read the financial statements and related notes included elsewhere in this
report. This section contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those we
anticipate in these forward-looking statements for many reasons, including the
factors described below and in "Risk Factors".

OVERVIEW

      DUSA is a pharmaceutical company engaged primarily in the research,
development and marketing of our first drug in combination with light devices to
treat or detect a variety of conditions in processes known as photodynamic
therapy or photodetection. 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.

      Our products, the 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 under a former dermatology collaboration. AKs are precancerous skin
lesions caused by chronic sun exposure that can develop over time into a form of
skin cancer called

                                       41


squamous cell carcinoma. In addition, in September 2003 we received clearance
from the United States 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.

      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 objectives include
increasing the sales of our products in the United States and Canada, continuing
our efforts of exploring partnership opportunities for Levulan(R) PDT for
dermatology in Europe and/or other countries outside of the United States and
Canada and Latin America and continuing our clinical development programs for
our 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. See sections entitled "Business
- - Internal Indications" and "Business - Distribution".

      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 our drug and related processes and
improvements. In the United States, DUSA(R), DUSA Pharmaceuticals, Inc.(R),
Levulan(R), Kerastick(R) and BLU-U(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. See
sections entitled "Business - Licenses; and - Patents and Trademarks".

      On December 30, 2005, we entered into a merger agreement to acquire all of
the common stock of Sirius Laboratories, Inc. of Vernon Hills, Illinois in
exchange for cash and common stock of DUSA worth up to $30,000,000. The
transaction is expected to close during the first quarter of 2006, subject to
the terms and conditions in the Merger Agreement. Of the up to $30,000,000,
$8,000,000 less certain expenses will be paid in cash upon closing, $17,000,000
was paid in shares of DUSA's common stock also upon closing, and up to
$5,000,000 in cash or common stock, as DUSA determines, may be paid based on a
combination of new product approvals or launches, and achievement of certain
pre-determined total cumulative sales milestones for Sirius products. The
products acquired in this transaction, called the Sirius Merger, focus primarily
on the treatment of acne vulgaris and acne rosacea. The DUSA shares are expected
to be issued pursuant to Regulation D. The number of shares to be paid will be
equal to $17,000,000 divided by the lesser of $10.10 or the average closing
price of DUSA's shares on the NASDAQ Stock Market for the twenty (20) trading
days prior to closing date.

      The closing is subject to certain closing conditions as previously
disclosed which if not met, would provide a party the right to terminate the
Merger Agreement. See section entitled "Business - General." If the Merger
Agreement is terminated, a break-up fee in the amount of $250,000 might be due
from one party to the other. In addition, DUSA has incurred approximately
$800,000 of direct acquisition related costs which will affect the statement of
operations if the transaction does not close. We cannot be certain that the
merger will close.

      Historically, we devoted most of our resources to fund research and
development efforts in order to advance the Levulan(R) PDT/PD technology
platform. More recently, we have also devoted significant

                                       42


resources to our sales and marketing efforts. As a result, we have experienced
significant operating losses. During the quarter ended September 30, 2005, the
Company eliminated 14 staff positions, representing 16% of the workforce, to
align headcount more closely with management's assessment of its resource
requirements at that time. These workforce reductions were made across all
functions of the Company. As a result of these actions the Company recorded a
restructuring charge of approximately $150,000. As of December 31, 2005, the
Company had paid all of its obligations under the restructuring plan. As of
December 31, 2005, we had an accumulated deficit of approximately $89,537,000.
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 therapy by the medical and
consumer constituencies, and our ability to develop and/or acquire new
profitable 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.

      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 100,668 and 76,482 for the twelve
months ended December 31, 2005 and 2004, respectively, consisting of 87,210 and
69,870 units sold in the U.S., and 13,458 and 6,612 units sold in Canada, in
2005 and 2004 respectively. A summary of quarterly Kerastick(R) unit sales to
end users during the periods ended December 31, 2005 and 2004 is indicated
below:



                                       2005
                 -----------------------------------------------
                   Q1        Q2        Q3        Q4       TOTAL
                 ------    ------    ------    ------    -------
                                          
UNITED STATES    24,900    16,506    17,766    28,038     87,210

CANADA            3,804     3,666     2,520     3,468     13,458

                 ------    ------    ------    ------    -------
     TOTAL       28,704    20,172    20,286    31,506    100,668

                 ======    ======    ======    ======    =======




                                      2004
                 ----------------------------------------------
                   Q1        Q2        Q3        Q4       TOTAL
                 ------    ------    ------    ------    ------
                                          
UNITED STATES    12,054    16,002    18,870    22,944    69,870

CANADA                -     1,908     1,326     3,378     6,612

                 ------    ------    ------    ------    ------
     TOTAL       12,054    17,910    20,196    26,322    76,482

                 ======    ======    ======    ======    ======


      The net number of BLU-U(R) units placed in doctors' offices during the
twelve months ended December 31, 2005 and 2004 was 423 and 508, respectively,
including 94 and 101 placed in Canada in 2005 and 2004, respectively. As of
December 31, 2005 and 2004 there were 1,337 and 914 units in doctor's offices,
consisting of 1,142 and 813 in the U.S. and 195 and 101 in Canada in 2005 and
2004,

                                       43


respectively. In addition, during 2005 we began a BLU-U 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.

      We have continued our efforts to penetrate the market by expanding our
sales coverage in key geographic locations. See section entitled "Management's
Discussion and Analysis - Results of Operations, Marketing and Sales Costs". 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 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 and Canada following our recently completed agreement with
Stiefel Laboratories, Inc. 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 term.

      We believe that the issues related to reimbursement have negatively
impacted the economic competitiveness of our therapy with other AK therapies and
have hindered its adoption in the past. We have continued to 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. Doctors 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 (i.e.
it will be unchanged from 2005 levels). DUSA had expected reimbursement under
the CPT code to increase on January 1, 2006; however, we now believe that the
increase will not be effective until January 1, 2007 based on information from
CMS and the AAD. We are aware that some physicians believe that reimbursement
levels do not fully reflect the required efforts to routinely execute our
therapy in their practices. We 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.

      We have been encouraged by the positive response from many physicians and
patients who have used our therapy, but we recognize that we have to continue to
demonstrate the clinical value of our unique therapy, and the related product
benefits as compared to other well-established conventional therapies, in order
for the medical community to accept our products on a large scale. While our
financial position is strong, we cannot predict when product sales may offset
the costs associated with these efforts. We are aware that physicians have been
using Levulan(R) with the BLU-U(R) using short incubation, and 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.

                                       44


      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. We believe that these activities are negatively impacting our sales
growth. Therefore in December 2004 and in January 2005, we filed lawsuits
against two compounding pharmacies and several physicians. See section entitled
"Legal Proceedings".

      As of December 31, 2005, we had a staff of 64 full-time employees and 2
part-time employee, as compared to 65 full-time employees and 4 part-time
employees at the end of 2004, 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 2005, we increased the size of our sales force to 26 from 22
at the end of 2004. During 2005 we eliminated 14 positions through a
restructuring action, representing 16% of our workforce, to align headcount more
closely with our assessment of our resource requirements at this time. These
workforce reductions were made across all functions of the Company. We
anticipate that this reduction in staff will reduce our future operating costs
by $1,400,000 on an annualized basis. We may add and/or replace employees during
2006 as business circumstances deem necessary.

2005 TRANSACTIONS

      During 2005 and early 2006, DUSA entered into a number of transactions,
all designed to foster future growth of its Levulan(R) PDT and early 2006
platform.

      ENTERED INTO EXCLUSIVE MARKETING, DISTRIBUTION AND SUPPLY AGREEMENT WITH
STIEFEL LABORATORIES - In January, 2006, we announced that we had entered into
an exclusive Marketing, Distribution and Supply Agreement (the "Agreement") with
Stiefel Laboratories, Inc. ("Stiefel") covering current and future uses of
DUSA's proprietary Levulan(R) Kerastick(R) for photodynamic therapy (PDT) in
dermatology. The Agreement, grants Stiefel an exclusive right to distribute,
promote and sell the Levulan(R) Kerastick(R) in the western hemisphere from
south of and including Mexico and all other countries in the Caribbean,
excluding United States territories (collectively, the "Territory"). DUSA will
manufacture and supply to Stiefel on an exclusive basis in the Territory all of
Stiefel's reasonable requirements for the product. The Agreement, which has an
initial term of ten years, will expand the distribution of Levulan(R) beyond the
North American market for the first time into Mexico, Central and South America.
DUSA has completed its portion of the Brazilian regulatory submission for the
use of Levulan PDT for actinic keratoses. Effective with the signing of the
Agreement, Stiefel will complete final integration and submission of the data to
the Brazilian regulatory agency with market launch expected in late 2006 or
early 2007. Stiefel will prepare and file the regulatory applications in other
countries in the Territory subject to the terms of the Agreement. The parties
have certain rights to terminate the Agreement prior to the end of the initial
term, and Stiefel has an option to extend the term for an additional ten years
on mutually agreeable terms and conditions.

      SIGNED MERGER AGREEMENT TO ACQUIRE SIRIUS LABORATORIES, INC. - In
December, 2005, we signed a definitive Merger Agreement to acquire all of the
common stock of Sirius Laboratories Inc. of Vernon Hills, Illinois in exchange
for cash and common stock worth up to $30,000,000. Sirius is a privately held
dermatology specialty pharmaceuticals company founded in 2000 with a primary
focus on the treatment of acne vulgaris and acne rosacea. Closing of the
transaction is expected in the first quarter of 2006, subject to the terms and
conditions in the Merger Agreement. Of the up to $30,000,000, $8,000,000 less
certain expenses will be paid in cash upon closing, $17,000,000 will be paid in
shares of DUSA's common stock also upon closing in a private placement, and up
to $5,000,000 in cash or common stock may be paid based on a combination of new
product approvals or launches, and achievement of certain pre-determined total
cumulative sales milestones for Sirius products.

                                       45


      LAWSUITS FILED FOR INFRINGEMENT OF OUR LEVULAN(R) PHOTODYNAMIC THERAPY
PATENTS- In November 2005, we filed lawsuits against physicians in California,
Florida, and Tennessee to prevent their continued use of versions of its
Levulan(R) brand of aminolevulinic acid HCl (ALA) produced by compounding
pharmacies, for use in DUSA's patented photodynamic therapy (PDT) treatment for
actinic keratosis, basal cell carcinoma, acne and other dermatological
conditions. Additionally, some doctors were sued for misuse of DUSA's trademarks
and for violations of the Latham 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. We also sued two compounding pharmacies.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

      Critical accounting policies are those that require application of
management's most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain and may change in subsequent periods and that can significantly affect
our financial position and results of operations. Our accounting policies are
disclosed in Note 2 to the Consolidated Financial Statements. We have discussed
these policies and the underlying estimates used in applying these accounting
policies with our Audit Committee. Since not all of these accounting policies
require management to make difficult, subjective or complex judgments or
estimates, they are not all considered critical accounting policies. We consider
the following policies and estimates to be critical to our financial statements.

      REVENUE RECOGNITION - Revenues on product sales are recognized when
persuasive evidence of an arrangement exists, the price is fixed and final,
delivery has occurred, and there is reasonable expectation of collection.
Product sales made through distributors have been recorded as deferred revenue
until the product is sold by our distributors to the end user. Although we make
every effort to assure the reasonableness of our estimates, significant
unanticipated changes in our estimates due to business, economic, or industry
events could have a material impact on our results of operations.

      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 long-lived
assets for impairment whenever events or changes in business circumstances
indicate that the carrying amount of assets may not be fully recoverable or that
the useful lives of these assets are no longer appropriate. Factors considered
important which could trigger an impairment review include significant changes
relative to: (i) projected future operating results; (ii) the use of the assets
or the strategy for the overall business; (iii) business collaborations; and
(iv) industry, business, or economic trends and developments. Each impairment
test is based on a comparison of the undiscounted cash flow to the recorded
value of the asset. If it is determined that the carrying value of long-lived or
intangible assets may not be recoverable, the asset is written down to its
estimated fair value on a discounted cash flow basis. At December 31, 2005 and
2004, respectively, total property, plant and equipment had a net carrying value
of $2,972,000 and $3,482,000 including $2,233,000 at December 31, 2005
associated with our manufacturing facility. As of December 31, 2005 and 2004,
respectively, we had intangible assets totaling $150,000 and $197,000 recorded
in deferred charges and other assets

                                       46


relating to the unamortized balance of payments made in 2004 to a light source
supplier related to an amendment to our agreement and to a licensor related to
the reacquisition of our product rights in Canada.

      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.

      In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123(R), "Share-Based Payment," a revision of SFAS Statement No. 123.
The Company adopted SFAS 123(R) effective January 1, 2006, using the modified
prospective application method, and beginning with the first quarter of 2006
will be required to measure all employee share-based compensation awards using a
fair value based method and record share-based compensation expense in its
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. 123(R) will not affect the Company's cash flow, but it will
materially increase the Company's net loss and basic and diluted loss per common
share. In accordance with SFAS 123R, the Company will recognize the expense
attributable to stock awards that are granted or vest in periods ending
subsequent to December 31, 2005.

      For 2006, total stock-based compensation expense is estimated to be in the
range of $1,500,000 to $2,500,000. In order to develop the fiscal 2006
stock-based compensation expense estimate, we utilized assumptions including,
among other items, projected option grants, volatility measures using a
combination of historical and current and historical implied volatility, and
expected life estimates for officer and non-officer employee groups. The amount
of the 2006 grants, if any, have not yet been determined and could result in a
change to the amounts included in the range reflected above. Total
unrecognized stock-based compensation expense related to unvested stock options,
expected to be recognized over approximately two years, amounted
to $3,300,000 at December 31, 2005 net of forfeitures.

                                       47


RESULTS OF OPERATIONS

      YEAR ENDED DECEMBER 31, 2005 AS COMPARED TO 2004

      REVENUES - Total revenues for the year ended December 31, 2005 were
$11,337,000, as compared to $7,988,000 in 2004 and were comprised of the
following:



                                       2005             2004           INCREASE
                                   ------------     ------------     ------------
                                                            
KERASTICK(R) REVENUES
         United States             $  7,957,000     $  5,450,000     $  2,507,000
         Canada                         935,000          401,000          534,000
                                   ------------     ------------     ------------
                Total              $  8,892,000     $  5,851,000     $  3,041,000

BLU-U(R) REVENUES
         United States             $  1,930,000     $  1,795,000     $    135,000
         Canada                         515,000          342,000          173,000
                                   ------------     ------------     ------------
                Total              $  2,445,000     $  2,137,000     $    308,000

                                   ------------     ------------     ------------
           Total product sales     $ 11,337,000     $  7,988,000     $  3,349,000
                                   ============     ============     ============


      For the year ended December 31, 2005, overall Kerastick(R) unit sales to
end-users were 100,668, including 87,210 sold in the United States and 13,458
sold in Canada by Coherent-AMT, our Canadian marketing and distribution partner.
This represents an increase from 76,482 Kerastick(R) units sold in the year
ended December 31, 2004, including 69,870 sold in the United States, and 6,612
sold in Canada by Coherent-AMT. The increase in Kerastick(R) revenues for 2005
compared with 2004 is attributable to increased sales volumes, an increase in
our average unit selling price, increased levels of our direct distribution to
customers and a reduction in our overall sales volume discount programs. Our
average net selling price for the Kerastick(R) increased to $88.33 for 2005 from
$76.50 in 2004. 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 and Canada.

      The increase in 2005 BLU-U(R) revenue was driven by an increase in our
average selling price, which increased to $6,542 in 2005 from $4,368 in 2004.
During 2005, there were 368 units sold versus 489 units in 2004. The 2005 total
consists of 276 units sold in the United States and 92 units sold in Canada by
Coherent-AMT. The 2004 total consists of 398 sold in the United States and 91
sold in Canada. The decrease in BLU-U(R) units sold in 2005 compared to 2004 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 December 31, 2005, there were 80
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. Revenues pursuant to the evaluation program were not
significant in 2005.

      The increase of both Kerastick(R) and BLU-U(R) revenues during 2005 is a
result of the increased 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 and distribution efforts, while
still maintaining the services of one external distributor, and reduced our
overall sales volume discount programs, all of which have had a positive impact
on our average selling prices during 2005. Sales must increase significantly
from these levels in order for us to become profitable. We remain confident that
we

                                       48


are in a good position to exploit our therapy and that sales will continue to
increase through increased consumption of the Kerastick(R) by our existing
customers as well as the addition of new customers.

      COST OF PRODUCT SALES AND ROYALTIES - Cost of product sales and royalties
for the year ended December 31, 2005 were $6,214,000, as compared to $3,875,000
in 2004. The components of cost of product sales and royalties for the years
ended December 31, 2005 and 2004, including direct and indirect costs to support
our product are provided below:



                                                                                                                          INCREASE
KERASTICK(R) COST OF PRODUCT REVENUES AND ROYALTIES                                           2005           2004        (DECREASE)
                                                                                           ----------     ----------     ----------
                                                                                                                
Direct Kerastick Product Costs                                                             $1,771,000     $1,478,000     $  293,000
Other Kerastick(R) Product costs including internal costs assigned
  to support products                                                                       1,357,000        261,000      1,096,000
Royalty and Supply fees (1)                                                                   456,000        285,000        171,000
                                                                                           ----------     ----------     ----------
              Total Kerastick(R) cost of  product revenues and royalties                   $3,584,000     $2,024,000     $1,560,000
                                                                                           ==========     ==========     ==========




                                                                                                                          INCREASE/
BLU-U(R) COST OF PRODUCT REVENUES                                                             2005           2004        (DECREASE)
                                                                                           ----------     ----------     ----------
                                                                                                                
Direct BLU-U(R) Product costs (2)                                                          $1,249,000     $       -      $1,249,000
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                                                                     1,381,000      1,851,000       (470,000)
                                                                                           ----------     ----------     ----------
Total BLU-U(R)  cost of product revenues                                                   $2,630,000     $1,851,000     $  779,000
                                                                                           ----------     ----------     ----------
TOTAL COST OF PRODUCT REVENUES AND ROYALTIES                                               $6,214,000     $3,875,000     $2,339,000
                                                                                           ==========     ==========     ==========


- ----------
1)    Royalty and supply fees are paid to our licensor, PARTEQ Research and
      Development Innovations, the licensing arm of Queen's University,
      Kingston, Ontario, and starting in 2004, amortization of an upfront fee
      and a royalty are paid to Draxis, DUSA's former parent, on sales of the
      Levulan(R) Kerastick(R) in Canada.

2)    Although there were direct BLU-U(R) product revenues in 2004, there were
      no related direct BLU-U(R) product costs as these units had a zero book
      value due to inventory impairment charges recorded during 2002.

      MARGINS - Total product margins for the year ended December 31, 2005, were
$5,124,000 as compared to $4,113,000 for the year ended December 31, 2004, as
shown below:



                                                                       INCREASE/
                                 2005                  2004            (DECREASE)
                          ------------------     ----------------     ------------
                                                             
Kerastick(R)              $ 5,308,000   60%      $ 3,827,000  65%     $ 1,481,000
BLU-U(R)                     (184,000)  (8)%         286,000  13%        (470,000)
                          -----------            -----------          -----------
         Total Margin     $ 5,124,000   45%      $ 4,113,000  51%     $ 1,011,000
                          ===========            ===========          ===========


                                       49


      Kerastick(R) margins for the year ended December 31, 2005, were 60%
compared to 65% for the year ended December 31, 2004. The decrease in the
Kerastick(R) margin percentage for the year ended December 31, 2005 is due
primarily to an increase in unabsorbed manufacturing expenses incurred in 2005.
In general, we have been operating our Kerastick(R) manufacturing plant well
below capacity, resulting in underutilization charges, which have negatively
impacted margins. Due to this situation, we are realizing fluctuations in our
margins as a result of both the timing of production and unabsorbed expenses.
This has been somewhat offset by an increase in the overall selling price per
unit. Our long-term goal is to achieve higher margins on Kerastick(R) sales,
which is significantly dependent on increased volume.

      BLU-U(R) margins for the year ended December 31, 2005, were (8)% compared
with 13% for the year ended December 31, 2004. The erosion on margin is directly
attributable to the fact that in 2005 we sold newly purchased units with an
associated production cost, whereas during 2004 period, we sold units which had
a zero net book value due to inventory impairment charges recorded during 2002
following termination of an agreement with a marketing partner. The margin
erosion is somewhat offset by an increase in the overall selling price per unit
and a decrease in Other BLU-U(R) Product costs. Our short-term strategy is to
break-even on device sales in an effort to drive Kerastick(R) sales volumes.
However, our longer term goal is to move towards a reasonable profit margin on
all device sales.

      RESEARCH AND DEVELOPMENT COSTS - Research and development costs for the
year ended December 31, 2005 and 2004 were $5,588,000 as compared to $6,490,000
in 2004.

      Contributing to the decrease in spending in 2005 compared with 2004 is the
receipt of a refund from the FDA for our 2003 and 2004 product and registration
fees in the amount of approximately $530,000.



                                                                                            INCREASE/
                                                             2005             2004         (DECREASE)
                                                         ------------     -----------     ------------
                                                                                 
Research & Development costs incurred                    $ 6,118,000      $ 6,490,000     $  (372,000)
Refund of FDA product and registration fees                 (530,000)               -        (530,000)
                                                         -----------      -----------     -----------
              Total Research and Development Expense     $ 5,588,000      $ 6,490,000     $  (902,000)
                                                         ===========      ===========     ===========



      During the fourth quarter of 2004, we initiated a DUSA-sponsored Phase II
study which we recently completed. This 72 patient, investigator blinded study
was designed to examine various safety and efficacy parameters as a function of
varying Levulan/vehicle incubation times, namely 15, 60 and 120 minutes.
Patients were randomized within each incubation group so that 18 subjects
received 'Levulan BLU-U' and six received `BLU-U alone'. There were no formal
placebo arms in this study. Up to four PDT treatments were given at 2-week
intervals. The primary efficacy parameters were the percent change in total acne
lesion count for inflammatory, non-inflammatory, and total lesions at 4 and 8
weeks after the final PDT session. Acne severity scores (grades 0 - 4) were also
assessed. Safety and tolerability were also followed throughout the study. The
results of the study indicate that both `Levulan BLU-U' and `BLU-U alone' appear
to effectively reduce the number of both inflammatory and non-inflammatory acne
lesions. Given the higher than anticipated `BLU-U alone' response rate using
this protocol, the study was not powered (sized) to discern differences between
these arms. Using an intent-to-treat analysis, at the Week 8 time point, the
median percent decrease in total lesion count, (inflammatory plus
non-inflammatory) for Levulan BLU-U and BU-U alone was 61% and 80%,
respectively. In the overall Acne Severity Assessment at the Week 8 time point,
the Levulan BLU-U group showed 7/18 (39%) of subjects had at least 2 grades of
improvement in their acne, compared with 4/6 (67%) in the BLU-U alone group.

                                       50



In the group of 28 patients with the most severe (Grade 4) acne, which included
those with the highest number of inflammatory lesions at baseline (> or = 60
lesions), the total lesion count at Week 8 decreased in the Levulan BLU-U group,
whereas total lesion count at Week 8 increased in the BLU-U alone group.
Treatment was well tolerated in both arms of the study with no unanticipated
adverse events being reported. Side effects were minimal. In the 15-minute
Levulan BLU-U group, no PDT treatments were discontinued due to pain, and at the
Week 8 time-point, there were no significant differences between the groups in
erythema, edema or hyperpigmentation. The results of this study suggest that for
future development of the acne indication for Levulan PDT, those patients with
the most severe form(s) of acne should receive the greatest benefit.

      In February 2006, we reported the interim analysis results from our 80
patient, multi-center Phase II split-face clinical study of PDT in the treatment
of photodamaged skin using the Levulan(R) (aminolevulinic acid HCl, ALA)
Kerastick(R) in combination with either the Company's BLU-U(R), an Intense
Pulsed Light, or IPL, or a Long Pulsed Dye Laser, or LPDL, Each patient served
as his or her own control, using a 'split-face' design. Following skin cleansing
with an acetone solution, and approximately 60 minutes of drug and/or vehicle
incubation, light treatment with a fixed dose was given using one of the three
light sources. Up to 3 treatments were given, 3 weeks apart. Interim results
were assessed at Weeks 9 and 12. The protocol includes additional follow-up
visits scheduled for Weeks 26 and 52.

      The goal of the study was to guide selection of light source(s) for future
development in the treatment of photodamaged skin, using the Company's
proprietary Levulan PDT technology. The study was not designed to detect
differences between the light sources.

      At Week 12, Levulan PDT with BLU-U light demonstrated material improvement
in photodamaged skin, in comparison to BLU-U and vehicle. Statistical
significance in net changes from baseline scores was achieved in 2 parameters of
photodamage, namely mottled pigmentation (p=0.0348) and tactile roughness
(p=0.0455). In addition, the trend toward improvement in a number of parameters
was notably greater at Week 12 than Week 9, without any additional treatments
with Levulan, which suggests that other parameters may also reach statistical
significance over time. Specifically, Levulan with BLU-U showed greater
improvements in mottled pigmentation, tactile roughness, fine wrinkling,
sallowness and Global Photodamage Score (i.e. all the parameters that were
measured except for telangiectasia (small blood vessels in the skin)), compared
with areas treated with BLU-U and vehicle. BLU-U by itself is not known to have
any effects on photodamaged skin.

      These results support the conclusions of a prior independent study by
Touma et al (2004), using Levulan with BLU-U versus BLU-U alone, that achieved
statistical significance with the addition of Levulan in all photodamage
parameters measured, other than deep wrinkles. In that study, the investigators
treated more severely sun-damaged patients, each with a minimum of 4 actinic
keratoses. They also used twice the dose of blue light compared to the current
study (10 vs. 5 Joules/cm2), and drug incubation times ranging from 1-3 hours.

      IPL by itself has previously been shown in independent studies to
significantly improve photodamage, predominantly by targeting brown
discoloration and red blood vessels. Therefore, as would be expected, at Week
12, significant improvement in photodamage was seen with IPL and vehicle,
especially with respect to mottled pigmentation and telangiectasia. With the
addition of Levulan, there was a trend toward even greater improvement in all
parameters of photodamage except for mottled pigmentation, although these trends
did not achieve statistical significance. However, similar to the BLU-U results,
the trend toward improvement was notably greater at Week 12 than Week 9 without
any additional treatments with Levulan, and additional follow up is scheduled at
weeks 26 and 52.

                                       51


      These results support the conclusions of prior independent studies by
Dover et al (2005), Alster et al (2005), and Gold et al (in press) using Levulan
with IPL versus IPL alone for photodamage. All of these studies reported
significant benefits from the addition of Levulan to IPL, especially in patients
with significant photodamage. In addition, although IPL itself does not treat
pre-cancerous cell damage, such as actinic keratoses, when combined with Levulan
(ALA) to produce a PDT effect, IPL has been reported to effectively remove these
lesions (Avram and Goldman, 2004, Ruiz-Rodrigues, 2002).

      With LPDL, as would be expected, there was significant improvement in
photodamaged skin with LPDL and vehicle, especially with respect to
telangiectasia, the primary target of this device. However, with LPDL, the
addition of Levulan for the treatment of photodamage did not lead to any
discernable differences in photodamage parameters between the two groups, as
suggested by the results of an earlier study (Smith et al, 2004).

      In general, safety was excellent in all groups, but treatment using
Levulan with BLU-U was better tolerated than treatment with IPL or LPDL (with or
without Levulan) i.e. the frequency and severity of stinging and burning during
treatment was greater with IPL and LPDL (with or without Levulan) compared to
Levulan with BLU-U, and for BLU-U with vehicle. Levulan with BLU-U was also easy
to use and less operator dependent.

      During September 2005, the FDA issued a new draft guidance for the
pharmaceutical industry regarding the development of new drugs for acne vulgaris
treatment. As a result of the issuance of this guidance, in combination with the
results of our Phase II study, we believe that additional Phase II work will be
required before we commence Phase III acne trials. As our Phase II clinical
trials proceed, and especially at such time as we may commence Phase III trials
in these indications, research and development expenses are expected to increase
significantly. We have retained the services of a regulatory consultant to
assist us with seeking foreign marketing approvals for our products, which could
cause research and development expenses to increase.

      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) photodynamic therapy ("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
outlines of 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), device(s) and the necessary training for the investigators
involved. All other costs of these studies will be the responsibility of the NCI
DCP. We will maintain full ownership of our existing intellectual property, have
options on new intellectual property and, subject to successful Phase II and III
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 Barrett's esophagus, our small single-center pilot Phase II
clinical trial using our new proprietary endoscopic light delivery device is
continuing.

      We have entered into a series of agreements for our research projects and
clinical studies. As of December 31, 2005, future payments to be made pursuant
to these agreements, under certain terms and conditions, total approximately
$1,775,000 for 2006. This amount does not include any amounts which may become
due to photonamic GmbH & Co. KG under the terms of our License and Development
Agreement. See Note 13(f) to the Notes to the Consolidated Financial Statements.
We expect research

                                       52


and development costs to increase in 2006 as compared to 2005 as we continue to
invest in our clinical programs.

      MARKETING AND SALES COSTS -- Marketing and sales costs for the year ended
December 31, 2005 were $9,069,000 as compared to $7,622,000 for 2004. These
costs consist of overhead expenses such as salaries and benefits for the
marketing and sales staff, commissions, and related support expenses such as
travel, and telephone, totaling $6,934,000 in 2005 and $5,268,000 in 2004. These
increases were mainly attributable to the expansion of our sales force during
2005 and related marketing activities. The remaining expenses consist of trade
shows, miscellaneous marketing expenses and outside consultants totaling
$2,135,000 in 2005 and $2,354,000 in 2004. For 2006, we expect marketing and
sales costs will increase from 2005 levels reflecting our increased efforts to
generate higher sales volumes; as well as, a full year impact of our sales force
expansion that took place during 2005.

      GENERAL AND ADMINISTRATIVE COSTS -- General and administrative expenses
for the year ended December 31, 2005, decreased to $6,703,000 as compared to
$7,210,000 for 2004. The increase/decrease is mainly attributable to lower legal
expenses of $1,902,000 as compared to $3,144,000 in the comparable period in
2004, due to the absence of patent litigation costs in Australia as the final
hearing in the PhotoCure litigation described below was held in 2004. The
savings related to the Australian litigation is partially offset by patent
litigation costs against compounding pharmacies and physicians, as described
below. Additionally, general corporate expenses, including increased personnel
related costs, have increased as our business has expanded. For 2006, we expect
general and administrative costs to be relatively consistent with 2005 levels.
General and administrative costs are highly dependent on our legal expenses,
which are difficult to predict.

      OTHER INCOME, NET -- Other income for the year ended December 31, 2005,
decreased to $1,388,000, as compared to $1,580,000 in 2004. This decrease
reflects a reduction in our average investable cash balances during 2005 as we
used cash to support our operating activities. We expect other income, net will
decrease in 2006 as we continue to use cash in support of our operations, our
capital requirements and corporate transactions, particularly upon the expected
closing of the merger with Sirius Laboratories, Inc.

      INCOME TAXES -- There is no provision for income taxes due to ongoing
operating losses. As of December 31, 2005, we had net operating loss
carryforwards of approximately $79,261,000 and tax credit carryforwards of
approximately $2,521,000 for Federal reporting purposes. These amounts expire at
various times through 2024. See Note 8 to the Notes to the Consolidated
Financial Statements. We have provided a full valuation allowance against the
net deferred tax assets at December 31, 2005 and 2004.

      NET LOSS -- For the year ended December 31, 2005, we recognized a net loss
of $14,999,000, or $0.89 per share, as compared to $15,629,000, or $0.96 per
share, for the year ended 2004. Net losses are expected to continue until
product sales to physicians offset the cost of our sales force and marketing
initiatives, and the costs for other business support functions.

      YEAR ENDED DECEMBER 31, 2004 AS COMPARED TO 2003

      REVENUES -- Total revenues for the year ended December 31, 2004, were
$7,988,000, as compared to $970,000 in 2003 and were comprised of the following:

                                       53




                                     2004               2003            INCREASE
                                   ----------         --------         ----------
                                                              
KERASTICK(R) PRODUCT REVENUES
      United States                $5,450,000         $901,000         $4,549,000
      Canada                          401,000                -            401,000
                                   ----------         --------         ----------
          Total                    $5,851,000         $901,000         $4,950,000

BLU-U(R) PRODUCT REVENUES
      United States                $1,795,000         $ 69,000         $1,726,000
      Canada                          342,000                -            342,000
                                   ----------         --------         ----------
          Total                    $2,137,000         $ 69,000         $2,068,000
                                   ----------         --------         ----------
        Total Product Revenues     $7,988,000         $970,000         $7,018,000
                                   ==========         ========         ==========


      The increase in 2004 product revenues reflects sales to physicians of
76,482 Kerastick(R) units, as compared to 11,172 Kerastick(R) units in 2003, and
an increase in the BLU-U(R) units in place in physician's offices of 914 units
as of December 31, 2004, up from 406 units at December 31, 2004. With respect to
U.S. Kerastick(R) sales, we increased our direct selling and distribution
efforts, while still maintaining the services of one external distributor.

      On March 31, 2004, DUSA signed an exclusive marketing and distribution
agreement for the Kerastick(R) and BLU-U(R) in Canada with Coherent-AMT Inc.
("Coherent"), a leading Canadian medical device and laser distribution company.
Following receipt of regulatory approval from Health Canada, Coherent began
marketing the BLU-U(R) for moderate inflammatory acne in April 2004, and the
Kerastick(R) for the PDT treatment of non-hyperkeratotic actinic keratoses, or
AKs, in June 2004. DUSA recognizes product sales when Coherent sells the
Kerastick(R) and/or the BLU-U(R) to the end-user, as the price is fixed and
final at that point. Kerastick(R) product sales through our Canadian distributor
for the year ended December 31, 2004 were 6,612, and there were 101 BLU-U(R)
units in physician's offices as of December 31, 2004.

      The increase of Kerastick(R) and BLU-U(R) revenues in the U.S. during 2004
is a result of the efforts of a larger sales force, and related marketing and
sales activities. In addition, the increase in BLU-U(R) placements was caused,
in part, by our ability to sell the BLU-U(R) to physicians as a stand alone
device for the treatment of moderate inflammatory acne vulgaris and general
dermatological conditions following FDA clearance in September 2003. BLU-U(R)
sales during the quarter ended December 31, 2004 decreased as expected, compared
with the prior quarter, due to a planned price increase that became effective at
the beginning of the fourth quarter, and a decreased emphasis on BLU-U(R)
placements by our sales-force, in light of diminishing BLU-U(R) inventory levels
at that time. We ordered additional BLU-U(R) units in the fourth quarter of
2004, and started to be re-supplied during the first quarter of 2005. As we
experienced a backlog until the new supply of light sources started to become
available, BLU-U(R) revenues were limited during the fourth quarter of 2004, and
were limited until being re-supplied during the first quarter of 2005.

      Although the level of Kerastick(R) sales to end-users for 2004 was
substantially higher than the level in the prior year, we significantly
increased the size of our sales force and geographic reach during 2004.

      COST OF PRODUCT REVENUES AND ROYALTIES -- Cost of product revenues and
royalties for the year ended December 31, 2004 were $3,875,000, as compared to
$3,481,000 in 2003. The components of cost of product revenues and royalties for
the years ended December 31, 2004 and 2003, including direct and indirect costs
to support our product are provided below:

                                       54



KERASTICK(R) COST OF PRODUCT REVENUES AND ROYALTIES



                                                                                                              INCREASE
                                                                               2004              2003        (DECREASE)
                                                                            ----------       ----------      ----------
                                                                                                    
Direct Kerastick(R) Product Cost s(1)                                       $1,478,000         $216,000      $1,262,000
Other Kerastick Product costs including internal costs assigned to
   support products                                                            261,000        1,972,000      (1,711,000)
Royalty and supply fees (3)                                                    285,000           74,000         211,000
                                                                            ----------       ----------      ----------
        Total Kerastick(R) cost of  product revenues and royalties          $2,024,000       $2,262,000      $ (238,000)
                                                                            ==========       ==========      ==========


BLU-U(R) COST OF PRODUCT REVENUES



                                                                                                              INCREASE
                                                                               2004             2003         (DECREASE)
                                                                            ----------       ----------      ----------
                                                                                                    
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 (2)                        1,851,000        1,219,000        632,000
                                                                            ----------       ----------       --------
        Total BLU-U(R) cost of  product revenues                            $1,851,000       $1,219,000       $632,000

        TOTAL COST OF PRODUCT REVENUES AND ROYALTIES                        $3,875,000       $3,481,000       $394,000
                                                                            ==========       ==========       ========


- ----------
(1)The decrease in product costs for 2004 primarily reflects the capitalization
of labor and overhead associated with the manufacture of Kerastick(R) units in
our facility. These costs were expensed in the prior year due to the absence of
production.

(2)Although there were direct BLU-U(R) product sales in 2004 and 2003, there
were no related direct BLU-U(R) product costs as these units had a zero book
value due to inventory impairment charges recorded during 2002.

(3) Royalty and supply fees are paid to our licensor, PARTEQ Research and
Development Innovations, the licensing arm of Queen's University, Kingston,
Ontario, and starting in 2004, amortization of an upfront fee and a royalty are
paid to Draxis, DUSA's former parent, on sales of the Levulan(R) Kerastick(R) in
Canada.

      MARGINS -- Total product margins for the year ended December 31, 2004,
were $4,113,000 as compared to $(2,511,000) for the year ended December 31,
2003, as shown below:



                                                                INCREASE/
                       2004              2003                  (DECREASE)
                    ----------        -----------              ----------
                                                
Kerastick(R)        $3,827,100  65%   $(1,361,000)   (151)%    $5,188,000
BLU-U(R)               286,000  13%   $(1,150,000)  (1,660)%    1,436,000
                    ----------        -----------              ----------
     Total Margin   $4,113,000  51%   $(2,511,000)   (259)%    $6,624,000
                    ==========        ===========              ==========
 

      Kerastick(R) margins for the year ended December 31, 2004, were 65%
compared to (151)% for the year ended December 31, 2004. The increase in the
Kerastick(R) margins, in terms of both dollars and percentages, for the year
ended December 31, 2004 is due primarily to the capitalization of labor and
overhead associated with the manufacture of Kerastick(R) units in our facility
in 2004. These costs were expensed in 2003 due to the absence of production.

                                       55


      BLU-U(R) margins for the year ended December 31, 2004, were 13% compared
with (1,660) % for the year ended December 31, 2003. The increase in margin is
directly attributable to increased BLU-U(R) revenues during 2004 with no
associated direct costs, since the units being sold in both 2003 and 2004 had a
zero book value due to an inventory impairment charge recorded in 2002.

      RESEARCH AND DEVELOPMENT COSTS -- Research and development costs for the
year ended December 31, 2004, were $6,490,000 as compared to $5,404,000 in 2003.
This increase reflects the preparation work associated with initiating the Phase
II photodamaged skin trial, protocol finalization and initiation of our Phase II
acne trial, and the start of our Phase II pilot study for Barrett's esophagus
offset, in part, by lower third-party expenditures for our FDA mandated Phase IV
clinical study of the long-term efficacy of the Kerastick(R). This FDA mandated
Phase IV study was completed in late 2003 and we incurred only limited costs to
file the final report with the FDA in 2004. We concentrated our dermatology
development program on indications that use our approved Kerastick(R). Based on
market research that was completed in 2003, we moved forward with our Phase II
clinical studies for use of Levulan(R) PDT in photodamaged skin and moderate to
severe acne vulgaris. We initiated the photodamaged skin study during the second
quarter of 2004, and a Phase II study on Levulan(R) PDT for the treatment of
acne vulgaris at the end of October 2004. In addition, 2004 expenses included
compensation of $241,000 for the services of 3 consultants. These consultants
originally received 30,000 fully vested stock options as compensation which were
subsequently repurchased for $240,000 in December 2004 in response to new
guidelines of pharmaceutical industry groups that prohibit physicians from
having an ownership interest in companies with which they are affiliated.

      MARKETING AND SALES COSTS -- Marketing and sales costs for the year ended
December 31, 2004, were $7,622,000 as compared to $2,494,000 for 2003. These
costs consisted of overhead expenses such as salaries and benefits for the
marketing and sales staff, commissions, and related support expenses such as
travel, and telephone, totaling $5,268,000 in 2004 and $1,297,000 in 2003. The
remaining expenses consisted of trade shows, miscellaneous marketing expenses
and outside consultants totaling $2,354,000 in 2004 and $1,197,000 in 2003.
These increases were mainly attributable to the launch of our direct sales force
in October 2003 and related marketing and sales activities.

      As of December 31, 2004, our sales force was comprised of 22 direct sales
professionals, including managers and representatives, and various independent
representatives in key target markets.

      GENERAL AND ADMINISTRATIVE COSTS -- General and administrative expenses
for the year ended December 31, 2004 increased to $7,210,000 as compared to
$6,344,000 for 2003. Other than legal costs as described below, this increase
was mainly attributable to a higher level of general corporate expenses to
support our expanding business, including an increase in audit and consulting
fees primarily related to Sarbanes Oxley compliance work of $285,000, an
increase in personnel related costs of $335,000, and an increase in general
corporate expenses of $354,000. General and administrative costs also included
legal expenses incurred in 2004 of $3,144,000 and $3,253,000 in 2003, due
primarily to the PhotoCure patent litigation costs in Australia. Total patent
defense costs in 2004 were $2,150,000 as compared to $2,447,000 in 2003.

      OTHER INCOME, NET -- Other income for the year ended December 31, 2004,
decreased to $1,580,000, as compared to $1,926,000 in 2003. This decrease
reflects a reduction in our average investable cash balances during early 2004
as we used cash to support our operating activities, offset by the additional
proceeds received from the private placement in March 2004. Additionally,
interest income had been negatively impacted by the general decrease in interest
rates which occurred during 2003 and early 2004. During 2004 and 2003, we
incurred interest expense of $20,000 and $56,000, respectively, on borrowings
associated with the construction of our Kerastick(R) manufacturing facility. Of
these amounts,

                                       56


$36,000 was capitalized in property and equipment in the Consolidated Balance
Sheet in 2003. We repaid the outstanding secured term loan promissory note with
Citizens Bank of Massachusetts in June 2004.

      INCOME TAXES -- There was no provision for income taxes due to ongoing
operating losses. As of December 31, 2004, we had net operating loss
carryforwards of approximately $74,243,000 and tax credit carryforwards of
approximately $2,278,000 for Federal reporting purposes. These amounts expire at
various times through 2024. See Note 8 to the Notes to the Consolidated
Financial Statements. We have provided a full valuation allowance against the
net deferred tax assets at December 31, 2004 and 2003.

      NET LOSS -- For the year ended December 31, 2004, we recognized a net loss
of $15,629,000, or $0.96 per share, as compared to $14,827,000, or $1.06 per
share, for the year ended 2003. The decrease in net loss per share in 2004 as
compared to 2003 was primarily due to an increase in the number of weighted
average of common shares outstanding during 2004 as a result of our private
placement earlier in 2004. The increase in total net loss in 2004 was due to the
increase in operating costs offset, in part, by an increase in revenues. Net
losses are expected to continue until product sales to physicians offset the
cost of our sales force and marketing initiatives, and the costs for other
business support functions.

                                       57


QUARTERLY RESULTS OF OPERATIONS

      The following is a summary of the unaudited quarterly results of
operations for the years ended December 31, 2005 and 2004, respectively:



                                              QUARTERLY RESULTS FOR YEAR ENDED DECEMBER 31, 2005
                                      --------------------------------------------------------------
                                       MARCH 31          JUNE 30       SEPTEMBER 30      DECEMBER 31
                                      ----------        ----------     ------------      -----------
                                                                             
Total revenues                        $3,368,614        $2,228,116      $2,392,244       $3,348,487
Loss from operations                  (4,698,611)       (5,178,714)     (3,948,670)      (2,560,692)
Net loss                              (4,331,614)       (4,826,118)     (3,608,281)      (2,232,696)
Basic and diluted loss per share      $    (0.26)       $    (0.29)     $    (0.21)      $    (0.13)




                                              QUARTERLY RESULTS FOR YEAR ENDED DECEMBER 31, 2004
                                      --------------------------------------------------------------
                                        MARCH              JUNE
                                         31                 30        SEPTEMBER 30       DECEMBER 31
                                      ----------        ----------    ------------       -----------
                                                                             
Total revenues                        $1,255,685        $2,176,028     $2,010,619        $2,545,324
Loss from operations                  (4,800,791)       (4,571,668)    (3,325,565)       (4,510,703)
Net loss                              (4,401,654)       (4,196,087)    (2,974,992)       (4,056,247)
Basic and diluted loss per share           (0.30)            (0.25)         (0.18)            (0.24)


LIQUIDITY AND CAPITAL RESOURCES

      We remain in a strong cash position to continue to fund increased
Levulan(R) PDT sales and marketing expenses and current research and development
activities for our Levulan(R) PDT/PD platform. At February 28, 2006, we had
approximately $31,147,000 of total cash resources comprised of $11,681,000 of
cash and cash equivalents, $19,466,000 of marketable securities.

      The Company is also exposed to concentration of credit risk related to
accounts receivable that are generated from its distributors and customers. To
manage credit risk, the Company performs regular credit evaluations of its
customers' and provides allowances for potential credit losses, when applicable.

      On December 30, 2005, we signed a definitive Merger Agreement to acquire
all of the common stock of Sirius Laboratories Inc. of Vernon Hills, Illinois in
exchange for cash and common stock worth up to $30,000,000. Sirius is a
privately held dermatology specialty pharmaceuticals company founded in 2000
with a primary focus on the treatment of acne vulgaris and acne rosacea. Closing
of the transaction is expected in the first quarter of 2006, subject to the
terms and conditions in the Merger Agreement. Of the up to $30,000,000,
$8,000,000 less certain expenses will be paid in cash upon closing, $17,000,000
will be paid in shares of DUSA's common stock also upon closing in a private
placement, and up to $5,000,000 in cash or common stock may be paid based on a
combination of new product approvals or launches, and achievement of certain
pre-determined total cumulative sales milestones for Sirius products. As part of
the Sirius Merger, we also expect to pay at closing certain expenses incurred by
Sirius related to the acquisition and Sirius' balance on their bank line of
credit, if any. We believe we have sufficient resources to finance the
acquisition utilizing our existing resources.

      On February 27, 2004, we consummated a private placement of 2,250,000
shares of our common stock at a purchase price of $11.00 per share resulting in
gross proceeds of $24,750,000. We also granted the investors the right to
purchase up to an aggregate of an additional 337,500 shares of common stock at
$11.00 per share, which were exercised on April 14, 2004, resulting in
additional proceeds of $3,712,500.

                                       58


Offering costs incurred in connection with the placement were $1,908,000, of
which $1,708,000 consisted of the placement agent's commission and
non-refundable retainer paid in the form of 155,250 shares of common stock
calculated at the offering price.

      As of December 31, 2005, our working capital (total current assets minus
total current liabilities) was $34,889,000 as compared to $48,799,000 as of
December 31, 2004. Total current assets decreased $13,766,000 in 2005 due
primarily to a decrease in marketable securities, which was used to fund our
loss from operations. Total current liabilities increased $143,000 in 2005 due
to an increase in accounts payable and other accrued expenses, partially offset
by a decrease in deferred revenue.

      During 2005, we used $14,101,000 of cash to support our operating
activities, purchased $415,000 of property, plant, and equipment, received
$928,000 in exercises of stock options and received $14,874,000 of net proceeds
from maturations and sales of marketable securities. During the comparable 2004
period, we used $14,070,000 of cash for operating activities, purchased $530,000
of property, plant and equipment, received $765,000 n proceeds from exercises of
stock options and invested $14,037,000 of net proceeds from maturations and
sales of marketable securities.

      We believe that we have sufficient capital resources to proceed with our
current programs for Levulan(R) PDT, and to fund operations and capital
expenditures for approximately 2 years. We have invested our funds in liquid
investments, so that we have ready access to these cash reserves for funding our
needs on a short-term and long-term basis. However, upon the closing of the
Sirius Merger we will deplete a significant amount of our liquid assets and if
product revenues do not meet our expectations, we will need to raise capital in
order to continue our research and development activities as planned.

      In addition to the contemplated merger with Sirius Laboratories, Inc., we
continue to seek opportunities to enhance our business by using resources to
acquire by license, purchase or other arrangements, businesses, new
technologies, or products, especially in dermatology-related areas in the near
term. For 2006, we are focusing primarily on increasing the sales of our
approved products in the U.S. and Canada, continuing our efforts of exploring
partnership opportunities for Levulan(R) PDT for dermatology in Europe and/or
other countries outside of the United States, Canada and Latin America, and
continuing our clinical development programs for our facial photodamage and
moderate to severe acne indications. In January 2006, we entered into a
marketing and distribution agreement with Stiefel Laboratories, Inc. granting
Stiefel an exclusive right to distribute the Levulan(R) Kerastick(R) in Mexico,
Central and South America. We have also 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 and the NCI
DCP have prepared outlines of clinical studies in both indications. The NCI DCP
is currently working with us 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), device(s) and the necessary training for the
investigators involved. All other costs of these studies will be the
responsibility of the NCI DCP.

      Full development and testing of the use of Levulan PDT for treatment of
acne and facial photodamage would require additional funding. The timing of
expenditures will be dependent on various factors, including:

                                       59


      -     the level of sales of our products including the success of our
            marketing programs for the dermatological uses of Levulan(R) PDT,

      -     progress of our research and development programs,

      -     the results of preclinical and clinical trials,

      -     the timing of regulatory marketing approvals,

      -     competitive developments,

      -     the results of patent disputes,

      -     any new additional collaborative arrangements, if any, we may enter,
            and

      -     the availability of other financing.

      At this time, we cannot accurately predict the level of revenues from
sales of our products. In order to maintain and continue to expand our sales and
marketing endeavors, and to initiate our planned research and development
programs, we may need to raise additional funds through future corporate
alliances, financings, or other sources, depending upon the amount of sales we
generate.

      DUSA has no off-sheet balance sheet financing arrangements other than its
operating leases.

CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS

      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 December 31, 2005:



                                                          OBLIGATIONS DUE BY PERIOD
                                       ---------------------------------------------------------------
                                                     1 YEAR OR                               AFTER 5
                                         TOTAL          LESS       2-3 YEARS    4-5 YEARS     YEARS
                                       ----------    ----------    ---------    ---------    ---------
                                                                              
Operating lease obligations            $2,959,000    $  470,000    $ 887,000    $ 880,000     $722,000
Purchase obligations (1, 2)            $1,934,000    $1,934,000            -            -            -
Minimum royalty obligations (3)          $667,000    $   86,000    $ 172,000    $ 172,000     $237,000


- ----------
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.

3)    Annual minimum royalties to PARTEQ must total at least CDN $100,000 (U.S.
      $86,000 as of December 31, 2005) through the expiration of the term of the
      agreement.

RECENTLY ISSUED ACCOUNTING GUIDANCE


                                       60




      In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4." The amendments made by SFAS No. 151 clarify
that abnormal amounts of idle facility expense, freight, handling costs, and
wasted materials should be recognized as current-period charges and require the
allocation of fixed production overheads to inventory based on the normal
capacity of the production facilities. The provisions of SFAS No. 151 are
effective for inventory costs incurred during fiscal years beginning after June
15, 2005. We have adopted this standard beginning the first quarter of 2006 and
do not believe the adoption will have a material impact on our results of
operations or financial position as such costs have historically been expensed
as incurred.

      In November 2005, FASB issued FASB Staff Position FAS 115-1 and FAS 124-1,
"The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments" ("FSP FAS 115-1"), which provides guidance on determining when
investments in certain debt and equity securities are considered impaired,
whether that impairment is other-than-temporary, and on measuring such
impairment loss. FSP FAS 115-1 also includes accounting considerations
subsequent to the recognition of an other-than-temporary impairment and requires
certain disclosures about unrealized losses that have not been recognized as
other-than-temporary impairments. FSP FAS 115-1 is required to be applied to
reporting periods beginning after December 15, 2005. We are required to adopt
FSP FAS 115-1 in the first quarter of 2006. We do not expect that the adoption
of this statement will have a material impact on our results of operations or
financial condition. The unrealized losses on the Company's investments in U.S.
Treasury obligations, and direct obligations of U.S. government agencies and
investment grade corporate securities were caused by interest rate increases. It
is expected that these securities would not be settled at a price less than the
amortized cost of the Company's investment. Because the Company has the ability
and

                                       61


intent to hold these investments until a recovery of fair value, which may be
maturity, the Company does not consider these investments to be
other-than-temporarily impaired at December 31, 2005.

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  7A. 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 December 31, 2005, the weighted average rate of return on our
investments was 4.08%. If market interest rates were to increase immediately and
uniformly by 100 basis points from levels as of December 31, 2005, the fair
market value of the portfolio would decline by $259,000. Declines in interest
rates could, over time, reduce our interest income.

FORWARD-LOOKING STATEMENTS SAFE HARBOR

      This report, including the Management's Discussion and Analysis, contains
various "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and 21E of the Securities Exchange Act of 1934 which
represent our expectations or beliefs concerning future events, including, but
not limited to management's goal of becoming profitable, statements regarding
our strategies and core objectives for 2006, our expectations regarding our
proposed merger with Sirius Laboratories, Inc. and matters relating thereto,
management's beliefs regarding the unique nature of Levulan(R) and its use and
potential use, expectations regarding the timing of results of clinical trials,
future development of Levulan(R) and our other products for cancer, warts,
onychomycosis, psoriasis, molluscum contagiosum, oily skin and acne rosacea,
facial photodamaged skin, cystic acne, acne vulgaris, Barrett's esophagus,
high-grade dysplasia, infected sweat glands (hidradenitis suppurativa) and other
potential indications, intention to pursue licensing, marketing, co-promotion,
collaboration or acquisition opportunities, status of clinical programs for all
other indications and beliefs regarding potential efficacy and marketing, our
intention to develop combination drug and light device systems, our expectations
regarding new proprietary endoscopic light delivery systems and the potential
use of other light devices, our beliefs regarding the safety, simplicity,
reliability and cost-effectiveness of certain light sources, our expectations
regarding product launches, our intention to expand our sales force, hope that
our products will be an AK therapy of choice and barriers to achieving that
status, our beliefs regarding revenues and market opportunities from approved
and potential products and Levulan's(R) competitive properties, our intention to
postpone or commence clinical trials and investigator studies in 2006, beliefs
regarding the clinical benefit of Levulan(R) PDT for acne and other indications,
beliefs regarding the suitability of clinical data, expectations of exclusivity
under the Hatch-Waxman Act and other patent laws and the potential benefits
thereof, expectations regarding the confidentiality of our proprietary
information, intentions to seek additional U.S. and foreign regulatory
approvals, trademarks, and to

                                       62


market and increase sales outside the U.S., beliefs regarding regulatory
classifications, filings, timelines, off-label use and environmental compliance,
beliefs concerning patent disputes and litigation, the impact of a third-party's
regulatory compliance and fulfillment of contractual obligations, expectations
of increases in cost of product sales, expectations regarding margins on
Kerastick(R) and other products, estimations as to the time it takes for a sales
representative to break even in comparison to DUSA's investment, expected use of
cash resources in 2006, requirements of cash resources for our future liquidity,
beliefs regarding investments and economic conditions, beliefs regarding
accounting policies and practices, expectations regarding outstanding options
and warrants and our dividend policy, anticipation of increases or decreases in
personnel, effect of reimbursement policies on revenues and acceptance of our
therapies, expectations for future strategic opportunities and research and
development programs, expectations for continuing operating losses and
competition, expectations regarding the adequacy and availability of insurance,
expectations regarding stable general and administrative costs, expectations
regarding the status of research and development costs and our efforts with
respect thereto, expectations regarding increased sales and marketing costs,
levels of interest income and our capital resource needs, intention to sell
securities to meet capital requirements, potential for additional inspection and
testing of our manufacturing facilities, beliefs regarding the adequacy of our
inventory of Kerastick(R) and BLU-U(R) units, our manufacturing capabilities and
the impact of inventories on revenues, belief regarding interest rate risks to
our investments and effects of inflation and new and existing accounting
standards and policies, beliefs regarding the impact of any current or future
legal proceedings, dependence on key personnel, beliefs concerning product
liability insurance, intention to continue to develop an alternative BLU-U(R)
light device and integrated drug and light device systems, our principal methods
of competition, competition in general and competitive developments. These
forward-looking statements are further qualified by important factors that could
cause actual results to differ materially from those in the forward-looking
statements. These factors include, without limitation, changing market and
regulatory conditions, actual clinical results of our trials, the reimbursement
by third-parties for our treatments, the impact of competitive products and
pricing, the timely development, FDA and foreign regulatory approval, and market
acceptance of our products, environmental risks relating to our products,
reliance on third-parties for the production, manufacture, sales and marketing
of our products, the availability of products for acquisition and/or license on
terms agreeable to DUSA, sufficient sources of funds, the securities regulatory
process, the maintenance of our patent portfolio and ability to obtain
competitive levels of reimbursement by third-party payors, none of which can be
assured. Results actually achieved may differ materially from expected results
included in these statements as a result of these or other factors.

ITEM  8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm.........    F-1
Consolidated Balance Sheets.....................................    F-2
Consolidated Statements of Operations...........................    F-3
Consolidated Statements of Shareholders' Equity.................    F-4
Consolidated Statements of Cash Flows...........................    F-5
Notes to the Consolidated Financial Statements..................    F-6

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

      None.

                                       63


ITEM  9A. CONTROLS AND PROCEDURES

      Evaluation of Disclosure Controls and Procedures. We carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information relating to our (including our subsidiaries) required to be
included in our periodic Securities and Exchange Commission filings. No
significant changes were made in our internal controls or in other factors that
could significantly affect these controls subsequent to the date of their
evaluation.

      Changes in Internal Control Over Financial Reporting. There was no change
in our internal control over financial reporting that occurred during the period
covered by this Report that has materially affected, or is reasonably likely to
materially affect, our internal control over-financial reporting.

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

      Our management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange
Act Rules 13a-15(f). Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
we conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation under the framework in Internal Control --
Integrated Framework, our management concluded that our internal control over
financial reporting was effective as of December 31, 2005.

      Our management's assessment of the effectiveness of our internal control
over financial reporting as of December 31, 2005 has been audited by Deloitte &
Touche LLP, an independent registered public accounting firm, as stated in their
report which is included herein.

                                       64


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
DUSA Pharmaceuticals, Inc.
Wilmington, Massachusetts

      We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting that DUSA
Pharmaceuticals, Inc. and its subsidiary (the "Company") maintained effective
internal control over financial reporting as of December 31, 2005, based on
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.

      We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.

      A company's internal control over financial reporting is a process
designed by, or under the supervision of, the company's principal executive and
principal financial officers, or persons performing similar functions, and
effected by the company's board of directors, management, and other personnel to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.

      Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.

      In our opinion, management's assessment that the Company maintained
effective internal control over financial reporting as of December 31, 2005, is
fairly stated, in all material respects, based on the criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring

                                       65


Organizations of the Treadway Commission. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2005, based on the criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.

      We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated financial
statements as of and for the year ended December 31, 2005, of the Company and
our report dated March 10, 2006, expressed an unqualified opinion on those
financial statements.

/s/ DELOITTE & TOUCHE LLP

Boston, Massachusetts
March 10, 2006

                                       66


ITEM  9B. OTHER INFORMATION

      None.

                                    PART III

ITEM  10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      The information required by Item 10 is hereby incorporated by reference to
the sections entitled "Nominees," "Executive Officers who are not Directors,"
and "Compliance with Section 16(a) of the Exchange Act" of the Registrant's 2006
Proxy Statement.

ITEM  11. EXECUTIVE COMPENSATION

      The information required by Item 11 is hereby incorporated by reference to
the sections entitled "Director Compensation," "Executive Compensation," "Board
Compensation Committee Report on Executive Compensation," "Performance Graph,"
"Option Grants in 2005," "Aggregate Option Exercises in 2006 and Option Values
at December 31, 2005," and "Other Compensation" of Registrant's 2006 Proxy
Statement.

ITEM  12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
          RELATED STOCKHOLDER MATTERS

      The information required by Item 12 is hereby incorporated by reference to
the section entitled "Security Ownership of Certain Beneficial Owners and
Management and Related Shareholder Matters" of the Registrant's 2006 Proxy
Statement.

ITEM  13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The information required by Item 13 is hereby incorporated by reference to
the section entitled "Certain Relationships and Related Transactions" of the
Registrant's 2006 Proxy Statement.

ITEM  14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

      The information required by Item 14 is hereby incorporated by reference to
the section entitled "Ratification and Selection of Auditors" of the
Registrant's 2006 Proxy Statement.

                                       67


ITEM  15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

       A.  List of Financial Statements and Schedules

           Report of Independent Registered Public Accounting Firm.....   F-1
           Consolidated Balance Sheets.................................   F-2
           Consolidated Statements of Operations.......................   F-3
           Consolidated Statements of Shareholders' Equity.............   F-4
           Consolidated Statements of Cash Flows.......................   F-5
           Notes to the Consolidated Financial Statements..............   F-6

       B.  Exhibits filed as part of this Report

2(a.1)*  Merger Agreement by and among the Company, Sirius Laboratories, Inc.,
         and the shareholders of Sirius dated as of December 30, 2005; and

2(a.2)   First Amendment to Merger Agreement by and among the Company, Sirius
         Laboratories, Inc. and the shareholders of Sirius, dated as of
         February 6, 2006.

3(a.1)   Certificate of Incorporation, as amended, filed as Exhibit 3(a) to the
         Registrant's Form 10-K for the fiscal year ended December 31, 1998, and
         is incorporated herein by reference;

3(a.2)   Certificate of Amendment to the Certificate of Incorporation, as
         amended, dated October 28, 2002 and filed as Exhibit 99.3 to the
         Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended
         September 30, 2002, filed November 12, 2002 and is incorporated herein
         by reference; and

3(b)     By-laws of the Registrant, filed as Exhibit 3 to the Registrant's
         current report on Form 8-K, filed on January 4, 2005, and is
         incorporated herein by reference.

4(a)     Common Stock specimen, filed as Exhibit 4(a) to the Registrant's Form
         10-K for the fiscal year ended December 31, 2002, and is incorporated
         herein by reference;

4(b)     Class B Warrant, filed as Exhibit 4.3 to the Registrant's Registration
         Statement on Form S-1, No. 33-43282, and is incorporated herein by
         reference;

4(c)     Rights Agreement filed as Exhibit 4.0 to Registrant's Current Report on
         Form 8-K dated September 27, 2002, filed October 11, 2002, and is
         incorporated herein by reference; and

4(d)     Rights Certificate relating to the rights granted to holders of common
         stock under the Rights Agreement filed as Exhibit 4.0 to Registrant's
         Current Report on Form 8-K, dated September 27, 2002, filed October 11,
         2002, and is incorporated herein by reference.

10(a)    License Agreement between the Company, PARTEQ and Draxis Health Inc.
         dated August 27, 1991, filed as Exhibit 10.1 to the Registrant's
         Registration Statement on Form S-1, No. 33-43282, and is incorporated
         herein by reference;

10(b)    ALA Assignment Agreement between the Company, PARTEQ, and Draxis Health
         Inc. dated October 7, 1991, filed as Exhibit 10.2 to the Registrant's
         Registration Statement on Form S-1, No. 33-43282, and is incorporated
         herein by reference;

10(b.1)  Amended and Restated Assignment Agreement between the Company and
         Draxis Health, Inc. dated April 16, 1999, filed as Exhibit 10(b.1) to
         the Registrant's Form 10-K for the fiscal year ended December 31, 1999,
         and is incorporated herein by reference;

                                       68


10(b.2)  Termination and Transfer Agreement between the Company and Draxis
         Health Inc. dated as of February 24, 2004, filed as Exhibit 10(b.2) to
         the Registrant's Form 10-K for the fiscal year ended December 31, 2003,
         portions of which have been omitted pursuant to a request for
         confidential treatment pursuant to Rule 24b-2 of the Securities
         Exchange Act of 1934, as amended, and is incorporated herein by
         reference;

10(c)    Employment Agreement of D. Geoffrey Shulman, MD, FRCPC dated October 1,
         1991, filed as Exhibit 10.4 to the Registrant's Registration Statement
         on Form S-1, No. 33-43282, and is incorporated herein by reference; +

10(d)    Amendment to Employment Agreement of D. Geoffrey Shulman, MD, FRCPC
         dated April 14, 1994, filed as Exhibit 10.4 to the Registrant's
         Registration Statement on Form S-2, No. 33-98030, and is incorporated
         herein by reference; +

10(e)    Amended and Restated License Agreement between the Company and PARTEQ
         dated March 11, 1998, filed as Exhibit 10(e) to the Registrant's Form
         10-K/A filed on June 18, 1999, portions of Exhibit A have been omitted
         pursuant to a request for confidential treatment pursuant to Rule 24b-2
         of the Securities Exchange Act of 1934, as amended, and is incorporated
         herein by reference;

10(f)    Incentive Stock Option Plan, filed as Exhibit 10.11 of Registrant's
         Registration Statement on Form S-1, No. 33-43282, and is incorporated
         herein by reference; +

10(g)    1994 Restricted Stock Option Plan, filed as Exhibit 1 to Registrant's
         Schedule 14A definitive Proxy Statement dated April 26, 1995, and is
         incorporated herein by reference; +

10(h)    1996 Omnibus Plan, as amended, filed as Appendix A to Registrant's
         Schedule 14A Definitive Proxy Statement dated April 26, 2001, and is
         incorporated herein by reference; +

10(h.1)  1996 Omnibus Plan, as amended on May 1, 2003, filed as Exhibit 10(h.1)
         to the Registrant's Form 10-K for the fiscal year ended December 31,
         2003, and is incorporated herein by reference; +

10(h.2)  1996 Omnibus Plan, as amended April 23, 2004, filed as Appendix A to
         Registrant's Schedule 14A definitive Proxy Statement dated April 28,
         2004, and is incorporated herein by reference; +

10(i)    Purchase and Supply Agreement between the Company and National
         Biological Corporation dated November 5, 1998, filed as Exhibit 10(i)
         to the Registrant's Form 10-K/A filed on June 18, 1999, portions of
         which have been omitted pursuant to a request for confidential
         treatment pursuant to Rule 24b-2 of the Securities Exchange Act of
         1934, as amended, and is incorporated herein by reference;

10(i.1)  Amended and Restated Purchase and Supply Agreement between the Company
         and National Biological Corporation dated as of June 21, 2004 filed as
         Exhibit 10(a) to the Registrant's Quarterly Report on Form 10-Q for the
         fiscal quarter ended June 30, 2004, portions of which have been omitted
         pursuant to a request for confidential treatment pursuant to Rule 24b-2
         of the Securities Exchange Act of 1934, as amended, filed August 11,
         2004, and is incorporated herein by reference;

10(j)    Supply Agreement between the Company and Sochinaz SA dated December 24,
         1993, filed as Exhibit 10(q) to Registrant's Form 10-K/A filed on March
         21, 2000, portions of which have been

                                       69


         omitted pursuant to a request for confidential treatment pursuant to
         Rule 24b-2 of the Securities Exchange Act of 1934, as amended, and
         is incorporated herein by reference;

10(j.1)  First Amendment to Supply Agreement between the Company and Sochinaz SA
         dated July 7, 1994, filed as Exhibit 10(q.1) to Registrant's Annual
         Report on Form 10-K for the fiscal year ended December 31, 1999, and is
         incorporated herein by reference;

10(j.2)  Second Amendment to Supply Agreement between the Company and Sochinaz
         SA dated as of June 20, 2000, filed as Exhibit 10.1 to Registrant's
         Current Report on Form 8-K dated June 28, 2000, and is incorporated
         herein by reference;

10(j.3)  Third Amendment to Supply Agreement between the Company and Sochinaz SA
         dated July 29, 2005, filed as Exhibit 10.1 to the Registrant's Form
         10-Q filed on August 3, 2005, portions of which have been omitted
         pursuant to a request for confidential treatment pursuant to Rule 24b-2
         of the Securities Exchange Act of 1934, as amended, and is incorporated
         herein by reference;

10(k)    Master Service Agreement between the Company and Therapeutics, Inc.
         dated as of October 4, 2001, filed as Exhibit 10(b) to the Registrant's
         Quarterly Report on Form 10-Q for the fiscal quarter ended September
         30, 2001, filed November 8, 2001, portions of which have been omitted
         pursuant to a request for confidential treatment under Rule 24b-2 of
         the Securities Exchange Act of 1934, as amended and is incorporated
         herein by reference;

10(l)    License and Development Agreement between the Company and photonamic
         GmbH & Co. KG dated as of December 30, 2002, filed as Exhibit 10(r) to
         Registrant's Annual Report on Form 10-K for the fiscal year ended
         December 31, 2002, 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 and is incorporated herein by
         reference;

10(m)    Supply Agreement between the Company and medac GmbH dated as of
         December 30, 2002, filed as Exhibit 10(r) to Registrant's Annual Report
         on Form 10-K for the fiscal year ended December 31, 2002, 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 and is incorporated herein by reference;

10(n)    Securities Purchase Agreement dated as of February 27, 2004, by and
         among the Company and certain investors, filed as Exhibit 10.1 to the
         Registrant's current report on Form 8-K, filed on March 2, 2004,
         portions of which have been omitted pursuant to a request for
         confidential treatment under Rule 24(b) of the Securities Exchange Act
         of 1934, as amended, and is incorporated herein by reference;

10(o)    Registration Rights Agreement dated as of February 27, 2004 by and
         among the Company and certain investors, filed as Exhibit 10.2 to the
         Registrant's current report on Form 8-K, filed on March 2, 2004, and is
         incorporated herein by reference;

10(p)    Form of Additional Investment Right dated as of February 27, 2004,
         filed as Exhibit 10.3 to the Registrant's current report on Form 8-K,
         filed on March 2, 2004, and is incorporated herein by reference;

10(q)    License, Promotion, Distribution and Supply Agreement between the
         Company and Coherent-AMT dated as of March 31, 2004 filed as Exhibit
         10(a) to the Registrant's Quarterly Report on

                                       70


         Form 10-Q for the fiscal quarter ended March 31, 2004, filed May 4,
         2004, and is incorporated herein by reference;

10(r)    Employment Agreement of Scott L. Lundahl dated as of June 23, 1999
         filed as Exhibit 10(u) to the Registrant's Form 10-K for the fiscal
         year ended December 31, 2004, and is incorporated herein by
         reference; +

10(s)    Amended Employment Agreement of Stuart L. Marcus, MD, PhD dated
         December 9, 1999 filed as Exhibit 10(v) to the Registrant's Form 10-K
         for the fiscal year ended December 31, 2004, and is incorporated herein
         by reference; +

10(t)    Employment Agreement of Mark C. Carota dated as of February 14, 2000
         filed as Exhibit 10(w.1) to the Registrant's Form 10-K for the fiscal
         year ended December 31, 2004, and is incorporated herein by
         reference; +

10(t.1)  First Amendment to Employment Agreement of Mark C. Carota dated October
         31, 2001 filed as Exhibit 10(w.2) to the Registrant's Form 10-K for the
         fiscal year ended December 31, 2004, and is incorporated herein by
         reference; +

10(u)    Employment Agreement of Paul A. Sowyrda dated as of July 31, 2001 filed
         as Exhibit 10(x) to the Registrant's Form 10-K for the fiscal year
         ended December 31, 2004, and is incorporated herein by reference; +

10(v)    Employment Agreement of Richard Christopher dated as of January 1, 2004
         filed as Exhibit 10(y) to the Registrant's Form 10-K for the fiscal
         year ended December 31, 2004, and is incorporated herein by
         reference; +

10(w)    Employment Agreement of Robert F. Doman dated as of March 15, 2005
         filed as Exhibit 10(z) to the Registrant's Form 10-K for the fiscal
         year ended December 31, 2004, and is incorporated herein by
         reference; +

10(x)    Employment Agreement of Gary F. Talarico dated as of February 15, 2005
         filed as Exhibit 10(aa) to the Registrant's Form 10-K for the fiscal
         year ended December 31, 2004, and is incorporated herein by
         reference; +

10(y)    Severance Agreement and General Release between the Company and Peter
         Chakoutis dated as of February 25, 2005 filed as Exhibit 10(bb) to the
         Registrant's Form 10-K for the fiscal year ended December 31, 2004, and
         is incorporated herein by reference; +

10(y.1)  Final Agreement and General Release, between the Company and Peter
         Chakoutis, dated as of April 4, 2005, filed as Exhibit 10.1 to the
         Registrant's Current Report on Form 8-K, filed on April 4, 2005, and is
         incorporated herein by reference; +

10(z)    Compensation Policy Applicable to the Company's Non-Employee Directors
         filed as Exhibit 10(cc) to the Registrant's Form 10-K for the fiscal
         year ended December 31, 2004, and is incorporated herein by reference;
         and +

10(aa)   Marketing, Distribution and Supply Agreement between the Company and
         Stiefel Laboratories, Inc., dated as of January 12, 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.

14(a)    Form of DUSA Pharmaceuticals, Inc. Code of Ethics Applicable to Senior
         Officers, filed as Exhibit 14(a) to the Registrant's Form 10-K for the
         fiscal year ended December 31, 2004, and is incorporated herein by
         reference.

21(a)    Subsidiaries of the Registrant.

23(a)    Consent of Deloitte & Touche LLP, Independent Registered Public
         Accounting Firm.

31(a)    Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer;
         and

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.

+        Management contract or compensatory plan or arrangement.

                                       71


      * Schedules and exhibits omitted pursuant to Item 601(b)(2) of
      Regulation S-K. The Company agrees to furnish supplementally a copy of
      any omitted schedule or exhibit to the Commission upon request.

                                       72


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
DUSA Pharmaceuticals, Inc.
Wilmington, Massachusetts

      We have audited the accompanying consolidated balance sheets of DUSA
Pharmaceuticals, Inc. and its subsidiary (the "Company") as of December 31, 2005
and 2004, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 2005. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

     In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Dusa Pharmaceuticals, Inc. and
subsidiaries as of December 31, 2005 and 2004, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2005, in conformity with accounting principles generally accepted
in the United States of America.

      We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of the
Company's internal control over financial reporting as of December 31, 2005,
based on the criteria established in Internal Control--Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 10, 2006, expressed an unqualified opinion on
management's assessment of the effectiveness of the Company's internal control
over financial reporting and an unqualified opinion on the effectiveness of the
Company's internal control over financial reporting.

/s/ DELOITTE & TOUCHE LLP

Boston, Massachusetts
March 10, 2006

                                      F-1



DUSA PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS



                                                                                             DECEMBER 31,
                                                                                      -------------------------
                                                                                        2005           2004
                                                                                      -----------   -----------
                                                                                              
ASSETS

CURRENT ASSETS
    Cash and cash equivalents                                                         $ 4,210,675   $ 2,928,143
    Marketable securities                                                              30,579,486    46,222,969
    Accrued interest receivable                                                           353,449       641,797
    Accounts receivable, net                                                              373,130       711,016
    Inventory                                                                           1,860,793     1,417,160
    Deferred acquisition costs                                                            831,875            --
    Prepaids and other current assets                                                     776,293       830,895
                                                                                      -----------   -----------
       TOTAL CURRENT ASSETS                                                            38,985,701    52,751,980
    Restricted cash                                                                       144,541       140,764
    Property, plant and equipment, net                                                  2,971,869     3,481,888
    Deferred charges and other assets                                                     228,520       276,256
                                                                                      -----------   -----------
TOTAL ASSETS                                                                          $42,330,631   $56,650,888
                                                                                      ===========   ===========

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
    Accounts payable                                                                  $   934,694   $   857,268
    Accrued compensation                                                                1,071,677       963,607
    Other accrued expenses                                                              1,995,679     1,901,841
    Deferred revenue                                                                       94,283       230,715
                                                                                      -----------   -----------
       TOTAL CURRENT LIABILITIES                                                        4,096,333     3,953,431
    Other liabilities                                                                     205,570       190,439
                                                                                      -----------   -----------

TOTAL LIABILITIES                                                                       4,301,903     4,143,870
                                                                                      ===========   ===========
COMMITMENTS AND CONTINGENCIES  (NOTE 12)

SHAREHOLDERS' EQUITY
    Capital Stock
      Authorized: 100,000,000 shares; 40,000,000 shares designated as common
      stock, no par, 60,000,000 shares issuable in series or classes; and
      40,000 junior Series A preferred shares. Common stock shares issued
      and outstanding: 17,041,197 in 2005 and 16,876,822 in 2004, no par              125,626,163   124,698,059
    Additional paid-in capital                                                          2,035,783     2,016,339
    Accumulated deficit                                                               (89,537,470)  (74,538,761)
    Accumulated other comprehensive (loss) income                                         (95,748)      331,381
                                                                                      -----------   -----------
TOTAL SHAREHOLDERS' EQUITY                                                             38,028,728    52,507,018
                                                                                      -----------   -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                            $42,330,631   $56,650,888
                                                                                      ===========   ===========


      See the accompanying Notes to the Consolidated Financial Statements.

                                      F-2


DUSA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS



                                                                       YEAR ENDED DECEMBER 31,
                                                         -----------------------------------------------
                                                              2005              2004             2003
                                                         --------------    -------------    ------------
                                                                                   
REVENUES

   Kerastick(R) Product Revenues                         $    8,891,565    $   5,850,835    $    900,803
   BLU-U(R) Product Revenues                                  2,445,896        2,136,821          69,306
                                                         --------------    -------------    ------------
PRODUCT REVENUES                                             11,337,461        7,987,656         970,109

COST OF PRODUCT REVENUES

   Kerastick(R) Cost of Product Revenues and Royalties        3,583,650        2,023,685       2,261,749
   BLU-U(R) Cost of Product Revenues                          2,629,951        1,851,333       1,219,499
                                                         --------------    -------------    ------------
COST OF PRODUCT REVENUES AND ROYALTIES                        6,213,601        3,875,018       3,481,248
GROSS MARGIN                                                  5,123,860        4,112,638      (2,511,139)

OPERATING COSTS

   Research and Development                                   5,587,599        6,489,723       5,403,961
   Marketing and sales                                        9,068,984        7,622,106       2,494,405
   General and administrative                                 6,703,047        7,209,536       6,343,680
   Restructuring                                                150,917                -               -
                                                         --------------    -------------    ------------
TOTAL OPERATING COSTS                                        21,510,547       21,321,365      14,242,046
                                                         --------------    -------------    ------------
LOSS  FROM OPERATIONS                                       (16,386,687)     (17,208,727)    (16,753,185)
                                                         --------------    -------------    ------------

OTHER INCOME

   Interest income                                            1,387,978        1,579,747       1,926,331
                                                         --------------    -------------    ------------
NET LOSS                                                 $  (14,998,709)   $ (15,628,980)   $(14,826,854)
                                                         ==============    =============    ============

BASIC AND DILUTED NET LOSS PER COMMON SHARE              $        (0.89)   $       (0.96)   $      (1.06)
                                                         ==============    =============    ============

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING         16,932,138       16,317,078      13,936,482
                                                         ==============    =============    ============


      See the accompanying Notes to the Consolidated Financial Statements.

                                      F-3


DUSA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY



                                                 COMMON STOCK
                                          --------------------------                                   ACCUMULATED
                                                                        ADDITIONAL                        OTHER
                                          NUMBER OF                      PAID-IN      ACCUMULATED     COMPREHENSIVE
                                            SHARES        AMOUNT         CAPITAL        DEFICIT       INCOME (LOSS)       TOTAL
                                          ----------   -------------   -----------   --------------   -------------   -------------
                                                                                                    

BALANCE, JANUARY 1, 2003                  13,887,612   $  95,490,561   $ 2,015,586   $  (44,082,927)   $  2,634,510   $  56,057,730
                                          ----------   -------------   -----------   --------------   -------------   -------------

Comprehensive loss:
   Net loss for period                                                                  (14,826,854)                    (14,826,854)
   Net unrealized loss on marketable
     securities available for sale                                                                       (1,178,820)     (1,178,820)
                                                                                                                      -------------

Total comprehensive loss                                                                                                (16,005,674)
Issuance of common stock to consultants       44,416         110,000                                                        110,000
Exercises of options                          11,000          32,870                                                         32,870
Issuance of common stock to employee          23,219          37,123                                                         37,123
                                          ----------   -------------   -----------   --------------   -------------   -------------
BALANCE, DECEMBER 31, 2003                13,966,247   $  95,670,554   $ 2,015,586   $  (58,909,781)    $ 1,455,690   $  40,232,049
                                          ----------   -------------   -----------   --------------   -------------   -------------

Comprehensive loss:
   Net loss for period                                                                  (15,628,980)                    (15,628,980)
   Net unrealized loss on marketable                                                                     (1,124,309)     (1,124,309)
     securities available for sale
                                                                                                                      -------------
Total comprehensive loss                                                                                                (16,753,289)
Issuance of common stock for cash
   through a private placement, net of
   total offering costs of $1,907,952
   including 155,250 shares issued to
   placement agent                         2,742,750      28,262,298                                                     28,262,298
Exercises of options                         167,825         765,207                                                        765,207
Issuance of options to consultants                                         240,753                                          240,753
Repurchase of options issued to
   consultants                                                            (240,000)                                        (240,000)
                                          ----------   -------------   -----------   --------------   -------------   -------------
BALANCE, DECEMBER 31, 2004                16,876,822     124,698,059     2,016,339      (74,538,761)        331,381      52,507,018
Comprehensive loss
   Net loss for period                                                                  (14,998,709)                    (14,998,709)
   Net unrealized loss on marketable                                                                       (427,129)       (427,129)
     securities available for sale
                                                                                                                      -------------
Total comprehensive loss                                                                                                (15,425,838)
Exercises of options                         164,375         928,104                                                        928,104
Acceleration of vesting of stock
   options                                                                  19,444                                           19,444
                                          ----------   -------------   -----------   --------------   -------------   -------------
BALANCE, DECEMBER 31, 2005                17,041,197   $ 125,626,163   $ 2,035,783   $  (89,537,470)  $     (95,748)  $  38,028,728
                                          ==========   =============   ===========   ==============   =============   =============


      See the accompanying Notes to the Consolidated Financial Statements.

                                      F-4


DUSA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS



                                                                                          YEAR ENDED DECEMBER 31,
                                                                                ---------------------------------------------
                                                                                    2005              2004           2003
                                                                                -------------    ------------    ------------
                                                                                                        
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
   Net (loss)                                                                   $ (14,998,709)   $(15,628,980)   $(14,826,854)
   Adjustments to reconcile net loss to net cash used in operating
     activities:
     Amortization of premiums and accretion of discounts on debt
     securities, net                                                                  416,550         225,614         100,346
     Realized gain on sale of marketable securities                                   (74,512)              -               -
     Depreciation and amortization                                                    925,185       1,299,308       1,610,848
     Stock-based compensation                                                          19,444         240,753         110,000
   Changes in other assets and liabilities impacting cash flows from operating
     activities:
     Accrued interest receivable                                                      288,348        (108,001)        165,868
     Accounts receivable                                                              337,886        (481,533)       (192,763)
     Inventory                                                                       (443,632)       (704,329)        475,828
     Prepaid and other current assets                                                (729,537)        169,518         (84,709)
     Deferred charges and other assets                                                      -        (276,256)              -
     Accounts payable                                                                  77,426          (2,014)        306,391
     Accrued compensation and other accrued expenses                                  201,907         906,691        (550,872)
     Deferred revenue                                                                (136,432)        100,815         124,800
     Other liabilities-non current                                                     15,131         190,439               -
                                                                                -------------    ------------    ------------
NET CASH USED IN OPERATING ACTIVITIES                                             (14,100,945)    (14,067,975)    (12,761,117)
                                                                                -------------    ------------    ------------

CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
   Purchases of marketable securities                                             (58,850,356)    (58,858,323)     (4,000,000)
   Proceeds from maturities and sales of marketable securities                     73,724,674      44,821,212      15,000,000
   Restricted cash                                                                     (3,777)         (1,551)         (1,330)
   Purchases of property, plant and equipment                                        (415,168)       (529,707)       (632,654)
   Repurchase of options issued to consultants                                              -        (240,000)              -
                                                                                -------------    ------------    ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES                                14,455,373     (14,808,369)     10,366,016
                                                                                -------------    ------------    ------------

CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
   Issuance of common stock (net of stock offering costs of $200,202)                       -      28,262,298               -
   Payment of long-term debt                                                                -      (1,517,500)       (270,000)
   Proceeds from exercise of options                                                  928,104         765,207          32,870
                                                                                -------------    ------------    ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                                   928,104      27,510,005        (237,130)
                                                                                -------------    ------------    ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS                                           1,282,532      (1,366,339)     (2,632,231)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                    2,928,143       4,294,482       6,926,713
                                                                                -------------    ------------    ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                                      $   4,210,675    $  2,928,143    $  4,294,482
                                                                                =============    ============    ============
   Cash paid for interest                                                                        $     20,186    $     58,623
                                                                                =============    ============    ============


      NON-CASH TRANSACTIONS

      During 2004, the Company issued 155,250 shares of its common stock in a
      private placement at $11.00 per share as commission and non-refundable
      retainer to the placement agent for a total value of $1,707,750 (See Note
      10.) Also during 2004, the Company granted 30,000 fully vested options to
      three consultants. These options were valued at $240,753 (See Note 10.)

      During 2003, the Company issued 23,219 shares of restricted common stock
      at $1.599 per share to its Chief Executive Officer, reflecting payment of
      the after-tax portion of his 2002 bonus compensation (See Note 10.)

      See the accompanying Notes to the Consolidated Financial Statements.

                                      F-5


DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2005, 2004, AND 2003

      1)    NATURE OF BUSINESS

                  DUSA Pharmaceuticals, Inc. ("DUSA" or the "Company") is a
            pharmaceutical company engaged primarily in the research,
            development and marketing of a drug named 5-aminoluvulinic acid, or
            ALA, which is used in combination with light devices to treat or
            detect a variety of conditions in processes known as photodynamic
            therapy or photodetection. 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.

                  The Company's products, the Levulan(R) Kerastick(R) 20%
            Topical Solution with PDT and the BLU-U(R) brand light source were
            launched in the United States of America, 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.

      2)    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

            a) PRINCIPLES OF CONSOLIDATION - The Company's consolidated
            financial statements include the accounts of the Company and its
            wholly-owned subsidiary, DUSA Pharmaceuticals New York, Inc. All
            intercompany balances and transactions have been eliminated.

            b) BASIS OF PRESENTATION AND USE OF ESTIMATES - These financial
            statements have been prepared in conformity with accounting
            principles generally accepted in the United States. Such principles
            require management to make estimates and assumptions that affect the
            reported amounts of assets and liabilities and disclosure of
            contingent assets and liabilities at the date of the financial
            statements and the reported amounts of revenues and expenses during
            the reporting period. Actual results could differ from those
            estimates.

            c) CASH AND CASH EQUIVALENTS - Cash equivalents include money market
            funds. All other investments are classified as marketable
            securities. In December 2001, the Company executed a short-term,
            renewable, irrevocable and unconditional letter of credit in lieu of
            a security deposit for the Company's Kerastick(R) manufacturing
            facility at its Wilmington, Massachusetts location. The cash in
            support of the letter of credit is held in a separate bank account
            and is recorded as restricted cash in the Consolidated Balance
            Sheets. At December 31, 2005, the amount of the letter of credit was
            $136,018, and the restricted cash balance was $144,541.

            d) MARKETABLE SECURITIES - The Company classifies all investment
            securities as available-for-sale and records such investments at
            fair market value. Unrealized gains and losses on available for sale
            securities are recorded as a separate component of shareholders'
            equity. The premiums and discounts recorded on the purchase of the
            debt securities are amortized into interest income over the life of
            the securities. As the Company's marketable securities are available
            to fund operations and as management expects to sell a portion of
            its marketable securities in the next fiscal year in order to meet
            its working capital requirements, all marketable securities are
            classified as current assets.

                                      F-6


DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2005, 2004, AND 2003

            e) INVENTORY - Inventory is stated at the lower of cost (first-in,
            first-out method) or market. Inventory identified for research and
            development activities is expensed in the period in which that
            inventory is designated for such use. BLU-U(R) commercial light
            sources placed in physicians' offices for an initial evaluation
            period are included in inventory in the accompanying Consolidated
            Balance Sheets until all revenue recognition criteria are met.

            f) DEFERRED ACQUISITION COSTS - Deferred acquisition costs are
            direct costs incurred by the Company through December 31, 2005,
            related to a pending acquisition (see Note 13). If the negotiations
            are unsuccessful and a determination is made that the acquisition is
            not likely to be consummated, the deferred acquisition costs will be
            expensed in the period such a determination is made.

            g) PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment is
            carried at cost less accumulated depreciation and amortization.
            Depreciation is computed on a straight-line basis over the estimated
            lives of the related assets. Leasehold improvements are amortized
            over the lesser of their useful lives or the lease terms.

            h) VALUATION OF LONG-LIVED ASSETS - The Company reviews its
            long-lived assets for impairment whenever events or changes in
            circumstances indicate that the carrying amount of a long-lived
            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.

            i) REVENUE RECOGNITION - Revenues on product sales are recognized
            when persuasive evidence of an arrangement exists, the price is
            fixed and determinable, delivery has occurred to end-users, and
            there is collection is probable. Product sales made through
            distributors have been recorded as deferred revenue until the
            product is sold by the distributors to the end user. The Company has
            certain units held by physicians for a trial period. No revenue is
            recognized until the physician elects to purchase the equipment and
            all other revenue recognition criteria are met.

            j) RESEARCH AND DEVELOPMENT COSTS - Costs related to the conceptual
            formulation and design of products and processes are expensed as
            research and development costs as they are incurred. Purchased
            technology, including the costs of licensed technology for a
            particular research project that do not have alternative future
            uses, are expensed at the time the costs are incurred.

            k) MARKETING AND SALES COSTS - The Company commenced certain
            marketing and sales initiatives in 2003 including the launch of its
            direct sales force in October 2003 and related marketing and sales
            activities. Costs included in marketing and sales expense consist
            mainly of overhead expenses such as salaries and benefits for the
            marketing and sales staff, commissions, and related support expenses
            such as travel, and telephone, as well as costs related to trade
            shows, miscellaneous marketing and outside consultants. All such
            costs are expensed as incurred.

            l) INCOME TAXES - The Company recognizes deferred income tax assets
            and liabilities for the expected future tax consequences for events
            that have been included in the Company's financial statements or tax
            returns. Deferred tax assets and liabilities are based on the
            difference between the financial statement and tax bases of assets
            and liabilities using tax rates expected to be in effect in the
            years in which these differences are expected to reverse. A
            valuation allowance is provided to reduce the deferred tax assets to
            the amount that will more likely than not be realized.

                                      F-7


DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2005, 2004, AND 2003

            m) BASIC AND DILUTED NET LOSS PER COMMON SHARE - Basic net loss per
            common share is based upon the weighted average number of shares
            outstanding during each period. Stock options and warrants are not
            included in the computation of the weighted average number of shares
            outstanding for dilutive net loss per common share during each of
            the periods presented in the Statement of Operations, as the effect
            would be antidilutive. For the years ended December 31, 2005, 2004,
            and 2003, stock options and warrants totaling approximately
            3,150,000, 3,009,000, and 2,745,000 shares, respectively, have been
            excluded from the computation of diluted net loss per share.

            n) STOCK-BASED COMPENSATION - Statement of Financial Accounting
            Standard ("SFAS") No. 123, "Accounting for Stock-Based
            Compensation," as amended, addresses the financial accounting and
            reporting standards for stock or other equity-based compensation
            arrangements. The Company elected to continue to use the intrinsic
            value-based method to account for employee stock option awards under
            the provisions of Accounting Principles Board Opinion ("APB") No.
            25, "Accounting for Stock Issued to Employees," and to provide
            disclosures based on the fair value method in the Notes to the
            Consolidated Financial Statements as permitted by SFAS No. 123.
            Under the intrinsic value method, compensation expense, if any, is
            recognized for the difference between the exercise price of the
            option and the fair value of the underlying common stock as of a
            measurement date. The measurement date is the time when both the
            number of shares and the exercise price is known. Stock or other
            equity-based compensation for non-employees must be 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 measurement date,
            which is generally the grant date. The resulting compensation cost
            is recognized and charged to operations over the service period,
            which is generally the vesting period.

            As described above, prior to January 1, 2006 the Company used the
            intrinsic value method to measure compensation expense associated
            with grants of stock options to employees. Had the Company used the
            fair value method to measure compensation, the net loss and net loss
            per share would have been reported as follows for the years ended
            December 31:

                                      F-8


DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2005, 2004, AND 2003



                                            2005                2004           2003
                                        -------------    -------------    -------------
                                                                 
Net loss: as reported                   $ (14,998,709)   $ (15,628,980)   $ (14,826,854)
                                        -------------    -------------    -------------
Add: stock-based compensation expense
included in reported net loss                  19,444                -                -
Deduct: effect on net loss
   if fair value method had been used      (1,738,275)      (2,275,678)      (3,445,951)
                                        -------------    -------------    -------------
Net loss: pro forma                     $ (16,717,540)   $ (17,904,658)   $ (18,272,805)
                                        =============    =============    =============
Basic and diluted net loss
   per common share: as reported        $       (0.89)   $       (0.96)   $       (1.06)
                                        -------------    -------------    -------------
Basic and diluted net loss
   per common share: proforma           $       (0.99)   $       (1.10)   $       (1.31)
                                        =============    =============    =============


The fair value of the options at the date of grant was estimated using the
Black-Scholes model with the following weighted average assumptions for the
years ended December 31:



                           2005     2004     2003
                          -----    -----    -----
                                   
Expected life (years)         5        5        5
Risk free interest rate    3.97%    3.02%    3.02%
Expected volatility       72.05%   76.40%   80.85%
Dividend yield                -        -        -


      Using these assumptions, the weighted-average fair value per option
      granted during the years ended December 31, 2005, 2004, and 2003, was
      $6.71, $6.34, and $1.57, respectively.

      In December 2004, the Financial Accounting Standards Board ("FASB") issued
      SFAS No. 123(R), "Share-Based Payment," a revision of SFAS Statement No.
      123. The Company adopted SFAS 123(R) effective January 1, 2006, using the
      modified prospective application method, and beginning with the first
      quarter of 2006 will be required to measure all employee share-based
      compensation awards using a fair value based method and record share-based
      compensation expense in its financial statements if the requisite service
      to earn the award is provided. The above disclosed 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. 123(R) will not affect the Company's cash flow, but
      it will materially increase the Company's net loss and basic and diluted
      loss per common share. In accordance with SFAS 123R, the Company will
      recognize the expense attributable to stock awards that are granted or
      vest in periods ending subsequent to December 31, 2005.

      For 2006, total stock-based compensation expense is estimated to be in a
      range of $1,500,000 to $2,500,000. In order to develop the fiscal 2006
      stock-based compensation expense estimate, we utilized assumptions
      including, among other items, projected option grants, volatility measures
      using a combination of historical and current and historical implied
      volatility, and expected life estimates for officer and non-officer
      employee groups. The amount of the 2006 grants, if any, have not yet been
      determined and could result in a change to the amounts included in the
      range reflected above. Total unrecognized stock-based compensation expense
      related to unvested stock options, expected to be recognized over
      approximately two years, amounted to $3,300,000 at December 31, 2005, net
      of forfeitures.

                                      F-9


DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2005, 2004, AND 2003

      o) COMPREHENSIVE LOSS - The Company has reported comprehensive loss and
      its components as part of its Consolidated Statements of Shareholders'
      Equity. Comprehensive loss, apart from net loss, relates to net unrealized
      gains and losses on marketable securities.

      p) SEGMENT REPORTING - The Company presently operates in one segment,
      which is the development and commercialization of emerging technologies
      that use drugs in combination with light to treat and detect disease.

      During the years ended 2005, 2004 and 2003, the Company derived revenues
      from the following geographies (as a percentage of product revenues):



                  2005    2004    2003
                  ----    ----    ----
                         
UNITED STATES       87%     91%    100%
CANADA              13%      9%      -
                  ----    ----    ----
         TOTAL     100%    100%    100%
                  ====    ====    ====


      q) FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying value of the
      Company's financial assets and liabilities approximates their fair values
      due to their short-term nature. Marketable securities classified as
      available for sale are carried at fair market value.

      r) 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 distributors and
      customers. To manage credit risk, the Company performs regular credit
      evaluations of its customers' and provides allowances for potential credit
      losses, when applicable. Concentrations in the Company's accounts
      receivable as of December 31, 2005 and 2004 and in the Company's revenues
      for the years ended December 31, 2005, 2004, and 2003, were as follows:



                             2005                    2004               2003
                      --------------------    ---------------------   -------
                                    % OF                    % OF
                       % OF      ACCOUNTS      % OF       ACCOUNTS      % OF
                      REVENUE   RECEIVABLE    REVENUE    RECEIVABLE   REVENUE
                      -------   ----------    -------    ----------   -------
                                                       
   Distributor A        16%          -          31%          27%        89%
   Distributor B         -           -          17%           -          -
   Distributor C        13%          6%          5%          34%         -
   Direct Customers     71%         94%         47%          39%        11%
                       ---         ---         ---          ---        ---
      Total            100%        100%        100%         100%       100%
                       ===         ===         ===          ===        ===


      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.

      s) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

                                      F-10


DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2005, 2004, AND 2003

      In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
      amendment of ARB No. 43, Chapter 4." The amendments made by SFAS No. 151
      clarify that abnormal amounts of idle facility expense, freight, handling
      costs, and wasted materials should be recognized as current-period charges
      and require the allocation of fixed production overheads to inventory
      based on the normal capacity of the production facilities. The provisions
      of SFAS No. 151 are effective for inventory costs incurred during fiscal
      years beginning after June 15, 2005. The Company has adopted this standard
      beginning the first quarter of 2006 and does not believe the adoption will
      have a material impact on its results of operations or financial position
      as such costs have historically been expensed as incurred.

      In November 2005, FASB issued FASB Staff Position FAS 115-1 and FAS 124-1,
      "The Meaning of Other-Than-Temporary Impairment and Its Application to
      Certain Investments" ("FSP FAS 115-1"), which provides guidance on
      determining when investments in certain debt and equity securities are
      considered impaired, whether that impairment is other-than-temporary, and
      on measuring such impairment loss. FSP FAS 115-1 also includes accounting
      considerations subsequent to the recognition of an other-than-temporary
      impairment and requires certain disclosures about unrealized losses that
      have not been recognized as other-than-temporary impairments. FSP FAS
      115-1 is required to be applied to reporting periods beginning after
      December 15, 2005. We

                                      F-11


DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31,2005, 2004, AND 2003

      are required to adopt FSP FAS 115-1 in the first quarter of 2006. We do
      not expect the adoption of this statement will have a material impact on
      our results of operations or financial condition.

3)    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 December 31, 2005, current yields
      range from 2.36% to 7.38% and maturity dates range from January 17, 2006
      to June 15, 2008.

      The estimated fair value and cost of marketable securities were as follows
      as of December 31:



                                                                  2005
                                           -----------------------------------------------------
                                                            GROSS        GROSS
                                            AMORTIZED     UNREALIZED   UNREALIZED
                                              COST          GAINS        LOSSES      FAIR VALUE
                                           ------------   ----------   ----------   ------------
                                                                        
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 debt securities        $ 30,675,234   $   18,868    ($114,616)  $ 30,579,486
   available for sale
                                           ============   ==========   ==========   ============




                                                                  2004
                                           ----------------------------------------------------
                                                            GROSS        GROSS
                                            AMORTIZED     UNREALIZED   UNREALIZED
                                              COST          GAINS       LOSSES       FAIR VALUE
                                           ------------   ----------   ----------   -----------
                                                                        
United States government debt securities   $ 27,266,271   $ 389,585    ($ 15,315)   $27,640,541
Investment grade corporate debt securities   18,625,317         504      (43,393)    18,582,428
                                           ------------   ---------    ---------    -----------
   Total marketable debt securities        $ 45,891,588   $ 390,089    ($ 58,708)   $46,222,969
   available for sale
                                           ============   =========    =========    ===========


      The change in net unrealized gains and losses on such securities for the
      years ended December 31, 2005, 2004 and 2003 was ($427,129), ($1,124,309)
      and ($1,178,820), respectively, and has been recorded in accumulated other
      comprehensive income, which is reported as part of shareholders' equity in
      the Consolidated Balance Sheets. Realized gains on sales of marketable
      securities were $75,000 in 2005. There were no realized gains or losses in
      2004 or 2003.


                                      F-12


DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2005, 2004, AND 2003

      Because the Company has the ability and intent to hold these investments
      until a recovery of fair value, which may be maturity, the Company does
      not consider these investments to be other-than-temporarily impaired at
      December 31, 2005.

                                      F-13


DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2005, 2004, AND 2003

4)    INVENTORY

      Inventory consisted of the following at December 31:



                                2005          2004
                            ----------   -----------
                                    
Finished goods              $ 1,004,772   $ 1,226,071
BLU-U(R) evaluation units       292,129             -
Work in process                  60,805        85,910
Raw materials                   503,087       105,179
                            -----------   -----------
                            $ 1,860,793   $ 1,417,160
                            ===========   ===========


      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.

5)    RESTRUCTURING CHARGE

      During the quarter ended September 30, 2005, the Company eliminated 14
      staff positions, representing 16% of the workforce, to align headcount
      more closely with management's assessment of its resource requirements at
      that time. These workforce reductions were made across all functions of
      the Company. As a result of these actions the Company recorded a
      restructuring charge of approximately $150,000. As of December 31, 2005,
      the Company had paid all of its obligations under the restructuring plan.

                                      F-14


DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2005, 2004, AND 2003

6)    PROPERTY, PLANT AND EQUIPMENT

      Property, plant and equipment, at cost, consisted of the following at
      December 31:



                                          USEFUL LIVES
                                            (YEARS)              2005           2004
                                     ----------------------   -----------   -----------
                                                                   
Computer equipment and software                  3            $ 2,389,562   $ 2,226,646

BLU-U units in physicians' offices               3                      -       700,043

Furniture, fixtures and equipment                5                810,488       726,069

Manufacturing facility               Term of lease              2,204,122     2,204,122
Manufacturing equipment                          5              2,187,244     2,153,485
Leasehold improvements               Lesser of their useful
                                     Lives or term of lease       833,967       699,892
                                                              -----------   -----------

                                                                8,425,383     8,710,257
             Accumulated depreciation and amortization         (5,453,514)   (5,228,369)
                                                              $ 2,971,869   $ 3,481,888
                                                              ===========   ===========


      Depreciation and amortization totaled $925,000, $1,299,000, and $1,611,000
      for 2005, 2004, and 2003, respectively.

7)    OTHER ACCRUED EXPENSES

      Other accrued expenses consisted of the following at December 31:



                                        2005          2004
                                    -----------   -----------
                                            
Research and development costs      $   347,220   $   778,926
Marketing and sales costs               173,092       153,167
Product related costs                   667,388       261,444
Legal and other professional fees       488,401       374,142
Employee benefits                       225,628       229,304
Other expenses                           93,950       104,858
                                    -----------   -----------
                                    $ 1,995,679   $ 1,901,841
                                    ===========   ===========


8)    INCOME TAXES

      The tax effect of significant temporary differences representing deferred
      tax assets and liabilities at December 31:



                                                              2005            2004
                                                          -----------    ------------
                                                                   
DEFERRED TAX ASSETS
    Deferred revenue                                      $    19,000    $     93,000
    Intangible assets                                         917,000         632,000
    Accrued charges                                            60,000          51,000
    Research and development tax credit carryforwards       2,720,000       2,593,000
    Capitalized R&D                                         3,571,000               -
    Operating loss carryforwards                           31,916,000      29,463,000
    License fee                                               141,000         161,000
    Reserves                                                                        -
                                                                         ------------


                                      F-15


DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2005, 2004, AND 2003

                                                                  
                                                              102,000
                                                         ------------
    Total deferred tax assets                              39,446,000      32,993,000
                                                         ------------   -------------
DEFERRED TAX LIABILITIES

    Fixed assets                                               (8,000)         (8,000)
                                                         ------------   -------------
         Total deferred tax liabilities                        (8,000)         (8,000)
                                                         ------------   -------------
    Net deferred tax assets before allowance               39,438,000      32,985,000
    Valuation allowance                                   (39,438,000)    (32,985,000)
                                                         ------------   -------------
                    Total                                $          -   $           -
                                                         ============   =============



      During the years ended December 31, 2005, 2004, and 2003, the valuation
      allowance was increased by approximately $6,453,000, $5,503,000, and
      $5,022,000, respectively, due to the uncertainty of future realization of
      the net deferred tax assets which were increasing.

      Included in deferred tax assets at December 31, 2005 and 2004 is
      $1,817,000 and $1,600,000 of future benefits attributable to the exercise
      of stock options which, if realized, will be credited to additional
      paid-in capital rather than results of operations.

      As of December 31, 2005, the Company has Federal net operating loss
      carryforwards for tax purposes of approximately $79,261,000 and research
      and development tax credits of approximately $2,521,000, both of which, if
      not utilized, will expire for Federal tax purposes as follows:



                         RESEARCH AND
       OPERATING LOSS   DEVELOPMENT TAX
        CARRYFORWARDS       CREDITS
       --------------   ---------------
                  
2010    $   2,325,000   $         -
2011        6,638,000         7,000
2012        6,841,000        57,000
2013                -        66,000
2014                -        84,000
2015                -        44,000
2016                -       102,000
2017                -       235,000
2018        5,738,000       145,000
2019                -        81,000
2020                -       159,000
2021        1,772,000       343,000
2022       15,382,000       477,000
2023       12,716,000       232,000
2024        9,913,000       282,000
2025       17,936,000       207,000
         ------------   -----------
         $ 79,261,000   $ 2,521,000
         ============   ===========


      The tax loss carryforwards of the Company and its subsidiaries may be
      subject to limitation by Section 382 of the Internal Revenue Code with
      respect to the amount utilizable each year. The amount of the limitation,
      if any, has not been quantified by the Company.

                                      F-16


DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2005, 2004, AND 2003

      A reconciliation between the effective tax rate and the statutory Federal
      rate is as follows:



                                                            2005                 2004                 2003
                                                 ---------------------  ---------------------  --------------------
                                                                  %                       %                    %
                                                 ------------  -------  ------------  -------  ------------  ------
                                                                                           
Income tax benefit at statutory rate             ($5,100,000)   (34.0)  ($5,314,000)   (34.0)  ($5,041,000)  (34.0)
State taxes                                         (939,000)    (6.3)     (979,000)    (6.3)     (930,000)   (6.3)
Tax credit carryforwards                            (234,000)    (1.6)     (435,000)    (2.8)     (329,000)   (2.2)
Change in valuation allowance including
     revisions of prior year estimates             6,233,000     41.6     6,676,000     42.7     6,268,000    42.3
Other                                                 40,000      0.3        52,000      0.4        32,000     0.2
                                                  ----------     ----    ----------     ----    ----------    ----

                                                  $        -        -    $        -        -    $        -       -
                                                  ==========     ====    ==========     ====    ==========    ====


9)    SHAREHOLDERS' EQUITY

      COMMON STOCK ISSUANCES -

      In March 2005, the vesting period for 18,875 options to purchase shares of
      common stock was extended beyond the original terms and the vesting of
      1,250 options was accelerated upon an employee's termination. As a result
      of this stock option modification, the Company recorded compensation
      expense of approximately $19,000 during 2005. The compensation expense was
      calculated using the intrinsic value method, which compares the common
      stock option exercise price to the fair market value of the underlying
      common stock on the date of modification. The stock compensation expense
      was recorded as part of general and administrative costs in the
      Consolidated Statement of Operations.

      On February 27, 2004, the Company completed a private placement of
      2,250,000 shares of its common stock at a purchase price of $11.00 per
      share, resulting in gross proceeds of $24,750,000. The closing date of the
      private placement was March 2, 2004. The Company also granted the
      investors the right to purchase up to an aggregate of an additional
      337,500 shares of common stock at $11.00 per share. These additional
      investment rights were exercised on April 14, 2004, resulting in
      additional gross proceeds of $3,712,500. Offering costs incurred in
      connection with the placement were $1,907,952, of which $1,707,750
      consisted of the placement agent's commission and non-refundable retainer
      paid in the form of 155,250 shares of common stock calculated at the
      offering price.

      On March 18, 2004, the Company granted a total of 30,000 fully vested
      options to three consultants on its Medical Advisory Board as compensation
      for services. These options were valued at $240,753 and recorded as part
      of research and development costs in the Consolidated Statement of
      Operations. On December 30, 2004 the Company repurchased these options for
      a total cash payment of $240,000.

      On June 15, 2003, the Company granted compensation of $50,000 to
      Therapeutics, Inc. ("Therapeutics"), a clinical research organization,
      pursuant to an agreement for services. This compensation was issued in
      July 2003 and was comprised of 11,666 shares of common stock valued at
      $35,000 and $15,000 of cash. The transaction was recorded in research and
      development expense in the Consolidated Statements of Operations.

      On May 2, 2003, the Company granted a total of 32,750 shares of
      unregistered common stock to two outside consultants as compensation for
      services rendered. These shares were valued at approximately $75,000 and
      recorded as part of research and development costs in the Consolidated
      Statements of Operations.

                                      F-17


DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2005, 2004, AND 2003

      On March 13, 2003, the Company issued 23,219 shares of restricted common
      stock at the grant date fair value of $1.599 per share to its Chief
      Executive Officer, reflecting payment of the after-tax portion of his
      2002 bonus compensation. This amount had been accrued in the December 31,
      2002 financial statements.

10)   STOCK OPTIONS AND WARRANTS

      a) 1996 OMNIBUS PLAN - The 1996 Omnibus Plan ("Omnibus Plan"), as amended,
      provides for the granting of awards to purchase up to a maximum of 20% of
      the Company's common stock outstanding or a maximum of 3,343,874 shares.
      The Omnibus Plan is administered by a committee ("Committee") established
      by the Board of Directors. The Omnibus Plan enables the Committee to grant
      non-qualified stock options ("NQSO"), incentive stock options ("ISO"),
      stock appreciation rights, restricted stock, or other securities
      determined by the Company, to directors, employees and consultants.

      NON-QUALIFIED STOCK OPTIONS - All the NQSOs granted under the Omnibus Plan
      have an expiration period not exceeding ten years and are issued at a
      price not less than the market value of the common stock on the grant
      date. NQSO grants to employees become exercisable at a rate of one quarter
      of the total granted on each of the first, second, third and fourth
      anniversaries of the grant date, subject to satisfaction of certain
      conditions involving continuous periods of service. In addition, the
      Company initially grants each individual who agrees to become a director
      15,000 NQSO to purchase common stock of the Company. Thereafter, each
      director reelected at an Annual Meeting of Shareholders will automatically
      receive an additional 10,000 NQSO on June 30 of each year. Grants to
      directors immediately vest on the date of the grant.

      INCENTIVE STOCK OPTIONS - ISOs granted under the Omnibus Plan have an
      expiration period not exceeding ten 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.
      These options become exercisable at a rate of one quarter of the total
      granted on each of the first, second, third and fourth anniversaries of
      the grant date, subject to satisfaction of certain conditions involving
      continuous periods of service.

      The following table summarizes information about all stock options
      outstanding at December 31, 2005:



                                 OPTIONS OUTSTANDING            OPTIONS EXERCISABLE
                         ------------------------------------  ---------------------
                                        WEIGHTED
                            NUMBER       AVERAGE     WEIGHTED     NUMBER    WEIGHTED
                         OUTSTANDING    REMAINING     AVERAGE  EXERCISABLE   AVERAGE
                         AT DECEMBER   CONTRACTUAL   EXERCISE  AT DECEMBER  EXERCISE
RANGE OF EXERCISE PRICE    31, 2005        LIFE        PRICE    31, 2005     PRICE
- -----------------------  ------------  ------------  --------  -----------  --------
                                                             
$1.60 to 5.10               461,625      6.85 years  $  2.86      303,625   $  2.96
5.11 to 7.75                503,750      1.15 years     7.41      503,750      7.41
7.76 to 9.92                681,125      6.39 years     9.55      445,939      9.42
9.93 to 27.31               899,750      6.60 years    14.22      456,000     17.15
31.00 to 31.00              304,000      4.18 years    31.00      304,000     31.00
                          ---------                             ---------
                          2,850,250      5.37 years  $ 11.85    2,013,314   $ 12.95
                          =========                             =========


                                      F-18


DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2005, 2004, AND 2003

            Activity under stock option plans during the years ended December
            31, 2005, 2004 and 2003 was as follows:



                                                      WEIGHTED                WEIGHTED               WEIGHTED
                                                      AVERAGE                 AVERAGE                AVERAGE
                                                      EXERCISE                EXERCISE               EXERCISE
                                            2005       PRICE         2004      PRICE       2003       PRICE
                                          ---------   -------     ---------   -------    ---------   --------
                                                                                   
Options outstanding, beginning of year    2,708,750   $ 11.62     2,444,950   $ 11.50    2,253,075   $ 12.95
Options granted                             598,750     11.00       512,250      9.97      447,000      2.76
Options exercised                          (164,375)     5.65      (167,825)     4.50      (11,000)     2.99
Options cancelled                          (292,875)    11.46       (80,625)    12.28     (244,125)    11.21
                                          ---------   -------     ---------   -------    ---------   -------
Options outstanding, end of year          2,850,250   $ 11.85     2,708,750   $ 11.62    2,444,950   $ 11.50
                                          =========   =======     =========   =======    =========   =======
Options exercisable, end of year          2,013,314   $ 12.95     1,924,625   $ 13.46    1,771,325   $ 12.59
                                          =========   =======     =========   =======    =========   =======


      Options that were granted during 2005, 2004 and 2003 have exercise prices
      ranging from $9.04 to $15.90 per share, $9.05 to $12.87 per share, and
      $1.60 to $5.20 per share, respectively.

      Options which were exercised during 2005, 2004 and 2003 were exercised at
      per share prices ranging from $1.60 to $9.92, $1.60 to $7.44, and $2.90 to
      $3.87, respectively.

      b) WARRANTS - On January, 17, 2002, the Company extended the term of
      300,000 warrants, which were previously issued to the Chief Executive
      Officer of the Company, from January 29, 2002 to January 29, 2007. The
      warrants are convertible on a one-for-one basis into Shares of Common
      Stock. No compensation expense resulted from the extension of these
      warrants as the intrinsic value of these warrants at the date of extension
      was zero. As of December 31, 2005, all of these warrants were outstanding.
      The exercise price of the warrants is CDN $6.79 (U.S. $5.82 at December
      31, 2005).

11)   RETIREMENT PLAN

      Effective January 1, 1996, the Company adopted a tax-qualified employee
      savings and retirement 401(k) Profit Sharing Plan (the "401(k) Plan"),
      covering all qualified employees. Participants may elect a salary deferral
      of at least 1% as a contribution to the 401(k) Plan, up to the statutorily
      prescribed annual limit for tax-deferred contributions. Effective February
      1, 2003, DUSA matches a participant's contribution up to 1.25% of a
      participant's salary (the "Match"), subject to certain limitations of the
      401(k) Plan. Participants will vest in the Match at a rate of 25% for each
      year of service to DUSA. The Company's matching contributions in 2005,
      2004 and 2003 were $42,000, $39,000 and $33,000, respectively.

12)   COMMITMENTS AND CONTINGENCIES

      a) PARTEQ AGREEMENT - The Company licenses certain patents underlying its
      Levulan(R) PDT/PD systems under a license agreement with PARTEQ Research
      and Development Innovations, the licensing arm of Queen's University,
      Kingston, Ontario. Under the agreement, the Company has been granted an
      exclusive worldwide license, with a right to sublicense, under PARTEQ
      patent rights, to make, have made, use and sell certain products,
      including ALA. The agreement covers certain use patent rights.

                                      F-19


DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2005, 2004, AND 2003

      When the Company is selling its products directly, it has agreed to pay to
      PARTEQ royalties of 6% and 4% on 66% of the net selling price in countries
      where patent rights do and do not exist, respectively. In cases where the
      Company has a sublicensee, it will pay 6% and 4% when patent rights do and
      do not exist, respectively, on its net selling price less the cost of
      goods for products sold to the sublicensee, and 6% of payments the Company
      receives on sales of products by the sublicensee.

      For the years ended December 31, 2005, 2004 and 2003, actual royalties
      based on product sales were approximately $340,000, $229,000, and $36,000,
      respectively. However, based on the annual minimum royalty requirements,
      the Company incurred total royalty expense of $74,000 in 2003, which has
      been recorded in cost of product sales and royalties. Commencing with the
      initial product launch, annual minimum royalties to PARTEQ must total at
      least CDN $100,000 (U.S. $86,000 as of December 31, 2005).

      The Company is also obligated to pay to PARTEQ 5% of any lump sum
      sublicense fees received, such as milestone payments, excluding amounts
      designated by the sublicensee for future research and development efforts.
      No amounts have been paid to PARTEQ as a result of sublicense fees
      received.

      b) DRAXIS TERMINATION AND TRANSFER AGREEMENT - On February 24, 2004, the
      Company reacquired the rights to the aminolevulinic acid (Levulan(R))
      technology for Canada held by Draxis Health Inc. ("Draxis"). These rights
      were initially assigned to Draxis in 1991. The Company and Draxis
      terminated the assignment and DUSA agreed to pay to Draxis an upfront fee
      of $150,000 CDN ($114,000 USD at February 24, 2004) and a 10% royalty on
      sales of the Levulan(R) Kerastick(R) in Canada over a five year term
      commencing in June 2004 based on the first Kerastick(R) sale in Canada by
      Coherent, our Canadian marketing and distribution partner. The upfront fee
      was capitalized and is being amortized over the five year term of the
      arrangement. At December 31, 2005, the remaining unamortized balance of
      $78,000 is included in deferred charges and other assets. The Company
      incurred total royalty expense of $116,000 and $56,000 in 2005 and 2004,
      respectively, which has been recorded in cost of product sales and
      royalties.

      c) LEASE AGREEMENTS - The Company has entered into lease commitments for
      office space in Wilmington, Massachusetts, Valhalla, New York, and
      Toronto, Ontario. These leases generally have five or ten year terms. The
      minimum lease payments disclosed below include the non-cancelable terms of
      the leases. Future minimum lease payments are as follows:



               MINIMUM LEASE
                    PAYMENTS
               -------------
            
2006            $    470,000
2007                 469,000
2008                 418,000
2009                 432,000
2010                 448,000
Beyond 2010          722,000
                ------------
                $  2,959,000
                ============


      Rent expense incurred under these operating leases was approximately
      $477,000, $472,000, and $471,000 for the years ended December 31, 2005,
      2004, and 2003, respectively.

      d) RESEARCH AGREEMENTS - The Company has entered into various agreements
      for research projects and clinical studies. As of December 31, 2005,
      future payments to be made pursuant to these agreements, under certain
      terms and conditions, totaled approximately $1,775,000 for 2006. Included
      in this future payment is a master service agreement, effective June 15,
      2001, with

                                      F-20


DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2005, 2004, AND 2003

      Therapeutics, Inc. for an initial term of two years, with annual renewal
      periods thereafter, to engage Therapeutics to manage the clinical
      development of the Company's products in the field of dermatology. The
      agreement was renewed on June 15, 2005 for a one year period. Therapeutics
      is entitled to receive a bonus valued at $50,000, in cash or stock at the
      Company's discretion, upon each anniversary of the effective date.
      Therapeutics 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
      during Therapeutics' management.

      e) LEGAL MATTERS - 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
      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. Since these claims
      are unique to the Australian patent and Australian law differs from patent
      law in other jurisdictions, we do not expect that this decision is
      determinative of the validity of any other patents licensed by us from
      Queen's University or of whether PhotoCure's product infringes claims in
      such other patents, including the United States patent. None of the
      parties have appealed the decision and the date to do so has expired. The
      parties, including PhotoCure's marketing partner, Galderma S.A., signed a
      Mediation Agreement in August 2004 to attempt to settle their disputes and
      negotiations are on-going.

            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 March 17, 2005,
      New England Compounding Pharmacy filed an answer against us, including a
      defense that our patents are invalid and several counterclaims against us,
      and we filed our response on April 5, 2005. The parties are now in the
      discovery stage of this litigation. A tentative trial date has been set by
      the court for January 2007. We are seeking injunctive relief, monetary
      damages and costs.

            In January 2005, we filed a lawsuit against The Cosmetic Pharmacy of
      Tucson, Arizona alleging violations of the Lanham Act for false
      advertising and trademark infringement, and of U.S. patent law in the U.S.
      District Court for the District of Arizona. 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 $20,668.

            In November, 2005 and January, 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 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. Most of the physicians have entered Consent Judgments in which

                                      F-21


DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2005, 2004, AND 2003

      they admit the infringement and provide DUSA with the right to review
      their books and records. Two lawsuits are currently on-going.

            The Company has not accrued any amounts for these contingencies as
      of December 31, 2005, as these amounts are neither probable nor estimable.

      f) LICENSE AND SUPPLY AGREEMENTS - In December 2002, DUSA entered into a
      License and Development Agreement with photonamic GmbH & Co. KG, a
      subsidiary of medac GmbH, a German pharmaceutical company, and a supply
      agreement with medac. These agreements provide for the licensing to DUSA
      of photonamic's proprietary technology related to ALA for systemic dosing
      in the field of brain cancer. Based on the license agreement, DUSA made a
      non-refundable $500,000 milestone payment to photonamic in 2003. The
      Company may also be obligated to pay certain regulatory milestones
      including $1,250,000 upon FDA acceptance of a registration application for
      a brain cancer product in the U.S., and an additional $1,250,000 upon
      registration of the product and royalties of 12.5% on net sales under the
      terms of the License and Development Agreement. The Company will also
      purchase product under the supply agreement for mutually agreed upon
      indications. Should photonamic's clinical study be successful, DUSA will
      be obligated to proceed with development of the product in the U.S. in
      order to retain the license for the use of the technology to treat brain
      cancer. Such additional obligations are undeterminable at this time.

      g) AMENDED AND RESTATED PURCHASE AND SUPPLY AGREEMENT - On June 21, 2004,
      the Company signed an Amended and Restated Purchase and Supply Agreement
      with National Biological Corporation ("NBC"), the manufacturer of its
      BLU-U(R) light source. This agreement provides for the elimination of
      certain exclusivity clauses, permits the Company to order on a purchase
      order basis without minimums, and other modifications of the original
      agreement providing both parties greater flexibility related to the
      development and manufacture of light sources and the associated technology
      within the field of PDT. The Company paid $110,000 to NBC upon execution
      of the agreement which will be amortized over the remaining term of the
      agreement, expiring November 5, 2008.

13)   PENDING TRANSACTION

            In December, 2005, we signed a definitive Merger Agreement to
      acquire all of the common stock of Sirius Laboratories Inc. of Vernon
      Hills, Illinois in exchange for cash and common stock worth up to
      $30,000,000. Sirius is a privately held dermatology specialty
      pharmaceuticals company founded in 2000 with a primary focus on the
      treatment of acne vulgaris and acne rosacea. Closing of the transaction is
      expected in the first quarter of 2006, subject to the terms and conditions
      in the Merger Agreement. Of the potential $30,000,000 consideration,
      $8,000,000 less certain expenses will be paid in cash upon closing,
      $17,000,000 will be paid in shares of DUSA's common stock also upon
      closing in a private placement, and up to $5,000,000 in cash or common
      stock may be paid based on a combination of new product approvals or
      launches, and achievement of certain pre-determined total cumulative sales
      milestones for Sirius products. The amount of DUSA common stock to be
      issued in the merger agreement will depend upon the average trading price
      of DUSA's common stock during a 20 trading-day period just prior to the
      closing.

            Included in the accompanying Consolidated Balance Sheets as of
      December 31, 2005 are deferred acquisition costs of approximately $830,000
      related to the Sirius acquisition. If the negotiations are unsuccessful
      and a determination is made that the acquisition is not likely to close,
      the deferred acquisition costs will be expensed in the period such a
      determination is made.

                                      F-22


                                   SIGNATURES

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

(Registrant) DUSA Pharmaceuticals, Inc.

By (Signature and Title)       /s/D. Geoffrey Shulman
                              ------------------------
                              Chairman of the Board and Chief Executive Officer

Date: March 10, 2006

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

                                                                       
/s/ D. Geoffrey Shulman            Director, Chairman of the Board and       March 10, 2006
- -------------------------------    Chief Executive Officer (principal
D. Geoffrey Shulman, MD,           executive officer)
FRCPC

/s/ Robert F. Doman                President, Chief Operating Officer        March 10, 2006
- -------------------------------
Robert F. Doman

/s/ Richard C. Christopher         Vice President, Finance and Chief         March 10, 2006
- -------------------------------    Financial Officer (principal financial
Richard C. Christopher             officer and principal accounting
                                   officer)

/s/ John H. Abeles                 Director                                  March 10, 2006
- -------------------------------
John H. Abeles

/s/ David Bartash                  Director                                  March 10, 2006
- -------------------------------
David Bartash

/s/ Jay M. Haft                    Vice Chairman of the Board and Lead       March 10, 2006
- -------------------------------    Director
Jay M. Haft, Esq.

/s/ Richard C. Lufkin              Director                                  March 10, 2006
- -------------------------------
Richard C. Lufkin

/s/ Magnus Moliteus                Director                                  March 10, 2006
- -------------------------------
Magnus Moliteus





                                  EXHIBIT INDEX

2(a.1)* Merger Agreement by and among the Company, Sirius Laboratories, Inc.,
        and the shareholders of Sirius dated as of December 30, 2005; and

2(a.2)  First Amendment to Merger Agreement by and among the Company, Sirius
        Laboratories, Inc. and the shareholders of Sirius, dated as of
        February 6, 2006.

3(a.1)  Certificate of Incorporation, as amended, filed as Exhibit 3(a) to the
        Registrant's Form 10-K for the fiscal year ended December 31, 1998, and
        is incorporated herein by reference;

3(a.2)  Certificate of Amendment to the Certificate of Incorporation, as
        amended, dated October 28, 2002 and filed as Exhibit 99.3 to the
        Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended
        September 30, 2002, filed November 12, 2002 and is incorporated herein
        by reference; and

3(b)    By-laws of the Registrant, filed as Exhibit 3 to the Registrant's
        current report on Form 8-K, filed on January 4, 2005, and is
        incorporated herein by reference.

4(a)    Common Stock specimen, filed as Exhibit 4(a) to the Registrant's Form
        10-K for the fiscal year ended December 31, 2002, and is incorporated
        herein by reference;

4(b)    Class B Warrant, filed as Exhibit 4.3 to the Registrant's Registration
        Statement on Form S-1, No. 33-43282, and is incorporated herein by
        reference;

4(c)    Rights Agreement filed as Exhibit 4.0 to Registrant's Current Report on
        Form 8-K dated September 27, 2002, filed October 11, 2002, and is
        incorporated herein by reference; and

4(d)    Rights Certificate relating to the rights granted to holders of common
        stock under the Rights Agreement filed as Exhibit 4.0 to Registrant's
        Current Report on Form 8-K, dated September 27, 2002, filed October 11,
        2002, and is incorporated herein by reference.

10(a)   License Agreement between the Company, PARTEQ and Draxis Health Inc.
        dated August 27, 1991, filed as Exhibit 10.1 to the Registrant's
        Registration Statement on Form S-1, No. 33-43282, and is incorporated
        herein by reference;

10(b)   ALA Assignment Agreement between the Company, PARTEQ, and Draxis Health
        Inc. dated October 7, 1991, filed as Exhibit 10.2 to the Registrant's
        Registration Statement on Form S-1, No. 33-43282, and is incorporated
        herein by reference;

10(b.1) Amended and Restated Assignment Agreement between the Company and Draxis
        Health, Inc. dated April 16, 1999, filed as Exhibit 10(b.1) to the
        Registrant's Form 10-K for the fiscal year ended December 31, 1999, and
        is incorporated herein by reference;

10(b.2) Termination and Transfer Agreement between the Company and Draxis Health
        Inc. dated as of February 24, 2004, filed as Exhibit 10(b.2) to the
        Registrant's Form 10-K for the fiscal year ended December 31, 2003,
        portions of which have been omitted pursuant to a request for
        confidential treatment pursuant to Rule 24b-2 of the Securities Exchange
        Act of 1934, as amended, and is incorporated herein by reference;

10(c)   Employment Agreement of D. Geoffrey Shulman, MD, FRCPC dated October 1,
        1991, filed as Exhibit 10.4 to the Registrant's Registration Statement
        on Form S-1, No. 33-43282, and is incorporated herein by reference; +

10(d)   Amendment to Employment Agreement of D. Geoffrey Shulman, MD, FRCPC
        dated April 14, 1994, filed as Exhibit 10.4 to the Registrant's
        Registration Statement on Form S-2, No. 33-98030, and is incorporated
        herein by reference; +

10(e)   Amended and Restated License Agreement between the Company and PARTEQ
        dated March 11, 1998, filed as Exhibit 10(e) to the Registrant's Form
        10-K/A filed on June 18, 1999, portions of Exhibit A have been omitted
        pursuant to a request for confidential treatment pursuant to Rule



        24b-2 of the Securities Exchange Act of 1934, as amended, and is
        incorporated herein by reference;

10(f)   Incentive Stock Option Plan, filed as Exhibit 10.11 of Registrant's
        Registration Statement on Form S-1, No. 33-43282, and is incorporated
        herein by reference; +

10(g)   1994 Restricted Stock Option Plan, filed as Exhibit 1 to Registrant's
        Schedule 14A definitive Proxy Statement dated April 26, 1995, and is
        incorporated herein by reference; +

10(h)   1996 Omnibus Plan, as amended, filed as Appendix A to Registrant's
        Schedule 14A Definitive Proxy Statement dated April 26, 2001, and is
        incorporated herein by reference; +

10(h.1) 1996 Omnibus Plan, as amended on May 1, 2003, filed as Exhibit 10(h.1)
        to the Registrant's Form 10-K for the fiscal year ended December 31,
        2003, and is incorporated herein by reference; +

10(h.2) 1996 Omnibus Plan, as amended April 23, 2004, filed as Appendix A to
        Registrant's Schedule 14A definitive Proxy Statement dated April 28,
        2004, and is incorporated herein by reference; +

10(i)   Purchase and Supply Agreement between the Company and National
        Biological Corporation dated November 5, 1998, filed as Exhibit 10(i) to
        the Registrant's Form 10-K/A filed on June 18, 1999, portions of which
        have been omitted pursuant to a request for confidential treatment
        pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as
        amended, and is incorporated herein by reference;

10(i.1) Amended and Restated Purchase and Supply Agreement between the Company
        and National Biological Corporation dated as of June 21, 2004 filed as
        Exhibit 10(a) to the Registrant's Quarterly Report on Form 10-Q for the
        fiscal quarter ended June 30, 2004, portions of which have been omitted
        pursuant to a request for confidential treatment pursuant to Rule 24b-2
        of the Securities Exchange Act of 1934, as amended, filed August 11,
        2004, and is incorporated herein by reference;

10(j)   Supply Agreement between the Company and Sochinaz SA dated December 24,
        1993, filed as Exhibit 10(q) to Registrant's Form 10-K/A filed on March
        21, 2000, portions of which have been omitted pursuant to a request for
        confidential treatment pursuant to Rule 24b-2 of the Securities Exchange
        Act of 1934, as amended, and is incorporated herein by reference;

10(j.1) First Amendment to Supply Agreement between the Company and Sochinaz SA
        dated July 7, 1994, filed as Exhibit 10(q.1) to Registrant's Annual
        Report on Form 10-K for the fiscal year ended December 31, 1999, and is
        incorporated herein by reference;

10(j.2) Second Amendment to Supply Agreement between the Company and Sochinaz SA
        dated as of June 20, 2000, filed as Exhibit 10.1 to Registrant's Current
        Report on Form 8-K dated June 28, 2000, and is incorporated herein by
        reference;

10(j.3) Third Amendment to Supply Agreement between the Company and Sochinaz SA
        dated July 29, 2005, filed as Exhibit 10.1 to the Registrant's Form 10-Q
        filed on August 3, 2005, portions of which have been omitted pursuant to
        a request for confidential treatment pursuant to Rule 24b-2 of the
        Securities Exchange Act of 1934, as amended, and is incorporated herein
        by reference;

10(k)   Master Service Agreement between the Company and Therapeutics, Inc.
        dated as of October 4, 2001, filed as Exhibit 10(b) to the Registrant's
        Quarterly Report on Form 10-Q for the fiscal quarter ended September 30,
        2001, filed November 8, 2001, portions of which have been omitted
        pursuant to a request for confidential treatment under Rule 24b-2 of the
        Securities Exchange Act of 1934, as amended and is incorporated herein
        by reference;

10(l)   License and Development Agreement between the Company and photonamic
        GmbH & Co. KG dated as of December 30, 2002, filed as Exhibit 10(r) to
        Registrant's Annual Report on Form 10-



        K for the fiscal year ended December 31, 2002, 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 and is
        incorporated herein by reference;

10(m)   Supply Agreement between the Company and medac GmbH dated as of December
        30, 2002, filed as Exhibit 10(r) to Registrant's Annual Report on Form
        10-K for the fiscal year ended December 31, 2002, 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 and is
        incorporated herein by reference;

10(n)   Securities Purchase Agreement dated as of February 27, 2004, by and
        among the Company and certain investors, filed as Exhibit 10.1 to the
        Registrant's current report on Form 8-K, filed on March 2, 2004,
        portions of which have been omitted pursuant to a request for
        confidential treatment under Rule 24(b) of the Securities Exchange Act
        of 1934, as amended, and is incorporated herein by reference;

10(o)   Registration Rights Agreement dated as of February 27, 2004 by and among
        the Company and certain investors, filed as Exhibit 10.2 to the
        Registrant's current report on Form 8-K, filed on March 2, 2004, and is
        incorporated herein by reference;

10(p)   Form of Additional Investment Right dated as of February 27, 2004, filed
        as Exhibit 10.3 to the Registrant's current report on Form 8-K, filed on
        March 2, 2004, and is incorporated herein by reference;

10(q)   License, Promotion, Distribution and Supply Agreement between the
        Company and Coherent-AMT dated as of March 31, 2004 filed as Exhibit
        10(a) to the Registrant's Quarterly Report on Form 10-Q for the fiscal
        quarter ended March 31, 2004, filed May 4, 2004, and is incorporated
        herein by reference;

10(r)   Employment Agreement of Scott L. Lundahl dated as of June 23, 1999 filed
        as Exhibit 10(u) to the Registrant's Form 10-K for the fiscal year ended
        December 31, 2004, and is incorporated herein by reference; +

10(s)   Amended Employment Agreement of Stuart L. Marcus, MD, PhD dated December
        9, 1999 filed as Exhibit 10(v) to the Registrant's Form 10-K for the
        fiscal year ended December 31, 2004, and is incorporated herein by
        reference; +

10(t)   Employment Agreement of Mark C. Carota dated as of February 14, 2000
        filed as Exhibit 10(w.1) to the Registrant's Form 10-K for the fiscal
        year ended December 31, 2004, and is incorporated herein by reference; +

10(t.1) First Amendment to Employment Agreement of Mark C. Carota dated October
        31, 2001 filed as Exhibit 10(w.2) to the Registrant's Form 10-K for the
        fiscal year ended December 31, 2004, and is incorporated herein by
        reference; +

10(u)   Employment Agreement of Paul A. Sowyrda dated as of July 31, 2001 filed
        as Exhibit 10(x) to the Registrant's Form 10-K for the fiscal year ended
        December 31, 2004, and is incorporated herein by reference; +

10(v)   Employment Agreement of Richard Christopher dated as of January 1, 2004
        filed as Exhibit 10(y) to the Registrant's Form 10-K for the fiscal year
        ended December 31, 2004, and is incorporated herein by reference; +

10(w)   Employment Agreement of Robert F. Doman dated as of March 15, 2005 filed
        as Exhibit 10(z) to the Registrant's Form 10-K for the fiscal year ended
        December 31, 2004, and is incorporated herein by reference; +

10(x)   Employment Agreement of Gary F. Talarico dated as of February 15, 2005
        filed as Exhibit 10(aa) to the Registrant's Form 10-K for the fiscal
        year ended December 31, 2004, and is incorporated herein by reference; +

10(y)   Severance Agreement and General Release between the Company and Peter
        Chakoutis dated as of February 25, 2005 filed as Exhibit 10(bb) to the
        Registrant's Form 10-K for the fiscal year ended December 31, 2004, and
        is incorporated herein by reference; +

10(y.1) Final Agreement and General Release, between the Company and Peter
        Chakoutis, dated as of April 4, 2005, filed as Exhibit 10.1 to the
        Registrant's Current Report on Form 8-K, filed on April 4, 2005, and is
        incorporated herein by reference; +

10(z)   Compensation Policy Applicable to the Company's Non-Employee Directors
        filed as Exhibit 10(cc) to the Registrant's Form 10-K for the fiscal
        year ended December 31, 2004, and is incorporated herein by reference;
        and +

10(aa)  Marketing, Distribution and Supply Agreement between the Company and
        Stiefel Laboratories, Inc., dated as of January 12, 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.


14(a)   Form of DUSA Pharmaceuticals, Inc. Code of Ethics Applicable to Senior
        Officers filed as Exhibit 14(a) to the Registrant's Form 10-K for the
        fiscal year ended December 31, 2004, and is incorporated herein by
        reference.

21(a)   Subsidiaries of the Registrant.

23(a)   Consent of Deloitte & Touche LLP, Independent Registered Public
        Accounting Firm.

31(a)   Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer;
        and

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.

- -------------
+ Management contract or compensatory plan or arrangement.

* Schedules and exhibits omitted pursuant to Item 601(b)(2) of Regulation S-K.
The Company agrees to furnish supplementally a copy of any omitted schedule or
exhibit to the Commission upon request.

EX-2.A.1

                                                                  EXECUTION COPY

                                                                  EXHIBIT 2(A.1)

                                MERGER AGREEMENT

                                  BY AND AMONG

                           DUSA PHARMACEUTICALS, INC.,

                           SIRIUS LABORATORIES, INC.,

                                       AND

                  THE SHAREHOLDERS OF SIRIUS LABORATORIES, INC.
                                SET FORTH ON THE
                         SIGNATURE PAGES ATTACHED HERETO

                                DECEMBER 30, 2005



                                TABLE OF CONTENTS



                                                                                                      PAGE
                                                                                                   
ARTICLE I DEFINITIONS.............................................................................      1

ARTICLE II MERGER; CLOSING........................................................................     11

           2.1       Merger.......................................................................     11
           2.2       Consideration................................................................     11
           2.3       Closing......................................................................     13
           2.4       Closing Obligations..........................................................     13
           2.5       Liability Escrow.............................................................     15
           2.6       Lock-Up......................................................................     16
           2.7       Registration Rights..........................................................     17
           2.8       Assumption of Sirius Liabilities.............................................     17
           2.9       Shareholders and Expense Escrow..............................................     17

ARTICLE III REPRESENTATIONS AND WARRANTIES REGARDING SIRIUS.......................................     18

           3.1       Organization and Good Standing...............................................     18
           3.2       Authority; No Conflict; Consents.............................................     18
           3.3       Capitalization...............................................................     19
           3.4       Financial Statements.........................................................     20
           3.5       Books and Records............................................................     20
           3.6       Title to Assets; Encumbrances................................................     20
           3.7       Revolving Credit and Other Debt..............................................     21
           3.8       Subsidiaries.................................................................     21
           3.9       Intellectual Property Matters................................................     21
           3.10      Related Party Transactions...................................................     22
           3.11      No Undisclosed Liabilities...................................................     22
           3.12      Taxes........................................................................     23
           3.13      Employee Benefits............................................................     24
           3.14      Compliance with Legal Requirements; Governmental Authorizations..............     27
           3.15      Legal Proceedings............................................................     29
           3.16      Absence of Certain Changes and Events........................................     30
           3.17      Material Contracts; No Defaults..............................................     31
           3.18      Insurance....................................................................     32
           3.19      Environmental Matters........................................................     34
           3.20      Brokers or Finders...........................................................     36
           3.21      Accounts Receivable..........................................................     36
           3.22      Inventory....................................................................     36
           3.23      Warranties...................................................................     36
           3.24      Product Liability............................................................     36
           3.25      Customers and Suppliers......................................................     37
           3.26      Product Treatments; Product Returns..........................................     37
           3.27      Complete Copies of Materials.................................................     37
           3.28      Disclosures..................................................................     37
           3.29      Principal Shareholders.......................................................     37


                                      -i-



                                                                                                   
           3.30      Representations Complete.....................................................     38

ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PRINCIPAL SHAREHOLDERS...............................     38

           4.1       Legal Capacity, Organization and Good Standing...............................     38
           4.2       Authority; No Conflict.......................................................     38
           4.3       Ownership of Shares..........................................................     39
           4.4       No Public Sale or Distribution...............................................     39
           4.5       Reliance on Exemptions.......................................................     39
           4.6       Information..................................................................     39
           4.7       No Governmental Review.......................................................     40
           4.8       Transfer or Resale...........................................................     40
           4.9       Legends......................................................................     40
           4.10      Brokers or Finders...........................................................     41
           4.11      Representations Complete.....................................................     41

ARTICLE V REPRESENTATIONS AND WARRANTIES OF DUSA..................................................     41

           5.1       Organization and Good Standing...............................................     41
           5.2       Authority; No Conflict.......................................................     41
           5.3       Investment Intent............................................................     42
           5.4       Certain Proceedings..........................................................     42
           5.5       Brokers or Finders...........................................................     42
           5.6       DUSA Sub.....................................................................     42
           5.7       No Undisclosed Liabilities...................................................     42
           5.8       Representations Complete.....................................................     42
           5.9       Compliance with Legal Requirements...........................................     42
           5.10      SEC Compliance...............................................................     42
           5.11      No Contemplated Sale of DUSA.................................................     43

ARTICLE VI ADDITIONAL AGREEMENTS..................................................................     43

           6.1       Approvals of Governmental Bodies.............................................     43
           6.2       Tax Matters..................................................................     44
           6.3       Expenses.....................................................................     44
           6.4       Sirius Shareholders' Representatives.........................................     45
           6.5       Sirius Information Statement.................................................     45
           6.6       Sirius Shareholder Meeting...................................................     45
           6.7       Investor Questionnaires......................................................     45
           6.8       Unaccredited Investors.......................................................     46
           6.9       Transition...................................................................     46
           6.10      Due Diligence................................................................     46
           6.11      Micanol License Agreement....................................................     46

ARTICLE VII CONDITIONS PRECEDENT TO DUSA'S OBLIGATION TO CLOSE....................................     46

           7.1       Accuracy of Representations..................................................     47
           7.2       Covenants....................................................................     47



                                      -ii-



                                                                                                   
           7.3       Board and Shareholder Approval...............................................     47
           7.4       Closing Deliverables.........................................................     47
           7.5       Consents.....................................................................     47
           7.6       No Proceedings...............................................................     47
           7.7       Termination of Sirius Employee Plans.........................................     47
           7.8       Financial Statements.........................................................     47
           7.9       Minimum Participation........................................................     48
           7.10      FIRPTA Affidavit.............................................................     48
           7.11      Non-Competition..............................................................     48
           7.12      Access to Manufacturing and Distribution Facilities..........................     48
           7.13      No Dropped Coverage..........................................................     48
           7.14      Extending Reporting Endorsement..............................................     49
           7.15      Waiver of Right of First Refusal to Purchase Bioglan Shares..................     49
           7.16      Key Contracts................................................................     49
           7.17      Adverse Event Reporting......................................................     49
           7.18      Product Registrations........................................................     49
           7.19      Effective Form S-4...........................................................     49
           7.20      Qualification Fees...........................................................     49
           7.21      Schedules....................................................................     49
           7.22      Disclosures..................................................................     49

ARTICLE VIII CONDITIONS PRECEDENT TO SHAREHOLDERS AND SIRIUS'S OBLIGATION TO CLOSE................     50

           8.1       Accuracy of Representations..................................................     50
           8.2       Covenants....................................................................     50
           8.3       Board Approval...............................................................     50
           8.4       Closing Deliverables.........................................................     50
           8.5       No Proceedings...............................................................     50
           8.6       Disclosures..................................................................     50

ARTICLE IX COVENANTS OF SIRIUS PRIOR TO CLOSING DATE..............................................     50

           9.1       Access and Investigations....................................................     50
           9.2       Operation of Sirius..........................................................     51
           9.3       Negative Covenant............................................................     51
           9.4       Required Approvals...........................................................     51
           9.5       Standstill...................................................................     52
           9.6       Employee Plans...............................................................     53
           9.7       Representation and Warranty Insurance........................................     53

ARTICLE X POST-CLOSING COVENANTS..................................................................     53

           10.1      Sirius Board Nominee.........................................................     53
           10.2      Maintenance of Sirius D&O Insurance..........................................     54
           10.3      Continuity of Sirius Business................................................     54
           10.4      Product Development and Marketing Requirements...............................     54



                                     -iii-



                                                                                                   
ARTICLE XI TERMINATION............................................................................     55

           11.1      Termination Events...........................................................     55
           11.2      Effect of Termination........................................................     56
           11.3      Break-Up Fee.................................................................     56

ARTICLE XII SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS.....................     57

           12.1      Representations and Warranties...............................................     57
           12.2      Limitation of Liability......................................................     57

ARTICLE XIII INDEMNIFICATION......................................................................     57

           13.1      Indemnification of DUSA Indemnitees..........................................     57
           13.2      Indemnification of the Sirius Shareholders...................................     57
           13.3      Limitations..................................................................     58
           13.4      General Provisions...........................................................     59
           13.5      Procedures for Indemnification - Third Party Claims..........................     59
           13.6      Procedure for Indemnification - Other Claims.................................     61

ARTICLE XIV TAX MATTERS...........................................................................     61

           14.1      Tax Allocation...............................................................     61

ARTICLE XV GENERAL PROVISIONS.....................................................................     62

           15.1      Expenses.....................................................................     62
           15.2      Public Announcements.........................................................     62
           15.3      Confidentiality..............................................................     62
           15.4      Notices......................................................................     62
           15.5      Jurisdiction; Service of Process.............................................     63
           15.6      Further Assurances...........................................................     64
           15.7      Waiver.......................................................................     64
           15.8      Entire Agreement and Modification............................................     64
           15.9      Disclosure Schedules.........................................................     64
           15.10     Assignments, Successors, and No Third-Party Rights...........................     64
           15.11     Severability.................................................................     65
           15.12     Article and Section Headings, Construction...................................     65
           15.13     Governing Law................................................................     65
           15.14     Counterparts.................................................................     65

ARTICLE XVI DISPUTE RESOLUTION....................................................................     65

           16.1      Arbitration..................................................................     65
           16.2      Judicial Proceedings.........................................................     66



                                      -iv-



                              DISCLOSURE SCHEDULES

                      
Schedule 1.80            New Products
Schedule 1.95            Products
Schedule 1.100           Management Bonus Program
Schedule 2.8             Assumed Liabilities
Schedule 3.1(a)          Executive Officers and Directors of Sirius
Schedule 3.2(b)          No Conflict
Schedule 3.2(c)          Consents
Schedule 3.3(a)          Capitalization and Shareholders
Schedule 3.3(b)          Equity Incentive Plans/Options
Schedule 3.3(c)          Shareholder Agreements
Schedule 3.3(d)          Beneficial Ownership (Fully Diluted)
Schedule 3.4             Financial Statements
Schedule 3.6             Property and Assets
Schedule 3.8             Subsidiaries
Schedule 3.9(a)          Intellectual Property Rights
Schedule 3.9(c)          Claims, Judgments and Disputes
Schedule 3.10            Related Party Transactions
Schedule 3.11            Undisclosed Liabilities
Schedule 3.12(c)         Tax Returns
Schedule 3.13(b)         Plans and Other Benefit Obligations
Schedule 3.13(c)         Effect of Transaction
Schedule 3.14(a)         Compliance with Legal Requirements
Schedule 3.14(b)         Governmental Authorization
Schedule 3.14(c)         Prescription and Non-Prescription Products
Schedule 3.15            Legal Proceedings
Schedule 3.16            Absence of Certain Changes and Events
Schedule 3.17(a)         Material Contracts
Schedule 3.17(b)         Restrictive Contracts
Schedule 3.17(c)         Validity of Material Contracts
Schedule 3.17(d)         Material Compliance
Schedule 3.18(b)         Insurance
Schedule 3.18(c)         Validity of Insurance
Schedule 3.18(d)         Claims-Made Policies
Schedule 3.19(b)         Facilities
Schedule 3.21            Accounts Receivable
Schedule 3.23            Warranties
Schedule 3.24            Product Liability
Schedule 3.25            Customers and Suppliers
Schedule 3.26            Products Treatments; Product Returns
Schedule 4.2(b)          No Conflict
Schedule 4.2(c)          Consents
Schedule 9.6             Employee Plans



                                      -v-



                                    EXHIBITS

                      
Exhibit A                Form of Subscription Agreement
Exhibit B                Form of Liability Escrow Agreement
Exhibit C                Form of Registration Rights Agreement
Exhibit D                Form of Shareholders Escrow Agreement
Exhibit E                Form of Expense Escrow Agreement
Exhibit F                Undisclosed Liabilities of DUSA
Exhibit G                Form of the 2006 Micanol License Agreement
Exhibit H1               Form of Non-Competition Agreement
Exhibit H2               Form of Non-Competition Agreement
Exhibit I                Form of Amendment to Harmony Supply and Development Agreement
Exhibit J                Form of Amendment to Amide Supply Agreement



                                      -vi-


                                                                  EXECUTION COPY

                                MERGER AGREEMENT

      THIS MERGER AGREEMENT (this "Agreement") is made on the 30th day of
December, 2005, by and among DUSA Pharmaceuticals, Inc., a publicly traded
pharmaceutical company incorporated in the State of New Jersey, with principal
offices at 25 Upton Drive, Wilmington, Massachusetts ("DUSA"), Sirius
Laboratories, Inc., a privately held specialty pharmaceutical company
incorporated in the State of Illinois, with principal offices at 100 Fairway
Drive, Suite 130, Vernon Hills, Illinois ("Sirius"), and those shareholders of
Sirius set forth on the signature pages hereto (each a "Principal Shareholder"
and collectively the "Principal Shareholders"). DUSA, Sirius and the Principal
Shareholders are at times referred to each as a "Party" and collectively as the
"Parties."

                                    RECITALS

      WHEREAS, pursuant to a Plan of Merger and Reorganization, to be drafted in
a form mutually agreeable to the parties and delivered prior to the Closing Date
(the "Plan of Merger"), the Parties agree to effect a merger of Sirius with and
into a wholly-owned subsidiary of DUSA ("DUSA Sub") to be incorporated by DUSA
prior to Closing, resulting in DUSA Sub being the surviving entity, the Sirius
Shareholders receiving the consideration provided for herein, and DUSA owning
all of the issued and outstanding common stock of DUSA Sub (the "Transaction");

      WHEREAS, the Parties intend that the Transaction constitute a
"reorganization" as defined in IRC Section 368(a); and

      WHEREAS, the Parties agree to effect the Transaction and agree to be bound
by the terms and conditions set forth in this Agreement;

      NOW, THEREFORE, the Parties, in furtherance of the foregoing and for good
and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, intending to be legally bound, agree as follows:

                                    ARTICLE I
                                   DEFINITIONS

      For purposes of this Agreement, the following terms have the meanings
specified or referred to in this Article I:

      1.1 "Accounts Receivable" means all of Sirius's trade accounts receivable,
notes receivable, employee advances and other miscellaneous receivables.

      1.2 "Affiliates" means, with respect to any Person, any Persons directly
or indirectly controlling, controlled by, or under common control with, such
Person. For purposes hereof, the term "controlled" (including the terms
"controlling," "controlled by," and "under common control with"), as used with
respect to any Person, shall mean the direct or indirect ability or power to
direct or cause the direction of management policies of such Person or otherwise
direct the affairs of such Person, whether through ownership of voting
securities or otherwise.



      1.3 "Agreement" has the meaning defined in the opening paragraph of this
Agreement.

      1.4 "Altana" means Altana Inc., a New York corporation.

      1.5 "Altana Agreement" means the Development, License and Supply
Agreement, dated as of June 13, 2005, by and between Sirius and Altana.

      1.6 "Amide" means Amide Pharmaceuticals, Inc., a New Jersey corporation.

      1.7 "Amide Supply Agreement" means the Supply Agreement, dated as of May
18, 2001, by and between Sirius and Amide.

      1.8 "Balance Sheet" has the meaning defined in Section 3.4.

      1.9 "Break-Up Fee" means One Hundred Twenty Five Thousand Dollars
($125,000) on or before February 7, 2006, or Two Hundred Fifty Thousand Dollars
($250,000) thereafter.

      1.10 "Business Day" means any day other than a Saturday, Sunday or federal
holiday.

      1.11 "Closing" has the meaning defined in Section 2.3.

      1.12 "Closing Date" has the meaning defined in Section 2.3.

      1.13 "Closing Deliverables" has the meaning defined in Section 2.4(a).

      1.14 "Commercially Reasonable Efforts" means the efforts that a Party
desirous of achieving a business result would use in similar circumstances, to
ensure that such result is achieved in the context of such Party's business;
provided, however, that an obligation to use Commercially Reasonable Efforts
does not require the Party subject to that obligation to assume any Material
obligations or pay any Material amounts outside the normal course of its
business.

      1.15 "Consent" means any approval, consent, ratification, waiver, or other
authorization, including any Governmental Authorization.

      1.16 "Consideration" has the meaning defined in Section 2.2.

      1.17 "Contract" means any agreement, contract, license, sublicense,
obligation, promise, or undertaking (whether written or oral and whether express
or implied) that is legally binding.

      1.18 "Damages" means any and all losses, damages, liabilities,
obligations, costs and expenses, including without limitation, reasonable fees
and disbursements of counsel, sustained or incurred by the applicable Person
after deducting therefrom: (a) any Tax benefit actually recognized by the Person
resulting from such Damages; and (b) any insurance proceeds in the order
specified in Section 13.3(b) and any indemnity, contribution or other similar
payment actually recovered, net of all expenses incurred in prosecuting such
claim, by the Person suffering the Damages from any Third Party with respect
thereto.

                                       2


      1.19 "Disclosure Schedules" means, collectively, those schedules delivered
by Sirius and attached to and incorporated in this Agreement that set forth the
facts and circumstances that qualify the representations and warranties of
Sirius in Article III and the Principal Shareholders in Article IV of this
Agreement, and "Schedule" means any schedule comprising part of the Disclosure
Schedules.

      1.20 "Dissenters Escrow Account" shall have the meaning defined in Section
2.9(a).

      1.21 "Dissenters Escrow Amount" shall be an amount equal to Thirty Million
Dollars ($30,000,000) less the Sirius Transaction Expenses and the Expense
Escrow Amount multiplied by the Dissenters Multiplier, which amount is to be
held in escrow by the Shareholders Escrow Agent pursuant to the terms and
conditions of the Shareholders Escrow Agreement.

      1.22 "Dissenters Multiplier" means the total number of Sirius Shares held
by the Dissenting Shareholders as of the Closing Date divided by the total
number of Sirius Shares issued and outstanding as of the Closing Date.

      1.23 "Dissenting Shareholders" means those shareholders of Sirius who
dissent from, refuse to participate in or otherwise fail to take part in the
Transaction.

      1.24 "Dollars" means the United States Dollar.

      1.25 "Draft Financial Statements" has the meaning defined in Section 3.4.

      1.26 "DUSA" has the meaning defined in the opening paragraph of this
Agreement.

      1.27 "DUSA Change of Control" has the meaning defined in Section 2.2(d).

      1.28 "DUSA SEC Documents" means the reports, registration statements and
definitive proxy statements filed by DUSA with the SEC since January 1, 2004.

      1.29 "DUSA Shares" means shares of common stock, no par value per share,
of DUSA, having the restrictions set forth in Sections 4.8 and 4.9.

      1.30 "DUSA Sub" has the meaning defined in the Recitals of this Agreement.

      1.31 "Elorac" means Elorac Limited, an Illinois partnership.

      1.32 "Elorac Agreement" means the Sale and Purchase Agreement, dated as of
December 18, 2002, by and between Sirius and Elorac.

      1.33 "Employee" means any current employee, consultant or agent of Sirius
or its ERISA Affiliates.

      1.34 "Encumbrance" means any mortgage, easement, right of way, charge,
claim, equitable interest, lien, option, pledge, security interest, right of
first refusal, or restriction of any kind, including any restriction on use,
voting, transfer, receipt of income, or exercise of any other attribute of
ownership.

                                       3


      1.35 "Environmental Claim" has the meaning defined in Section 3.19(a).

      1.36 "Environmental Laws" has the meaning defined in Section 3.19(a).

      1.37 "Environmental Permits" has the meaning defined in Section 3.19(a).

      1.38 "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, or any successor law, and regulations and rules issued pursuant to that
Act or any successor law.

      1.39 "ERISA Affiliate" has the meaning defined in Section 3.13(a).

      1.40 "Escrow Agent" means the Expense Escrow Agent, Shareholders Escrow
Agent and/or the Liability Escrow Agent, as applicable.

      1.41 "Exchange Act" means the Securities Exchange Act of 1934, as amended.

      1.42 "Expense Escrow Account" shall have the meaning defined in Section
2.9(b).

      1.43 "Expense Escrow Agent" shall have the meaning defined in Section
2.9(b).

      1.44 "Expense Escrow Agreement" shall have the meaning defined in Section
2.9(b).

      1.45 "Expense Escrow Amount" means the amount of the Consideration to be
delivered to the Expense Escrow Agent at Closing for payment of expenses arising
after the Closing pursuant to the Expense Escrow Agreement.

      1.46 "Expenses" has the meaning defined in Section 6.3(a).

      1.47 "Fair Market Value" means for purposes of Section 2.2(c)(ii), the
average closing price of DUSA Shares on the NASDAQ Stock Market for the last
twenty (20) trading days of the month in which the applicable milestone is
achieved, which average closing price shall be calculated by adding the closing
price of DUSA Shares for each of the twenty (20) designated days and dividing
the sum by twenty (20); and shall mean for purposes of Sections 2.2(b) and 2.5
the average closing price of DUSA Shares on the NASDAQ Stock Market for the
twenty (20) trading days prior to the public announcement of the Transaction by
DUSA, which average closing price shall be calculated by adding the closing
price of DUSA Shares for each of the twenty (20) designated days and dividing
the sum by twenty (20). If the closing price cannot be calculated for the DUSA
Shares on a particular date on any of the foregoing bases, the closing price of
such security on such date shall be the fair market value as mutually determined
by DUSA and the Shareholder Representatives. DUSA and the Shareholder
Representatives shall use Commercially Reasonable Efforts to resolve any dispute
regarding the determination of Fair Market Value, provided, however, that the
limitation with respect to Material expenditures shall not apply. All such
determinations shall be appropriately adjusted for any stock dividend, stock
split, stock combination or other similar transaction during the applicable
calculation period. Should DUSA Shares cease to be quoted on the NASDAQ Stock
Market, for purposes of any calculation hereunder, the NASDAQ Stock Market shall
be replaced by the applicable exchange or quotation system or in the event the
DUSA Shares cease to trade on any exchange or

                                       4


quotation system, then the determination of Fair Market Value shall be mutually
determined by DUSA's Board of Directors and the Shareholders' Representatives.

      1.48 "FDA" means the United States Food and Drug Administration, or any
successor agency.

      1.49 "FDCA" means the United States Food, Drug and Cosmetic Act, as
amended, or any successor law, and the rules and regulations issued pursuant to
that Act or successor law.

      1.50 "Final Financial Statements" has the meaning defined in Section 3.4.

      1.51 "Floor" means Twenty Five Thousand Dollars ($25,000).

      1.52 "Form S-4" has the meaning defined in Section 6.8.

      1.53 "Governmental Authorization" means any approval, consent, license,
permit, certification, registration, waiver, or other authorization issued,
granted, given, or otherwise made available by or under the authority of any
Governmental Body or pursuant to any Legal Requirement.

      1.54 "Governmental Body" means any: (a) nation, state, county, city, town,
village, district, or other jurisdiction of any nature; (b) federal, state,
local, municipal, foreign, or other government; (c) governmental or
quasi-governmental authority of any nature, including any governmental agency,
branch, department, official, or entity and any court or other tribunal; or (d)
body exercising, or entitled to exercise, any administrative, executive,
judicial, legislative, police, regulatory, or taxing authority or power of any
nature.

      1.55 "Harmony" means Harmony Laboratories, Inc., a North Carolina
corporation.

      1.56 "Harmony Supply and Development Agreement" means the Supply and
Development Agreement, dated as of September 18, 2001, by and between Sirius and
Harmony Laboratories, Inc.

      1.57 "Hazardous Materials" has the meaning defined in Section 3.19(a).

      1.58 "Indemnitee" and "Indemnitor" have the respective meanings defined in
Section 13.5.

      1.59 "Intellectual Property Rights" means any item of or right under any
and all Know-how, Patents, inventions, trademarks, trade names, domain names,
service marks, trade dress, slogans, designs, concepts, compilations of
information, copyrights, or any application or registration thereof, whether by
ownership or license or the ability of an entity to grant access to, or a
license or sublicense of, such item or right, and any and all inventions,
improvements or discoveries in connection therewith.

      1.60 "Interim Balance Sheet" has the meaning defined in Section 3.4.

                                       5


      1.61 "Inventory" means all inventory of Sirius's business held for resale
and all raw materials, work in process, finished products, shipments in transit,
wrapping and supply and packaging items exclusively used or held for use in
Sirius's business, including, without limitation, inventory held for
distribution to physicians as samples.

      1.62 "Investor Questionnaires" has the meaning defined in Section 6.7.

      1.63 "IRC" means the Internal Revenue Code of 1986, as amended, or any
successor law, and regulations issued by the IRS pursuant to the Internal
Revenue Code or any successor law.

      1.64 "IRS" means the United States Internal Revenue Service or any
successor agency, and, to the extent relevant, the United States Department of
the Treasury.

      1.65 "Know-how" means any and all unpatented formulae, processes, trade
secrets, technologies and know-how, whether or not patentable, including,
without limitation, synthesis, preparation, recovery and purification processes
and techniques, control methods and assays, chemical data, toxicological and
pharmacological data and techniques, clinical data, medical uses, product forms
and product formulations and specifications.

      1.66 "Knowledge" means to the applicable person's actual knowledge after
reasonable inquiry.

      1.67 "Legal Requirement" means any administrative order, constitution,
law, ordinance, principle of common law, court order, consent, decree, rule,
regulation, guidance, license, permit, statute, or treaty of any Governmental
Body.

      1.68 "Liability Escrow Account" has the meaning defined in Section 2.5.

      1.69 "Liability Escrow Agent" has the meaning defined in Section 2.5.

      1.70 "Liability Escrow Agreement" has the meaning defined in Section 2.5.

      1.71 "Liability Escrow Amount" has the meaning defined in Section 2.5.

      1.72 "Material" means, (i) when used in connection with a monetary amount,
an amount of Twenty Five Thousand Dollars ($25,000) or more; and (ii) when used
with respect to a non-monetary concepts or a concept that is both monetary and
non-monetary, information that a reasonably prudent person would find important
in deciding to take an action (or not take an action).

      1.73 "Material Adverse Effect (or Change)" means (i) any effect or change
that is Materially adverse to the business, assets, condition (financial or
otherwise), operating results, or operations of a particular Person taken as a
whole, including, without limitation, a court order or permanent injunction with
respect to the continued manufacturing, production and/or marketing of a Product
or the engaging of counsel with respect to any Third Party Intellectual Property
Rights Materially affecting the Products, (ii) a Material impairment of such
Person's ability to consummate the Transaction; (iii) a greater than five
percent (5%) detrimental deviation between

                                       6


the 2003 Draft Financial Statements and the 2003 Final Financial Statements, the
2004 Draft Financial Statements and the 2004 Final Financial Statements, and the
September 30, 2005 Sirius management financial statements and the 2005 Final
Financial Statements, respectively, with respect to net sales and/or profit/loss
with the exception of variances caused by adjustments related to revenue
recognition, compensation expense, and reserves for returns and allowances, or
(iv) the failure by Sirius to deliver the Final Financial Statements as provided
for herein.

      1.74 "Material Contracts" has the meaning defined in Section 3.17(a).

      1.75 "Milestone Payments" means the payments to be made upon the
satisfaction of the conditions and the absence of certain events set forth in
Section 2.2(c), subject to adjustments, if any.

      1.76 "Milestone Termination Date" means the date that is forty-two (42)
months after the Closing Date.

      1.77 "Minimum Marketing Standards" means Commercially Reasonable Efforts
to sell and/or promote the New Products selected for development pursuant to
this Agreement (including to achieve marketing launch and/or regulatory approval
of such New Products subject to the terms of Section 10.4(c) permitting DUSA to
cease development of any New Product candidate) and the Products (as applicable)
in a manner consistent with Sirius's past practices (including merely sampling
certain Products) or the customary practices within the industry, including,
without limitation, sales force promotion, sales incentive bonuses, product
sampling and non-personal promotion, all at levels consistent with good faith
operations of DUSA aimed at providing Sirius Shareholders with a realistic
opportunity to achieve the sales milestones described in Section 2.2(c);
provided, however, that it is understood and agreed that (a) the sales force
used in working towards achieving the Minimum Marketing Standards will not be
required to exclusively promote the New Products and the Products and may
simultaneously promote DUSA's other existing and future products and services,
and (b) the monetary amounts expended and activity levels applied to such
marketing efforts by DUSA may be greater or less than the amounts and levels
currently expended and applied by Sirius.

      1.78 "Multi-Employer Plan" has the meaning defined in Section 3.13(a).

      1.79 "Net Sales" means with respect to any Product and New Product, the
gross amount invoiced by DUSA to unrelated third parties for such Product and
New Product less deductions for: (a) sales and excise taxes and duties and any
other governmental charges imposed upon the production, importation, use or sale
of any Product or New Product; (b) trade, quantity and cash discounts actually
allowed; (c) allowances or credits to customers on account of rejection or
return of any Product or New Product or on account of retroactive price
reductions affecting any Product or New Product; and (d) product rebates and
charge backs, including those granted to governmental agencies, managed care
entities and pharmaceutical benefit management service entities; in each case,
as accounted for in accordance with United States Generally Accepted Accounting
Principles, as applicable, or their equivalents in other countries, as
applicable, but in any case, consistently applied.

      1.80 "New Products" means the product candidates set forth on Schedule
1.80 hereto.

                                       7


      1.81 "Organizational Documents" means the articles or certificate of
incorporation (including without limitation certificate(s) of designation),
bylaws, certificate(s) of authority to conduct business, and any amendment to
any of the foregoing, of a corporation.

      1.82 "Other Benefit Obligation" has the meaning defined in Section
3.13(a).

      1.83 "Paid Sirius Expenses" means any Sirius Transaction Expenses which
have been or will be paid by Sirius prior to the Closing.

      1.84 "Participating Shareholders" means the Principal Shareholders and
other Sirius Shareholders who exchange their Sirius Shares for DUSA Shares at
the Closing and who collectively hold greater than ninety percent (90%) of the
issued and outstanding Sirius Shares on a fully diluted basis on the Closing
Date, and, if approved by the requisite number of Sirius Shareholders at the
meeting of Sirius Shareholders described in Section 6.6, those holders of Sirius
Options who elect to exercise their options, respectively, with or without cash,
in exchange for the right to participate in the Transaction prior to Closing.

      1.85 "Party" and "Parties" has the meaning defined in the opening
paragraph of this Agreement.

      1.86 "Patents" means the patents and patent applications in any country in
the world, together with any patents that may issue therefrom in any country in
the world, including any and all extensions, renewals, continuations,
continuations-in-part, divisions, patents-of-additions, reissues, supplementary
protection certificates or foreign counterparts of any of the foregoing and any
patents based on applications that claim priority from any of the foregoing; and
a "Patent" shall be any one of the foregoing.

      1.87 "Pension Plan" has the meaning defined in Section 3.13(a).

      1.88 "Perrigo" means Perrigo Company, a Michigan company.

      1.89 "Perrigo Agreement" means the Supply Agreement, dated October 21,
2005, by and between Perrigo and Sirius.

      1.90 "Person" means any individual, corporation (including any non-profit
corporation), general or limited partnership, limited liability partnership,
limited liability company, joint venture, estate, trust, association,
organization, labor union, Governmental Body or other entity.

      1.91 "Plan" has the meaning defined in Section 3.13(a).

      1.92 "Plan of Merger" has the meaning defined in the Recitals to this
Agreement.

      1.93 "Principal Shareholders" means those shareholders of Sirius whose
names are set forth on the signature pages attached to this Agreement, who are
the holders of greater than eighty-eight percent (88%) of the issued and
outstanding Sirius Shares as of the date of this Agreement.

                                       8


      1.94 "Proceeding" means any action, arbitration, audit, hearing,
investigation, litigation, inquiry or suit (whether civil, criminal,
administrative or investigative) commenced, brought, conducted, or heard by or
before, or otherwise involving, any Governmental Body or arbitrator.

      1.95 "Products" means those products of Sirius set forth on Schedule 1.95
to this Agreement.

      1.96 "Qualified Plan" has the meaning defined in Section 3.13(a).

      1.97 "Regulation D" has the meaning defined in the Securities Act.

      1.98 "Representation and Warranties Insurance" has the meaning defined in
Section 9.7.

      1.99 "Representative" means with respect to a particular Person, any
director, officer, employee, agent, consultant, advisor, or other representative
of such Person, including legal counsel, accountants, and financial advisors.

      1.100 "Restricted Payment" means any acceleration or increase by Sirius of
any salaries, or any acceleration, payment or increase by Sirius of any bonuses
or other compensation, severance or similar payments to any service provider,
shareholder, director or officer since the Interim Balance Sheet, except for any
payment or prepayment of any Sirius Debt Obligations or payments made in the
ordinary course of business; provided, however, Restricted Payments shall not
include Sirius's 2005 Management Bonus Program attached hereto as Schedule
1.100, or payment of Expenses as contemplated herein.

      1.101 "SEC" means the United States Securities and Exchange Commission.

      1.102 "Securities Act" means the Securities Act of 1933, as amended from
time to time, and the rules and regulations promulgated thereunder.

      1.103 "Shareholder Representatives" has the meaning defined in Section
6.4.

      1.104 "Shareholders Escrow Agent" shall have the meaning defined in
Section 2.9(a).

      1.105 "Shareholders Escrow Agreement" shall have the meaning defined in
Section 2.9(a).

      1.106 "Sirius" has the meaning defined in the opening paragraph of this
Agreement.

      1.107 "Sirius Debt Obligations" means, as of a particular date, the
following obligations of Sirius: Sirius's Expenses other than the Sirius
Transaction Expenses, and up to One Million Dollars ($1,000,000) of outstanding
liabilities with respect to The PrivateBank and Trust Company Obligation,
subject to the terms and conditions set forth in Section 2.4(a)(vii).

                                       9


      1.108 "Sirius Facility" means any offices, land or other facilities now or
formerly owned, operated, leased, managed, used, controlled or occupied by or on
behalf of Sirius in connection with Sirius's business or any
predecessor-in-interest of Sirius.

      1.109 "Sirius Options" has the meaning defined in Section 3.3(b).

      1.110 "Sirius Shareholders" means all shareholders of Sirius on a fully
diluted, as converted to common stock, basis.

      1.111 "Sirius Shares" means the shares of common stock, $.01 par value per
share, of Sirius.

      1.112 "Sirius Transaction Expenses" has the meaning defined in Section
6.3(a)(ii).

      1.113 "Tax" and "Taxes" means any federal, state, local or foreign income,
gross receipts, franchise, excise, transfer, severance, value added, ad valorem,
sales, use, wage, payroll, workmen's compensation, employment, occupation,
estimated, withholding, social security, unemployment, disability, and real and
personal property taxes; taxes measured by or imposed on capital; levies,
imports, duties, license and legislation fees; and any other tax of any kind
whatsoever imposed by any Governmental Body, including assessments in the nature
of taxes; interest, penalties, fines, assessments and deficiencies relating to
any tax or taxes; any transferee or secondary liability for taxes and any taxes
due as a result of being a member of any affiliated, consolidated, combined or
unitary group or any liability in respect of taxes under a tax sharing, tax
allocation, tax indemnity or other agreement.

      1.114 "Tax Return" means any return (including any information return),
report, statement, schedule, notice, form, or other document or information
filed with or submitted to, or required to be filed with or submitted to, any
Governmental Body in connection with the determination, assessment, collection,
or payment of any Tax or in connection with the administration, implementation,
or enforcement of or compliance with any Legal Requirement relating to any Tax.

      1.115 "The PrivateBank and Trust Company Obligations" means all
indebtedness and obligations owed by Sirius to The PrivateBank and Trust Company
under (a) that certain Business Loan Agreement, dated August 1, 2005, between
Sirius and The PrivateBank and Trust Company; and (b) that certain Promissory
Note, dated August 1, 2005, in the principal amount of $2,000,000, payable by
Sirius to the order of The PrivateBank and Trust Company.

      1.116 "Third Party" means any Person other than DUSA, Sirius and the
Principal Shareholders.

      1.117 "Third Party Manufacturer" has the meaning defined in Section
3.14(c)(iv).

      1.118 "Title IV Plans" has the meaning defined in Section 3.13(a).

      1.119 "Transaction" has the meaning defined in the Recitals of this
Agreement.

                                      10


                                   ARTICLE II
                                 MERGER; CLOSING

      2.1 MERGER. Subject to the terms and conditions of this Agreement and the
Plan of Merger, at the Closing, Sirius shall merge with and into DUSA Sub and
the Sirius Shareholders shall receive the Consideration set forth below.

      2.2 CONSIDERATION. The aggregate consideration paid to the Sirius
Shareholders shall be up to Thirty Million Dollars ($30,000,000), which amount
shall be adjusted as provided for herein (the "Consideration"). The
Consideration shall be paid as follows:

            (a) Eight Million Dollars ($8,000,000) in cash, less (i) the Sirius
Transaction Expenses, which shall be paid at Closing as provided in Section 6.3,
(ii) the Expense Escrow Amount, which shall be paid at Closing as provided in
Sections 2.2(f) and 2.9(b), and (iii) the Dissenters Escrow Amount, which shall
be paid to the Shareholders Escrow Agent at Closing, as provided in Section
2.9(a), shall be paid on a pro rata basis within five (5) Business Days
following the Closing Date (or such shorter time period as may be reasonably
practicable with respect to any Participating Shareholder who provides valid
wire transfer instructions for such payments to DUSA in advance of the Closing)
directly to the Participating Shareholders in accordance with their respective
ownership percentages of the Sirius Shares set forth in Schedule 3.3(a), as
shall be confirmed as of the Closing Date.

            (b) Subject to Section 2.5, a number of DUSA Shares having a Fair
Market Value of Seventeen Million Dollars ($17,000,000) as of the date of the
official public announcement of the Transaction shall be paid on a pro rata
basis on the Closing Date directly to the Participating Shareholders, in
accordance with their respective ownership percentages of the Sirius Shares set
forth in Schedule 3.3(a).

            (c) An aggregate amount of up to Five Million Dollars ($5,000,000)
shall be paid when due following the Closing to the Participating Shareholders
on a pro rata basis with respect to the following milestone events that are
achieved prior to the date that is forty-two (42) months from the Closing Date:

                  (i) One Million Five Hundred Thousand Dollars ($1,500,000) in
cash will be paid on a pro rata basis to the Sirius Shareholders in Five Hundred
Thousand Dollar ($500,000) increments within ten (10) Business Days of each of
the following milestone events (in each case subject to Section 10.4): (A) the
marketing launch of New Product No. 1 as set forth on Schedule 1.80 being
developed pursuant to the Perrigo Agreement, which does not require FDA
pre-marketing approval; (B) the receipt of FDA pre-marketing approval of New
Product No. 2 as set forth on Schedule 1.80 being developed pursuant to the
Altana Agreement, which requires FDA approval; and (C) the marketing launch of
any other New Product (i.e., other than those identified with respect to the
Milestone Payments triggered by clause (A) or (B)), to be selected as provided
in Section 10.4 below, whether or not FDA approval is required for such New
Product.

                  (ii) Three Million Five Hundred Thousand Dollars ($3,500,000)
to be paid, in cash or DUSA Shares, as determined by DUSA in its sole
discretion, within ten (10)

                                      11


Business Days following the month in which a respective milestone is satisfied,
if at all, of each of the following milestone events (in each case subject to
Section 10.4): (A) One Million Five Hundred Thousand Dollars ($1,500,000) when
cumulative Net Sales of the Products and the New Products reach Twenty Five
Million Dollars ($25,000,000); (B) One Million Dollars ($1,000,000) when
cumulative Net Sales of the Products and the New Products reach Thirty Five
Million Dollars ($35,000,000); and (C) One Million Dollars ($1,000,000) when
cumulative Net Sales of the Products and the New Products reach Forty Five
Million Dollars ($45,000,000).

      In the event DUSA chooses to make any or all such Milestone Payments in
DUSA Shares, such DUSA Shares shall have a Fair Market Value as close as is
reasonably possible to the amount of the Milestone Payment after taking into
account that no fractional DUSA Shares shall be issued in accordance with
Section 2.2(e).

            (d) No interest shall accrue on any Milestone Payments, if any, to
be paid, hereunder; provided such Milestone Payments are timely made in
accordance with the terms of this Agreement. Interest on Milestone Payments not
timely made in accordance with the terms hereof will accrue at an annual rate
equal to the prime rate published in the Wall Street Journal (or a successor
publication in the event the Wall Street Journal is no longer available) on the
applicable due date of the late payment, plus five percent (5%). DUSA's
obligation to pay each Milestone Payment, respectively, shall terminate if the
aforementioned approvals, launches or cumulative Net Sales target amounts
applicable to such Milestone Payments are not achieved by the Milestone
Termination Date; provided, however, that, in the event of any sale, merger,
dissolution, liquidation, winding-up, change of control or similar transaction
involving DUSA (any such event being referred to as a "DUSA Change of Control")
prior to the Milestone Termination Date, each Milestone Payment not already due
and payable hereunder shall become immediately due and payable upon the
effective date of such transaction, (i) in an amount equal to fifty percent
(50%) of the amount of such Milestone Payment specified herein, or (ii) if such
transaction occurs on or after the second (2nd) anniversary of the Closing Date
and the cumulative Net Sales with respect to the Products and the New Products
equals or exceeds Twenty Million Dollars ($20,000,000) for the period beginning
on the Closing Date through the effective dates of such transaction, in an
amount equal to one hundred percent (100%) of the amount of such Milestone
Payment specified herein. Upon payment in-full of such amount under subparagraph
(d)(i) or (ii) above in connection with a DUSA Change of Control, neither DUSA
nor its successors or assigns shall have any further obligation or liability
with respect to any of the Milestone Payments hereunder.

            (e) No fractional DUSA Shares shall be issued in satisfaction of the
Consideration. DUSA shall be entitled to pay cash for any pro rata DUSA Share
that is less than one whole DUSA Share.

            (f) The Expense Escrow Amount, in immediately available funds, shall
be delivered to the Expense Escrow Agent on the Closing Date and held on behalf
of the Participating Shareholders as provided for in Section 2.9(b) below. The
Expense Escrow Amount shall be used to pay, unless paid prior to or at Closing,
the legal expenses of Sirius in connection with the Transaction (other than such
amounts to be paid by DUSA pursuant to Section 6.3(a)(ii) of this Agreement),
any payments due to Elorac as a result of a change of control of Sirius under
the Elorac Agreement, the premiums in connection with the extended

                                      12


reporting endorsement for each claims-made insurance policy as provided for in
Section 3.18(d), and other Sirius Shareholder post-Closing expenses, all of
which in the aggregate are estimated to be Six Hundred Fifty Thousand Dollars
($650,000), in accordance with the terms of this Agreement and the Expense
Escrow Agreement.

            (g) The Dissenters Escrow Amount, in immediately available funds,
shall be delivered to the Shareholders Escrow Agent on the Closing Date and held
on behalf of the Dissenting Shareholders as provided for in Section 2.9(a)
below. The Dissenters Escrow Amount shall be used to pay the Dissenting
Shareholders in accordance with the terms of this Agreement and the Shareholders
Escrow Agreement.

      2.3 CLOSING. Subject to the satisfaction of all of the Closing conditions
set forth in this Agreement, unless waived, the closing of the Transaction (the
"Closing") will take place at the offices of Reed Smith LLP at 136 Main Street,
Suite 250, Princeton, New Jersey 08543 at 10:00 a.m. (EST) (a) on or before
February 7, 2006, or (b) on such later date as mutually agreed upon by Sirius
and DUSA, but in no event later than the date which is six (6) months from the
date of the execution of this Agreement. (the "Closing Date").

      2.4 CLOSING OBLIGATIONS.

            (a) On or prior to the Closing Date, the Principal Shareholders or
Sirius, as appropriate, shall deliver or cause to be delivered to DUSA in a form
satisfactory to DUSA and its counsel the following (the "Closing Deliverables"):

                  (i) stock certificates representing all of the Sirius Shares
being exchanged in connection with the Transaction, duly endorsed with
signatures guaranteed (or accompanied by duly executed stock powers) for
conversion to DUSA Shares;

                  (ii) a certificate executed by Sirius to the effect that each
of the representations and warranties of Sirius contained in this Agreement were
true and correct when made and are true and correct as of the Closing Date; and
that the Participating Shareholders hold ninety (90%) percent or more of the
issued and outstanding shares of Sirius Stock on a fully diluted as converted to
common stock basis on the Closing Date.

                  (iii) a certificate executed by each Principal Shareholder
holding in excess of five percent (5%) of the Sirius shares to the effect that
each of the representations and warranties of the Principal Shareholders
contained in this Agreement, were true and correct when made and are true and
correct as of the Closing Date;

                  (iv) a fully completed and executed subscription agreement,
substantially in the form attached hereto as Exhibit A, from each Participating
Shareholder;

                  (v) a certificate as to the incumbency of officers;

                  (vi) a legal opinion from counsel of Sirius in form and
substance reasonably satisfactory to DUSA and its counsel;

                                      13


                  (vii) written confirmation from The PrivateBank and Trust
Company that the Transaction, and, if necessary, the assumption by DUSA of The
PrivateBank and Trust Company Obligations, will not result in a default under
The PrivateBank and Trust Company Obligations;

                  (viii) written confirmation, in form and substance reasonably
satisfactory to DUSA, that as of the Closing the aggregate outstanding amount of
The PrivateBank and Trust Company Obligations does not exceed One Million
Dollars ($1,000,000) and that such amount does not exceed the cost of the
Inventory then held by Sirius.

                  (ix) an executed counterpart of the Articles of Merger to be
filed with the Secretary of State of Illinois and the Certificate of Merger to
be filed with the Secretary of State of New Jersey; and

                  (x) an executed Plan of Merger adopted by the responsible
officers of Sirius and meeting the requirements of IRC Reg. 1.368-3.

                  (xi) audited consolidated financial statements of Sirius for
the years ended December 31, 2003, 2004 and 2005, respectively, that meet the
requirements of Item 9.01 of Form 8-K and the applicable provisions of
Regulation S-X.

            (b) On or prior to the Closing Date, DUSA shall, in a form
satisfactory to Sirius and its counsel, deliver to:

                  (i) the Participating Shareholders and the Escrow Agent, those
portions of the Consideration due pursuant to Sections 2.2(a), 2.2(b), 2.2(f)
and 2.2(g);

                  (ii) Sirius, a certificate executed by DUSA to the effect that
each of the representations and warranties of DUSA contained in this Agreement
were true and correct when made and are true and correct as of the Closing Date;

                  (iii) Sirius, an executed counterpart of the Articles of
Merger to be filed with the Secretary of State of Illinois and the Certificate
of Merger to be filed with the Secretary of State of New Jersey;

                  (iv) Sirius, an executed Plan of Merger adopted by the
responsible officers of DUSA and meeting the requirements of IRC Reg. 1.368-3.

                  (v) Sirius, an Assignment and Assumption of Sirius Debt
Obligations.

            (c) On or prior to the Closing Date, the Parties shall execute and
deliver to each other the Liability Escrow Agreement, the Shareholders Escrow
Agreement, the Registration Rights Agreement, any consulting agreements and all
other agreements, certifications, and other documents, as necessary and
appropriate.

                                      14


      2.5 LIABILITY ESCROW.

            (a) At the Closing, DUSA shall withhold a number of DUSA Shares
having a Fair Market Value of Three Million Dollars ($3,000,000) (the "Liability
Escrow Amount") from that portion of the Consideration to be issued pursuant to
Section 2.2(b) and shall instead deliver the Liability Escrow Amount to American
Stock Transfer and Trust Company, who shall act as escrow agent (the "Liability
Escrow Agent"), for deposit into an escrow account (the "Liability Escrow
Account"). The Liability Escrow Amount shall be withheld from the Consideration
to be issued pursuant to Section 2.2(b) on a pro rata basis among all of the
Participating Shareholders in proportion to the aggregate amount of the
Consideration each such Participating Shareholder would otherwise be entitled to
receive at Closing. The Liability Escrow Amount shall be held pursuant to the
provisions of an escrow agreement (the "Liability Escrow Agreement"),
substantially in the form attached as Exhibit B.

            (b) The Liability Escrow Amount will be available to satisfy the
indemnification obligations of Sirius and the Sirius Shareholders hereunder
pursuant to the terms of Article XIII to compensate DUSA for any Damages
incurred by DUSA pursuant to (i) any undisclosed liabilities of Sirius arising
prior to the Closing Date, (ii) subject to Section 2.5(f), a court order,
temporary restraining order, permanent injunction, cease and desist letter or
other notice containing a significant threat to the continued manufacturing,
production and/or marketing of a Product with respect to any Third Party
Intellectual Property Rights relating to any of the Products; provided, however,
that for purposes of indemnification hereunder, the maximum portion of the
Liability Escrow Amount available to satisfy any claim with respect to a Product
pursuant to Section 2.5(b)(ii) shall be equal to the Liability Escrow Amount
reduced on a Dollar for Dollar basis by the amount of the revenue recognized by
DUSA or DUSA Sub from such Product referenced in this clause (ii) from and after
the Closing, and, subject to Section 2.5(f) below, as of the date upon which
DUSA retains litigation counsel to defend any claim in connection with this
clause (ii) (the "Claim Date"), the amount of revenue recognized with respect to
such Product following the Claim Date will be offset by the amount of Damages
incurred by DUSA from and after the Claim Date, (iii) any Material breach of any
representation, warranty or covenant made by Sirius or a Principal Shareholder
made in this Agreement or otherwise in connection with the Transaction, (iv) any
tort claim, including, but not limited to, negligence and strict liability
claims, and claims for intentional misconduct or wrongdoing; and (v) any Taxes
to the extent provided in Article XIV. The value per share of each of the DUSA
Shares used to satisfy a claim, if any, shall equal the same value per share as
calculated for purposes of Section 2.2(b). For purposes of clarity, this means
that in the event a claim is made, the value per DUSA Share as calculated
pursuant to Section 2.2(b) of this Agreement shall be used notwithstanding the
fact that the fair market value of a share of the common stock of DUSA at the
time of the claim may be lower or higher than the value calculated in accordance
with Section 2.2(b) of this Agreement.

            (c) No claims may be offset against the Liability Escrow Amount
after two (2) years following the Closing Date. In addition, notwithstanding
anything herein to the contrary, DUSA may not make any claim against the
Liability Escrow Amount and the Liability Escrow Agent shall not release any
Liability Escrow Amount to DUSA unless and until any individual claim or group
of like claims is equal to or exceeds the Floor and all cumulative claims exceed
One Hundred Thousand Dollars ($100,000), and shall be otherwise subject to the

                                      15


limits set forth in Article XIII hereof; provided, however, for purposes of
determining whether any individual claim equals or exceeds the Floor, DUSA shall
be permitted to aggregate "like claims" falling within the following specified
categories: (i) contractual claims with respect to any and all contracts assumed
by DUSA in connection with the Transaction, (ii) unpaid taxes and other
governmental claims, (iii) tort claims, including, but not limited to,
negligence and strict liability claims, and (iv) claims for intentional
misconduct or wrongdoing. In consideration of the foregoing, all claims shall be
considered to fall within one of the four categories specified above. In the
event a claim could fit into 2 or more categories, it shall be applied in its
entirety to the category that is most applicable. For purposes of clarity,
individual claims each falling below the Floor shall be eligible to be offset
against the Liability Escrow Amount if, when grouped together in the
aforementioned categories, such claims in the aggregate equal or exceed the
Floor and all claims cumulatively exceed One Hundred Thousand Dollars
($100,000). Further, once cumulative claims exceed One Hundred Thousand Dollars
($100,000), it will not be necessary for subsequent claims to again cumulatively
exceed One Hundred Thousand Dollars ($100,000) so long as claims including
aggregated "like claims" exceed the Floor as set forth above.

            (d) To the extent that there are any DUSA Shares remaining in the
Liability Escrow Account which have not been reserved for asserted claims under
the Liability Escrow Agreement on the date that is two (2) years after the
Closing Date, such DUSA Shares will be released on a pro rata basis to the
Participating Shareholders.

            (e) Notwithstanding the foregoing, upon the effective date of any
DUSA Change of Control, the Liability Escrow Amount shall be immediately
released from the Liability Escrow Account by the Liability Escrow Agent. DUSA
shall be entitled to pay cash for any pro rata DUSA Share that is less than one
whole DUSA Share and shall not issue any fractional shares as provided in
Section 2.2(e).

            (f) DUSA shall notify the Shareholder Representatives of any matter
described in Section 2.5(b)(ii) as promptly as practicable after DUSA obtains
Knowledge thereof. DUSA shall consult with the Shareholder Representatives and
shall take such Commercially Reasonable Efforts as may be appropriate,
including, without limitation, entering into litigation with respect thereto
after reasonably considering the circumstances with regard to such potential
litigation, including, but not limited to, the cost to DUSA to enter into and
maintain such litigation, the estimated time period necessary to successfully
conclude such litigation, and the amount of the Liability Escrow Amount
remaining available for indemnification purposes; provided, however, that DUSA
shall not be required to spend any amount in excess of the available Liability
Escrow Amount on any defense of its rights with respect to such Products. DUSA
may only make a claim with respect to the Liability Escrow Amount under Section
2.5(b)(ii) in the event DUSA has, in its commercially reasonable discretion
after consulting with the Shareholder Representatives, engaged litigation
counsel directly in response thereto.

      2.6 LOCK-UP. DUSA Shares to be issued as provided for in Section 2.2(b) to
any Sirius Shareholder who owns directly or beneficially five percent (5%) or
more of the issued and outstanding Sirius Shares shall be subject to a lock-up
of the DUSA Shares (the "Escrowed Shares"). The Escrowed Shares shall be held in
escrow by the Shareholders Escrow Agent in an

                                      16


account separate from the Dissenters Escrow Account with fifty percent (50%) of
such Escrowed Shares being released on the first anniversary of the Closing Date
and the balance being released on the second anniversary of the Closing Date. In
addition, each other Sirius Shareholder receiving DUSA Shares hereunder who also
receives (as determined by Sirius in advance of the Closing) the estimated 2006
revenue and loss ranges for DUSA (following the consummation of the Transaction)
shall agree to be subject to a lock-up of such DUSA Shares until the earlier of
(i) the first anniversary of the Closing Date, or (ii) the date on which such
estimated 2006 revenue and loss ranges for DUSA (following the consummation of
the Transaction) is announced to the public by DUSA or such information is
deemed by DUSA in its reasonable discretion (in which case it will so notify
such locked-up Sirius Shareholders) no longer Material to the business and
operations of DUSA and/or DUSA Sub. If either the first or second anniversary of
the Closing Date shall not fall on a Business Day, the respective Escrowed
Shares shall be released as provided for herein on the next succeeding Business
Day. Notwithstanding the foregoing, upon the effective date of any DUSA Change
of Control, the Escrowed Shares shall be released from the escrow account by the
Shareholders Escrow Agent and all of the obligations of the Sirius Shareholders
pursuant to this Section 2.6 shall immediately terminate and cease to be of
further force or effect, subject to applicable securities laws.

      2.7 REGISTRATION RIGHTS. At Closing, to the extent the Form S-4 has not
been prepared in accordance with this Agreement, the Parties shall execute a
Registration Rights Agreement, substantially in the form attached hereto as
Exhibit C (the "Registration Rights Agreement"), pursuant to which DUSA shall
provide certain registration rights with respect to the DUSA Shares under the
Securities Act and applicable state securities laws which shall provide each
Participating Shareholder with rights to have his, her or its DUSA Shares
registered promptly after Closing as further provided in the Registration Rights
Agreement.

      2.8 ASSUMPTION OF SIRIUS LIABILITIES. Effective as of the Closing, DUSA
shall assume all liabilities of Sirius as shown on Schedule 2.8 (to be updated
by Sirius prior to the Closing to include all liabilities incurred in the
ordinary course between the date hereof and the Closing Date),the outstanding
liabilities shown on the Interim Balance Sheet and all Sirius Debt Obligations,
except as otherwise specifically provided for herein; provided, however, that
DUSA shall have the right in its reasonable discretion to reject any Restricted
Payments or liabilities otherwise accruing outside of the ordinary course
between the date hereof and the Closing Date.

      2.9 SHAREHOLDERS AND EXPENSE ESCROW.

            (a) The Dissenters Escrow Amount shall be delivered to American
Stock Transfer and Trust Company, who will act as escrow agent with respect to
the Dissenters Escrow Amount (the "Shareholders Escrow Agent"), in immediately
available funds on the Closing Date for deposit into a designated account (the
"Dissenters Escrow Account"). The Dissenters Escrow Amount shall be held
pursuant to the provisions of an escrow agreement (the "Shareholders Escrow
Agreement"), substantially in the form attached hereto as Exhibit D, to be
entered into at or prior to the Closing.

            (b) The Expense Escrow Amount shall be delivered to Chicago Title
and Trust Company, who will act as escrow agent with respect to the Sirius
Shareholders (the "Expense Escrow Agent"), in immediately available funds on the
Closing Date for deposit into a

                                      17


designated account (the "Expense Escrow Account"). The Expense Escrow Amount
shall be held pursuant to the provisions of an escrow agreement (the "Expense
Escrow Agreement"), substantially in the form attached hereto as Exhibit E, to
be entered into at or prior to the Closing.

                                   ARTICLE III
                 REPRESENTATIONS AND WARRANTIES REGARDING SIRIUS

      Sirius hereby represents and warrants to DUSA as follows:

      3.1 ORGANIZATION AND GOOD STANDING.

            (a) Sirius is a corporation duly organized, validly existing, and in
good standing under the laws of the State of Illinois, with full corporate power
and authority to conduct its business as it is now being conducted and to own or
use the properties and assets that it purports to own or use. Schedule 3.1(a)
sets forth the current directors and executive officers of Sirius. Except as set
forth on Schedule 3.1(a), Sirius is duly qualified and authorized to transact
business as a foreign corporation and is in good standing under the laws of each
jurisdiction where such qualification is required or where failure to be so
qualified would not have a Material Adverse Effect on Sirius. To the extent
reasonably practicable, Sirius shall have paid in advance of Closing any fees
and penalties arising as a result of any such failure to qualify.

            (b) Sirius does not own any shares of capital stock or any interest
in, or does not control, and is not controlled by, directly or indirectly, any
other corporation, limited liability company, partnership, association, joint
venture or other business entity.

            (c) Sirius has provided to DUSA true and correct copies of the
Organizational Documents of Sirius, as currently in effect.

      3.2 AUTHORITY; NO CONFLICT; CONSENTS.

            (a) This Agreement constitutes the legal, valid, and binding
obligation of Sirius, enforceable against Sirius in accordance with its terms.
Sirius has all corporate right, power and authority to execute and deliver this
Agreement and the other documents to be executed in connection herewith and to
perform its obligations under this Agreement and the documents to be executed in
connection herewith.

            (b) Except as set forth in Schedule 3.2(b), the execution, delivery
and performance of this Agreement will not (with or without notice or lapse of
time):

                  (i) contravene, conflict with, or result in a violation of (1)
any provision of the Organizational Documents of Sirius, or (2) any resolution
of Sirius adopted by its board of directors or shareholders;

                  (ii) contravene, conflict with, or result in a violation of
any of the terms or requirements of, or give any Governmental Body the right to
revoke, withdraw, suspend, cancel, terminate, or modify, any Governmental
Authorization that is held by Sirius; or

                                      18


                  (iii) contravene, conflict with, or result in a violation or
breach of any provision of, or give any Person the right to declare a default or
exercise any remedy under, or to accelerate the maturity or performance of, or
to cancel, terminate, or modify, any contract, to which Sirius is a party or by
which Sirius may be bound.

            (c) Except as set forth in Schedule 3.2(c), Sirius is not, and will
not be, required to give any notice to or obtain any Consent from any Person in
connection with the execution, delivery or performance of this Agreement.

      3.3 CAPITALIZATION.

            (a) The total authorized capital stock of Sirius consists of
25,000,000 shares of Common Stock, of which 20,737,079 are issued and
outstanding and no shares are held in treasury. Sirius has no other authorized
classes of capital stock. The Sirius Shares have been duly authorized and are
validly issued and are fully paid and nonassessable and, except as set forth on
Schedule 3.3(a), are not subject to preemptive rights created by statute, the
Organizational Documents of Sirius or any Contract. Except as referenced in
Schedule 3.3(a), there are no Contracts for the issuance, sale or transfer of
any equity securities or other securities of Sirius. All of the issued and
outstanding Sirius Shares are held of record by the Persons with the addresses
of record and in the amounts and pro rata percentages set forth in Schedule
3.3(a).

            (b) Schedule 3.3(b) contains a list of (i) any and all equity
incentive plans that are currently in effect, (ii) the total number of Sirius
Shares authorized for issuance under each equity incentive plan, and (iii) the
total number of Sirius Shares underlying issued and outstanding grants under
each such equity incentive plan. Except for the transactions contemplated by
this Agreement and except as otherwise set forth in Schedule 3.3(b), there are
no options, warrants, calls, rights, exchangeable or convertible securities,
commitments or agreements of any character, written or oral, to which Sirius is
a party or by which it is bound obligating Sirius to (i) issue, deliver, sell,
repurchase or redeem, or cause to be issued, delivered, sold, repurchased or
redeemed, any securities, or (ii) grant, extend, accelerate the vesting of,
change the price of, otherwise amend or enter into any such option, warrant,
call, right, exchangeable or convertible securities, commitment or agreement.
All issued and outstanding options (each, an "Sirius Option," and collectively,
the "Sirius Options") to purchase equity securities have been offered, sold and
delivered by Sirius in compliance with the applicable equity incentive plan and
with applicable law, including federal and state securities laws. Schedule
3.3(b) sets forth for each outstanding Sirius Option, the name of the holder of
such Sirius Option, the domicile address of such holder, the number of shares
issuable upon the exercise of such Sirius Option, the exercise price of such
Sirius Option, the vesting schedule for such Sirius Option, including the extent
vested to date, and whether such Sirius Option is intended to qualify as an
incentive stock option as defined in Section 422 of the IRC. Schedule 3.3(b)
sets forth all outstanding Sirius Shares that constitute unvested restricted
stock or that are otherwise subject to a repurchase or redemption right,
indicating the name of the applicable shareholder, the vesting schedule
(including any acceleration provisions with respect thereto), and the repurchase
price payable by Sirius, if any.

            (c) Except for the transactions contemplated by this Agreement and
except as otherwise set forth in Schedule 3.3(c), there are no shareholder
agreements, investor rights

                                      19


agreements, registration rights agreements, voting trusts or other agreements or
understandings to which Sirius is a party or to which it is bound relating
directly or indirectly to any capital stock of Sirius.

            (d) Schedule 3.3(d) contains a list of the beneficial ownership,
including number of shares and percentage of ownership, of all stockholders and
option holders of Sirius on a fully diluted basis, assuming the vesting in full
of all shares underlying outstanding options. Schedule 3.3(d) shall also contain
a list of those holders of Sirius Options who elect to exercise their options,
respectively, with or without cash, in exchange for the right to participate in
the Transaction prior to Closing, including the number of options held and the
percentage ownership attributable to such holder, assuming such options were
exercised on a cashless basis.

      3.4 FINANCIAL STATEMENTS. Prior to the date hereof, Sirius shall have
delivered to DUSA draft financial statements, attached hereto as Schedule 3.4
(the "Draft Financial Statements"), of: (a) audited consolidated balance sheets
of Sirius as of December 31, 2004 and 2003, respectively, and the related
audited consolidated statements of income, changes in shareholders' equity, and
cash flow for each of the fiscal years then ended, together with the notes
thereto (the December 31, 2004 consolidated balance sheet together with notes is
referred to herein as the "Balance Sheet") and (b) an unaudited consolidated
balance sheet of Sirius as of the latest calendar quarter ended prior to the
date hereof (the "Interim Balance Sheet") and the related unaudited consolidated
statements of income. Such consolidated financial statements and notes fairly
present in all Material respects the financial condition and the results of
operations, changes in shareholders' equity, and cash flow of Sirius as at the
respective dates of and for the periods referred to in such consolidated
financial statements, all in accordance with GAAP, subject, in the case of
interim consolidated financial statements, to normal recurring year-end
adjustments (including, but not limited to, normal year-end current and deferred
income tax adjustments); the consolidated financial statements referred to in
this Section 3.4 reflect the consistent application of GAAP throughout the
periods involved, except as otherwise disclosed in the notes to such
consolidated financial statements or in Schedule 3.4. As soon as is practicable,
but in no event less than five (5) Business Days prior to the Closing, Sirius
shall provide DUSA with the final, audited financial statements for the three
years ended December 31, 2005, 2004 and 2003, respectively (the "Final Financial
Statements") as well as reasonable access to the management, financial
consultants and auditors of Sirius for purposes of verifying such Final
Financial Statements.

      3.5 BOOKS AND RECORDS. The books of account, minute books, stock record
books, and other records of Sirius, all of which have been provided to DUSA for
review and have been or at Closing will be delivered to DUSA, are complete and
correct in all Material respects.

      3.6 TITLE TO ASSETS; ENCUMBRANCES. Sirius owns, leases or licenses all
buildings, machinery, equipment, Products, inventory, marketing materials, other
tangible assets, Intellectual Property Rights and other intangible assets
necessary or desirable for the conduct of the business of Sirius as presently
conducted and as conducted since its incorporation, and a complete and accurate
list of all such assets are included on Schedule 3.6. All assets reflected on
Schedule 3.6 are owned, leased or licensed (as applicable) (i) free and clear of
all Encumbrances, except for The PrivateBank and Trust Company Obligations, (ii)
free from Material defects, (iii)

                                      20


in good operating condition and repair, normal wear and tear excepted, and. (iv)
suitable for the purposes for which each is presently used.

      3.7 REVOLVING CREDIT AND OTHER DEBT. Other than The PrivateBank and Trust
Company Obligations, Sirius has no other revolving line of credit, short-term or
long-term capital leases or other long-term debt.

      3.8 SUBSIDIARIES. Except as otherwise set forth on Schedule 3.8, Sirius
has no subsidiaries, whether wholly or partially owned, nor has Sirius had any
subsidiaries since its inception.

      3.9 INTELLECTUAL PROPERTY MATTERS.

            (a) Schedule 3.9(a) sets forth an accurate and complete list of all
Sirius Intellectual Property Rights, including, but not limited to, the
following:

                  (i) all patents and patent applications owned or filed by, or
on behalf of, Sirius or used in the business or operations of Sirius, including
the country of filing, owner, filing number, date of issue, expiration date and
title;

                  (ii) all registered trademarks and applications for
registration of trademarks owned or filed by, or on behalf of, or used by
Sirius, including country of filing, description of goods or services,
registration or application number and date of issue;

                  (iii) all registered copyrights and applications for
registration of copyrights owned or filed by, or on behalf of, or used by
Sirius, including country of filing, owner, filing number, date of issue and
expiration date;

                  (iv) all common law trademarks, service marks, trade names,
slogans, trade dress and the like owned by Sirius or used in the business or
operations of Sirius;

                  (v) all license agreements pursuant to which Sirius has
outstanding rights to any Intellectual Property Rights of others and all
agreements, oral or written, pursuant to which Sirius is obligated to pay
royalties to Third Parties with respect to such Intellectual Property Rights;
and

                  (vi) all license agreements, oral or written, pursuant to
which Sirius has granted to any Person any outstanding right to any Intellectual
Property Rights and all agreements, oral or written, pursuant to which Sirius is
entitled to receive royalties from Third Parties with respect to such
Intellectual Property Rights, including licenses or other rights in unpatented
formulations, manufacturing methods and other know-how and proprietary
information of Sirius.

            (b) Complete and accurate copies of all patents, trademarks,
copyrights, applications and agreements referenced in subsection (a) above have
been delivered to DUSA. Complete and accurate summaries of verbal agreements
referenced in subsection (a) above have been delivered to DUSA.

                                      21


            (c) Except as otherwise set forth on Schedule 3.9(c):

                  (i) all the Intellectual Property Rights, to the extent owned
by or licensed to Sirius, are not subject to any pending or, to Sirius's
Knowledge, threatened claim, judgment or dispute of any nature;

                  (ii) Sirius has not: (A) consented to the use by another
Person of Sirius's name, trademarks, trade names or service marks or a name that
is substantially similar thereto; or (B) entered into any license, agreement, or
granted any other permission by which Sirius has granted to any Third Party
rights with respect to any of its Intellectual Property Rights;

                  (iii) there are no conflicts with the asserted rights of
others with respect to any of the Sirius Intellectual Property Rights;

                  (iv) to Sirius's Knowledge, the conduct of Sirius's business
as currently conducted, including the manufacture and sale of Sirius's Products
and the provision of Sirius's services as such activities are currently
conducted, does not infringe, misappropriate or violate the Intellectual
Property Rights of any other Person;

                  (v) Sirius has received no invitations or offers to license
the Intellectual Property of any Third Party;

                  (vi) Sirius has received no notification from any Third Party
stating that it believes any act of Sirius infringes such Third Party's
Intellectual Rights; and

                  (vii) with respect to Sirius's trademarks, trade names and
service marks used by Sirius in connection with its Products and services (A)
all such marks are valid and enforceable and in compliance with all formal legal
requirements, (B) no such mark has been or is currently involved in any
opposition or cancellation proceeding in the United States Patent and Trademark
Office or the corresponding trademark authority of any foreign jurisdiction, (C)
there has been no prior use of any such mark by any Third Party which would
confer upon such Third Party superior rights in such mark, and (D) Sirius has
received no written notice or claim contesting Sirius's ownership of such marks
or the validity or enforceability thereof.

      3.10 RELATED PARTY TRANSACTIONS. Schedule 3.10 sets forth a description of
all transactions since Sirius's inception between Sirius and a Person who was at
the time a related party. For purposes of this Section 3.10, "related party"
means any present or former officer, director or Affiliate of Sirius, any
present or former beneficial holder of five percent (5%) or more of the Sirius
Shares, and any member of the immediate family of the foregoing.

      3.11 NO UNDISCLOSED LIABILITIES. Except as set forth in Schedule 3.11,
Sirius has no liabilities or obligations of any nature arising outside of the
ordinary course of business (whether absolute, accrued, contingent, or
otherwise), except for The PrivateBank and Trust Company Obligations and the
liabilities or obligations reflected or reserved against in the Interim Balance
Sheet.

                                      22


      3.12 TAXES.

            (a) Except as set forth in Schedule 3.12(a), Sirius has filed all
Tax Returns that it was required to file under applicable laws and regulations.
To the extent reasonably practicable, Sirius shall have paid in advance of
Closing any Taxes and fees, including interest, arising as a result of any such
failure to file and any required restatements of previous filings. All such Tax
Returns were correct and complete in all respects and were prepared in
substantial compliance with all applicable laws and regulations. All Taxes due
and owing by Sirius (whether or not shown on any Tax Return) have been paid.
Sirius is not currently the beneficiary of any extension of time within which to
file any Tax Return. No claim has ever been made by an authority in a
jurisdiction where Sirius does not file Tax Returns that Sirius is or may be
subject to taxation by that jurisdiction. There are no Liens for Taxes (other
than Taxes not yet due and payable) upon any of the assets of Sirius.

            (b) Sirius has withheld and paid all Taxes required to have been
withheld and paid in connection with any amounts paid or owing to any employee,
director, independent contractor, creditor, stockholder, or other Third Party.

            (c) Neither the IRS nor any other Governmental Body has threatened
or to Sirius' Knowledge otherwise intends to assess Sirius any additional Taxes
for any period for which Tax Returns have been filed. No foreign, federal,
state, or local tax audits or administrative or judicial Tax proceedings are
pending or being conducted with respect to Sirius. Sirius has not received from
the IRS or any other Governmental Body (including jurisdictions where Sirius has
not filed Tax Returns) any (i) notice indicating an intent to open an audit or
other review, (ii) request for information related to Tax matters, or (iii)
notice of deficiency or proposed adjustment for any amount of Tax proposed,
asserted, or assessed by any taxing authority against Sirius. Schedule 3.12(c)
lists all federal, state, local, and foreign income Tax Returns filed with
respect to Sirius for taxable periods ended on or after January 1, 2002,
indicates those Tax Returns that have been audited, and indicates those Tax
Returns that currently are the subject of audit. Sirius has delivered to DUSA
correct and complete copies of all federal, state, local and foreign income Tax
Returns, examination reports, and statements of deficiencies assessed against or
agreed to by Sirius filed or received since January 1, 2002.

            (d) Sirius has not waived any statute of limitations in respect of
Taxes or agreed to any extension of time with respect to a Tax assessment or
deficiency.

            (e) Sirius has not filed a consent under IRC Section 341(f)
concerning collapsible corporations. Sirius is not a party to any agreement,
contract, arrangement or plan that has resulted or could result, separately or
in the aggregate, in the payment of (i) any "excess parachute payment" within
the meaning of IRC Section 280G (or any corresponding provision of state, local
or foreign Tax law) and (ii) any amount that will not be fully deductible as a
result of IRC Section 162(m) (or any corresponding provision of state, local or
foreign Tax law). Sirius has not been a United States real property holding
corporation within the meaning of IRC Section 897(c)(2) during the applicable
period specified in IRC Section 897(c)(1)(A)(ii). Sirius has disclosed on its
federal income Tax Returns all positions taken therein that could give rise to a
substantial understatement of federal income Tax within the meaning of IRC
Section 6662. Sirius is not a party to or bound by any Tax allocation or sharing
agreement. Sirius (A) has not been a member of an

                                       23

 Affiliated Group filing a consolidated federal income Tax Return (other than a
group the common parent of which was Sirius) or (B) has no liability for the
Taxes of any Person (other than Sirius) under Reg. Section.1.1502-6 (or any
similar provision of state, local, or foreign law), as a transferee or
successor, by contract, or otherwise.

            (f) Except as set forth on Schedule 3.12(a) with respect to the
returns that have not been filed as of the date hereof or that will be restated,
the unpaid Taxes of Sirius (i) did not, as of the Interim Balance Sheet, exceed
the reserve for Tax liability (rather than any reserve for deferred Taxes
established to reflect timing differences between book and Tax income) set forth
on the face of the Interim Balance Sheet (rather than in any notes thereto) and
(ii) do not exceed that reserve as adjusted for the passage of time through the
Closing Date in accordance with the past custom and practice of Sirius in filing
their Tax Returns. Since the date of the Interim Balance Sheet, Sirius has not
incurred any liability for Taxes arising from extraordinary gains or losses, as
that term is used in GAAP, outside the ordinary course of business consistent
with past custom and practice.

            (g) Sirius will not be required to include any item of income in, or
exclude any item of deduction from, taxable income for any taxable period (or
portion thereof) ending after the Closing Date as a result of any:

                  (i) change in method of accounting for a taxable period ending
on or prior to the Closing Date;

                  (ii) "closing agreement" as described in IRC Section.7121 (or
any corresponding or similar provision of state, local or foreign income Tax
law) executed on or prior to the Closing Date;

                  (iii) installment sale or open transaction disposition made on
or prior to the Closing Date; or

                  (iv) prepaid amount received on or prior to the Closing Date.

            (h) Sirius has not distributed stock of another Person, or has had
its stock distributed by another Person, in a transaction that was purported or
intended to be governed in whole or in part by IRC Section.355 or IRC
Section.361.

      3.13 EMPLOYEE BENEFITS.

            (a) As used in this Section 3.13, the following terms have the
meanings set forth below:

            "ERISA Affiliate" means, with respect to Sirius, any other Person
that, together with Sirius, would be treated as a single employer under IRC
Section. 414 or Section 4001 of ERISA.

            "Multi-Employer Plan" has the meaning given in ERISA Section.
3(37)(A).

            "Other Benefit Obligations" means all obligations, arrangements,
policies, programs, contracts, agreements, or practices, whether or not legally
enforceable, which is or has

                                       24


been maintained, contributed to, or required to be contributed to, by Sirius or
any ERISA Affiliate to provide benefits or remuneration of any kind, other than
salary, to Employees, other than obligations, arrangements, and practices that
are Plans. Other Benefit Obligations include consulting agreements, sabbatical
policies, severance payment policies which are not Plans, fringe benefits within
the meaning of IRC Section 132, performance awards, stock or stock related
awards.

            "Pension Plan" has the meaning given in ERISA Section 3(2)(A) other
than a Multi-Employer Plan.

            "Plan" has the meaning given in ERISA Section 3(3) whether written
or unwritten or otherwise, funded or unfunded, which is or has been maintained,
contributed to, or required to be contributed to, by Sirius or any ERISA
Affiliate for the benefit of any of their respective Employees.

            "Qualified Plan" means any Pension Plan that meets or purports to
meet the requirements of IRC Section 401(a).

            "Title IV Plans" means all Pension Plans that are subject to Title
IV of ERISA, 29 U.S.C. Section 1301 et seq., other than Multi-Employer Plans.

            (b) Schedule 3.13(b) contains a complete and accurate list of all
Plans and Other Benefit Obligations. Neither Sirius nor any ERISA Affiliate has
any plan or commitment to establish any new Plan or Other Benefit Obligation, to
modify any Plan or Other Benefit Obligation (except to the extent required by
law or to conform any such Plan or Other Benefit Obligation to the requirements
of any applicable law, in each case as previously disclosed to DUSA in writing,
or as required by this Agreement), or to adopt or enter into any Plan. Sirius
has delivered or made available to DUSA a true and correct copy of the governing
plan document (or a description, in the case of any unwritten Plan) for each
Plan (including all amendments thereto), its summary plan description and the
three (3) most recent Form 5500s with all schedules and attachments (if
applicable), if the Plan is funded, the most recent annual and periodic
accounting of Plan assets, all correspondence to or from any governmental agency
relating to any Plan, the three (3) most recent plan years discrimination tests
for each Plan, and any trust agreement, insurance contract or other document
under which Plan assets are held and invested or benefits provided. Sirius has
further delivered or made available to DUSA a written description of each Other
Benefit Obligation, and a copy of any document furnished to participants which
summarizes or describes each Other Benefit Obligation. Sirius and its ERISA
Affiliates have performed in all respects all obligations required to be
performed by them under, are not in default or violation of, and have no
knowledge of any default or violation by any other party, to each Plan and Other
Benefit Obligation, and each Plan and other Benefit Obligation complies in form
and operation in all respects with the applicable requirements of ERISA, the IRC
and other applicable Legal Requirements. Any Plan intended to be qualified under
Section 401(a) of the IRC and each trust intended to qualify under Section
501(a) of the IRC incorporates or has been amended to incorporate all provisions
required to comply with the Tax Reform Act of 1986 and subsequent legislation
with respect to which the period for adopting complying amendments has expired.
Neither Sirius nor any ERISA Affiliate has at any time through the date hereof
sponsored, maintained, contributed to or been obligated to contribute to

                                       25


any Title IV Plan or Multi-Employer Plan, or any "funded welfare plan" within
the meaning of Section 419 of the IRC. Neither Sirius or, to the Knowledge of
Sirius, any fiduciary with respect to any Plan has engaged in any nonexempt
prohibited transaction under ERISA Section 406 or Section 407, or incurred any
liability for breach of fiduciary duty or any other failure to comply with any
Legal Requirement in connection with the administration or investment of assets
of any Plan. No action, suit, proceeding, hearing, audit or investigation with
respect to the administration or investment of assets of any Plan (other than
routine claims for benefits) is pending or, to Sirius's Knowledge, threatened.
Except as otherwise disclosed on Schedule 3.13(b), Sirius does not provide
health or other welfare benefits for any Employee and is not obligated to
provide health or welfare benefits to any active Employee, following such
individual's retirement or other termination of service (other than "COBRA"
continuation coverage required under ERISA Sections 601 et seq. and IRC Section
4980B or similar state law). Neither Sirius nor its ERISA Affiliate has incurred
any liability for excise, income or other taxes or penalties with respect to a
Plan (other than employment and/or tax withholding that has been properly paid
or paid over to the applicable government agency), and no event has occurred and
no circumstances exists which could give rise to such liability. All persons
classified by Sirius or its ERISA Affiliates as independent contractors satisfy
and have at all times satisfied the requirements of applicable law to be so
classified. Sirius and its ERISA Affiliates have fully and accurately reported
their compensation on IRS Form 1099 when required to do so, and Sirius and its
ERISA Affiliates have no obligations to provide benefits with respect to such
persons under the Plans or otherwise. Neither Sirius nor its ERISA Affiliates
employ any "leased employees" as defined in Section 414(n) of the IRC. Except as
otherwise disclosed on Schedule 3.13(b), Sirius has not declared or paid any
bonus compensation in contemplation of the transaction contemplated by this
Agreement. No payments under any Plan or Other Benefit Obligation, as any such
Plan, program or arrangement may be amended prior to December 31, 2006, will
result in adverse tax treatment to Sirius or its successor, or any of its or
their employees, under IRC Section 409A.

            (c) Effect of Transaction.

                  (i) Except as disclosed on Schedule 3.13(c), the execution of
this Agreement and the consummation of the transactions contemplated hereby will
not (either alone or upon the occurrence of any additional or subsequent events)
constitute an event under any Plan, Other Benefit Obligation, trust or loan that
will or may result in any payment (whether of severance pay or otherwise),
acceleration, forgiveness of indebtedness, vesting, distribution, increase in
benefits or obligation to fund benefits with respect to any present or former
employee, director or consultant of Sirius or any ERISA Affiliate.

                  (ii) No payment or benefit which will or may be made by Sirius
or its ERISA Affiliates with respect to any Employee or any other "disqualified
individual" (as defined in IRC Section 280G and the regulations thereunder) will
be characterized as an "excess parachute payment," within the meaning of Section
280G of the IRC.

            (d) Sirius is in compliance in all respects with all applicable
foreign, federal, state and local laws, rules and regulations respecting
employment, employment practices, terms and conditions of employment and wages
and hours, in each case, with respect to Employees. There are no pending, or, to
Sirius's Knowledge, threatened or reasonably anticipated claims or actions
against Sirius under any worker's compensation policy or long-term disability
policy.

                                       26


There is no direct or indirect liability with respect to any misclassification
of any Person as an independent contractor rather than as an employee, or with
respect to any employee leased from another employer.

            (e) There are no actions, suits, claims, labor disputes or
grievances pending, or, to Sirius's Knowledge, threatened or reasonably
anticipated relating to any labor, safety or discrimination matters involving
any Employee, which, if adversely determined, would, individually or in the
aggregate, result in any Material liability to Sirius. Sirius has not incurred
any liability or obligation under the Worker Adjustment and Retraining
Notification Act or any similar state or local law which remains unsatisfied.

            (f) Since its incorporation, Sirius has not been a general partner
of any general partnership.

      3.14 COMPLIANCE WITH LEGAL REQUIREMENTS; GOVERNMENTAL AUTHORIZATIONS.

            (a) Except as set forth in Schedule 3.14(a) or Schedule 3.19:

                  (i) Other than with respect to matters covered by Section
3.14(c)(i), Sirius is in compliance in all Material respects with each Legal
Requirement that is or was applicable to it or to the conduct or operation of
its business or the ownership or use of any of its assets, including, but not
limited to, the Products;

                  (ii) to Sirius's Knowledge, no event has occurred or
circumstance exists that (with or without notice or lapse of time) may
constitute or result in a Material violation by Sirius of, or a Material failure
on the part of Sirius to comply with, any Legal Requirement; and

                  (iii) Sirius has not received any written notice or other
communication from any Governmental Body regarding: (1) any actual or alleged
violation of, or failure to comply with, any Legal Requirement, or (2) any
actual or alleged, obligation on the part of Sirius to undertake, or to bear all
or any portion of the cost of, any remedial action of any nature.

            (b) Schedule 3.14(b) and Schedule 3.19, taken together, contain a
list that is complete and accurate in all Material respects of each Governmental
Authorization that is held by Sirius or that otherwise relates to the business
of, or to any of the assets owned or used by, Sirius, including, but not limited
to, the Products. Each Governmental Authorization listed in Schedule 3.14(b) or
Schedule 3.19 is valid and in full force and effect. Except as set forth in
Schedule 3.14(b) or Schedule 3.19:

                  (i) Sirius is in compliance in all Material respects with all
of the terms and requirements of each Governmental Authorization identified or
required to be identified in Schedule 3.14(b) or Schedule 3.19;

                  (ii) No event has occurred or to Sirius's Knowledge no
circumstance exists that may (with or without notice or lapse of time): (A)
constitute or result in a violation of or a Material failure to comply with any
term or requirement of any Governmental Authorization identified or required to
be identified in Schedule 3.14(b) or Schedule 3.19, or (B) result in the

                                       27


revocation, withdrawal, suspension, cancellation, or termination of, any
Governmental Authorization identified or required to be identified in Schedule
3.14(b) or Schedule 3.19;

                  (iii) Sirius has not received any written notice or other
communication from any Governmental Body regarding: (1) any actual or alleged
violation of or failure to comply with any term or requirement of any
Governmental Authorization, or (2) any actual or threatened revocation,
withdrawal, suspension, cancellation, termination of any Governmental
Authorization; and

                  (iv) all applications required to have been filed for the
renewal of any Material Governmental Authorizations identified or required to be
identified in Schedule 3.14(b) or Schedule 3.19 have been duly filed on a timely
basis with the appropriate Governmental Bodies, and all other filings required
to have been made with respect to such Governmental Authorizations have been
duly made on a timely basis with the appropriate Governmental Bodies.

            (c) Except as set forth in Schedule 3.14(c):

                  (i) as to each prescription and non-prescription Product of
Sirius for which a new or abbreviated new drug application has been or is
required to be approved by the FDA, which Product is described in Schedule
3.14(c), Sirius and all Persons undertaking activities covered by such an
application, or which would be covered by such an application if approved, are
in compliance in all Material respects with applicable provisions of the FDCA
and all terms and conditions of any approved application, and where any Product
is marketed without an approved application, it is marketed in such a manner
that does not give rise to an FDA enforcement action pursuant to current FDA
enforcement policies for products marketed without an approved application.

                  (ii) Sirius has not filed any biological product license
application pursuant to Section 351 of the Public Health Service Act, 42 U.S.C.
262, for any Product;

                  (iii) Sirius is in compliance in all Material respects with
all applicable registration and listing requirements set forth in 21 U.S.C. 360
and 21 C.F.R. Part 207;

                  (iv) Sirius does not conduct any manufacturing operations. All
manufacturing operations relating to the business of Sirius are conducted by
third parties (each a "Third Party Manufacturer"). To Sirius's Knowledge, all
operations conducted on Sirius's behalf by Third Party Manufacturers have been
and are being conducted in compliance with the good manufacturing practice
regulations set forth in 21 C.F.R. Parts 210 and 211. Sirius has not received
any notice that, and has no Knowledge that, any manufacturing operations
conducted on behalf of Sirius by Third Party Manufacturers have not been or are
not being conducted in compliance with the good manufacturing practice
regulations set forth in 21 C.F.R. Parts 210 and 211;

                  (v) Sirius has not nor, to Sirius's Knowledge, have any of its
officers, employees or agents acting on its behalf, made an untrue or fraudulent
statement to the FDA, failed to disclose a fact required to be disclosed to the
FDA, or committed an act, made a statement or failed to make a statement that
could reasonably be expected to provide a basis for

                                       28


the FDA to cause Sirius or DUSA subsequent to Closing, to withdraw any Product
from the marketplace or invoke its policy respecting "Fraud, Untrue Statements
of Material Facts, Bribery, and Illegal Gratuities" as set forth in 56 Fed. Reg.
46191 (September 10, 1991);

                  (vi) Sirius has delivered to DUSA copies of any and all
reports in its possession of inspectional observations, establishment inspection
reports, untitled letters, warning letters and any other documents received by
Sirius or, to Sirius's Knowledge any other Person with respect to the Products,
from the FDA that indicate or suggest lack of compliance, in any Material
respect, with the FDA regulatory requirements by any one of the above or any
Third Party Manufacturer;

                  (vii) Sirius has not received, nor to Sirius's Knowledge has
any Third Party Manufacturer received, any written notice that the FDA has
commenced, or threatened to initiate any action to withdraw its approval or
request the recall of any Product, or commenced or threatened to initiate any
action to enjoin production at any Sirius Facility or any facility at which a
Third Party Manufacturer conducts manufacturing operations on behalf of Sirius;

                  (viii) as to each article of drug or consumer Product
manufactured and/or distributed by Sirius, which Products are described in
Schedule 3.14(c), to Sirius's Knowledge such article is not adulterated or
misbranded within the meaning of the FDCA, 21 U.S.C. 301 et seq. in any manner
that will give rise to any regulatory enforcement action pursuant to current FDA
enforcement policies;

                  (ix) as to each Product referred to in Schedule 3.14(c),
Sirius has included or caused to be included in the application for such
Product, where required, the certification described in 21 U.S.C. 335a(k)(l) and
the list described in 21 U.S.C. 335a(k)(2), and such certification and such list
was in each case true and accurate when made and remained true and accurate
thereafter;

                  (x) neither Sirius nor its officers, directors, or employees,
has been convicted of any crime or engaged in any conduct for which debarment is
mandated by 21 U.S.C. 335a(a) or authorized by 21 U.S.C. 335a(b); and

                  (xi) as to each new or abbreviated new drug application
submitted to but not approved by the FDA, and not withdrawn by Sirius or any
applicant acting on its behalf as of the date of this Agreement, Sirius has
complied in all Material respects with the applicable requirements of the FDCA,
including without limitation, 21 C.F.R. Parts 312 and 314 and have provided all
additional information and taken all additional action requested by the FDA in
connection with the application.

      3.15 LEGAL PROCEEDINGS. Except as set forth in Schedule 3.15, no
Proceeding:

            (a) has been commenced by or against Sirius or any of the assets
owned or used by Sirius; or

            (b) is, to Sirius's Knowledge, threatened or pending by or against
Sirius or any of the Material assets, including, but not limited to, the
Products, owned or used by Sirius; or

                                       29


            (c) challenges, or may have the effect of preventing, delaying,
making illegal, or otherwise interfering with, the Transaction.

      3.16 ABSENCE OF CERTAIN CHANGES AND EVENTS. Except as set forth in
Schedule 3.16, since the most recent fiscal year end, there has not been any
Material Adverse Change involving the business or the assets of Sirius. Without
limiting the generality of the foregoing, since that date there has not been a
Material Adverse Change involving any:

            (a) change in Sirius's authorized or issued capital stock (other
than pursuant to any exercise of stock options); grant of any stock option or
right to purchase shares of capital stock of Sirius other than Sirius Options
disclosed to DUSA; issuance of any security convertible into such capital stock;
grant of any registration rights; purchase, redemption, retirement, or other
acquisition by Sirius of any shares of any such capital stock;

            (b) split, combination, or reclassification any shares of its
capital stock; or declaration or payment of any dividend or other distribution
(whether in cash, stock or property or any combination thereof) in respect of
its capital stock;

            (c) amendment to the Organizational Documents of Sirius;

            (d) increase in the salaries, bonuses or other compensation to any
shareholder, director, officer, or employee of Sirius outside the ordinary
course of business or entry into any employment, severance, or similar Contract
with any director, officer, or employee of Sirius outside the ordinary course of
business;

            (e) grant of any severance or termination pay (cash, equity or
otherwise) to any officer or employee except pursuant to written agreements
outstanding, or policies existing, on the date hereof and as previously
disclosed in writing to DUSA, or adopt any new severance plan, or amend or
modify or alter in any respect any severance plan, agreement or arrangement
existing on the date hereof (other than as may be required or necessary to
comply with or ensure non-applicability of Section 409A of the IRC), or grant
any equity-based compensation;

            (f) adoption or amendment of any employee benefit plan, policy or
arrangement, or employee stock purchase or stock option plan (other than as may
be required or necessary to comply with or ensure non-applicability of Section
409A of the IRC), or execution of any employment contract outside the ordinary
course of business or collective bargaining agreement, payment of any special
bonus or special remuneration (cash, equity or otherwise) to any director or
employee, or increase in the salaries or wage rates or fringe benefits (cash,
equity or otherwise) (including rights to severance or indemnification) of its
directors, officers, employees or consultants outside the ordinary course of
business;

            (g) waiver of any stock repurchase rights, acceleration, amendment
or change in or to the period of exercisability of options, restricted stock or
any other equity or similar incentive awards (including without limitation any
long term incentive awards), or repricing of options granted under any employee,
consultant, director or other stock plans (other than as may be required or
necessary to comply with or ensure non-applicability of Section 409A of the
IRC);

                                       30


            (h) damage to or destruction or loss of any asset or property of
Sirius, whether or not covered by insurance;

            (i) sale, other than in the ordinary course of business, lease, or
other disposition of any asset or property of Sirius or mortgage, pledge, or
imposition of any lien or other encumbrance on any asset or property of Sirius;

            (j) change in the accounting methods used by Sirius; or

            (k) agreement, whether oral or written, by Sirius to do any of the
foregoing.

      3.17 MATERIAL CONTRACTS; NO DEFAULTS.

            (a) Schedule 3.17(a) contains a complete and accurate list, and
Sirius has delivered or by Closing will deliver to DUSA true and complete
copies, of the following Contracts (the "Material Contracts"):

                  (i) each employment, consulting, services, severance,
confidentiality, and non-compete agreement, contract or commitment;

                  (ii) each Contract that involves performance of services or
delivery of goods or materials by or to Sirius in an amount or value in excess
of $25,000 during any twelve-month period prior to and/or following the date
hereof;

                  (iii) each lease, rental or occupancy agreement, license,
installment and conditional sale agreement, and other Contract affecting the
ownership of, leasing of, title to, use of, or any leasehold or other interest
in, any real or personal property (except personal property leases and
installment and/or conditional sales agreements having a value per item or
aggregate payments of less than $25,000);

                  (iv) each joint venture, partnership, and other similar
Contract (however named) involving a sharing of profits, losses, costs, or
liabilities by Sirius with any other Person;

                  (v) each Contract containing covenants that restrict the
business activity of Sirius or limit the freedom of Sirius to engage in any line
of business or to compete with any Person;

                  (vi) each power of attorney that is currently effective and
outstanding;

                  (vii) each Contract for capital expenditures in excess of
$25,000;

                  (viii) each agreement between Sirius and any of its
Third-Party Manufacturers;

                  (ix) each agreement between Sirius and any of its
distributors; and

                                       31


                  (x) each amendment, supplement, and modification (whether oral
or written) in respect of any of the foregoing.

            (b) Except as set forth in Schedule 3.17(b):

                  (i) no Principal Shareholder has or may acquire any rights
under, and no Principal Shareholder has or may become subject to any obligation
or liability under, any Contract that relates in any Material respect to the
business of, or any of the assets owned or used by, Sirius; and

                  (ii) to Sirius's Knowledge, no officer, director, agent,
employee, consultant, or contractor of Sirius is bound by any Contract that
purports to limit the ability of such officer, director, agent, employee,
consultant, or contractor to: (1) engage in or continue any conduct, activity,
or practice relating to the business of Sirius or DUSA; or (2) assign to Sirius
or to any other Person any of Sirius' Intellectual Property Rights.

            (c) Except as set forth in Schedule 3.17(c), each Material Contract
identified or required to be identified in Schedule 3.17(a) is in full force and
effect and is valid and enforceable in accordance with its terms.

            (d) Except as set forth in Schedule 3.17(d):

                  (i) Sirius is in compliance in all Material respects with all
applicable terms and requirements of each Material Contract;

                  (ii) to Sirius's Knowledge, each other Person that has any
obligation or liability under any Material Contract is in compliance in all
Material respects with all applicable terms and requirements of such Material
Contract;

                  (iii) to Sirius's Knowledge, no event has occurred or
circumstance exists that (with or without notice or lapse of time) may
contravene, conflict with, or result in a violation or breach of, or give Sirius
or other Person the right to declare a default or exercise any remedy under, or
to accelerate the maturity or performance of, or to cancel, terminate, or
modify, any Material Contract; and

                  (iv) Sirius has not given to or received from any other
Person, at any time, any notice or other communication (whether oral or written)
regarding any actual, alleged, possible, or potential violation or breach of, or
default under, any Material Contract.

      3.18 INSURANCE.

            (a) Sirius has delivered to DUSA:

                  (i) true and complete copies of all policies of insurance to
which Sirius is a party or under which Sirius, or any officer or director of
Sirius, is or has been covered at any time within the two (2) years preceding
the date of this Agreement;

                                       32


                  (ii) true and complete copies of all pending applications for
policies of insurance; and

                  (iii) true and complete copies of all documentation pertaining
to any claim(s) made by Sirius pursuant to all policies of insurance with
respect to the two (2) year time period preceding the date of this Agreement.

            (b) Schedule 3.18(b) describes:

                  (i) any self-insurance arrangement by or affecting Sirius,
including any reserves established thereunder;

                  (ii) any contract or arrangement, other than a policy of
insurance, for the transfer or sharing of any risk by Sirius; and

                  (iii) all obligations of Sirius to third parties with respect
to insurance (including such obligations under leases and service agreements)
and identifies the policy under which such coverage is provided.

            (c) Except as set forth on Schedule 3.18(c):

                  (i) Sirius has not received: (1) any refusal of coverage or
any notice that a defense will be afforded with reservation of rights, or (2)
any notice of cancellation or any other indication that any insurance policy is
no longer in full force or effect or will not be renewed or that the issuer of
any policy is not willing or able to perform its obligations thereunder;

                  (ii) Sirius has paid all premiums due (or has accrued for such
on its financial statements), and has otherwise performed all of its
obligations, under each policy to which Sirius is a party or that provides
coverage to Sirius or any director thereof;

                  (iii) Sirius has notified its insurance carriers of any and
all claims or potential claims known to Sirius with regard to any event or
omission which could give rise to coverage under any insurance policy now in
effect.

            (d) Sirius shall purchase at Sirius's expense an extended reporting
endorsement, or a "tail," for each claims-made insurance policy now in effect
and identified on Schedule 3.18(d) to provide continued coverage for any event
or omission which may have occurred during the policy period which could give
rise to coverage under such policy. Sirius shall name DUSA as an additional
insured with respect to each such extended reporting endorsement.

            (e) Sirius has no Knowledge of or has not received any notice,
correspondence or other documentation indicating that any formulary has dropped
coverage for any Product or that any insurance provider will no longer provide
reimbursement in connection with the purchase of any Product currently being
reimbursed.

                                       33


      3.19 ENVIRONMENTAL MATTERS.

            (a) As used in this Section 3.19, the following terms have the
meanings set forth below:

            "Environmental Claim" means any written complaint, notice, claim,
demand, action, suit or judicial, administrative or arbitral proceeding by any
Person to Sirius asserting liability or potential liability (including without
limitation, liability or potential liability for investigatory costs, cleanup
costs, governmental response costs, natural resource damages, property damage,
personal injury, fines or penalties) arising out of, relating to, based on or
resulting from: (i) the presence, discharge, emission, release or threatened
release of any Hazardous Materials at any Sirius Facilities, (ii) circumstances
forming the basis of any violation or alleged violation of any Environmental
Laws or Environmental Permits, or (iii) otherwise relating to obligations or
liabilities under any Environmental Law.

            "Environmental Laws" means all applicable foreign, federal, state
and local statutes, rules, regulations, ordinances, orders and decrees relating
in any manner to pollution or protection of the environment, to the extent and
in the form that such exist at the date hereof.

            "Environmental Permits" means all permits, licenses, registrations,
exemptions and other governmental authorizations required under Environmental
Laws for Sirius to conduct its operations as presently conducted.

            "Hazardous Materials" means all hazardous or toxic substances,
wastes, materials or chemicals, petroleum and petroleum products, asbestos and
asbestos-containing materials, polychlorinated byphenyls, urea formaldehyde,
pollutants, contaminants and all other materials and substances, including but
not limited to radiologically contaminated materials and infectious materials
defined or regulated pursuant to any Environmental Laws or that could result in
liability under any Environmental Laws.

            "Off-Site Facilities" shall mean any facilities used for the
treatment, storage or disposal of any Hazardous Materials associated with or
resulting from either Sirius business or generated at any Sirius Facilities.

            "Release" shall mean any intentional or unintentional release,
discharge, spill, leaking, leaching, pumping, pouring, emitting, emptying,
injection, disposal or dumping.

            (b) Set forth in attached Schedule 3.19(b) are all of the Sirius
Facilities and Off-Site Facilities known to Sirius. Except as set forth in
Schedule 3.19(b):

                  (i) Sirius is and at all times has been in Material compliance
with all applicable Environmental Laws, if any, and, to Sirius's Knowledge,
there is no condition that is reasonably likely to prevent or Materially
interfere with compliance by Sirius with Environmental Laws;

                  (ii) Sirius possesses all Environmental Permits, if any,
applicable to Sirius. Each Environmental Permit issued to Sirius is in full
force and effect. Sirius is in Material compliance with all requirements, terms
and provisions of the Environmental Permits

                                       34


issued to it and has filed on a timely basis (and updated as required) all
reports, notices, applications or other documents required to be filed pursuant
to the Environmental Permits. Sirius has submitted to DUSA true and complete
copies of all of the Environmental Permits issued to or held by Sirius which by
their terms or by operation of law will expire or otherwise become ineffective
on or before the Closing Date. Sirius shall take all necessary actions to have
such Environmental Permits renewed or reissued to them prior to the Closing
Date. As for those Environmental Permits which by their terms or by operation of
law will not expire or otherwise become ineffective on or before the Closing
Date, no modification, revocation, reissuance, alteration, transfer or amendment
of such Environmental Permit, or any review by, or approval of, any Third Party
of any Environmental Permit is required in connection with the execution or
delivery of this Agreement or the consummation by Sirius of the transactions
contemplated hereby or the operation of the business of Sirius on the date of
the Closing;

                  (iii) Sirius has neither received any Environmental Claim,
nor, to the Knowledge of Sirius, has any Environmental Claim been threatened
against Sirius;

                  (iv) Sirius has not entered into, agreed to or is subject to
any outstanding judgment, decree, order or consent arrangement with any
Governmental Body under any Environmental Laws, including without limitation
those relating to compliance with any Environmental Laws or to the
investigation, response, removal or remediation of Hazardous Materials;

                  (v) Sirius is not and has never been a small or large quantity
generator of Hazardous Materials under any Environmental Law.

                  (vi) To Sirius's Knowledge, no Hazardous Materials have been
Released on any Sirius Facility, requiring government notification,
investigation, response, removal or remedial activity under any Environmental
Law or otherwise in violation of any Environmental Law.

                  (vii) No Federal, state, local, or municipal governmental
agency or authority has obtained or asserted an encumbrance or lien upon any
Sirius Facility as a result of any Release, use or cleanup of any Hazardous
Material for which either Sirius is legally responsible, nor has any such
Release, use or remediation occurred which could result in the assertion or
creation of such a lien or encumbrance.

                  (viii) (A) There is not now nor has there ever been located at
any Sirius Facility any areas or vessels used or intended for the treatment,
storage or disposal of Hazardous Materials, including, but not limited to, drum
storage areas, surface impoundments, incinerators, landfills, tanks, lagoons,
ponds, waste piles or deep well injunction systems.

                        (B) Sirius has not transported any Hazardous Materials
for storage, treatment or disposal, or arranged for the transportation, storage,
treatment or disposal of any Hazardous Materials by contract, agreement or
otherwise, at or to any location including, without limitation, any Off-Site
Facilities.

                  (ix) Sirius has delivered to DUSA (or before Closing will
deliver) all reports, records, tests, evaluations, governmental agency and Third
Party correspondence, and

                                       35


other documents in Sirius's possession and relating to Sirius's use, storage,
treatment, transport and disposal of Hazardous Materials or the presence of any
Hazardous Material at any Sirius Facility.

      3.20 BROKERS OR FINDERS. Sirius has incurred no obligation or liability,
contingent or otherwise, for brokerage or finders' fees or agents' commissions
or other similar payment in connection with this Agreement.

      3.21 ACCOUNTS RECEIVABLE. All Accounts Receivable of Sirius listed on
Schedule 3.21, are reflected properly on its books and records, are valid
receivables and are collectible in accordance with their terms at their recorded
amounts, subject only to the reserve for bad debts set forth in the Interim
Balance Sheet (rather than in any notes thereto) as adjusted for the passage of
time through the Closing Date in accordance with the past custom and practice of
Sirius.

      3.22 INVENTORY. All Inventory, taken as a whole, is useable and saleable,
except for obsolete items of below-standard quality, all of which have been or
will be prior to Closing written off or written down to estimated net realizable
value (or reserves have been established for such Inventory) in the books and
records of Sirius. The Inventory is free from Material defects in materials
and/or workmanship. The Inventory is not excessive in kind or amount, or slow
moving, in light of Sirius's business. All Inventory reflected in the financial
statements is valued at the lower of cost or market with cost determined by the
first in first out accounting method. Since the most recent fiscal year end,
there has not been a Material increase in the level of Inventory outside the
ordinary course of business.

      3.23 WARRANTIES. Except as set forth on Schedule 3.23, Sirius has not made
any oral or written warranties to its customers with respect to the quality or
absence of defects of its Products which are in force as of the date hereof or
with respect to which claims are outstanding as of the date hereof. There are no
Material claims pending, anticipated or, to Sirius's Knowledge, threatened
against Sirius with respect to the quality of, or existence of defects in, such
Products and, to the Knowledge of Sirius, there is no legitimate basis for any
such claim. Sirius has made available to DUSA information in its possession
which is accurate in all Material respects, regarding all Material returns of
defective or expired Products (other than Products damaged in transit) during
the period beginning February 9, 2000 and ending on the date hereof, and all
credits and allowances for such defective or expired Products given or promised
to customers during said period, and such information in each case accurately
describes the cause which resulted in the return, allowance or credit. Sirius
has not paid or been required to pay any direct, incidental or consequential
damages to any Person in connection with any of such Products.

      3.24 PRODUCT LIABILITY. Except as set forth in Schedule 3.24, Sirius has
filed with its insurance carrier all notices of claims or potential claims with
respect to any Product manufactured, licensed, produced, distributed or sold by
or on behalf of Sirius. Except as provided in Schedule 3.24, Sirius has not
received any notice or claim involving any Product manufactured, licensed,
produced, distributed or sold by or on behalf of Sirius resulting from an
alleged defect in design, manufacture, materials or workmanship, or any alleged
failure to warn, or from any breach of implied warranties or representations;
nor, to the Knowledge of Sirius, is

                                       36


there any basis for any such notice or claim. Products sold by Sirius since
February 9, 2000 (i) have been sold and marketed in compliance in all Material
respects with all Applicable Laws and (ii) have been fit for the purposes for
which they were intended to be used and conformed in all Material respects to
any promises or affirmations of fact made by Sirius, or with the authorization
or consent of Sirius, (x) on the containers or labels therefor or (y) in
connection with their sale. Sirius has not received any statement, citation or
decision by any Governmental Body that any Product is defective or fails to meet
any standards promulgated by such Governmental Body. There have been no recalls
ordered by any Governmental Body with respect to any Product. To Sirius's
Knowledge, there is no (i) fact relating to any Product that may impose upon
Sirius a duty to recall the same or to warn customers of a defect therein, or
(ii) latent or overt design, manufacturing or other defect in any Product.
Schedule 3.24 sets forth all of the express product warranty, repair and
replacement policies and obligations, of Sirius relating to the Products
manufactured or sold since February 9, 2000. To Sirius's Knowledge, there is no
(i) fact relating to any Product that may impose upon Sirius any duty to recall
such Product or duty to warn customers of any defect in such Product, or (ii)
latent or overt defect in any Product sold by Sirius. All Products sold by
Sirius contained adequate warnings presented in accordance with then Applicable
Laws.

      3.25 CUSTOMERS AND SUPPLIERS. All Material customers and suppliers of
Sirius are set forth on Schedule 3.25. Except as set forth on Schedule 3.25,
Sirius has not received any indication from any Material supplier and has no
knowledge or reason to believe that any Material supplier will stop, or
Materially decrease the rate of supplying materials, products or services to
Sirius. Sirius has not received any indication from any Material customer to the
effect that, and to the Knowledge of Sirius that, there is no reason to believe
that such customer will stop, or Materially decrease the rate of, buying
materials, products or services from Sirius.

      3.26 PRODUCT TREATMENTS; PRODUCT RETURNS. Except as set forth on Schedule
3.26, Sirius has not offered any promotional allowance to any customer nor has
Sirius or its agents provided any customer-specific packaging or value added
services (other than displays) with respect to the Products of Sirius outside
the ordinary course of business. Sirius has processed all Product returns or
requests for returns of Product of which Sirius is aware. No customer of Sirius
has refused to accept further shipments of Products of Sirius. Sirius does not
have outstanding any authorization to any of its customers to destroy any
Product in lieu of returning such Product to it.

      3.27 COMPLETE COPIES OF MATERIALS. Sirius has delivered true and complete
copies of each document (or detailed summaries of same) in its possession or
under its control that has been requested by DUSA or its counsel, including all
Contracts and other documents listed on the schedules attached to this
Agreement.

      3.28 DISCLOSURES. Sirius has received all information and materials
requested by the board of directors of Sirius relating to the business, finances
and operations of DUSA and materials relating to the offer and sale of the DUSA
Shares.

      3.29 PRINCIPAL SHAREHOLDERS. As of the date of this Agreement, the
Principal Shareholders hold greater than eighty-eight percent (88%) of the
issued and outstanding Sirius Shares.

                                       37


      3.30 REPRESENTATIONS COMPLETE. None of the representations or warranties
made by Sirius (as modified by the schedules attached to this Agreement) in this
Agreement, and none of the statements made in any exhibit, schedule or
certificate furnished by Sirius pursuant to this Agreement contains any untrue
statement of a Material fact or omits to state any Material fact necessary in
order to make the statements contained herein or therein, in the light of the
circumstances under which made, not misleading.

                                   ARTICLE IV
            REPRESENTATIONS AND WARRANTIES OF PRINCIPAL SHAREHOLDERS

      The Principal Shareholders represent and warrant to DUSA as follows:

      4.1 LEGAL CAPACITY, ORGANIZATION AND GOOD STANDING. Principal Shareholder
that is a natural Person has the legal capacity and all requisite power and
authority to enter into this Agreement and to comply with the provisions hereof.
Each Principal Shareholder that is not a natural Person, including any
corporation, limited partnership, limited liability company, trust or other
entity, is duly organized, validly existing and in good standing under the laws
of the jurisdiction of such entity's incorporation or formation and has all
requisite power and authority to enter into this Agreement and to comply with
the provisions hereof.

      4.2 AUTHORITY; NO CONFLICT.

            (a) This Agreement constitutes the legal, valid, and binding
obligation of such Principal Shareholder, enforceable against such Principal
Shareholder in accordance with its terms. Each Principal Shareholder has the
absolute and unrestricted right, power, authority, and capacity to execute and
deliver this Agreement and the other documents to be executed in connection
herewith and to perform its obligations under this Agreement and the documents
to be executed in connection herewith.

            (b) Except as set forth in Schedule 4.2(b), neither the execution
and delivery of this Agreement by any Principal Shareholder nor the consummation
or performance of the Transaction by a Principal Shareholder will give any
Person the right to prevent, delay, or otherwise Materially interfere with any
of the transactions contemplated by this Agreement pursuant to:

                  (i) any provision of any Principal Shareholder's
Organizational Documents, if applicable;

                  (ii) any resolution or consent adopted by the board of
directors or shareholders of any Principal Shareholder, if applicable;

                  (iii) any Legal Requirement to which a Principal Shareholder
may be subject; or

                  (iv) any Material Contract to which a Principal Shareholder is
a party or by which a Principal Shareholder may be bound.

                                       38


            (c) Except as set forth in Schedule 4.2(c), each Principal
Shareholder is not, and will not be, required to give any notice to or obtain
any Consent from any Person in connection with the execution, delivery or
performance of this Agreement.

      4.3 OWNERSHIP OF SHARES. Each Principal Shareholder is and will be on the
Closing Date the record and beneficial owner and holder of the Sirius Shares set
forth opposite his/her/its name in Schedule 3.3(a) as shall be confirmed as of
the Closing Date, and amended as required to accurately reflect any and all
exercises of Sirius Options between the date hereof and the Closing Date.

      4.4 NO PUBLIC SALE OR DISTRIBUTION. Each Principal Shareholder is
acquiring the DUSA Shares in the ordinary course of business for its own account
and not with a view towards, or for resale in connection with, the public sale
or distribution thereof, except pursuant to sales registered or exempted under
the Securities Act, and such Principal Shareholder does not have a present
arrangement to effect any distribution of the DUSA Shares to or through any
person or entity; provided, however, that by making the representations herein,
such Principal Shareholder does not agree to hold any of the DUSA Shares for any
minimum or other specific term (unless such Principal Shareholder is subject to
the lock up of his/her/its DUSA Shares under Section 2.6 above) and reserves the
right to dispose of the DUSA Shares at any time in accordance with or pursuant
to the Registration Rights Agreement.

      4.5 RELIANCE ON EXEMPTIONS. Each Principal Shareholder understands that
the DUSA Shares are being offered and sold in reliance on specific exemptions
from the registration requirements of federal and state securities laws and that
DUSA is relying upon the truth and accuracy of, and such Principal Shareholder's
compliance with, the representations, warranties, agreements, acknowledgments
and understandings of such Principal Shareholder set forth herein in order to
determine the availability of such exemptions and the eligibility of DUSA to
acquire the DUSA Shares.

      4.6 INFORMATION. Each Principal Shareholder and his/her/its advisors, if
any, have been furnished with all materials relating to the business, finances
and operations of DUSA and materials relating to the offer and sale of the DUSA
Shares which have been requested by such Principal Shareholder including, but
not limited to: (i) the DUSA SEC Documents; (ii) DUSA's Annual Report to
Shareholders, which includes DUSA's Annual Report on Form 10-K and audited
financial statements for the year ended December 31, 2004, and (iii) DUSA's
definitive proxy statement, delivered in connection with DUSA's 2005 Annual
Meeting of Shareholders. Such Principal Shareholder and his/her/its advisors, if
any, have been afforded the opportunity to ask questions of DUSA. Neither such
inquiries nor any other due diligence investigations conducted by such Principal
Shareholder or his/her/its advisors, if any, or his/her/its representatives
shall modify, amend or affect such Principal Shareholder's right to rely on
DUSA's representations and warranties contained herein. Such Principal
Shareholder understands that his/her/its investment in the DUSA Shares involves
a high degree of risk including, without limitation, the risks set forth in the
SEC Documents under the captions "Risk Factors," "Factors Affecting Future
Operating Results" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and is able to afford a complete loss of
such investment. Such Principal Shareholder has sought such accounting, legal
and tax advice

                                       39


as he/she/it has considered necessary to make an informed investment decision
with respect to the acquisition of the DUSA Shares.

      4.7 NO GOVERNMENTAL REVIEW. Such Principal Shareholder understands that no
Governmental Body has passed on or made any recommendation or endorsement of the
DUSA Shares or the fairness or suitability of the investment in the DUSA Shares
nor have such authorities passed upon or endorsed the merits of the offering of
the DUSA Shares.

      4.8 TRANSFER OR RESALE. Such Principal Shareholder understands that except
as provided in the Registration Rights Agreement: (i) the DUSA Shares have not
been and are not being registered under the Securities Act or any state
securities laws, and may not be offered for sale, sold, assigned or transferred
unless (A) subsequently registered thereunder, (B) such Principal Shareholder
shall have delivered to DUSA an opinion of counsel, in a form reasonably
acceptable to DUSA, to the effect that such DUSA Shares to be sold, assigned or
transferred may be sold, assigned or transferred pursuant to an exemption from
such registration; (ii) any sale of the DUSA Shares made in reliance on Rule 144
or Rule 144A promulgated under the Securities Act (collectively, "Rule 144") may
be made only in accordance with the terms of Rule 144 and further, if Rule 144
is not applicable, any resale of the DUSA Shares under circumstances in which
DUSA may be deemed to be an underwriter (as that term is defined in the
Securities Act) may require compliance with some other exemption under the
Securities Act or the rules and regulations of the SEC thereunder; and (iii)
neither DUSA nor any other Person is under any obligation to register the DUSA
Shares under the Securities Act or any state securities laws or to comply with
the terms and conditions of any exemption thereunder (except as provided in the
Registration Rights Agreement).

      4.9 LEGENDS. Each Principal Shareholder understands that the certificates
or other instruments representing the DUSA Shares, until such time as the resale
of the DUSA Shares have been registered under the Securities Act as contemplated
by the Registration Rights Agreement or such legend is not otherwise required
pursuant to applicable law, shall bear any legend as required by the "Blue Sky"
laws of any state and a restrictive legend in substantially the following form
(and a stop transfer order may be placed against transfer of such stock
certificates):

            NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS
            CERTIFICATE NOR THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE
            NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
            APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED
            FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN
            EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE
            SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL, IN
            A FORM REASONABLY ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS
            NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144
            UNDER SAID ACT.

                                       40


      4.10 BROKERS OR FINDERS. No Principal Shareholder has incurred any
obligation or liability, contingent or otherwise, for brokerage, finders' fees,
agents' commissions or other similar payment(s) in connection with this
Agreement.

      4.11 REPRESENTATIONS COMPLETE. None of the representations or warranties
made by the Principal Shareholders in this Agreement, and none of the statements
made in any exhibit, schedule or certificate furnished by the Principal
Shareholders pursuant to this Agreement, contain any untrue statement of a
Material fact or omits to state any Material fact necessary in order to make the
statements contained herein or therein, in the light of the circumstances under
which made, not misleading.

                                   ARTICLE V
                     REPRESENTATIONS AND WARRANTIES OF DUSA

      DUSA represents and warrants to Sirius and the Principal Shareholders as
follows:

      5.1 ORGANIZATION AND GOOD STANDING. DUSA is a corporation duly organized,
validly existing, and in good standing under the laws of the State of New
Jersey, with full corporate power and authority to conduct its business as it is
now being conducted. DUSA is duly qualified and authorized to transact business
as a foreign corporation and is in good standing under the laws of each
jurisdiction where such qualification is required or where failure to be so
qualified would not have a Material Adverse Effect on DUSA.

      5.2 AUTHORITY; NO CONFLICT.

            (a) This Agreement constitutes the legal, valid, and binding
obligation of DUSA, enforceable against DUSA in accordance with its terms. DUSA
has all corporate right, power and authority to execute and deliver this
Agreement and the other documents to be executed in connection herewith and to
perform its obligations under this Agreement and the documents to be executed in
connection herewith.

            (b) Neither the execution and delivery of this Agreement by DUSA,
nor the consummation or performance of the Transaction by DUSA or DUSA Sub, when
formed, will give any Person the right to prevent, delay, or otherwise
Materially interfere with the Transaction pursuant to:

                  (i) any provision of any applicable Organizational Documents;

                  (ii) any resolution adopted by the board of directors or the
shareholders of DUSA or DUSA Sub when formed; or

                  (iii) any Material Contract to which DUSA is or DUSA Sub when
formed will be a party or by which DUSA may be bound.

      Neither DUSA nor DUSA Sub, when formed, are required to obtain any Consent
from any Person, except for consents from their respective Boards of Directors,
in connection with the execution and delivery of this Agreement or the
consummation or performance of any of the transactions contemplated in this
Agreement.

                                       41


            (c) Except as contemplated by this Agreement or in the attachments
hereto, neither DUSA not DUSA Sub, when formed, is not a party to any other
agreement or understanding with any of the Sirius Shareholders, Sirius or any of
Sirius's employees.

      5.3 INVESTMENT INTENT. DUSA is acquiring the Sirius Shares for its own
account and not with a view to their distribution within the meaning of Section
2(a)(11) of the Securities Act.

      5.4 CERTAIN PROCEEDINGS. No Proceeding or action by any of DUSA's
shareholders has been commenced against DUSA or DUSA Sub, when formed, that
challenges, or may have the effect of preventing, delaying, making illegal, or
otherwise interfering with the performance of this Agreement or the transactions
contemplated herein. To DUSA's Knowledge, no such Proceeding or shareholder
action has been threatened.

      5.5 BROKERS OR FINDERS. None of DUSA or DUSA Sub, when formed, nor any of
their respective officers and agents have incurred any obligation or liability,
contingent or otherwise, for brokerage or finders' fees or agents' commissions
or other similar payment in connection with this Agreement.

      5.6 DUSA SUB. As of the Closing, DUSA Sub shall be a duly organized and
validly existing corporation in good standing under the laws of the State of New
Jersey with corporate power to own its property, carry on its business as being
conducted as of the Closing, and consummate the transaction. Prior to Closing,
DUSA Sub will have engaged only in the transactions contemplated under this
Agreement, will have no Material liabilities, and will have incurred no
obligations except in connection with its performance of the transactions
provided for in this Agreement.

      5.7 NO UNDISCLOSED LIABILITIES. Except as set forth in Exhibit F, the DUSA
SEC Documents and/or as reflected in DUSA's most recent financial statements set
forth therein, DUSA has no Material liabilities or obligations of any nature
arising outside of the ordinary course of business (whether absolute, accrued,
contingent, or otherwise).

      5.8 REPRESENTATIONS COMPLETE. None of the statements made in any exhibit,
schedule or certificate furnished by DUSA pursuant to this Agreement contains
any untrue statement of a Material fact or omits to state any Material fact
necessary in order to make the statements contained herein or therein, in the
light of the circumstances under which made, not misleading.

      5.9 COMPLIANCE WITH LEGAL REQUIREMENTS. DUSA is in Material compliance
with each applicable requirement of the SEC, National Association of Securities
Dealers, the Ontario Securities Commission and applicable state securities
commissions. DUSA has not received any written notice or other communication
from any Governmental Body regarding: (a) any actual or alleged Material
violation of or Material failure to comply with any term or requirement of any
Governmental Authorization where such violation or failure would cause a
Material Adverse Change, or (b) any actual or threatened revocation, withdrawal,
suspension, cancellation, termination of any Governmental Authorization.

      5.10 SEC COMPLIANCE. Except as otherwise treated or requested to be
treated as confidential pursuant to a confidential treatment application
submitted to the SEC, DUSA has

                                       42


made available to Sirius and the Sirius Shareholders (by public filing with the
SEC or otherwise) a true and complete copy of each report, schedule,
registration statement and definitive proxy statement filed by DUSA, with the
SEC since January 1, 2004 (the "DUSA SEC Documents"), which are all of the
documents required to have been filed by DUSA with the SEC since that date. As
of their respective dates, the DUSA SEC Documents complied in all Material
respects with the requirements of the Securities Act or the Exchange Act, as the
case may be, and all rules and regulations of the SEC promulgated thereunder
applicable to such DUSA SEC Documents and none of the DUSA SEC Documents
contained any untrue statement of a Material fact or omitted to state a Material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading, except
to the extent such statements have been modified or superseded by later DUSA SEC
Documents filed and publicly available prior to the date of this Agreement. DUSA
has no outstanding and unresolved comments from the SEC with respect to the DUSA
SEC Documents. The consolidated financial statements of DUSA included in the
DUSA SEC Documents complied as to form in all Material respects with the
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, and have been prepared in accordance with
generally accepted accounting principals applied on a consistent basis during
the periods involved (except as may be indicated in the notes thereto or, in the
case of the unaudited statements, as permitted by Rule 10-01 of Regulation S-X
under the Exchange Act) and fairly present, in accordance with the applicable
requirements of generally accepted accounting principles and the applicable
rules and regulations of the SEC (subject, in the case of unaudited statements,
to normal, recurring adjustments, none of which are Material), the consolidated
financial position of DUSA, as of their respective dates and the consolidated
statements of income and the consolidated cash flows of DUSA for the periods
presented therein.

      5.11 NO CONTEMPLATED SALE OF DUSA. Except as contemplated by this
Agreement, no transaction or series of transactions, including, without
limitation, a merger, consolidation, share exchange, reorganization or
recapitalization, is under consideration by the management or Board of Directors
of DUSA, which transaction is likely to result in a change in the ownership of
fifty percent (50%) or more of the outstanding capital stock of DUSA.

                                   ARTICLE VI
                              ADDITIONAL AGREEMENTS

      6.1 APPROVALS OF GOVERNMENTAL BODIES. Subject to the receipt of the
Investor Questionnaires, DUSA will make all filings required by the SEC,
National Association of Securities Dealers, the Ontario Securities Commission
and applicable state securities commissions necessary to consummate the
transactions contemplated by this Agreement as promptly as practicable after the
date of this Agreement. Between the date of this Agreement and the Closing Date,
DUSA will cooperate with Sirius and the Sirius Shareholders with respect to all
filings that are required by Legal Requirements to be made in connection with
the transactions contemplated herein. DUSA will cooperate with Sirius and the
Sirius Shareholders and Sirius will exercise Commercially Reasonable Efforts to
obtain all consents identified in Schedule 3.2(c) and Schedule 4.2(c).

                                       43


      6.2 TAX MATTERS. Sirius will file all Tax Returns related to periods
ending on or prior to Closing consistent with past practice. DUSA will, or will
cause Sirius to, file Sirius's Tax Returns for tax periods ending after the
Closing Date.

      6.3 EXPENSES.

            (a) Subject to provisions set forth herein, whether or not the
transactions contemplated hereby are consummated, all fees and expenses incurred
in connection with this Agreement and the transactions contemplated hereby,
including all investment banking, legal, accounting, financial advisory,
consulting and all other fees and expenses of third parties incurred by a Party
in connection with the negotiation and effectuation of the terms and conditions
of this Agreement and the transactions contemplated hereby ("Expenses"), shall
be the obligation of the respective party incurring such fees and expenses;
except as otherwise expressly provided herein, and provided that:

                  (i) So long as the Closing occurs, DUSA shall bear full
responsibility for (A) all costs and expenses of Sirius's accountants incurred
in connection with the auditing of Sirius for the three prior fiscal years and
the transactions contemplated hereby, and (B) the costs and expenses of the
Representation and Warranties Insurance; and

                  (ii) the Sirius Shareholders shall bear full responsibility
for (A) the costs of maintaining the insurance policy described in Section 10.2
from the Closing Date until the date that is three (3) years after the Closing
Date, as further provided in Section 10.2, (B) the legal fees and expenses of
Sirius incurred in connection with this Agreement and the transactions
contemplated hereby, including, but not limited to, the preparation of a
Registration Statement on Form S-4 as provided in Section 6.8; provided,
however, DUSA shall bear the first Twenty-five Thousand Dollars ($25,000) of the
cost of such legal fees and expenses incurred by Sirius in connection with the
preparation of a Registration Statement on Form S-4, (C) any payments due to
Elorac as a result of a change of control of Sirius under the Elorac Agreement,
(D) any severance payments to employees of Sirius provided for in any written
agreement in existence prior to the Closing, unless such employee is hired as an
employee or retained as a consultant of DUSA, DUSA Sub, Sirius or any Affiliate
thereof following the Closing, and (E) any of the PrivateBank and Trust Company
Obligations in excess of the Sirius Debt Obligations (collectively, the "Sirius
Transaction Expenses").

            (b) At least five (5) Business Days prior to the Closing Date,
Sirius shall provide DUSA with a statement of the Expenses described in clauses
6.3(a)(i) and (ii) above and all other Expenses of Sirius to be incurred prior
to the Closing, such statement showing detail of both the previously paid and
currently unpaid Expenses of Sirius incurred in connection with this Agreement
and the transactions contemplated hereby, as well as the Expenses that have been
incurred or are expected to be incurred by Sirius in connection with this
Agreement and the transactions contemplated hereby, all in form reasonably
satisfactory to DUSA and certified as true and correct in all Material respects
by Sirius's President. Sirius's Expenses, other than the Sirius Transaction
Expenses, shall constitute Sirius Debt Obligations and be assumed by DUSA.

                                       44


      6.4 SIRIUS SHAREHOLDERS' REPRESENTATIVES.

      Pursuant to the Subscription Agreement the Sirius Shareholders shall have
constituted and appointed Frank Pollard and Jeffrey Bernstein, either acting
alone or together, to serve as their representative (collectively, "Shareholder
Representatives") for and on behalf of all of the Sirius Shareholders, to give
and receive notices and communications, waive Closing conditions, accept
delivery of Closing documents, agree to negotiate, enter into settlements and
compromises of, and comply with orders of courts with respect to such claims, to
take all other actions on behalf of the Sirius Shareholders as is explicitly
contemplated by this Agreement, the Liability Escrow Agreement, the Expense
Escrow Agreement, the Shareholders Escrow Agreement and/or the Registration
Rights Agreement and to take all actions necessary or appropriate in the
judgment of the Shareholder Representatives for the accomplishment of the
foregoing. No bond shall be required of the Shareholder Representatives, and the
Shareholder Representatives shall receive no compensation for their services
from the Expense Escrow Amount. Notices or communications to or from the
Shareholders' Representatives shall constitute notice to or from each Sirius
Shareholder.

      6.5 SIRIUS INFORMATION STATEMENT. Subsequent to the execution of this
Agreement, Sirius shall prepare an information or proxy statement (the
"Information Statement") for the purpose of calling a special meeting of the
Sirius Shareholders to obtain approval of this Agreement and the Transaction.
The Parties shall reasonably cooperate with each other in the preparation of the
Information Statement. DUSA shall provide all information reasonably requested
by Sirius in connection with the preparation of the Information Statement, and
agrees that the information provided by it for inclusion in such Information
Statement and each amendment thereto, at the time of the delivery thereof to the
Sirius Shareholders and at the time of the Sirius Shareholders' meeting, will
not include an untrue statement of a Material fact or omit to state a Material
fact required to be stated or necessary to make the statements therein, in light
of the circumstances under which they are made, not misleading. Sirius shall
provide DUSA with a reasonable opportunity to review and comment upon the
Information Statement prior to the distribution thereof to the Sirius
Shareholders. Sirius shall reasonably consider all comments made by DUSA with
respect to the Information Statement and revise the Information Statement as
Sirius may determine to be necessary or appropriate.

      6.6 SIRIUS SHAREHOLDER MEETING. As promptly as practicable after
distribution of the Information Statement, but in any event prior to the Closing
Date, Sirius shall duly call, give notice of, convene and hold a special meeting
of the Sirius Shareholders for the purpose of approving the Transaction and
amending the option plans.

      6.7 INVESTOR QUESTIONNAIRES. Sirius shall use all efforts reasonably
necessary to timely receive the highest possible return of completed investor
questionnaires from each Sirius Shareholder in connection with the issuance of
the DUSA Shares required to be issued to such Participating Shareholders as
Consideration hereunder (collectively, the "Investor Questionnaires"),
indicating whether each such Participating Shareholder meets the status of an
"accredited investor," as that term is defined pursuant to the Securities Act.
Each Principal Shareholder agrees to provide to DUSA a completed Investor
Questionnaire.

                                       45


      6.8 UNACCREDITED INVESTORS. The parties understand and acknowledge that
pursuant to Regulation D of the Securities Act, there can be no more than
thirty-five (35) unaccredited Participating Shareholders taking part in the
Transaction if the DUSA Shares to be issued as Consideration hereunder are to be
issued in a Regulation D private placement. As such, promptly upon the receipt
of the Investor Questionnaires, DUSA shall determine in its reasonable, good
faith business judgment, based upon the information provided in the Investor
Questionnaires or otherwise available to DUSA, whether to proceed with a
Regulation D offering in connection with the Transaction. If DUSA determines not
to proceed with such a Regulation D offering, then DUSA shall promptly notify
Sirius thereof and, at its sole option and expense, except with respect to
Sirius' legal fees as provided for in Section 6.3(a)(ii), promptly prepare or
cause to be prepared and submitted to the SEC a registration statement on Form
S-4, in conformity with all applicable Legal Requirements, for the purpose of
registering the DUSA Shares to be issued as Consideration hereunder (the "Form
S-4"). Should DUSA decide to register the DUSA Shares on Form S-4, Sirius and
the Sirius Shareholders (or the Shareholders Representatives) shall cooperate
with DUSA in its preparation and filing of such Form S-4. DUSA shall use its
Commercially Reasonable Efforts to cause such Form S-4 to become effective as
soon as practicable thereafter, provided, however, that the limitation with
respect to Material expenditures shall not apply. For purposes of determining
the investor status of each Participating Shareholder, the Parties expressly
acknowledge and agree that any Sirius Shareholder that does not provide adequate
information in a timely fashion in his/her/its Investor Questionnaire or in a
follow-up response to Sirius subsequent to returning such Investor
Questionnaire, shall be deemed by DUSA to be unaccredited for purposes of this
Agreement.

      6.9 TRANSITION. Sirius and those Principal Shareholders who are also
officers of Sirius shall cooperate from the date hereof and for a reasonable
period of time following the Closing, to plan and effect the transition of
Sirius' business to DUSA Sub and shall reasonably consult with DUSA and/or DUSA
Sub in connection therewith.

      6.10 DUE DILIGENCE. Sirius shall permit DUSA to continue its due diligence
with respect to the matters contemplated herein through and until the Closing.
DUSA shall have to its satisfaction completed its due diligence review in
connection with the Transaction and all matters related thereto and shall have
concluded that no documentation or other information discovered during such due
diligence review affects DUSA's understanding of the business of Sirius, DUSA's
ability to conduct the business of Sirius, or the structure or effect of the
Transaction by or on DUSA as of the date of this Agreement.

      6.11 MICANOL LICENSE AGREEMENT. At or prior to Closing, the 2006 Micanol
License Agreement, substantially in the form attached hereto as Exhibit G, shall
be executed.

                                  ARTICLE VII
               CONDITIONS PRECEDENT TO DUSA'S OBLIGATION TO CLOSE

      DUSA's obligation to proceed with the Closing is subject to the
satisfaction, at or prior to the Closing, of each of the following conditions
(any of which may be waived by DUSA, in whole or in part):

                                       46


      7.1 ACCURACY OF REPRESENTATIONS. Each of the representations and
warranties of Sirius and the Sirius Shareholders, respectively, contained in
this Agreement shall be true and correct when made and as of the Closing, with
the same force and effect as if made as of the Closing (except where the failure
of a representation or warranty to be so true and correct would not reasonably
be likely to have a Material Adverse Effect). DUSA shall have received
certificates in accordance with Section 2.4 signed on behalf of Sirius by each
of Sirius's chief executive officer and chief financial officer with respect to
the foregoing.

      7.2 COVENANTS. Each of the covenants contained in this Agreement to be
complied with by Sirius and the Shareholders on or before the Closing shall have
been complied with (except where the failure to do so would not reasonably be
likely to have a Material Adverse Effect).

      7.3 BOARD AND SHAREHOLDER APPROVAL. The Sirius Board of Directors and
Sirius Shareholders, as necessary, shall have approved the Transaction and the
terms and conditions of this Agreement.

      7.4 CLOSING DELIVERABLES. Sirius and the Shareholders, as appropriate,
shall have delivered the required Closing Deliverables to DUSA.

      7.5 CONSENTS. Except as may be otherwise agreed to by Sirius and DUSA,
each of the Consents identified in Schedule 3.2(c) and Schedule 4.2(c) must have
been obtained and a copy of each such Consent identified in Schedule 3.2(c) and
Schedule 4.2(c) provided to DUSA prior to the Closing. Each such Consent must be
in full force and effect on and after the Closing Date, except where the failure
to obtain such Consents were not due to a breach of DUSA of its obligation to
cooperate to obtain such Consents under the standard outlined by the last
sentence of Section 6.1.

      7.6 NO PROCEEDINGS. Since the date of this Agreement, there must not have
been threatened in writing or commenced against DUSA and/or Sirius, or against
any Affiliate of Sirius, any Proceeding that, in the reasonable good faith
judgment of DUSA, based on the advice of outside counsel, would (a) enjoin,
restrain or otherwise prohibit the Transaction; (b) impose criminal penalties in
connection with the consummation of the Transaction; or (c) impose a Material
Adverse Effect, including, without limitation, preventing, delaying, making
illegal, or otherwise interfering with the consummation of the Transaction.

      7.7 TERMINATION OF SIRIUS EMPLOYEE PLANS. Subject to all of the current
employees of Sirius who are to be employed by DUSA being fully covered by
benefit plans maintained by DUSA effective as of the Closing (and not subject to
any waiting periods), Sirius shall have provided DUSA with evidence, reasonably
satisfactory to DUSA, as to the termination (to occur prior to or simultaneously
with the Closing unless otherwise expressly agreed to by Sirius and DUSA with
respect to a particular plan, program and/or arrangement) of Sirius plans,
programs and arrangements referred to in Section 9.6.

      7.8 FINANCIAL STATEMENTS. Sirius shall have delivered to DUSA, as soon as
practicable, but in no event later than five (5) Business Days prior to the
Closing Date, drafts of the Final Financial Statements and shall have provided
DUSA with reasonable access to the

                                       47


management, financial consultants and auditors of Sirius for the purpose of
verifying such Final Financial Statements. There shall not have been a greater
than five percent (5%) detrimental deviation between the 2003 Draft Financial
Statements and the 2003 Final Financial Statements, the 2004 Draft Financial
Statements and the 2004 Final Financial Statements, and the September 30, 2005
Sirius management financial statements and the 2005 Final Financial Statements,
respectively, with respect to net sales and/or profit/loss with the exception of
variances caused by adjustments related to revenue recognition, compensation
expense, and reserves for returns and allowances. All financial statements shall
be prepared in accordance with generally accepted accounting principals to the
reasonable satisfaction of DUSA and its independent accountants.

      7.9 MINIMUM PARTICIPATION. At Closing, DUSA must receive not less than
ninety percent (90%) of the issued and outstanding Sirius Shares as of the
Closing Date. Each Participating Shareholder must have returned to Sirius: (a) a
fully executed Subscription Agreement, substantially in the form attached hereto
as Exhibit A; (b) a completed and signed investor questionnaire previously
distributed by Sirius; and (c) one or more stock certificates, with completed
confirmed stock powers endorsed to DUSA, representing all of the Sirius Shares
beneficially owned by the Sirius Shareholder.

      7.10 FIRPTA AFFIDAVIT. Sirius shall deliver to DUSA an affidavit, under
penalties of perjury stating that Sirius is not and has not been a United States
real property corporation, dated as of the Closing Date, and in the form and
substance required under Treasury Regulation 1.897-2(h) so that DUSA is exempt
from withholding any portion of the Consideration thereunder (the "FIRPTA
Affidavit").


      7.11 NON-COMPETITION. DUSA shall have entered into non-competition
agreements with Frank R. Pollard and Joel Bernstein, M.D. in the applicable form
of Exhibits H1 and H2, respectively, hereto.

      7.12 ACCESS TO MANUFACTURING AND DISTRIBUTION FACILITIES. Promptly
following the execution of this Agreement, Sirius shall obtain the necessary
consents to enable representatives of DUSA to thoroughly inspect, prior to the
Closing Date, any and all (i) Third Party Manufacturer facilities used by or on
behalf of Sirius to manufacture one or more of the Products and (ii)
distribution facilities used by or on behalf of Sirius to distribute one or more
of the Products. As a condition to Closing, DUSA, in its reasonable discretion,
must determine that the Third Party Manufacturer facilities and distribution
facilities are in Material compliance with all applicable Legal Requirements and
that the Third Party Manufacturer facilities have the reasonable capability of
continuing to manufacture the Products in compliance with cGMP and all
applicable laws. DUSA shall promptly notify Sirius in the event DUSA reasonably
determines that such conditions may not be satisfied prior to Closing.

      7.13 NO DROPPED COVERAGE. Prior to the Closing, Sirius shall not have
become aware or received any notice, correspondence or other documentation
indicating that any formulary has dropped coverage for any Product or that any
insurance provider will no longer provide reimbursement in connection with the
purchase of any Product currently being reimbursed such that such event has a
Material Adverse Effect. Immediately upon receipt by Sirius of any such notice,
correspondence or other documentation, Sirius shall provide a copy of same to
DUSA.

                                       48


      7.14 EXTENDING REPORTING ENDORSEMENT. DUSA shall have received evidence of
Sirius's purchase of an extended reporting endorsement, or a "tail," for each
insurance policy as provided for in Section 3.18(d).

      7.15 WAIVER OF RIGHT OF FIRST REFUSAL TO PURCHASE BIOGLAN SHARES.
Provisions in Section 2, "Restrictions on Transfer," contained in the
Stockholders' Agreement, dated December 1, 2000, by and among Bioglan, Sirius,
Joel E. Bernstein, Jeffrey R. Bernstein and Frank R. Pollard, shall be waived by
Sirius and the shareholders named therein.

      7.16 KEY CONTRACTS. Sirius shall have caused the completion and execution
of the following agreements and amendments to agreements:

            (a) Harmony Supply and Development Agreement. The Harmony Supply and
Development Agreement shall be amended substantially in the form of the
amendment attached hereto as Exhibit I, with such modifications as may be
approved by DUSA, which approval shall not be unreasonably withheld, conditioned
or delayed.

            (b) Amide Supply Agreement. The Amide Supply Agreement shall be
amended substantially in the form of the amendment attached hereto as Exhibit J,
with such modifications as may be approved by DUSA, which approval shall not be
unreasonably withheld, conditioned or delayed.

      7.17 ADVERSE EVENT REPORTING. Sirius shall complete all required filings
with the FDA of MedWatch forms for adverse events and any other events
discovered by DUSA or Sirius from the date hereof through the date of Closing
pursuant to 21 C.F.R. Parts 312 and 314, and shall have notified its product
liability insurance carriers of the occurrence of such events.

      7.18 PRODUCT REGISTRATIONS. DUSA shall have determined to its reasonable
satisfaction and in good faith that, from the date of this Agreement through the
Closing Date, Sirius shall have completed all drug product registrations with
the FDA and that Sirius has no reason to believe that the FDA will not accept
such registrations for listing.

      7.19 EFFECTIVE FORM S-4. If DUSA shall have decided to register the DUSA
Shares to be issued as part of the Consideration on a Form S-4 as contemplated
in Section 6.8, the Form S-4 shall have been declared effective by the SEC prior
to the Closing Date.

      7.20 QUALIFICATION FEES. To the extent reasonably practicable, Sirius
shall have paid any fees and penalties arising as a result of any failure to
qualify to transact business as a foreign corporation under the laws of each
jurisdiction where such qualification is or was required by Sirius, as disclosed
in Schedule 3.1(a).

      7.21 SCHEDULES. The Schedules attached to this Agreement shall be complete
at or prior to Closing to the reasonable satisfaction of DUSA.

      7.22 DISCLOSURES. Sirius shall have provided all information and materials
in Sirius's possession reasonably requested in writing by DUSA prior to the
Closing Date.

                                       49


                                  ARTICLE VIII
                      CONDITIONS PRECEDENT TO SHAREHOLDERS
                        AND SIRIUS'S OBLIGATION TO CLOSE

      Sirius's and the Principal Shareholders' obligation to proceed with the
Closing is subject to the satisfaction, at or prior of the Closing, of each of
the following conditions (any of which may be waived by the Shareholder
Representatives, in whole or in part):

      8.1 ACCURACY OF REPRESENTATIONS. Each of the representations and
warranties of DUSA contained in this Agreement shall be true and correct when
made and as of the Closing, with the same force and effect as if made as of the
Closing (except where the failure of a representation or warranty to be so true
and correct would not reasonably be deemed to have a Material Adverse Effect).
DUSA shall have delivered a certificate signed on behalf of DUSA by each of the
chief executive officer and chief financial officer with respect to the
foregoing to the Shareholder Representatives and Sirius.

      8.2 COVENANTS. Each of the covenants contained in this Agreement to be
complied with by DUSA on or before the Closing shall have been complied with
(except where the failure to do so would not be reasonably likely to have a
Material Adverse Effect).

      8.3 BOARD APPROVAL. The Board of Directors of DUSA shall have approved the
consummation of the Transaction and the terms and conditions of this Agreement.

      8.4 CLOSING DELIVERABLES. DUSA shall have delivered the required Closing
Deliverables to the Shareholders.

      8.5 NO PROCEEDINGS. Since the date of this Agreement, there must not have
been commenced against DUSA and/or Sirius, or against any Affiliate of Sirius,
any Proceeding that, in the reasonable good faith judgment of Sirius, based on
the advice of outside counsel, would (a) enjoin, restrain or otherwise prohibit
the Transaction; (b) impose criminal penalties in connection with the
consummation of the Transaction; or (c) impose a Material Adverse Effect,
including, without limitation, preventing, delaying, making illegal, or
otherwise interfering with the consummation of the Transaction.

      8.6 DISCLOSURES. Sirius acknowledges that as of the date hereof, DUSA has
provided to Sirius all information and materials which have been requested in
writing by Sirius. Following the date of this Agreement and prior to the Closing
Date, DUSA shall have provided all information and materials in DUSA's
possession reasonably requested in writing by Sirius in order for Sirius to
satisfy its delivery obligations to the Sirius Shareholders under Section 6.5
hereof.

                                   ARTICLE IX
                    COVENANTS OF SIRIUS PRIOR TO CLOSING DATE

      9.1 ACCESS AND INVESTIGATIONS. Between the date of this Agreement and the
Closing Date, Sirius and its Representatives will cooperate with DUSA and,
during normal business hours, will: (a) afford DUSA and its Representatives
reasonable access to Sirius's personnel, properties, contracts, books and
records, and other documents and data, (b) furnish DUSA and

                                       50



DUSA's Representatives with copies of all such contracts, books and records, and
other existing documents and data as DUSA may reasonably request, and (c)
furnish DUSA and DUSA's Representatives with such additional financial,
operating, and other data and information as DUSA may reasonably request.

      9.2 OPERATION OF SIRIUS. Between the date of this Agreement and the
Closing Date, Sirius will:

            (a) conduct the business of Sirius only in the ordinary course of
business;

            (b) not amend any of its Organization Documents;

            (c) not issue any shares of its stock or rights to acquire shares of
its stock, except with respect to preexisting obligations under the Sirius
Options;

            (d) not make any Restricted Payment;

            (e) not enter into any Contract, or otherwise expense or distribute
funds, that involve obligations of Sirius in an aggregate amount greater than
$25,000 without the prior written approval of an officer of DUSA (other than as
may be required or necessary to comply with or ensure non-applicability of
Section 409A of the IRC);

            (f) not amend any Material Contract except as contemplated and
disclosed to DUSA;

            (g) use Commercially Reasonable Efforts to maintain the goodwill of
Sirius's customers, suppliers, distributors, employees, agents and consultants;
and

            (h) file all appropriate MedWatch forms in consultation with DUSA
with respect to any Product complaint or adverse event.

      9.3 NEGATIVE COVENANT. Except as otherwise expressly permitted by this
Agreement, between the date of this Agreement and the Closing Date, Sirius will
not, without the prior written consent of DUSA, take any affirmative action, or
fail to take any reasonable action within its control, as a result of which any
of the changes or events listed in Section 3.14 is likely to occur.

      9.4 REQUIRED APPROVALS. Sirius shall make all filings required by Legal
Requirements to be made in order to consummate the transactions contemplated
herein as promptly as practicable after the date of this Agreement and in any
event prior to, in the case of filings required in the United States pursuant to
such Legal Requirements, the tenth (10th) day following execution of this
Agreement. Between the date of this Agreement and the Closing Date, Sirius will:
(a) cooperate with DUSA with respect to all filings that DUSA elects to make or
is required by Legal Requirements to make in connection with the transactions
contemplated herein, and (b) cooperate with DUSA and will exercise Commercially
Reasonable Efforts to obtain all consents identified in Schedule 3.2(c) and
Schedule 4.2(c).

                                       51



      9.5 STANDSTILL.

            (a) From and after the date of this Agreement until the earlier to
occur of the Closing or termination of this Agreement pursuant to Article XI,
Sirius and the Principal Shareholders will not, and Sirius will not permit its
Representatives to, directly or indirectly (a) initiate, solicit, encourage or
entertain any inquiries, offers or proposals for any "Acquisition Proposal" (as
defined below) by any Person (other than DUSA or its Representatives); (b)
participate in any discussions or negotiations with, or disclose any non-public
information not customarily disclosed consistent with Sirius's past practices
concerning Sirius to, or afford access to the properties, books, or records of
Sirius to, or otherwise assist or facilitate, or enter into any agreement or
understanding with, any Person (other than DUSA and its Affiliates and
Representatives) for the purpose of making, or take any other action to
facilitate the making of, an Acquisition Proposal; (c) agree to approve or
recommend any Acquisition Proposal; and/or (d) entertain or negotiate the sale
of or offer to sell any shares of Sirius capital stock, whether or not presently
issued.

            (b) For the purposes of this Agreement, "Acquisition Proposal" shall
mean any one of the following (other than the Transactions contemplated
hereunder) involving Sirius: (i) a proposal for any transaction pursuant to
which a Third Party proposes to acquire beneficial ownership of at least ten
percent (10%) of the outstanding equity securities of Sirius, whether from
Sirius or pursuant to a tender offer, exchange offer, recapitalization,
reorganization or otherwise, (ii) a proposal for any merger, consolidation or
other business combination involving Sirius pursuant to which any Third Party
proposes to acquire beneficial ownership of at least ten percent (10%) of the
outstanding equity securities of Sirius, or the entity surviving such merger,
consolidation or other business combination, (iii) a proposal for any other
transaction or series of related transactions (including any license) pursuant
to which any Third Party proposes to acquire control of the assets of Sirius,
including, but not limited to, the Products, outside the normal course of
Sirius' business as such business has been conducted prior to the date of this
Agreement or which would otherwise have the effect of undermining the
negotiations contemplated by this Agreement, or (iv) any public announcement of
a proposal, plan or intention to do any of the foregoing or any agreement to
engage in any of the foregoing.

            (c) The Principal Shareholders and Sirius will, and Sirius will
cause its Representatives to, promptly cease any and all existing activities,
discussions or negotiations with any parties conducted heretofore with respect
to any Acquisition Proposal.

            (d) Notwithstanding the foregoing, no provision of this Section 9.5
shall be construed (i) to prohibit any of Sirius, the Principal Shareholders or
their respective Representatives from responding to any proposal, inquiry or
request for information in connection with an Acquisition Proposal or potential
Acquisition Proposal for the sole purpose of advising the Person making such
proposal, inquiry or request of Sirius' and the Principal Shareholders'
obligations under this Section 9.5 or (ii) to require any of Sirius, the
Principal Shareholders or their respective Representatives to disclose to DUSA
any terms and conditions of any such proposal, inquiry or request, including the
identity of the party making an Acquisition Proposal.

                                       52



      9.6 EMPLOYEE PLANS. Except as may otherwise expressly be agreed to by
Sirius and DUSA and provided that all current employees of Sirius who are to be
employed by DUSA following the Closing will be fully covered by benefit plans
maintained by DUSA effective as of the Closing (and not subject to any waiting
period), Sirius shall terminate, effective simultaneously with the Closing: (i)
any and all group severance, separation or salary continuation plans, programs,
or arrangements, and (ii) any and all other Plans (as defined in Section 3.13 of
this Agreement), except with respect to such other plans as set forth on
Schedule 9.6. DUSA shall receive from Sirius evidence that Sirius's Plan(s)
and/or program(s), as applicable, have been terminated pursuant to resolutions
of its Board of Directors (the form and substance of such resolutions shall be
subject to review by and approval of DUSA), effective as of the Closing. Sirius
shall also take such other actions in furtherance of terminating such Plans,
policies and arrangements as DUSA may reasonably require. In the event that
termination of a 401(k) plan is reasonably anticipated to trigger liquidation
charges, surrender charges, or other fees to be imposed upon the account of any
participant or beneficiary of such terminated plan or upon Sirius or the plan
sponsor, then Sirius shall take such actions as are necessary to reasonably
estimate the amount of such charges and/or fees and provide such estimate in
writing to DUSA no later than fifteen (15) days prior to the Closing Date.

      9.7 REPRESENTATION AND WARRANTY INSURANCE. Prior to Closing, DUSA shall
determine in its discretion whether to negotiate and obtain a policy of
representation and warranty insurance (the "Representation and Warranty
Insurance") covering the representations and warranties made by Sirius and the
Principal Shareholders pursuant to this Agreement. DUSA in its discretion shall
approve the terms and conditions of any policy of Representation and Warranty
Insurance obtained as provided for herein. Should DUSA decide to obtain a policy
of Representation and Warranty Insurance, DUSA shall be fully responsible for
all costs and expenses in connection therewith. Sirius and the Principal
Shareholders shall reasonably cooperate and assist DUSA as necessary in
obtaining such Representation and Warranty Insurance prior to Closing.

                                    ARTICLE X
                             POST-CLOSING COVENANTS

      10.1 SIRIUS BOARD NOMINEE. DUSA shall increase the size of its board of
directors by one (1) director and shall cause Neal Penneys, M.D. (the "Board
Nominee") to be appointed to fill such vacant board position until the date of
the next applicable meeting of DUSA Shareholders. DUSA shall recommend that its
Nominating and Corporate Governance Committee of the Board of Directors select
the Board Nominee to be included as a nominee to serve as a member of the board
of directors of DUSA on the slate of nominees to be voted upon at the next
annual meeting of the DUSA shareholders following the Closing. DUSA's
recommendation with respect to such nomination shall continue through the
expiration of the period of time any Milestone Payment may be paid pursuant to
the terms hereof, provided that during such period the Board Nominee (or such
substitute board nominee as may be recommended by the Shareholder
Representatives and selected by DUSA's Corporate Governance Committee should the
Board Nominee become unable or unwilling to serve) qualifies to serve on DUSA's
Board of Directors pursuant to its governance documents and applicable law.

                                       53



      10.2 MAINTENANCE OF SIRIUS D&O INSURANCE. DUSA shall, at the Sirius
Shareholders expense, cause Sirius to maintain policies of director and officer
liability insurance in amounts not less than Five Million Dollars ($5,000,000)
covering the officers and directors of Sirius as of the date hereof until the
later of (a) the date that is three (3) years after the Closing Date, or (b) the
date after which the statutes of limitations for any claims that may be made
thereunder have passed and all outstanding claims for liability with respect
thereto have been finally resolved. The cost of maintaining the insurance
coverage described in this Section 10.2 for a period of three (3) years shall,
unless otherwise paid at the Closing, be paid by the Shareholders Escrow Agent
from the Expense Escrow Amount, as soon as reasonably practicable following the
Closing, and as otherwise provided in the Shareholders Escrow Agreement.

      10.3 CONTINUITY OF SIRIUS BUSINESS. Following the Closing, for a period of
at least twelve (12) months, DUSA shall continue Sirius's historic business
and/or continue to use a significant portion of Sirius's historic assets in its
ongoing business as provided for in this Agreement as necessary to satisfy the
continuity of business enterprise requirements under Regulation 1.368-1(d) of
the IRC.

      10.4 PRODUCT DEVELOPMENT AND MARKETING REQUIREMENTS.

            (a) Promptly following the Closing, the Shareholder Representatives
and DUSA shall each appoint one (1) representative to discuss product
development and marketing activities relating to the Products and New Products
as they determine. The initial appointees shall be Frank Pollard and Robert
Doman, respectfully. The appointees shall consult with each other within six (6)
months after the Closing Date with respect to the selection of the New Products
to be used for purposes of determining the trigger for the applicable Milestone
Payments pursuant to paragraph 2.2(c)(i).

            (b) Except as provided in Section 10.4(c), DUSA shall at all times
prior to the Milestone Termination Date promote the Products and the New
Products in accordance with the Minimum Marketing Standards.

            (c) If at any time DUSA determines, in its reasonable business
judgment, that it is not commercially reasonable to initiate development,
further develop or promote any New Product identified or selected with respect
to any Milestone Payment pursuant to Section 2.2(c)(i) at the level required by
the Minimum Marketing Standards, DUSA shall promptly notify Mr. Pollard of such
determination and provide him with all relevant information regarding the
reasons for such determination. Within thirty (30) days of such notification,
Mr. Pollard shall consult with DUSA in its selection of an alternative New
Product to be developed by DUSA for purposes of the Milestone Payments. DUSA
shall promptly provide any information related to the marketing of any potential
alternative New Products as Mr. Pollard may reasonably request. In the event
DUSA declines to select an alternative New Product reasonably acceptable to Mr.
Pollard within such thirty (30) day period, DUSA shall immediately be obligated
to pay on a pro rata basis to the Sirius Shareholders Two Hundred Fifty Thousand
Dollars ($250,000) in lieu of continuing the Minimum Marketing Standards with
respect to the applicable New Product and all of its obligations with respect to
the applicable Milestone Payment in such event shall, upon payment in full of
such amount, be satisfied. In the event that Mr. Pollard becomes unable or

                                       54



unwilling to serve in the capacity provided in this Section 10.4, the
Shareholder Representatives may select another person to succeed Mr. Pollard in
such role.

                                   ARTICLE XI
                                   TERMINATION

      11.1 TERMINATION EVENTS. This Agreement may be terminated and the
Transaction abandoned at any time prior to or at the Closing, whether before or
after approval of the matters presented in connection with the Transaction by
the Sirius Shareholders:

            (a) by either DUSA, or Sirius if a Material breach of any provision
of this Agreement has been committed by the other Party and such breach has not
been waived, provided that written notice has been given to the other Party of
the intention to terminate under this Section 11.1(a) due to such breach and the
other party has not cured such breach within thirty (30) days of receipt of such
notice;

            (b) (i) by DUSA if any of the conditions in Article VII have not
been satisfied as of the Closing Date or if satisfaction of such a condition is
or becomes impossible (other than through the failure of DUSA to comply with its
obligations under this Agreement) and DUSA has not waived such condition on or
before the Closing Date;

                  (ii) by Sirius or the Principal Shareholders, if any of the
conditions in Article VIII have not been satisfied as of the Closing Date or if
satisfaction of such a condition is or becomes impossible (other than through
the failure of the Principal Shareholders to comply with their obligations under
this Agreement) and the Principal Shareholders have not waived such condition on
or before the Closing Date;

provided that in each case written notice has been given to the other party of
the intention to terminate under this Section 11.1(b) for failure to satisfy a
specified condition and the other party has not cured such failure within thirty
(30) days of receipt of such notice;

            (c) by either DUSA or Sirius if a Governmental Body of competent
jurisdiction shall have issued an order, decree or ruling or taken any other
action, in any case having the effect of permanently restraining, enjoining or
otherwise prohibiting the Transactions;

            (d) by DUSA or Sirius upon the occurrence of a Material Adverse
Effect to Sirius or DUSA; provided, however, that for purposes of this Section
11.1(d), Material Adverse Effect shall not include any effect or change solely
related to the price per share of DUSA's common stock such as, without
limitation, a general market or industry decline;

            (e) by DUSA should DUSA decide to obtain Representation and Warranty
Insurance as provided for in Section 9.7 but such insurance is not reasonably
satisfactory to DUSA in DUSA's reasonable determination prior to the Closing
Date;

            (f) by DUSA, if Sirius shall fail to (i) recommend, or fails to
continue its recommendation, that the Sirius Shareholders vote in favor of the
adoption of this Agreement and the consummation of the Transaction; or (ii) hold
a shareholders' meeting or otherwise

                                       55



obtain the written consent of the Sirius Shareholders approving the adoption of
this Agreement and the consummation of the Transaction;

            (g) by DUSA should the FDA notify Sirius of (i) any enforcement
action with respect to the marketing of any Product; (ii) any recall, voluntary
or otherwise, or (iii) any action which would undermine the ability of DUSA to
conduct Sirius's business in the manner it is conducted as of the date of this
Agreement and which result in a Material Adverse Effect;

            (h) by DUSA should, prior to the Closing, the price per share of
DUSA common stock fall to a level which would require approval by the
shareholders of DUSA prior to the issuance of any shares in satisfaction of the
Consideration;

            (i) by DUSA after receipt of the written legal opinion of counsel
detailing that terminating the Agreement is required in order for the Board of
Directors of DUSA to comply with its fiduciary duties under the applicable laws
of the State of New Jersey;

            (j) by mutual written consent of DUSA and Sirius; or

            (k) by either DUSA or Sirius if the Closing has not occurred (other
than through the failure of the party seeking to terminate this Agreement to
comply fully with its obligations under this Agreement) on or before (i)
February 7, 2006, if the terminating party has satisfied all of its obligations
hereunder and the non-terminating party has not satisfied all of its obligations
hereunder, or (ii) in the event that the DUSA Shares to be issued hereunder are
to be registered pursuant to a registration statement on Form S-4, as provided
for in Section 6.8, the date which is six (6) months from the date of the
execution of this Agreement.

      Notwithstanding 11.1(d), the Parties expressly agree that DUSA shall not
have the right to terminate this Agreement as a result of a court order,
temporary restraining order, cease and desist letter or other claim with respect
to any Third Party Intellectual Property Rights.

      11.2 EFFECT OF TERMINATION. Each Party's right of termination under
Section 11.1 is in addition to any other rights it may have under this Agreement
or otherwise, and the exercise of a right of termination will not be an election
of remedies. If this Agreement is terminated pursuant to Section 11.1, all
further obligations of the parties under this Agreement will terminate; provided
that if this Agreement is terminated by a Party because of the breach of the
Agreement by another Party or because one or more of the conditions to the
terminating Party's obligations under this Agreement is not satisfied as a
result of the other Party's failure to comply with its obligations under this
Agreement, the terminating Party's right to pursue all legal remedies will
survive such termination unimpaired for a period of six (6) months after such
termination.

      11.3 BREAK-UP FEE. In the event this Agreement is terminated by Sirius or
the Shareholders pursuant to Section 11.1(a) or 11.1(b)(ii), or by DUSA pursuant
to 11.1(e), 11.1(g) or 11.1(h), then DUSA shall pay to Sirius within five (5)
business days following such termination, the Break-Up Fee. In the event this
Agreement is terminated by DUSA pursuant to Section 11.1(a), 11.1(b)(i) or
11.1(f), then Sirius shall pay to DUSA within five (5) business days following
such termination, the Break-Up Fee. With respect to the foregoing, the parties
shall use their reasonable efforts to close the Transaction on or before
February 7, 2006. Without

                                       56



limiting the foregoing, a Material breach for purposes of Section 11.1(a) shall
include, but not be limited to, Sirius' failure to deliver the Final Financial
Statements to DUSA as required herein.

                                   ARTICLE XII
                          SURVIVAL OF REPRESENTATIONS,
                      WARRANTIES, COVENANTS AND AGREEMENTS

      12.1 REPRESENTATIONS AND WARRANTIES. Except as otherwise provided for
herein, all representations, warranties and covenants in this Agreement, the
certificates delivered hereunder, and any other certificate or document
delivered pursuant to this Agreement shall expire on the date which is
twenty-four (24) months after the Closing Date.

      12.2 LIMITATION OF LIABILITY. Notwithstanding anything herein to the
contrary, the liability of each Sirius Shareholder for any claim for Damages
made by DUSA or its Affiliates with respect to any matter arising out of or
related to this Agreement or the Transaction shall be limited to DUSA's rights
under Article XIII.

                                  ARTICLE XIII
                                 INDEMNIFICATION

      13.1 INDEMNIFICATION OF DUSA INDEMNITEES. The Sirius Shareholders shall
protect, defend, indemnify, and hold harmless DUSA and DUSA Sub and their
respective Representatives, Affiliates, successors and permitted assigns
(collectively, the "DUSA Indemnitees") from and against any and all Damages
actually sustained or incurred by any of them, directly or indirectly, as a
result of, in connection with, related to or arising out of:

            (a) any undisclosed liabilities of Sirius arising prior to the
Closing Date;

            (b) subject to Sections 2.5(b) and 2.5(f), a court order, temporary
restraining order, permanent injunction, cease and desist letter or other notice
containing a significant threat to the continued manufacturing, production
and/or marketing of a Product with respect to any Third Party Intellectual
Property Rights relating to any of the Products.

            (c) any Material breach of any representation, warranty or covenant
made by Sirius or a Principal Shareholder in this Agreement;

            (d) any tort claim, including, but not limited to, negligence and
strict liability claims, and any claim for intentional misconduct or wrongdoing;
and

            (e) any Taxes to the extent provided in Article XIV.

      Any assertion by the DUSA Indemnitees (or any of them) that the Sirius
Shareholders are liable under the terms of this Section 13.1 must be made in a
writing delivered to the Shareholders' Representatives and shall be subject to
the limitations set forth below.

      13.2 INDEMNIFICATION OF THE SIRIUS SHAREHOLDERS. DUSA shall protect,
defend, indemnify and hold harmless each Sirius Shareholder from and against any
and all Damages actually sustained or incurred by any of them, directly or
indirectly, as a result of, in connection

                                       57



with, related to or arising out of (a) a Material breach of any representation,
warranty or covenant made by DUSA in this Agreement, (b) any action taken by
DUSA, whether prior to or after the Closing, resulting in the failure of the
transaction to qualify as a tax-free reorganization, or (c) all Taxes of Sirius
(and claims with respect to such Taxes) with respect to all taxable periods
beginning after the Closing Date as further provided in Article XIV.

      13.3 LIMITATIONS.

            (a) No claims for breaches of representations, warranties, covenants
or obligations may be brought by any DUSA Indemnitee or Sirius Shareholder after
two (2) years following the Closing Date. No Person shall have any obligation to
indemnify any other Person pursuant to this Agreement, unless the amount of
Damages sustained or incurred with respect to a particular claim satisfy the
criteria set forth in Section 2.5(c) hereof If this Agreement is terminated and
the Closing does not occur, no Party shall have any obligation to indemnify any
Person hereunder except with respect to any breaches of the covenants contained
in Section 9.5 and Section 15.3 of this Agreement.

            (b) Any claim for indemnification made by any DUSA Indemnitee
pursuant to Section 13.1 shall be satisfied, subject to the terms and conditions
provided elsewhere herein, (i) first, from any applicable insurance policies
covering Sirius or covering Sirius' Representatives, other than the
Representation and Warranty Insurance, and (ii) second, from the Liability
Escrow Account pursuant to the terms of Section 2.5 and as provided below, and
(iii) thereafter, from the Representation and Warranty Insurance, if secured by
DUSA. Notwithstanding the foregoing, nothing contained herein shall be deemed to
prohibit or restrict application of the amounts held in the Liability Escrow
Account from being applied to the deductible amounts with respect to any
applicable insurance policies to be used for indemnification pursuant to clause
(i) and (iii) hereof.

            (c) The indemnification provisions of this Article XIII shall
constitute the exclusive remedy of the DUSA Indemnitees and the Sirius
Shareholders, except for fraud and equitable remedies, with respect to any
matter arising out of, related to or in connection with this Agreement.

            (d) If the DUSA Principal Officers (as defined below) have any
Actual Knowledge (as defined below) as of the date of this Agreement as proven
by Sirius in a court of competent jurisdiction or by other trier of fact as
provided for in Article XVI that any Material representation or warranty made by
Sirius or any Sirius Shareholder contained herein is incorrect in any Material
respect as of the date of this Agreement, DUSA shall have no remedy or recourse
with respect thereto. If, after the date of this Agreement and prior to the
Closing Date, any of the DUSA Principal Officers are notified in writing or
otherwise obtains any Actual Knowledge as proven by Sirius in a court of
competent jurisdiction or by other trier of fact that any Material
representation or warranty made by Sirius or any Sirius Shareholder is incorrect
in any Material respect as of the date of this Agreement or the Closing Date,
DUSA shall have as its sole remedy under this Agreement the option (i) to
terminate this Agreement (upon providing ten (10) Business Days' written notice
to Sirius and the Shareholders' Representative, during which period Sirius may
cure such Material misrepresentation or Material breach of representation or
warranty), or (ii) to proceed with the Closing and, upon the Closing, DUSA shall
be conclusively

                                       58



deemed to have waived all claims under this Agreement relating only to such
Material misrepresentation or Material breach of representation or warranty. For
purposes of this Section 13.3(d), "DUSA Principal Officers" means the following
officers and/or employees of DUSA: (i) Dr. Geoffrey Shulman, Chairman and Chief
Executive Officer, (ii) Mr. Robert Doman, President and Chief Operating Officer,
(iii) Mr. Richard Christopher, Vice President, Finance and Chief Financial
Officer, (iv) Mr. Michael Todisco, Controller, and (v) Mr. Scott Lundahl, Vice
President, Regulatory Affairs and Intellectual Property. Also for purposes of
this Section 13.3(d), "Actual Knowledge" means information that comes to such
Principal Officers without obligation to make any investigation or inquiry of
any kind by or on behalf of such Principal Officers.

      13.4 GENERAL PROVISIONS.

            (a) All payments made by DUSA or any Sirius Shareholder, as the case
may be, under this Article XIII shall be treated as adjustments to the
Consideration for all Tax purposes.

            (b) The obligations of DUSA and the Sirius Shareholders in respect
of a claim for indemnification under this Agreement shall not include any
special, exemplary or consequential damages, including business interruption or
lost profits, or any punitive damages.

            (c) DUSA and the Sirius Shareholders shall take all reasonable steps
to mitigate their respective Damages upon and after becoming aware of any event
which could reasonably be expected to give rise to any Damages that are
indemnifiable hereunder.

            (d) Upon making any indemnification payment, the indemnitor will, to
the extent of such payment, be subrogated to all rights of the indemnitee
against any third party in respect of the Damages to which the payment relates.
Without limiting the generality of any other provision hereof, each such
indemnitor and indemnitee will duly execute upon request all instruments
reasonably necessary to evidence and perfect the above-described subrogation
rights.

            (e) DUSA agrees that the aggregate amount of indemnification to
which it is entitled from one or more Sirius Shareholders in connection with any
or all claims made by DUSA under this Article XIII shall be expressly and
exclusively limited to the Liability Escrow Amount.

            (f) The Sirius Shareholders expressly agree that any indemnification
obligation of Sirius may be, to the extent provided for in this Article XIII,
satisfied from the Liability Escrow Account.

      13.5 PROCEDURES FOR INDEMNIFICATION - THIRD PARTY CLAIMS.

            (a) For the purposes of this Section 13.5, the term "Indemnitee"
shall refer to the Person(s) being indemnified, or entitled or claiming to be
entitled to be indemnified pursuant to Section 2.5, 13.1 or 13.2 and
"Indemnitor" shall refer to the Person(s) having the obligation to indemnify
pursuant to such provisions.

                                       59



            (b) An Indemnitee shall, promptly after receiving notice of or
becoming aware of any claim, including Third Party claims against it, but in any
event within one hundred twenty (120) days thereof, give written notice to the
Indemnitor. Such notification shall describe in reasonable detail (to the extent
known by the Indemnitee) the facts constituting the basis for such claim and the
amount of the claimed Damages; provided, however, that the failure to notify any
Indemnitor will relieve the Indemnitor of any liability or obligation that it
may have to such Indemnitee. A DUSA Indemnitee shall have satisfied this written
notice requirement by giving such notice to the Shareholder Representatives on
behalf of the Sirius Shareholders.

            (c) An Indemnitor will be entitled to participate in any Proceeding
in connection with its obligations hereunder and, to the extent that the
Indemnitor wishes (unless the Indemnitor is also a party to such Proceeding and
the Indemnitee determines in good faith that joint representation would be
inappropriate), to assume the defense of such Proceeding with counsel reasonably
satisfactory to the Indemnitee and, after notice from the Indemnitor to the
Indemnitee of its election to assume the defense of such Proceeding, the
Indemnitor will not, as long as it diligently conducts such defense, be liable
to the Indemnitee under this Agreement for any fees of other counsel or any
other expenses with respect to the defense of such Proceeding, in each case
subsequently incurred by the Indemnitee in connection with the defense of such
Proceeding, other than reasonable costs of investigation. If the Indemnitor
assumes the defense of a Proceeding:

                  (i) it will be conclusively established for purposes of this
Agreement that the claims made in that Proceeding are within the scope of and
subject to indemnification;

                  (ii) the Indemnitor will have no liability with respect to any
compromise or settlement of such claims effected without its consent, other than
reasonable, documented costs of investigation.

                  (iii) the Indemnitee shall cooperate with the Indemnitor in
such defense and make available to the Indemnitor all witnesses, pertinent
records, materials and information in its possession or under its control
relating thereto as is reasonably required by the Indemnitor;

                  (iv) the Indemnitee may participate by its own counsel and at
its own expense in the defense of such Third Party claim.

            (d) In the event the Indemnitee is, directly or indirectly,
conducting the defense against any claim, the Indemnitor shall cooperate with
the Indemnitee in such defense and make available to it all such witnesses,
records, materials and information in its possession or under its control
relating thereto as is reasonably required by the Indemnitee, and the Indemnitor
may participate by its own counsel at its own expense in the defense of such
Third Party claim.

            (e) Except for the settlement of a Third Party claim which involves
the payment of money only, with respect to which the Indemnitor has agreed to
indemnify the Indemnitee, no Third Party claim may be settled by the Indemnitor
without the written consent of the Indemnitee, which consent shall not be
unreasonably withheld, conditioned or delayed. No

                                       60



Third Party claim may be settled by an Indemnitee without the written consent of
the Indemnitor, which consent shall not be unreasonably withheld, conditioned or
delayed.

      13.6 PROCEDURE FOR INDEMNIFICATION - OTHER CLAIMS. A claim for
indemnification for any matter not involving a Third Party claim may be asserted
by notice to the Person from whom indemnification is sought.

                                   ARTICLE XIV
                                   TAX MATTERS

      14.1 TAX ALLOCATION. The following provisions shall govern the allocation
of responsibility as between DUSA and the Sirius Shareholders for certain tax
matters following the Closing Date:

            (a) In the case of any taxable period that includes (but does not
end on) the Closing Date (a "Straddle Period"), the amount of any Taxes based on
or measured by income or receipts of Sirius for the Pre-Closing Tax Period shall
be determined based on an interim Closing of the books as of the close of
business on the Closing Date (and for such purpose, the taxable period of any
partnership or other pass-through entity in which Sirius holds a beneficial
interest shall be deemed to terminate at such time) and the amount of other
Taxes of Sirius for a Straddle Period that relates to the Pre-Closing Tax Period
shall be deemed to be the amount of such Tax for the entire taxable period
multiplied by a fraction the numerator of which is the number of days in the
taxable period ending on the Closing Date and the denominator of which is the
number of days in such Straddle Period.

            (b) DUSA shall prepare or cause to be prepared and file or cause to
be filed all Tax Returns for Sirius that are filed after the Closing Date. At
the written request of the Sirius Shareholders, DUSA shall permit the Sirius
Shareholders (through the Shareholder Representatives) to review and comment on
each such Tax Return covering a Straddle Period prior to filing.

            (c) DUSA, Sirius and the Sirius Shareholders shall cooperate fully,
as and to the extent reasonably requested by the other Party, in connection with
the filing of Tax Returns pursuant to Section 14.1(d) and any audit, litigation
or other proceeding with respect to Taxes. Such cooperation shall include the
retention and (upon the other Party's request) the provision of records and
information that are reasonably relevant to any such audit, litigation or other
proceeding and making employees available on a mutually convenient basis to
provide additional information and explanation of any Material provided
hereunder. Sirius and the Sirius Shareholders agree (A) to retain all books and
records with respect to Tax matters pertinent to Sirius relating to any taxable
period beginning before the Closing Date until the expiration of the statute of
limitations (and, to the extent notified by DUSA or the Sirius Shareholders, any
extensions thereof) of the respective taxable periods, and to abide by all
record retention agreements entered into with any taxing authority, and (B) to
give the other Party reasonable written notice prior to transferring, destroying
or discarding any such books and records and, if the other Party so requests,
Sirius or the Sirius Shareholders, as the case may be, shall allow the other
Party to take possession of such books and records. DUSA shall have
responsibility for handling any audits of pre-Closing tax periods which occur
after the Closing Date.

                                       61



                  (i) DUSA and the Sirius Shareholders further agree, upon
request, to use their best efforts to obtain any certificate or other document
from any governmental authority or any other Person as may be necessary to
mitigate, reduce or eliminate any Tax that could be imposed (including, but not
limited to, with respect to the transactions contemplated hereby).

                  (ii) DUSA and the Sirius Shareholders further agree, upon
request, to provide the other Party with all information that either Party may
be required to report pursuant to Code Section 6043 and all Treasury Regulations
promulgated thereunder.

            (d) All tax-sharing agreements or similar agreements with respect to
or involving Sirius shall be terminated as of the Closing Date and, after the
Closing Date, Sirius shall not be bound thereby or have any liability
thereunder.

                                   ARTICLE XV
                               GENERAL PROVISIONS

      15.1 EXPENSES. DUSA will bear its expenses incurred in connection with the
preparation, execution, and performance of this Agreement and the transactions
contemplated herein, including all fees and expenses of agents, representatives,
counsel, and accountants. Additionally, DUSA shall be responsible to pay when
due all transfer, documentary, sales, use, value added, stamp, registration,
goods and services taxes, as well as all conveyance fees, recording charges and
other fees and charges, incurred in connection with the transactions
contemplated by this Agreement, regardless of whether the obligation to pay any
such taxes, fees or charges would otherwise be the obligation of Sirius or the
Sirius Shareholders under applicable law or by custom or practice. The parties
hereto acknowledge that Sirius shall pay all Expenses in connection with this
Agreement as provided in Section 6.3(a)(ii).

      15.2 PUBLIC ANNOUNCEMENTS. Any public announcement or similar publicity
with respect to this Agreement or the transactions contemplated herein will be
issued, if at all, at such time and in such manner as DUSA and Sirius shall
reasonably determine. Sirius and DUSA will consult with each other concerning
the means by which the public and Sirius's employees, distributors, customers,
and suppliers and others having dealings with Sirius will be informed of the
transactions contemplated herein and no announcement shall be made by any party
without the prior written consent of DUSA in the case of a proposed announcement
by Sirius or of Sirius in the case of a proposed announcement by DUSA; provided,
however, that this Section 15.2 shall not apply to DUSA's obligations to comply
with applicable state and federal securities laws and the rules and regulations
of the National Association of Securities Dealers and the NASDAQ National
Market.

      15.3 CONFIDENTIALITY. The provisions of the Mutual Confidential Agreement
Disclosure between Sirius and DUSA dated June 20, 2005 ("Confidentiality
Agreement") will continue in full force and effect and will survive the
execution and delivery of this Agreement.

      15.4 NOTICES. All notices, consents, waivers, and other communications
under this Agreement must be in writing and will be deemed to have been duly
given when: (a) delivered by hand (with written confirmation of receipt), (b)
sent by facsimile (with written confirmation of receipt), provided that a copy
is mailed by registered mail, return receipt requested, or (c)

                                       62



when received by the addressee, if sent by a nationally recognized overnight
delivery service (receipt requested), in each case to the appropriate addresses
and facsimile numbers set forth below (or to such other addresses and facsimile
numbers as a party may designate by written notice to the other parties):

If to Sirius:                               With a copy to:

Sirius Laboratories, Inc.                   Seyfarth Shaw LLP
100 Fairway Drive, Suite 130                55 East Monroe Street, Suite 4200
Vernon Hills, Illinois 60061                Chicago, Illinois 60603-5803
Attention: President and CEO                Attention: Deborah Gordon, Esq.
Telephone: No.: (847) 969-2424              Telephone: No.: (312) 781-8620
Facsimile No.: (847) 968-2484               Facsimile No.: (312) 269-8869

or, at such other address as Sirius or the Sirius Shareholders may designate by
advance written notice to the other parties hereto; and

If to the Shareholders Representative(s):   and to:

Frank Pollard                               Jeffrey Bernstein
3615 RFD                                    49 E. Division Street
Long Grove, Illinois 60047                  Chicago, Illinois 60611
Telephone No.: (847) 540-0413               Telephone No.: (312) 787-2573
                                            Facsimile No.: (312) 787-2682

with a copy to: Seyfarth Shaw LLP (set forth above); or, in each case, at such
other address such Shareholder Representatives or the Sirius Shareholders may
designate by advance written notice to the other parties hereto; and

If to DUSA:                                 With a copy to:

DUSA Pharmaceuticals, Inc.                  Reed Smith LLP
25 Upton Drive                              Princeton Forrestal Village
Wilmington, Massachusetts 01887             136 Main Street, Suite 250
Attention:  President and COO               P.O. Box 7839
Telephone: No.: (978) 657-7500              Princeton, New Jersey 08543-7839
Facsimile No.: (978) 909-1016               Attention: Nanette W. Mantell, Esq.
                                            Telephone No.: (609) 987-0050
                                            Facsimile No.: (609) 951-0824

or at such other address as DUSA may designate by advance written notice to the
other parties hereto.

      15.5 JURISDICTION; SERVICE OF PROCESS. Any action or proceeding seeking to
enforce any provision of, or based on any right arising out of, this Agreement
may be brought against any of the parties in the courts of the State of New
York, or, if it has or can acquire jurisdiction, in the United States District
Court for the Southern District of New York, and each of the parties consents to
the jurisdiction of such courts (and of the appropriate appellate courts) in any
such action or proceeding and waives any objection to venue laid therein.
Process in any action or proceeding referred to in the preceding sentence may be
served on any party anywhere in the world.

                                       63



      15.6 FURTHER ASSURANCES. The parties agree before and after Closing: (a)
to furnish upon request to each other such further information, (b) to execute
and deliver to each other such other documents, and (c) to do such other acts
and things, all as the other party may reasonably request for the purpose of
carrying out the intent of this Agreement and the documents referred to in this
Agreement.

      15.7 WAIVER. The rights and remedies of the parties to this Agreement are
cumulative and not alternative. Neither the failure nor any delay by any party
in exercising any right, power, or privilege under this Agreement or the
documents referred to in this Agreement will operate as a waiver of such right,
power, or privilege, and no single or partial exercise of any such right, power,
or privilege will preclude any other or further exercise of such right, power,
or privilege or the exercise of any other right, power, or privilege. To the
maximum extent permitted by applicable law: (a) no claim or right arising out of
this Agreement or the documents referred to in this Agreement can be discharged
by one party, in whole or in part, by a waiver or renunciation of the claim or
right unless in writing signed by the other party; (b) no waiver that may be
given by a party will be applicable except in the specific instance for which it
is given; and (c) no notice to or demand on one party will be deemed to be a
waiver of any obligation of such party or of the right of the party giving such
notice or demand to take further action without notice or demand as provided in
this Agreement or the documents referred to in this Agreement.

      15.8 ENTIRE AGREEMENT AND MODIFICATION. This Agreement supersedes all
prior agreements between the parties with respect to its subject matter (other
than the Confidentiality Agreement, which shall survive the execution and/or
termination of this Agreement in accordance with its terms) and constitutes
(along with the documents referred to in this Agreement and the Confidentiality
Agreement) a complete and exclusive statement of the terms of the agreement
between the parties with respect to its subject matter. This Agreement may not
be amended except by a written agreement executed by all parties.

      15.9 DISCLOSURE SCHEDULES.

            (a) If and to the extent any information required to be furnished in
any Schedule is contained in another Schedule, such information will be deemed
to be included in all Schedules in which such information is required to be
included, to the extent such disclosure is reasonably apparent on its face to be
applicable to such other Schedule.

            (b) In the event of any inconsistency between the statements in the
body of this Agreement and those in the Disclosure Schedules, the statements in
the body of this Agreement shall control.

      15.10 ASSIGNMENTS, SUCCESSORS, AND NO THIRD-PARTY RIGHTS. No party may
assign any of its rights or delegate its obligations under this Agreement
without the prior consent of the other parties, except that DUSA may assign its
rights or delegate its obligations hereunder to its Affiliates so long as DUSA
remains ultimately liable for all of DUSA's obligations hereunder. Subject to
the preceding sentence, this Agreement will apply to, be binding in all respects
upon, and inure to the benefit of the successors and permitted assigns of the
parties. Nothing expressed or referred to in this Agreement will be construed to
give any Person other than the parties to this Agreement any legal or equitable
right, remedy, or claim under or with respect to this Agreement

                                       64



or any provision of this Agreement. This Agreement and all of its provisions and
conditions are for the sole and exclusive benefit of the parties to this
Agreement and their successors and assigns.

      15.11 SEVERABILITY. If any provision of this Agreement is held invalid or
unenforceable by any court of competent jurisdiction, the other provisions of
this Agreement will remain in full force and effect. Any provision of this
Agreement held invalid or unenforceable only in part or degree will remain in
full force and effect to the extent not held invalid or unenforceable.

      15.12 ARTICLE AND SECTION HEADINGS, CONSTRUCTION. The headings of Sections
in this Agreement are provided for convenience only and will not affect its
construction or interpretation. All references to "Article," "Articles,"
"Section" or "Sections" refer to the corresponding Article, Articles, Section or
Sections of this Agreement. All words used in this Agreement will be construed
to be of such gender or number as the circumstances require. Unless otherwise
expressly provided, the word "including" does not limit the preceding words or
terms.

      15.13 GOVERNING LAW. This Agreement will be governed by the laws of the
State of New York without regard to conflicts of laws principles.

      15.14 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original copy of this
Agreement and all of which, when taken together, will be deemed to constitute
one and the same agreement.

                                   ARTICLE XVI
                               DISPUTE RESOLUTION

      16.1 ARBITRATION. Except as specified in Section 16.2 below, any dispute,
controversy or other claim, including for indemnification pursuant to Article
XIII, whether based on contract, tort, statute or other legal theory (including
but not limited to claims of fraud or misrepresentation), arising out of or
relating to this Agreement (including but not limited to its validity,
interpretation, performance or breach) shall be resolved exclusively by
arbitration pursuant to the then-current Commercial Rules and supervision of the
American Arbitration Association ("AAA"). The arbitration shall be held in New
York, New York. Each Party (the applicable Sirius Shareholders, as one party,
and DUSA (and any applicable Person claiming by or through DUSA, including the
DUSA Indemnitees), as one party) shall appoint one arbitrator within thirty (30)
days after receipt by the respondent of the notice of arbitration. The two
arbitrators appointed pursuant to the preceding sentence shall, within thirty
(30) days after their appointment, appoint a third, presiding arbitrator. If
either Party fails to nominate an arbitrator, or the two arbitrators appointed
by the parties are unable to appoint a presiding arbitrator within the stated
periods, the second or presiding arbitrator, as the case may be, shall be
appointed by the AAA. All arbitrators shall be fluent in English and all
hearings shall be conducted in the English language and shall have knowledge of
the pharmaceutical industry and relevant markets. The arbitrators shall, by
majority vote, render a written decision stating reasons therefor. The
arbitrators shall not have the power to award punitive or exemplary damages, or
any damages excluded by, or in excess of any limitations expressed in this
Agreement. The arbitrators' decision and award shall be final and binding and
may be entered in any court having jurisdiction

                                       65



thereof. Issues of arbitrability shall be determined in accordance with the
federal substantive and procedural laws relating to arbitration; all other
aspects of this Agreement shall be interpreted in accordance with, and the
arbitrators shall apply and be bound to follow the laws set forth in this
Section 16.1. The costs and expenses of the arbitration shall be paid as the
arbitrators determine. Any cash award shall be payable in United States dollars
through a bank in the United States.

      16.2 JUDICIAL PROCEEDINGS. Each Party shall have the right to institute
judicial proceedings against the other Party or anyone acting by, through or
under such other Party in order to enforce the instituting party's rights
hereunder through specific performance, injunction or similar equitable relief.

                            [Signature Page Follows.]

                                       66


                                                                  EXECUTION COPY

      IN WITNESS WHEREOF, the parties have executed and delivered this Merger
Agreement as of the date first written above.

                                     SIRIUS LABORATORIES, INC.

                                     By: /s/ Frank R. Pollard
                                         ---------------------------------------
                                     Name:  Frank R. Pollard
                                     Title: Vice Chairman

                                     DUSA PHARMACEUTICALS, INC.

                                     By:/s/ D. Geoffrey Shulman
                                         ---------------------------------------
                                     Name: D. Geoffrey Shulman, MD, FRCPC
                                     Title: Chairman and Chief Executive Officer

                                     THE SHAREHOLDERS

                                     /s/ Frank R. Pollard
                                     -------------------------------------------
                                     Frank R. Pollard

                                     /s/ Jean E. Pollard
                                     -------------------------------------------
                                     Jean E. Pollard

                                     /s/ Jeffrey R. Bernstein
                                     -------------------------------------------
                                     Jeffrey R. Bernstein Ph.D.

                                     /s/ Carole Bernstein
                                     -------------------------------------------
                                     Carole Bernstein

                                     /s/ Joel Bernstein
                                     -------------------------------------------
                                     Joel Bernstein, M.D.

                                     /s/ David Bernstein
                                     -------------------------------------------
                                     David Bernstein



                                     /s/ Rebecca Zelkin
                                     -------------------------------------------
                                     Rebecca Zelkin

                                     /s/ Frank R. Pollard
                                     -------------------------------------------
                                     Frank R. Pollard, Jr.

                                     /s/ Scott E. Pollard
                                     -------------------------------------------
                                     Scott E. Pollard

                                     /s/ Brett A. Pollard
                                     -------------------------------------------
                                     Brett A. Pollard

                                     /s/ Garry R. Barnes
                                     -------------------------------------------
                                     Garry R. Barnes

                                     /s/ Luanna Barnes
                                     -------------------------------------------
                                     Luanna Barnes

                                     /s/ Keyoumars Soltani
                                     -------------------------------------------
                                     Keyoumars Soltani

                                     For Saeed Soltani
                                     -------------------------------------------
                                     Saeed Soltani
                                     Power of attorney copy enclosed

                                     /s/ David H. Whitney
                                     -------------------------------------------
                                     David H. Whitney


Schedules and exhibits omitted pursuant to item 601(b)(2) of Regulation S-K.
The Company agrees to furnish supplementally a copy of any omitted schedule or
exhibit to the Commission upon request.

                                       2

EX-2.A.2

                                                                  EXHIBIT 2(a.2)

                       FIRST AMENDMENT TO MERGER AGREEMENT

      THIS FIRST AMENDMENT TO MERGER AGREEMENT (this "First Amendment") is made
on the 6th day of February, 2006, by and among DUSA Pharmaceuticals, Inc., a
publicly traded pharmaceutical company incorporated in the State of New Jersey,
with principal offices at 25 Upton Drive, Wilmington, Massachusetts ("DUSA"),
Sirius Laboratories, Inc., a privately held specialty pharmaceutical company
incorporated in the State of Illinois, with principal offices at 100 Fairway
Drive, Suite 130, Vernon Hills, Illinois ("Sirius"), and those shareholders of
Sirius set forth on the signature pages hereto (each a "Principal Shareholder"
and collectively the "Principal Shareholders"). DUSA, Sirius and the Principal
Shareholders are at times referred to each as a "Party" and collectively as the
"Parties." All capitalized terms used, but not specifically defined herein,
shall have the meaning provided for such terms in the Merger Agreement (as
defined below).

                                 R E C I T A L S

      WHEREAS, the Parties entered into that certain Merger Agreement, dated
December 30, 2005 (as the same may be amended from time to time, the "Merger
Agreement") whereby the Parties have agreed to effect a merger of Sirius with
and into a wholly-owned subsidiary of DUSA ("DUSA Sub"), resulting in DUSA Sub
being the surviving entity, the Sirius Shareholders receiving the consideration
provided for therein, and DUSA owning all of the issued and outstanding common
stock of DUSA Sub; and

      WHEREAS, the Parties wish to amend certain terms of the Merger Agreement
in accordance with Section 15.8 of the Merger Agreement, as provided for herein.

      NOW, THEREFORE, the Parties, in furtherance of the foregoing and for good
and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, intending to be legally bound, agree as follows:

      1.    The following is added as a new Section 1.50a:

                  1.50a "First Amendment" means the First Amendment to Merger
            Agreement between the Parties dated February 6, 2006.

      2.    The following is added as a new Section 1.109a:

                  1.109a "Sirius Share Equivalents" means the interest in the
            Consideration held by former holders of Sirius Options who elect to
            cancel their Sirius Options in exchange for treatment (without the
            need for any payment) as if such holders had exercised two-thirds
            (2/3) of their Sirius Options for Sirius Shares. Holders of Sirius
            Options who elect such treatment are not considered holders of
            shares of Sirius common stock.

      3.    Sections 1.21, 1.22 and 1.23 are amended as follows:

                  (a) In Section 1.21, replace "Thirty Million Dollars
            ($30,000,000)" with "Twenty-Five Million Dollars ($25,000,000)."



                  (b) Delete Section 1.22 in its entirety and replace it with
            the following: ""Dissenters Multiplier" means the total number of
            Sirius Shares and Sirius Share Equivalents held by the Dissenting
            Shareholders as of the Closing Date divided by the total number of
            Sirius Shares on a fully diluted, as converted to common stock basis
            plus all Sirius Share Equivalents as of the Closing Date."

                  (c) The following is added to the end of Section 1.23:
            "including any Non-Participating Sirius Option Holders (For sake of
            clarity, it is understood that the Non-Participating Sirius Option
            Holders are not, as result of holding Sirius Options, stockholders
            of Sirius, and the Dissenting Shareholders are not entitled to the
            Consideration set forth herein)."

      4.    The first sentence of Section 1.47 is deleted and replaced with the
            following:

                  ""Fair Market Value" means for purposes of Section 2.2(c)(ii),
            the average closing price of DUSA Shares on the NASDAQ Stock Market
            for the last twenty (20) trading days of the month in which the
            applicable milestone is achieved, which average closing price shall
            be calculated by adding the closing price of DUSA Shares for each of
            the twenty (20) designated days and dividing the sum by twenty (20);
            and shall mean for purposes of Sections 2.2(b) and 2.5 the lesser of
            (i) the average closing price of DUSA Shares on the NASDAQ Stock
            Market for the twenty (20) trading days prior to the Closing Date,
            which average closing price shall be calculated by adding the
            closing price of DUSA Shares for each of the twenty (20) designated
            days and dividing the sum by twenty (20), or (ii) Ten Dollars and
            10/100 ($10.10)."

      5.    The following is added as a new Section 1.80a:

                  1.80 "Non-Participating Sirius Option Holders" means any
            holders of Sirius Options who refuse or fail to participate in or
            take part in the Transaction, except those holders of Sirius Options
            who waive any and all rights under their Sirius Options, the
            Transaction and the Merger Agreement by completing, executing and
            delivering a waiver in a form and substance mutually acceptable to
            the Parties, provided that DUSA's acceptance shall not be
            unreasonably withheld or delayed."

      6. The following is added to the end of Section 1.84: "including those
holders of Sirius Options who elect to cancel their Sirius Options in exchange
for Sirius Share Equivalents."

      7. The following is added to the end of Section 2.2(a) and Section 2.2(b):
"In addition, Schedule 3.3(a) shall set forth the amount paid with respect to
Sirius Share Equivalents held by the Participating Shareholders. No amount shall
be paid under this Section 2.2(a) with respect to any Dissenting Shareholder."

      8. Section 2.3 is amended by deleting "February" and replacing it with
"March."

                                      - 2 -



      9. The following is added to the end of Section 2.4(b)(i): "(it being
understood that those Participating Shareholders who do not provide wire
instructions shall be mailed a check within five (5) Business Days of the
Closing Date);"

      10. The third sentence of Section 2.6 is deleted and replaced with the
following:

                  "In addition, each other Sirius Shareholder receiving DUSA
            Shares hereunder who also receives (as determined by Sirius in
            advance of the Closing) the estimated 2006 revenue and loss ranges
            for DUSA (following the consummation of the Transaction) shall agree
            to be subject to a lock-up of such DUSA Shares until the earlier of
            (i) the date on which DUSA releases its 2006 earnings to the public
            (which is estimated to be in February 2007), or (ii) the date on
            which such estimated 2006 revenue and loss ranges for DUSA
            (following the consummation of the Transaction) is announced to the
            public by DUSA or such information is deemed by DUSA in its
            reasonable discretion (in which case it will so notify such
            locked-up Sirius Shareholders) no longer Material to the business
            and operations of DUSA and/or DUSA Sub."

      11. The following is added to the end of Section 2.9(a): "The Dissenters
Escrow Agreement shall provide that, following the Closing, to the extent DUSA
provides consideration to a Non-Participating Sirius Option Holder upon the
exercise of, or in exchange for, a Sirius Option, including without limitation
DUSA's grant of a stock option to purchase shares of DUSA's common stock in
exchange for a Sirius Option, DUSA shall be entitled to receive from the Escrow
Agent the amount corresponding to the lesser of (i) the amount such
Non-Participating Sirius Option Holder is entitled to receive as a Dissenting
Shareholder, or (ii) the actual value of any cash or shares of DUSA common stock
issued by DUSA less any consideration received by DUSA by such Non-Participating
Sirius Option Holder."

      12. The following is added to the end of Section 6.3(a)(i): "and (C) the
legal fees and expenses actually and reasonably incurred by Sirius in connection
with the preparation of the First Amendment and any Information Statement dated
after February 6, 2006; provided, further, that Sirius and its counsel shall
provide DUSA with a detailed accounting of all such legal fees and expenses."

      13. Section 11.1(k) and Section 11.3 are revised by deleting "February"
and replacing it with "March."

      14. All other terms and conditions of the Merger Agreement shall remain in
full force and effect. This First Amendment shall not constitute a waiver or
modification of any of the Parties' rights and remedies or of any of the terms,
conditions, warranties, representations, or covenants contained in the Merger
Agreement, except as specifically set forth above.

      15. This First Amendment may be executed in counterparts, each of which,
when taken together, shall be deemed to be one and the same instrument.

                            [Signature Pages Follow.]

                                     - 3 -



      IN WITNESS WHEREOF, the parties have executed and delivered this First
Amendment to Merger Agreement as of the date first written above.

                                    SIRIUS LABORATORIES, INC.

                                    By:/s/ Frank R. Pollard
                                       ----------------------------------------
                                    Name:  Frank R. Pollard
                                    Title: Vice Chairman

                                    DUSA PHARMACEUTICALS, INC.

                                    By:/s/ D. Geoffrey Shulman
                                       ----------------------------------------
                                    Name:  D. Geoffrey Shulman, MD, FRCPC
                                    Title: Chairman and Chief Executive Officer

                                    THE SHAREHOLDERS

                                    /s/ Frank R. Pollard
                                    -------------------------------------------
                                    Frank R. Pollard

                                    /s/ Jean E. Pollard
                                    -------------------------------------------
                                    Jean E. Pollard

                                    /s/ Jeffrey R. Bernstein
                                    -------------------------------------------
                                    Jeffrey R. Bernstein Ph.D.

                                    /s/ Carole Bernstein
                                    -------------------------------------------
                                    Carole Bernstein

                                    /s/ Joel Bernstein, M.D.
                                    -------------------------------------------
                                    Joel Bernstein, M.D.

                                    /s/ David Bernstein
                                    -------------------------------------------
                                    David Bernstein

                                      - 4 -



                                    /s/ Rebecca Zelken
                                    -------------------------------------------
                                    Rebecca Zelken

                                    /s/ Frank R. Pollard
                                    -------------------------------------------
                                    Frank R. Pollard, Jr.

                                    (Signature Page to First Amendment to
                                    Merger Agreement Continued)

                                    /s/ Scott E. Pollard
                                    -------------------------------------------
                                    Scott E. Pollard

                                    /s/ Brett A. Pollard
                                    -------------------------------------------
                                    Brett A. Pollard

                                    /s/ Garry R. Barnes
                                    -------------------------------------------
                                    Garry R. Barnes

                                    /s/ Luanna Barnes
                                    -------------------------------------------
                                    Luanna Barnes

                                    /s/ Keymoumars Soltani
                                    -------------------------------------------
                                    Keyoumars Soltani

                                    For Saeed Soltani
                                    ------------------------------------------
                                    Saeed Soltani
                                    Power of attorney copy enclosed

                                    /s/ David H. Whitney
                                    -------------------------------------------
                                    David H. Whitney

                                     - 5 -

EX-10.AA

                                                                  Exhibit 10(aa)

Note: Certain portions of this document have been marked "[C.I.]" to indicate
that confidential treatment has been requested for this confidential
information. The confidential portions have been omitted and filed separately
with the Securities and Exchange Commission.

                  MARKETING, DISTRIBUTION AND SUPPLY AGREEMENT

                                     BETWEEN

                           DUSA PHARMACEUTICALS, INC.

                                       AND

                           STIEFEL LABORATORIES, INC.

                                      DATED

                                JANUARY 12, 2006



Note: Certain portions of this document have been marked "[C.I.]" to indicate
that confidential treatment has been requested for this confidential
information. The confidential portions have been omitted and filed separately
with the Securities and Exchange Commission.

     MARKETING, DISTRIBUTION AND SUPPLY AGREEMENT made as of the 12th day of
January 2006 (the "EFFECTIVE DATE") between DUSA PHARMACEUTICALS, INC., a New
Jersey corporation having a principal office and place of business at 25 Upton
Drive, Wilmington, Massachusetts, USA 01887 (hereinafter called "DUSA") and
STIEFEL LABORATORIES, INC., a Delaware corporation having a principal office and
place of business at 255 Alhambra Circle, Suite 1000, Coral Gables, Florida, USA
33134 (hereinafter called "STIEFEL").

     WHEREAS, DUSA is engaged in the development, manufacture and sale of
pharmaceutical products and wishes to market certain of its products in the
Territory (as such term is defined below);

     WHEREAS, STIEFEL is a pharmaceutical company that distributes and sells
pharmaceutical products in the Territory and desires to obtain an exclusive
right to, distribute, promote, and sell in the Territory the Products as such
term is defined manufactured by DUSA;

     WHEREAS, DUSA has agreed, subject to the terms and conditions of the
Agreement, to grant STIEFEL an exclusive right to distribute, promote, and sell
such Product in the Territory and to manufacture and supply to STIEFEL on an
exclusive basis in the Territory all of STIEFEL's reasonable requirements of the
Product;

     WHEREAS, STIEFEL has agreed to undertake the distribution, promotion, and
sale of such Products in the Territory, and will purchase the Product
exclusively from DUSA in accordance with the terms and conditions of this
Agreement; and

     WHEREAS, the Parties also wish to memorialize the understanding between
them with respect to DUSA's grant to STIEFEL of a license to use the DUSA
Trademarks on the DUSA labeled Products in connection with the marketing and
sale of the Product in the Territory under the terms and conditions of the
Agreement.

     NOW, THEREFORE, the Parties agree as follows:

1.   DEFINITIONS.

     For the purposes of this Agreement, capitalized terms used but not
otherwise defined in this Agreement shall have the meanings set forth in this
Section 1:

     1.1 "AFFILIATES" shall mean any Person (defined below) which directly or
indirectly controls, is controlled by, or under common control with a Party to
this Agreement. For purposes of the foregoing definition, the term "control"
(including with correlative meaning, the terms "controlling", "controlled by",
and "under common control with") as used with respect to any Person, shall mean
(i) in the case of corporate entities, direct or indirect ownership of at least
[C.I.] percent ([C.I.]%) of the stock or shares entitled to vote for the
election of directors; and (ii) in the case of non-corporate entities, direct or
indirect ownership of at least [C.I.] percent ([C.I.]%) of the equity interest
or the possession, directly or indirectly, of the power to direct or cause the



Note: Certain portions of this document have been marked "[C.I.]" to indicate
that confidential treatment has been requested for this confidential
information. The confidential portions have been omitted and filed separately
with the Securities and Exchange Commission.

direction of the management and policies of such Person, whether through
ownership of voting securities, by contract, or otherwise.

     1.2 "APPLICABLE LAWS" shall mean all applicable laws, statutes, rules,
regulations and guidelines that may apply to the sale of the Product in the
Territory or the promotion, marketing, packaging, labeling, importation,
exportation, warehousing or distribution of a Product that is to be sold in the
Territory or the performance of either Party's obligations under this Agreement,
and including all good manufacturing practices and all applicable standards or
guidelines promulgated by the appropriate Regulatory Authority.

     1.3 "APPROVED PRICE" shall mean the [C.I.] price per unit to STIEFEL [C.I.]
for the sale of the Product in Brazil excluding up to [C.I.] Percent ([C.I.]%)
in government sales taxes actually paid by STIEFEL on units of the Product sold.

     1.4 "APPROVED PRODUCT" shall mean any Product that shall have been granted
all necessary approvals by the required Regulatory Authorities to allow DUSA
and/or Stiefel, as the case may be, the right to sell and distribute, promote,
and sell the Product in any country in the Territory.

     1.5 "BATCH", with respect to any of the Product, shall mean a separate and
distinct quantity of such Product processed under continuous and identical
conditions and designated by a batch number.

     1.6 "CERTIFICATE OF CONFORMANCE" shall mean a document, which is dated and
signed by a duly authorized representative of the Quality Control or Quality
Assurance Department of DUSA, certifying that a Batch of any Product meets all
Specifications.

     1.7 "COMMERCIALLY REASONABLE EFFORTS" mean the channels, methods and
diligence that a Party employs with respect to other products sold by it
(including its own products) of the same or similar commercial potential.

     1.8 "COMPETING PRODUCTS" means the products identified on Schedule A
attached hereto as Competing Products.

     1.9 "CONFIDENTIAL INFORMATION" means with respect to a Party, all
information of any kind whatsoever (including without limitation, data,
compilations, formulae, models, patent disclosures, procedures, processes,
projections, protocols, results of experimentation and testing, specifications,
strategies, techniques, business and financial information, projections,
customer lists, and all non-public intellectual property rights, and all
tangible and intangible embodiments thereof of any kind whatsoever (including
without limitation, apparatus, compositions, documents, drawings, machinery,
patent applications, records and reports), and all business information,
financial data, projections, customer lists which is disclosed by such Party to
the other Party.

     1.10 "DOMAIN NAMES AND WEBSITES" shall mean those domain names and website
agreed upon by the Parties through which the Products shall be marketed by
STIEFEL hereunder.



Note: Certain portions of this document have been marked "[C.I.]" to indicate
that confidential treatment has been requested for this confidential
information. The confidential portions have been omitted and filed separately
with the Securities and Exchange Commission.

     1.11 "FDA" shall mean the U.S. Food and Drug Administration, or any
successor body.

     1.12 "FD&C ACT" means the Federal Food, Drug and Cosmetic Act of 1938, as
amended and the regulations thereunder, as the same may be amended or revised.

     1.13 "FIELD" shall mean [C.I.] uses of the Products for dermatology
indications.

     1.14 "FIRST APPROVAL DATE" shall mean the date on which DUSA first obtains
approval to market a Product from a Regulatory Authority in the Territory.

     1.15 "FISCAL YEAR" shall mean the twelve-month period commencing on January
1st of each year and ending on December 31st, or any other twelve-month period
designated as the fiscal year of STIEFEL.

     1.16 "GMP" shall mean good manufacturing practices as required by the rules
and regulations of the applicable Regulatory Authority.

     1.17 "GROSS-UP" shall have the meaning set forth in Section 7.2(a).

     1.18 "INDEMNIFIED PARTY" shall have the meaning set forth in Section
14.3(a).

     1.19 "INDEMNIFYING PARTY" shall have the meaning set forth in Section 14.3
(a).

     1.20 "INDEPENDENT LABORATORY" shall have the meaning set forth in Section
9.4.

     1.21 "LAUNCH DATE", as to each Approved Product, shall mean that date on
which marketing and distribution of such Approved Product shall commence in a
given country in the Territory.

     1.22 "LAUNCH NOTICE" shall have the meaning set forth in Section 7.3(a).

     1.23 "MINIMUM PURCHASE OBLIGATIONS" shall have the meaning set forth in
Section 7.2(a).

     1.24 "OBJECTION NOTICE" shall have the meaning set forth in Section 9.4.

     1.25 "PARTY" means STIEFEL and DUSA, individually, and "PARTIES" means
STIEFEL and DUSA, collectively.

     1.26 [C.I.] shall have the meaning set forth on Schedule C attached hereto.

     1.27 "PERSON" shall mean an individual, corporation, partnership, limited
liability company, firm, association, joint venture, estate, trust, governmental
or administrative body or agency, or any other entity.

     1.28 "PRICING APPROVAL" shall mean STIEFEL's receipt from CMED of
Registration of the [C.I.] price allowed to market and sell the Product in
Brazil within the time period stated in Section 2.4 below, at a price of not
less than [C.I.] Brazilian Reals (Brazilian Reals [C.I.]) per unit



Note: Certain portions of this document have been marked "[C.I.]" to indicate
that confidential treatment has been requested for this confidential
information. The confidential portions have been omitted and filed separately
with the Securities and Exchange Commission.

including [C.I.] ([C.I.]%) government taxes (i.e.Net per unit to STIEFEL is
[C.I.] Brazilian Reals (Brazilian Reals [C.I.])).

     1.29 "PRODUCT" shall mean the product set forth on Schedule A.

     1.30 "PRODUCT ALLIANCE MANAGER" shall have the meaning set forth in Section
5.1.

     1.31 "PURCHASE PRICE PER UNIT" shall have the meaning set forth on Schedule
C attached hereto.

     1.32 "REGISTRATION" means the regulatory approvals of any applicable
Regulatory Authorities issued in DUSA's name and necessary to permit the
commencement of the marketing and sale of the Product in any country in the
Territory.

     1.33 "REGULATORY AUTHORITY" means any and all bodies and organizations
regulating the manufacture, importation, distribution, use and sale of the
Product in any country in the Territory.

     1.34 "REPORT" shall have the meaning set forth in Section 9.4.

     1.35 "SPECIFICATIONS" of Product means the specifications for the Product
as approved by the FDA. The Specifications may be amended from time to time by
[C.I.] and as specifically requested by applicable Regulatory Authorities.

     1.36 "DUSA'S TRADEMARKS" shall mean the DUSA Trademarks set forth on
Schedule A hereto, as such Schedule may be amended from time to time by mutual
agreement of the parties.

     1.37 "TECHNICAL INFORMATION" shall mean the manufacturing process and any
and all technical knowledge, trade secrets, analytical methodology, processes,
manufacturing and toxicological information, and any and all other technical
information or experience related to the manufacturing of the Product.

     1.38 "TERM" shall have the meaning set forth in Section 18.1.

     1.39 "TERRITORY" shall mean all countries of the Western Hemisphere from
south of and including Mexico, and all other countries located in the Caribbean
excluding US territories.

     1.40 "THIRD PARTY" means any party other than DUSA, STIEFEL or their
respective Affiliates.

     1.41 "THIRD PARTY LOSS" shall have the meaning set forth in Section 14.1.

     1.42 "TRADEMARK INFRINGEMENT CLAIMS" shall have the meaning set forth in
Section 3.3(a).



Note: Certain portions of this document have been marked "[C.I.]" to indicate
that confidential treatment has been requested for this confidential
information. The confidential portions have been omitted and filed separately
with the Securities and Exchange Commission.

2.   DISTRIBUTION, MARKETING AND PROMOTION.

     2.1 Appointment. During the Term and subject to Sections 2.2(b) and
7.1(a)(i), DUSA hereby appoints STIEFEL as its exclusive distributor for the
Product in the Field in the Territory and STIEFEL hereby accepts such
appointment. Pursuant to this appointment, STIEFEL shall have the exclusive
right to import in finished package form, distribute, promote and sell the
Product in the Field in the Territory subject to the terms and conditions of
this Agreement.

     2.2 Marketing and Promotion Efforts.

          (a) STIEFEL shall use its Commercially Reasonable Efforts to
vigorously distribute, sell and promote the sale of the Product in the Field
within and throughout the Territory [C.I.], so as to maximize sales in each
country in the Territory, beginning [C.I.] after the date of this Agreement,
provided that in the event that STIEFEL is legally prohibited from selling the
Product until Registration for the Product is obtained, then STIEFEL shall begin
distribution and promotion of the Product no later than [C.I.] ([C.I.]) days
after Pricing Approval for the Product is obtained.

          (b) STIEFEL shall be deemed to have commenced the marketing of the
Product in a country within the Territory [C.I.] when it shall have offered such
Product [C.I.]. If STIEFEL does not begin marketing and promotion of the Product
in a country within the Territory within [C.I.] ([C.I.]) days after receipt of
all necessary government approvals to market the Product in such country, in
addition to any other remedies available to DUSA hereunder or under law or in
equity, DUSA may, in its sole discretion [C.I.] of such Product in such country.

          (c) STIEFEL shall provide DUSA as reasonably requested by DUSA on a
[C.I.] basis: (1) [C.I.], as reasonably requested by DUSA for purposes of DUSA's
[C.I.] within the Territory, (2) a summary of the [C.I.] of the Product held by
STIEFEL at the end of such [C.I.] and (3) a report of [C.I.] of the Product sold
by STIEFEL as requested by DUSA, including to comply with applicable laws. The
Parties will mutually agree on the form(s) of reports, information to be
contained therein and the timing of such reports regarding [C.I.] within [C.I.]
([C.I.]) days of the Effective Date, and such agreed upon items shall be
attached to this Agreement as a Schedule D.

          (d) STIEFEL shall, [C.I.], use its Commercially Reasonable Efforts to
distribute, promote, and sell the Product for use [C.I.], as appropriate in the
Territory, in compliance with Applicable Laws and good commercial practice
(including, but not limited to proper shipping and storage).

          (e) STIEFEL will not (and will ensure that its subdistributors, if
any, do not) enter into any [C.I.] for the Product with its customers, including
but not limited to [C.I.], that contain terms that exceed or are otherwise
inconsistent with the terms of this Agreement (including but not limited to
[C.I.] that exceed the term of this Agreement), without receiving DUSA's written
approval, which may be withheld in its sole discretion, before entering into
such agreement.



Note: Certain portions of this document have been marked "[C.I.]" to indicate
that confidential treatment has been requested for this confidential
information. The confidential portions have been omitted and filed separately
with the Securities and Exchange Commission.

          (f) STIEFEL shall purchase all Product needed in pre-marketing efforts
from DUSA at the Purchase Price Per Unit; provided with respect to pre-marketing
in Brazil, during the time that the Pricing Approval has not yet been received,
STIEFEL shall purchase Product needed in pre-marketing efforts in Brazil from
DUSA at [C.I.] U.S. Dollars (U.S. $[C.I.]) per unit.

          (g) Prior to STIEFEL marketing, promoting, distributing or selling a
Product in the Territory, DUSA shall [C.I.] for the Product for STIEFEL's
trainers, at [C.I.]. The [C.I.] shall use [C.I.] provided by DUSA and be limited
only to provide medical information regarding the safety and efficacy of the
Product in question [c.i.] the Products should be marketed, promoted,
distributed or sold in the Territory. [C.I.] STIEFEL and its personnel, sales
force or subdistributors, if any, regarding such medical information regarding
the safety and efficacy and [C.I.], including without limitation marketing and
promotion [C.I.], shall be the responsibility of [C.I.].

     2.3 Restrictions.

          (a) STIEFEL undertakes and agrees that it will not [C.I.] directly or
indirectly [C.I.] the Product [C.I.] nor [C.I.] for the Product knowing that
such [C.I.].

          (b) Except as permitted pursuant to Section 2.5 below, during the term
of this Agreement, STIEFEL shall not, nor shall it aid or facilitate [C.I.] to,
market, promote, sell, offer for sale, distribute or otherwise make the Product
available [C.I.], except as supplied to STIEFEL by DUSA, [C.I.] in the
Territory.

          (c) STIEFEL warrants to DUSA that STIEFEL does not currently represent
or promote [C.I.]. During the term of this Agreement, STIEFEL shall not, nor
shall it aid or facilitate any Third Party to, market, promote, sell, offer for
sale, distribute or otherwise make available [C.I.] to any person in the
Territory.

     2.4 Milestone Payments; Rights of Termination Relating to Pricing Approval.

          (a) Pricing Approval Milestone Payment. Within [C.I.] ([C.I.]) days of
STIEFEL's receipt of the Pricing Approval, STIEFEL shall make a [C.I.], [C.I.]
payment of [C.I.] U.S. Dollars (U.S. $[C.I.]) to DUSA.

          (b) First Units Shipped Milestone Payment. Within [C.I.] ([C.I.]) days
following the total cumulative number of units of Product ordered hereunder by
STIEFEL and shipped by DUSA to STIEFEL exceeding [C.I.] ([c.i.]) units, STIEFEL
shall make a [C.I.], [C.I.] payment of [C.I.] U.S. Dollars (U.S. $[C.I.]) to
DUSA.

          (c) Second Units Shipped Milestone Payment. Within [C.I.] ([C.I.])
days following the total cumulative number of units of Product ordered hereunder
by STIEFEL and shipped by DUSA to STIEFEL exceeding [C.I.] ([c.i.]) units,
STIEFEL shall make a [C.I.], [C.I.] payment of [C.I.] U.S. Dollars (U.S.
$[C.I.]) to DUSA.

          (d) STIEFEL Right of Termination. If STIEFEL does not receive the
Pricing Approval and STIEFEL wishes to terminate the Agreement, STIEFEL must
give DUSA notice



Note: Certain portions of this document have been marked "[C.I.]" to indicate
that confidential treatment has been requested for this confidential
information. The confidential portions have been omitted and filed separately
with the Securities and Exchange Commission.

of such termination within [C.I.] ([C.I.]) days of either (i) receiving a
pricing approval not meeting the conditions of the Pricing Approval (as defined
in Section 1.21), or (ii) failing to receive any approval within [C.I.] ([C.I.])
days of Registration; provided, however that STIEFEL shall not have such right
to terminate if negotiations with CMED are on-going and DUSA and STIEFEL
mutually agree, in writing, to extend such [C.I.] ([C.I.]) day period. In the
event STIEFEL elects to terminate this Agreement, in addition to other effects
of termination set forth herein, STIEFEL shall maintain any Registration for the
Product, [C.I.], until DUSA is able to [C.I.].

          (e) DUSA Right of Termination. If STIEFEL fails receive any approval
from CMED within [C.I.] ([C.I.]) days of Registration, DUSA may elect to
terminate this Agreement provided, however that DUSA shall not have such right
to terminate if negotiations with CMED are on-going and DUSA and STIEFEL
mutually agree, in writing, to extend such [C.I.] ([C.I.]) day period. In such
event, in addition to other effects of termination set forth herein, (i) STIEFEL
shall maintain any Registration for the Product, [C.I.], until DUSA is able to
[C.I.], and (ii) STIEFEL shall be [C.I.] for any Product and [C.I.] ordered from
DUSA on purchase orders submitted to DUSA prior to the date of termination.

     2.5 Sub-Distributor.

          (a) Upon prior written notice to DUSA, STIEFEL shall have the right to
appoint any sub-distributor to distribute, market, promote and/or sell the
Product within the Territory. The appointment of any sub-distributor shall be in
writing and on such terms and conditions as STIEFEL may reasonably require in
writing provided such terms and conditions are not inconsistent with the terms
and conditions of this Agreement. STIEFEL shall provide DUSA with complete,
unredacted copies of each agreement appointing a sub-distributor hereunder.

          (b) STIEFEL acknowledges and agrees that the appointment of a
sub-distributor hereunder shall not relieve STIEFEL of any of STIEFEL's
obligations hereunder. STIEFEL further agrees that it shall, at all times, be
solely responsible:

               (i) for the acts, deeds or omissions of any sub-distributor
appointed pursuant to this Section 2.5; and

               (ii) for the compensation or for the wages, salaries and
remunerations to any such sub-distributors or representatives, without any cost
or liability to DUSA;

          (c) Sales made by such sub-distributors shall be [C.I.] by STIEFEL to
DUSA and such sub-distribution arrangements shall not [C.I.] to DUSA in respect
of such sales (that is, the [C.I.] to DUSA in respect of such Product sales
shall be [C.I.] if STIEFEL had made the sale itself).

          (d) Each sub-distributor shall meet all obligations of STIEFEL
hereunder with respect to the activities undertaken by such sub-distributor in
the distribution, marketing and sale of the Product, including without
limitation adverse event reporting and use of trademarks.



Note: Certain portions of this document have been marked "[C.I.]" to indicate
that confidential treatment has been requested for this confidential
information. The confidential portions have been omitted and filed separately
with the Securities and Exchange Commission.

3.   TRADEMARKS; PRODUCT MARKING.

     3.1 DUSA Trademarks.

          (a) Ownership of DUSA Trademarks. STIEFEL shall use the DUSA
Trademarks set forth on Schedule A for the Product and the Domain Names and
Websites to distribute, market, promote, sell, package and label such Product
during the Term in accordance with the Applicable Laws of the relevant
Regulatory Authority. STIEFEL acknowledges and agrees that DUSA shall own all
right, title and interest in and to each of the DUSA Trademarks and the Domain
Names and Websites. During the Term: (i) STIEFEL and its Affiliates shall not
[c.i.] of the DUSA Trademarks or the Domain Names and Websites, and agree that
no ownership rights are vested or created in any of the DUSA Trademarks or the
Domain Names and Websites by virtue of any licenses and other rights granted to
STIEFEL under this Agreement; and (ii) all use of the DUSA Trademarks or the
Domain Names and Websites in the Territory during the Term, whether in
combination with or apart from any Party's corporate name, including any
goodwill generated in connection therewith, inures to the benefit of DUSA, and
DUSA may call for a confirmatory assignment thereof.

          (b) Use of DUSA Trademarks. Each Party shall use Commercially
Reasonable Efforts during the Term not to do any act which endangers, destroys
or similarly affects, in any material respect, the value of the goodwill
pertaining to the DUSA Trademarks. Further, except when used in accordance with
any usage guidelines agreed to by DUSA or except when a use is otherwise
approved in accordance with other provisions of this Agreement, STIEFEL shall
submit to DUSA any materials bearing the DUSA Trademarks for review and approval
prior to the use thereof.

          (c) Costs. All costs of prosecuting and maintaining the DUSA
Trademarks shall be paid by [C.I.].

     3.2 Other Proprietary Trademarks.

          (a) Ownership of Corporate Names. Each Party shall retain all right,
title and interest in and to its corporate names, and agrees that it shall not
[C.I.] of such other Party's corporate names, or any registrations issued or
issuing with respect thereto. Each Party expressly acknowledges and agrees that
no ownership rights are vested or created by the limited rights of use granted
under this Agreement, and that all use of the corporate names in accordance
therewith, including any goodwill generated in connection therewith, inures to
the benefit of the respective owner of the corporate names and the owner of such
corporate names may call for a confirmatory assignment thereof.

          (b) Use of Corporate Names. With respect to any corporate names
licensed to a Party under or in connection with this Agreement, such Party
agrees to conform to the customary guidelines of the granting Party with respect
to manner of use (as provided in writing by the owner of the corporate name),
and to maintain the quality standards of such granting Party with respect to the
goods sold and services provided in connection with such Party's corporate
names. Each Party shall [C.I.] not to do any act which endangers, destroys or
similarly affects the



Note: Certain portions of this document have been marked "[C.I.]" to indicate
that confidential treatment has been requested for this confidential
information. The confidential portions have been omitted and filed separately
with the Securities and Exchange Commission.

value of the goodwill pertaining to the other Party's corporate names. Further,
except when used in accordance with any usage guidelines provided by the owner
of a corporate name or a use is otherwise approved in accordance with other
provisions of this Agreement, each Party shall submit to the other Party any
materials bearing the other Party's corporate name for review and approval prior
to the use thereof and shall make no use of such corporate name of the other
Party without the other Party's written consent. Neither Party shall use, or
allow any of their Affiliates to use, in connection with the Product any other
trademark that is similar to or substantially similar to or so nearly resembles
the other Party's corporate names as to be likely to cause deception or
confusion.

          (c) Cooperation. Each Party shall execute any documents required in
the reasonable opinion of the other Party to be entered as a "registered user"
or recorded licensee of the other Party's corporate names, or to be removed as
registered user or licensee thereof.

     3.3 DUSA Trademarks Infringement.

          (a) Trademark Infringement Asserted by Third Parties in the Territory.
Each Party shall notify the other Party promptly upon learning of any actual or
alleged infringement of any trademark or of any unfair trade practices, trade
dress imitation, passing off of counterfeit goods, or like offenses, or any such
claims (hereinafter "TRADEMARK INFRINGEMENT CLAIMS") brought by a Third Party
against a Party in connection with the Product in the Territory.

               (i) Upon learning of such Trademark Infringement Claim, DUSA,
[C.I.], shall take reasonable and appropriate steps to resolve the Trademark
Infringement Claim with the reasonable cooperation and assistance of STIEFEL;
provided however DUSA [C.I.] such alleged infringement on behalf of STIEFEL
[C.I.] of STIEFEL, [C.I.].

               (ii) DUSA shall have the right to [C.I.].

          (b) DUSA Trademarks Infringement by Third Parties in the Territory.
Each Party shall notify the other Parties in writing promptly upon learning of
any actual or alleged infringement by a Third Party of any DUSA Trademarks in
the Territory of which they become aware.

               (i) Upon learning of such infringement under this Section 3.3(b),
DUSA shall, [C.I.], take reasonable and appropriate steps to resolve such
infringement with the reasonable cooperation and assistance of STIEFEL; provided
however DUSA [C.I.] such alleged infringement on behalf of STIEFEL [C.I.]
STIEFEL, [C.I.].

               (ii) DUSA shall have the right to [C.I.].

     3.4 Product Marking. Any Product marketed and sold hereunder shall be
marked with appropriate patent numbers and Trademarks, as approved by DUSA.

     3.5 Alternative Trademarks. If one or more the DUSA Trademarks cannot be
used or registered in any country within the Territory for reasons beyond DUSA's
control (e.g., due to objections by Third Parties or local trademark offices) or
cannot otherwise be legally used to


Note: Certain portions of this document have been marked "[C.I.]" to indicate
that confidential treatment has been requested for this confidential
information. The confidential portions have been omitted and filed separately
with the Securities and Exchange Commission.

commercialize the Product in a country within the Territory (e.g., due to
rejection by regulatory authorities), and if the Parties have determined that an
alternative worldwide trademark is not practicable for the Product, then [C.I.]
shall have the right to propose one or more alternative trademarks. [C.I.] shall
then select one of the alternative trademarks for the Product in each country in
the Territory. [C.I.] will undertake the obligation and expense of conducting
appropriate trademark clearance of any such selected alternative trademark for
use in each such country in the Territory, and filing applications for the
cleared trademark. If (a) an alternative trademark is cleared successfully for
use and registration, (b) trademark applications are filed for the additional
alternative trademark, and (c) such additional alternative trademark receives
regulatory approval, then all terms and conditions of this Agreement shall
apply, mutatis mutandis, to the use and registration of such alternative
trademark approved [C.I.] and, thereafter the term "DUSA Trademarks" shall
include such alternative trademark.

4.   REGISTRATIONS.

     4.1 Approval and Maintenance.

          (a) DUSA shall, [C.I.], use Commercially Reasonable Efforts to prepare
the documents necessary for submission to the Regulatory Authorities in Brazil
to seek approval for the treatment of Actinic Keratoses. [C.I.] shall [C.I.] for
[C.I.] incurred on or after the Effective Date, including but not limited to,
[C.I.], and [C.I.] in connection with seeking Registration in Brazil. [C.I.]
shall be responsible for [C.I.] prior to the Effective Date, including but not
limited to, [C.I.], and [C.I.] in connection with seeking Registration in
Brazil.

          (b) STIEFEL shall, [C.I.], provide [C.I.] with reasonable assistance
and cooperation in [C.I.] preparing, filing, seeking and maintaining
Registration in Brazil, which shall include, but not be limited to, the naming
of a [C.I.] and developing and implementing documented standard operating
procedures required to support the Product Registration. If the Pricing Approval
is not obtained and STIEFEL wishes to terminate the Agreement, STIEFEL shall
continue to perform all necessary activities to maintain DUSA's regulatory
approval for the Product, [C.I.], until DUSA is able to [C.I.].

          (c) For other countries in the Territory and/or other indications in
the Field, STIEFEL shall, [C.I.], use [C.I.] to prepare the application for
Registration, on [C.I.] behalf, to seek approval to market. With regard to the
application for Registration for the treatment of Actinic Keratoses, DUSA will
provide STIEFEL with copies of existing clinical and chemistry, manufacturing
and controls data to support of this application. STIEFEL shall [C.I.] for
[C.I.], including but not limited to, [C.I.], and [C.I.] in connection with
seeking these approvals. STIEFEL shall, [C.I.], provide DUSA with reasonable
assistance with the development and implementation of mutual documented standard
operating procedures, such as, but not limited to, adverse event reporting,
storage and handling, etc., required to support the Registration in other
countries in the Territory.

          (d) For clarity, regulatory [C.I.] shall mean all [C.I.] and [C.I.]
(including [C.I.]) incurred by a Party or any of its Affiliates in accordance
with GAAP during the term and pursuant to this Agreement in connection with the
preparation of regulatory submissions for the



Note: Certain portions of this document have been marked "[C.I.]" to indicate
that confidential treatment has been requested for this confidential
information. The confidential portions have been omitted and filed separately
with the Securities and Exchange Commission.

Product, the obtaining and maintenance of Registrations, and compliance with
Registrations and requirements of such Regulatory Authorities, including ICSR
recordation and reporting, regulatory affairs activities, and recalls and
withdrawals of the Product in the Territory. [C.I.] shall report to [C.I.]
within [C.I.] ([C.I.]) days after the end of each calendar [c.i.] with regard to
regulatory costs incurred during such calendar [C.I.]. Such report shall (i)
specify in reasonable detail all expenses incurred during such [C.I.], or (ii)
be accompanied by invoices or other appropriate supporting documentation for any
payments to Third Parties that individually exceed $[C.I.] or such [C.I.] as may
be determined by the Parties. The Parties shall seek to resolve any questions
related to such accounting statements within [C.I.] ([C.I.]) days following
receipt by STIEFEL of DUSA's report hereunder and payment shall be made within
[C.I.] ([C.I.]) days of such report.

     4.2 Adverse Event Reporting. STIEFEL shall notify DUSA, in writing, of any
adverse drug experience within [C.I.] ([C.I.]) hours of such adverse drug
experience becoming known to STIEFEL. As provided in Section 4.5, and except as
required by any Applicable Laws, DUSA shall have the sole discretion and
responsibility to determine whether any adverse drug experience must be reported
to the applicable Regulatory Authority, and following making a determination to
report, to report such events to the applicable Governmental Authority.

     4.3 Ownership of Product Registration. All Registrations and regulatory
filings for the Product in the Territory, including marketing and pricing
filings and authorizations, in connection with the Product, shall be filed,
registered and owned exclusively by DUSA, unless otherwise explicitly agreed in
writing by DUSA.

     4.4 Cooperation.

          (a) STIEFEL shall, [C.I.], provide DUSA with reasonable assistance and
timely cooperation in the preparation, filing, submission and maintenance of
Registrations, which shall include naming of a [C.I.] in Brazil, and in any
country in the Territory which requires it.

          (b) At DUSA's reasonable request, STIEFEL will assist DUSA, in
determining the optimal form of, and the necessary information to be included
in, such filings to meet the applicable requirements of the Regulatory Authority
in the Territory.

          (c) From time to time, each Party shall provide the other Party with a
status of its efforts in attempting to obtain Registration for the Product in
each country in the Territory.

     4.5 Communications; Regulatory Inspections and Notifications. At all times,
[C.I.] shall have [C.I.] with the applicable Regulatory Authorities regarding
the manufacture, marketing and sale of the Product. DUSA and STIEFEL each shall
notify the other within [C.I.] ([C.I.]) hours (or, if such [C.I.] ends on a
non-business day, then prior to noon on the next following business day) of
receipt of any notice of any governmental agency inspection, investigation or
other inquiry, or other material governmental notice or communication, in each
case which relates to the marketing, promotion, distribution and/or detailing of
the Product within the Territory during the term of this Agreement. [C.I.] shall
discuss any response to observations or



Note: Certain portions of this document have been marked "[C.I.]" to indicate
that confidential treatment has been requested for this confidential
information. The confidential portions have been omitted and filed separately
with the Securities and Exchange Commission.

notifications received in connection with any such inspection, investigation or
other inquiry and each shall give the other an opportunity to comment upon any
proposed response before it is made. In the event of disagreement concerning the
form or content of such response, however, DUSA shall be responsible for
deciding the appropriate form and content of any response with respect to any of
its cited activities and STIEFEL shall be responsible for deciding the
appropriate form and content of any response with respect to any of its cited
activities. STIEFEL will provide DUSA with copies of all correspondence received
by it from, or filed by it with, any Regulatory Authority to the extent
pertaining to the Product or its marketing, promotion or detailing in the
Territory.

     4.6 Notwithstanding anything contained herein to the contrary, [C.I.] shall
have no obligation to perform, complete or undertake [C.I.] activities or [C.I.]
activities relating to the Product in furtherance of STIEFEL's rights under this
Agreement.

5.   ALLIANCE MANAGERS AND MEETINGS.

     5.1 Product Alliance Manager. Each Party will appoint an employee with
appropriate authority and experience to act as a liaison ("PRODUCT ALLIANCE
MANAGER") to communicate information concerning the Product and its marketing
and promotion by STIEFEL. The Product Alliance Manager shall be responsible for
calling meetings, preparing, and circulating an agenda in advance of meetings of
the Parties and preparing and issuing minutes of each meeting within [C.I.]
([C.I.]) days thereafter.

     5.2 Meetings. The Parties shall hold meetings at such times as it elects to
do so, but in no event shall such meetings be held less frequently than once
every [C.I.]. The first meeting of the Parties shall be held not more than
[C.I.] ([C.I.]) days after the Effective Date. Thereafter, the Parties shall
meet at such locations as the Parties may agree. Each Party shall be responsible
for [C.I.]. [C.I.] agrees to take into good faith consideration all comments
received [C.I.] in connection with STIEFEL's marketing and promotion of the
Products in the Field in the Territory, and in particular to [C.I.] to undertake
all such marketing and promotion in a manner consistent with and supportive of
DUSA's global marketing, promotion, development and commercialization of the
Product world-wide.

6.   LABELING.

     6.1 Labels.

          (a) Subject to Section 6.1(b), DUSA shall package and label each of
the Approved Products in accordance with the Specifications and in accordance
with the packaging and labeling agreed between the Parties; provided that the
Parties shall follow all legal requirements in effect throughout the Territory,
as applicable, and that the STIEFEL's or its designated Affiliate's name and
logo shall be prominently displayed on all Product packaging.

          (b) STIEFEL shall supply camera ready labeling and package insert
copy, and with the art work for such packaging and labeling, to DUSA
sufficiently in advance of any purchase order delivery timelines requested by
STIEFEL to allow DUSA to manufacture and



Note: Certain portions of this document have been marked "[C.I.]" to indicate
that confidential treatment has been requested for this confidential
information. The confidential portions have been omitted and filed separately
with the Securities and Exchange Commission.

label the Product, including sufficiently in advance of launch. All such
labeling, copy and artwork provided by STIEFEL shall comply with applicable
specifications and regulatory requirements. The labeling for each Product will
indicate that DUSA is the manufacturer of such Product and that STIEFEL is the
distributor and/or agent for the Product.

          (c) DUSA shall be fully responsible for the form and content of all
Product labels and other aspects of Product packaging and labeling, except to
the extent of claims relating to label information and content supplied by
STIEFEL.

7.   MANUFACTURE AND SUPPLY OF THE PRODUCTS.

     7.1 General. DUSA shall manufacture, or cause a Third Party to manufacture
on its behalf [C.I.], the Product in accordance with the Specifications and
supply the Product to STIEFEL pursuant to forecasts and purchase orders placed
by STIEFEL in accordance with this Section 7.

     7.2 Minimum Purchase Obligations; Inventory.

          (a) STIEFEL shall purchase, no less than the Minimum Number of Units
of the Product at the Purchase Price Per Unit during the applicable Time Period
(as such terms are defined on Schedule B) (the "MINIMUM PURCHASE OBLIGATIONS");
provided however if DUSA exercises [C.I.] to Brazil during a [C.I.] with respect
to Brazil pursuant to Section 8.3(a) and such [C.I.] causes STIEFEL not to meet
its Minimum Purchase Obligations for a Time Period, then (i) the Minimum
Purchase Obligations shall be [C.I.] and [C.I.] on which DUSA exercises its
right to [C.I.] to Brazil during a [C.I.] with respect to Brazil pursuant to
Section 8.3(a), and (ii) [C.I.] on (x) appropriate pro-rata adjustments to the
Minimum Purchase Obligations which are to apply to Time Periods during which
supply to Brazil has been [C.I.] (including the present Time Period in
question), and (y) a plan for the Product in Brazil which may include amendments
to this Agreement as necessary and appropriate. Within [C.I.] ([C.I.]) days of
the end of each Time Period, the Parties shall review the purchases made by
STIEFEL for the immediately preceding Time Period. If it is determined from the
review that STIEFEL has not met its Minimum Purchase Obligations for such
preceding Time Period, STIEFEL shall immediately [C.I.] DUSA [C.I.] from STIEFEL
for purchases of the number of units meeting the Minimum Purchase Obligations
and [C.I.] by DUSA for the number of units of Product purchased during such
preceding Time Period [C.I.]. If STIEFEL fails to meet its Minimum Purchase
Requirement for [C.I.] consecutive Time Periods or STIEFEL [C.I.] with respect
to any Time Period, in addition to any other remedies available to DUSA
hereunder or under law or in equity, DUSA may, in its sole discretion either:
(i) [C.I.] of such Product in such country, provided that DUSA does not waive
its right to terminate the Agreement under Section 7.1(a)(ii) even if it [C.I.],
or (ii) [C.I.] the Agreement upon giving written notice thereof to STIEFEL. For
purposes of clarity, DUSA retains its [C.I.] Agreement pursuant to Section
7.1(a)(ii) at any time thereafter even if DUSA initially chooses to [C.I.] in
the Territory. STIEFEL shall [C.I.] within [C.I.] ([C.I.]) days of completion of
the review in United States dollars via wire transfer, check or other instrument
approved by DUSA.



Note: Certain portions of this document have been marked "[C.I.]" to indicate
that confidential treatment has been requested for this confidential
information. The confidential portions have been omitted and filed separately
with the Securities and Exchange Commission.

          (b) Inventory. STIEFEL shall, [C.I.], maintain [C.I.] inventory of the
Product at all times during the term of this Agreement as necessary in order to
meet the marketing demand requirements of any customer or potential customer
within the Territory.

     7.3 Forecast and Purchase Orders. STIEFEL shall provide forecasts and
purchase orders to DUSA for Product as follows:

          (a) Within [C.I.] ([C.I.]) months of the Effective Date with respect
to Brazil, and within [C.I.] ([C.I.]) months prior to any other anticipated
Registration relating to the Product, STIEFEL shall provide DUSA with a forecast
of STIEFEL's quantity requirements for the applicable commercial launch of the
Product and the [C.I.] period following such launch. STIEFEL shall send to DUSA
a notice (the "LAUNCH NOTICE") with respect to such Product that shall contain
the following: (i) a statement of the estimated Launch Date of such Product;
and; (ii) a good faith forecast of the quantities that will in the future be
purchased by STIEFEL prior to the Launch Date.

          (b) At least [C.I.] ([C.I.]) days prior to any anticipated Launch Date
of the Product in the Territory, STIEFEL shall provide DUSA with a firm purchase
order for its requirements for commercial launch of the Product which shall be
for an amount of Product [C.I.] STIEFEL's first [C.I.] of forecasted sales.
Thereafter STIEFEL shall issue purchase orders for its requirements of Product
on the last day of each calendar [C.I.].

          (c) Each purchase order shall be accompanied by a rolling forecast of
STIEFEL's requirements of Product for the [C.I.] following the [C.I.] for which
the purchase order pertains, provided however that STIEFEL shall have no
obligation to make purchase order or forecasts for any time beyond the term of
this Agreement. If a required forecast for a [C.I.] is not timely submitted, the
last submitted [C.I.] forecast shall become the new forecast.

          (d) Each purchase order (including without limitation those provided
to DUSA prior to the commercial launch of the Product) shall be firm and
binding.

          (e) Each purchase order shall specify the delivery date for the
Product and the quantity of Product ordered. The delivery date shall be no
sooner than [C.I.] ([C.I.]) days following the date such purchase order is
issued. The quantity of Product specified shall not be less than [C.I.]% or more
than [C.I.]% of the most recent previous forecast for such quarter, unless
otherwise agreed to by DUSA in writing.

          (f) STIEFEL's forecasts and purchase orders shall reflect its good
faith expectations of customer demand and STIEFEL shall [C.I.] to schedule
orders to avoid creating production capacity problems for DUSA.

          (g) All Product shall be delivered by DUSA to STIEFEL FOB (as defined
in the Incoterms 2000) the manufacturing facility utilized by DUSA to the
destination specified in the applicable purchase order. STIEFEL shall [C.I.] to
the Territory, and [C.I.] in connection therewith. Title and risk of loss for
the Product shall transfer from DUSA to STIEFEL following delivery of the
Product to the common carrier at the manufacturing facility utilized by DUSA.



Note: Certain portions of this document have been marked "[C.I.]" to indicate
that confidential treatment has been requested for this confidential
information. The confidential portions have been omitted and filed separately
with the Securities and Exchange Commission.

          (h) STIEFEL shall have [C.I.] except for [C.I.] as defined in Section
9.1(a).

8.   PRICE AND PAYMENT; SUSPENSION OF SUPPLY AND RENEGOTIATION.

     8.1 Payment for Purchase Orders. Subject to Section 7.3(a), STIEFEL shall
pay for the quantities of Product ordered at the applicable Purchase Price Per
Unit (as set forth on Schedule C hereto) within [C.I.] ([C.I.]) days of the date
of invoice submitted by DUSA, provided that DUSA shall not [C.I.] the Product
has been delivered to STIEFEL pursuant to Section 7.3(g). All payments shall be
made in [C.I.], by wire transfer, preferably [C.I.], of immediately available
funds [C.I.].

     8.2 Late Fee. All payments made after the date it is due and payable shall
accrue interest at the [C.I.] as set forth in the Wall Street Journal, plus
[C.I.] percent ([C.I.]%) per year or the maximum amount allowable by law.

     8.3 Suspension of Supply and Renegotiation. During a [C.I.] with respect to
a country in the Territory (as defined on Schedule C attached hereto):

          (a) DUSA may from time to time or during the [C.I.], in DUSA's sole
discretion and without being liable to STIEFEL in any manner or in breach of any
provision of this Agreement, [C.I.] to supply Product with respect to such
country to STIEFEL under this Agreement and/or any order for Product with
respect to such country placed by STIEFEL in connection with this Agreement;

          (b) DUSA may from time to time or during the [C.I.], in DUSA's sole
discretion, [C.I.] Product with respect to such country to STIEFEL under this
Agreement under any order for Product placed by STIEFEL in connection with this
Agreement, including any such order with respect to which STIEFEL agrees to pay
DUSA; and

          (c) DUSA may (if not already included with the initial notice given by
DUSA pursuant to and as permitted under Schedule C hereto) give further notice
to STIEFEL requesting that the Parties [C.I.] of this Agreement with respect to
such country.

     8.4 Diversion of Product; Currency of Orders. As part of placing each order
for the Product, STIEFEL shall indicate in writing the country in the Territory
where such ordered Product is intended to be sold. Product purchased as being
indicated for sale in a given country shall not be sold in any other country.
Orders shall be placed in U.S. Dollars, adjusted at the then applicable local
currency / U.S. Dollar exchange rate for the currency of the country where
Product is intended to be sold.

9.   QUALITY CONTROL AND PRODUCT ACCEPTANCE.

     9.1 Quality Control.

          (a) DUSA shall ensure that all Products supplied to STIEFEL under the
terms of this Agreement will meet Specifications.



Note: Certain portions of this document have been marked "[C.I.]" to indicate
that confidential treatment has been requested for this confidential
information. The confidential portions have been omitted and filed separately
with the Securities and Exchange Commission.

          (b) DUSA shall conduct all quality control testing of the Product
prior to shipment in accordance with the Specifications and requirements of the
applicable Regulatory Authority.

          (c) DUSA shall retain records and samples of Product relating to such
testings as required by applicable Regulatory Authorities and, from time to
time, upon prior notice from STIEFEL, provide STIEFEL with reasonable access to
such records in accordance with Section 17 below.

     9.2 Delivery Documents. DUSA shall ensure that each Batch of Product is
labeled and each Batch number is applied to each such Batch, as required by the
applicable Regulatory Authority. DUSA will ensure that a copy of the Certificate
of Conformance with respect to each Batch of Product supplied to STIEFEL is (a)
faxed to STIEFEL prior to shipping such Batch to STIEFEL (confirmed by hard copy
mailed to STIEFEL) and (b) accompanies each Batch. DUSA shall not ship any Batch
to STIEFEL if such Batch does not meet Specifications.

     9.3 Storage.

          (a) DUSA shall provide and maintain suitable storage and transport
conditions for each Batch of Product and shall provide STIEFEL with complete
written instructions with respect to proper conditions for the transport and
storage of Product.

          (b) Upon receipt of any Batch of Product, STIEFEL shall provide and
maintain suitable storage conditions therefor and shall comply with any product
labeling and written instructions provided by DUSA in respect of the transport
and storage of Product.

     9.4 Acceptance and Rejection of Product.

          (a) All shipments of Product received by STIEFEL shall be deemed
accepted unless STIEFEL gives DUSA a written notice (the "OBJECTION NOTICE")
within [C.I.] ([C.I.]) days of such receipt specifying the manner in which the
Batch of Product does not conform to Specifications.

          (b) The Objection Notice shall be accompanied by written reports of
any testing performed by or for STIEFEL on such Batch. Upon receipt of the
Objection Notice, DUSA may request STIEFEL to [C.I.] thereof for further
testing. The test results, if any, submitted to DUSA by STIEFEL shall be deemed
conclusive unless DUSA notifies STIEFEL within [C.I.] ([C.I.]) days of its
receipt of the Objection Notice or the samples, whichever is later, that it
disagrees with such test results.

          (c) Should DUSA wish to verify STIEFEL's conclusion in an Objection
Notice, DUSA shall submit the rejected Product or samples to an independent
laboratory (the "INDEPENDENT LABORATORY") for analysis and the Independent
Laboratory shall submit its findings in the form of a written report (the
"REPORT"), the [C.I.] by [C.I.]; provided, however, if the results of the Report
determine that any of the Product rejected by STIEFEL does not meet the
applicable Specifications, [C.I.] for all such [C.I.].



Note: Certain portions of this document have been marked "[C.I.]" to indicate
that confidential treatment has been requested for this confidential
information. The confidential portions have been omitted and filed separately
with the Securities and Exchange Commission.

          (d) DUSA shall [C.I.] to [C.I.] Product that does not meet the
applicable Specifications with conforming goods as soon as reasonably possible,
provided that the departure from Specifications is not the direct result of the
[C.I.] of STIEFEL. In the event that [C.I.] Product is required, it shall be
[C.I.] unless otherwise agreed to in writing by STIEFEL.

     9.5 Limitation of Product Warranty. At no time shall STIEFEL make any
representation or extend the warranty regarding any Product which is not first
approved by DUSA in writing. All representations and warranties made by STIEFEL
regarding the Product must be strictly limited to the representations and
warranties made by the manufacturer of the Product at the time such Product is
made.

10.  RECORDS.

     10.1 Record Retention.

          (a) The Parties shall maintain all necessary and appropriate records
and documents relating to the sale of the Product. The retention period for
records for both Parties shall be: (i) the time period meeting all known
regulations of the applicable Regulatory Authorities with respect to such
Product; and (ii) [C.I.] ([C.I.]) years from the date of sale, whichever is
longer.

          (b) The parties shall use commercially reasonable efforts to ascertain
the retention requirements of the applicable Regulatory Authorities and will
keep the other Party informed of any changes that it becomes aware of that may
reasonably affect such other Party's obligations under this Section 10.1.

11.  INTELLECTUAL PROPERTY RIGHTS.

     11.1 Technical Information. STIEFEL acknowledges and agrees that DUSA is
the owner of the Technical Information, and of all industrial and intellectual
property rights of any kind in relation to the Technical Information, including
the right to patents, registered or other designs, copyrights, trademarks or
trade names and any other Confidential Information. Nothing contained in this
Agreement shall be effective to give STIEFEL any rights of ownership in and to
the Technical Information or to the intellectual property owned by DUSA.

     11.2 Improvements. Any improvements to the Technical Information made or
discovered by DUSA during the term of this Agreement shall remain the property
of DUSA and all industrial and intellectual property rights of any kind in
relation to such improvements, including the right to patents, registered or
other designs, copyrights, trademarks or trade names and any other Confidential
Information, shall remain the property of DUSA.

     11.3 Confidential Information. Within the term of this Agreement and after
its termination or expiration, it is agreed upon between the parties that the
Technical Information



Note: Certain portions of this document have been marked "[C.I.]" to indicate
that confidential treatment has been requested for this confidential
information. The confidential portions have been omitted and filed separately
with the Securities and Exchange Commission.

and all industrial and intellectual property rights of any kind in connection
with or related to the Technical Information shall be considered as Confidential
Information and shall be treated and protected by STIEFEL in accordance with the
terms of Section 16.

12.  RELATIONSHIP OF DUSA AND STIEFEL.

     12.1 Independent Relationship. The relationship between DUSA and STIEFEL
that is created by this Agreement shall be that of vendor and purchaser, and not
that of a partnership, principal and agent, or joint or co-ventures. In the
performance of this Agreement, STIEFEL shall have no authority to assume or
create any obligation or responsibility, either expressed or implied, on behalf
of or in the name of DUSA, or to bind DUSA or its Affiliates in any manner
whatsoever and DUSA shall have no authority to assume or create any obligation
or responsibility, either express or implied, on behalf of or in the name of
STIEFEL or to bind STIEFEL or its Affiliates in any manner whatsoever. Each
Party shall indemnify the other Party for any claim asserted by any Third Party
that the acts of such Party or any of its Affiliates created any obligation or
responsibility of the other Party other than as expressly set forth in this
Section.

     12.2 Use of Names. If this Agreement is terminated for any reason, neither
Party shall thereafter use, or permit anyone else under its control to use, the
other's name in the promotion of its business or the offer for sale of any goods
and neither Party shall package or label any goods in a manner that the other
Party hereto might reasonably consider to be imitative of any goods sold by such
Party.

13.  REPRESENTATIONS AND WARRANTIES.

     13.1 By STIEFEL. STIEFEL hereby represents and warrants to DUSA that:

          (a) it has the corporate authority to enter into this Agreement and to
perform its obligations hereunder;

          (b) it is not aware of any legal, contractual or other restriction,
limitation or condition which might affect adversely its ability to perform
hereunder; and

          (c) it shall at all times sell, market, handle and store the Product
in compliance with all Applicable Laws.

     13.2 By DUSA. DUSA hereby represents and warrants to STIEFEL that:

          (a) it has the corporate authority to enter into this Agreement and to
perform its obligations hereunder;

          (b) it is not aware of any legal contractual or other restriction,
limitation or condition which might affect adversely its ability to perform
hereunder;

          (c) all Product shipped to STIEFEL pursuant to this Agreement (i)
shall be manufactured, packaged and labeled in conformance with the applicable
Specifications for such



Note: Certain portions of this document have been marked "[C.I.]" to indicate
that confidential treatment has been requested for this confidential
information. The confidential portions have been omitted and filed separately
with the Securities and Exchange Commission.

Product at the time of shipment; (ii) shall be manufactured, packaged and
labeled at the manufacturing facilities utilized by DUSA which meets the
requirements of the applicable Regulatory Authority where the Product is
manufactured and sold, including, without limitation, conformance with GMP,
(iii) shall be stored and handled by DUSA at all times in the proper manner and
suitable conditions for such Product.

     13.3 Debarment. Each Party hereby represents, warrants and covenants to the
other that:

          (a) It is not debarred under the Generic Drug Enforcement Act of 1992
and it does not and will not use in any capacity the services of any person
debarred under the Generic Drug Enforcement Act of 1992; and

          (b) To the best of its knowledge, none of its employees, agents or
contractors, has engaged in any activity which could lead to it becoming
debarred under the Generic Drug Enforcement Act of 1992.

     13.4 Disclaimer. EXCEPT AS EXPRESSLY SET FORTH IN THIS SECTION 13, NEITHER
PARTY MAKES ANY REPRESENTATIONS OR EXTENDS ANY WARRANTIES OF ANY KIND, EITHER
EXPRESS OR IMPLIED, AND EACH PARTY EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES OF
MERCHANTABILITY AND OF FITNESS FOR A PARTICULAR PURPOSE OR USE.

14.  INDEMNIFICATION.

     14.1 By STIEFEL. STIEFEL agrees to indemnify DUSA against and hold DUSA
harmless from, any and all [C.I.] loss (except [C.I.], such as, for example,
[C.I.]), [C.I.], [C.I.], [C.I.], [C.I.] and [C.I.] (including, without
limitation, [C.I.] and liabilities for [C.I.]) ("THIRD PARTY LOSS") arising from
or in connection with any:

          (a) breach of the warranties by STIEFEL hereunder;

          (b) other misrepresentation or breach of this Agreement by STIEFEL or
the [C.I.] of STIEFEL in connection with its contract obligations hereunder

          (c) claim (expressed or implied) by STIEFEL, its Affiliates or its
sub-distributors, (except to the extent that such claim has been approved by the
Regulatory Authority or authorized by DUSA) as to the efficacy or safety of the
Product or the use to be made by any purchaser of the Product; provided that
DUSA shall indemnify and hold STIEFEL and STIEFEL's Affiliates harmless from any
and all [C.I.] resulting from [C.I.], if STIEFEL and its Affiliates have handled
and stored such Product in accordance with its labelling; or

          (d) any [C.I.] of STIEFEL, its Affiliates or sub-distributors in
connection with the sale and distribution of the Product.

     14.2 By DUSA. DUSA hereby agrees to indemnify and hold STIEFEL and
STIEFEL's Affiliates harmless from any and all [C.I.] arising from or in
connection with any:


Note: Certain portions of this document have been marked "[C.I.]" to indicate
that confidential treatment has been requested for this confidential
information. The confidential portions have been omitted and filed separately
with the Securities and Exchange Commission.

          (a) breach of the warranties by DUSA hereunder;

          (b) other misrepresentation or breach of this Agreement by DUSA or any
[C.I.] of DUSA in connection with its contract obligations hereunder;

          (c) claim (expressed or implied) by DUSA or its Affiliates (except to
the extent that such claim has been approved by the Regulatory Authority or
authorized by STIEFEL) as to the efficacy or safety of the Product or the use to
be made by any purchaser of the Product; provided that STIEFEL shall indemnify
DUSA against and hold DUSA harmless from, any and all [C.I.] arising from
STIEFEL's or its Affiliates' [C.I.] such Product in accordance with its
labeling, if the Product meets all Specifications;

          (d) any [C.I.] of DUSA in connection with the manufacture, packaging,
labeling and sale of Product to STIEFEL or its Affiliates.

     14.3 Procedure for Indemnification.

          (a) If STIEFEL or any of its Affiliates or DUSA or any of its
Affiliates (in each case an "INDEMNIFIED PARTY") receives any written claim
which it believes is the subject of indemnity hereunder by DUSA or STIEFEL, as
the case may be, (in each case as "INDEMNIFYING PARTY"), the Indemnified Party
shall, as soon as reasonably practicable after forming such belief, give notice
thereof to the Indemnifying Party, including full particulars of such claim to
the extent known to the Indemnified Party; provided, that the failure to give
timely notice to the Indemnifying Party as contemplated hereby shall not release
the Indemnifying Party from any liability to the Indemnified Party. The
Indemnifying Party shall have the right, by prompt notice to the Indemnified
Party, to assume the defense of such claim with counsel reasonably satisfactory
to the Indemnified Party, and at the cost of the Indemnifying Party. If the
Indemnifying Party does not so assume the defense of such claim or, having done
so, does not diligently pursue such defense, the Indemnified Party may assume
such defense, with counsel of its choice, but for the account of the
Indemnifying Party. If the Indemnifying Party so assumes such defense, the
Indemnified Party may participate therein through counsel of its choice, but the
cost of such counsel shall be for the account of the Indemnified Party.

          (b) The Party not assuming the defense of any such claim shall render
all reasonable assistance to the Party assuming such defense, and all
out-of-pocket costs of such assistance shall be for the account of the
Indemnifying Party.

          (c) No such claims shall be settled other than by the Party defending
the same, and then only with the consent of the other Party, which shall not be
unreasonably withheld; provided, that the Indemnified Party shall have no
obligation to consent to any settlement of any such claim which imposes on the
Indemnified Party any liability or obligation which cannot be assumed and
performed in full by the Indemnifying Party.

15.  COMPLIANCE WITH LAW.

     15.1 Compliance with Law.



Note: Certain portions of this document have been marked "[C.I.]" to indicate
that confidential treatment has been requested for this confidential
information. The confidential portions have been omitted and filed separately
with the Securities and Exchange Commission.

          (a) It shall be the responsibility of STIEFEL and DUSA, respectively,
to follow all procedures and take all actions which are necessary or required
for agreements of this type by the laws, treaties or regulations applicable in
the country in which it is, respectively, manufacturing, selling or marketing
the Product, in order to effect the intents and purposes of selling Product in
the Territory under this Agreement.

          (b) It is further agreed that neither Party shall be obligated to
carry out or to perform any terms of this Agreement if such term shall
constitute a violation of any treaty, law, code or regulation of any
governmental authority whether local, national or international. To the extent
severable, the other terms of this Agreement that do not violate any treaty,
law, code or regulation of any governmental authority whether local, national or
international shall continue in full force and effect and the Parties shall use
all reasonable efforts to re-negotiate and amend this Agreement so that the
performance of this Agreement as so amended will not involve any such violation.

16.  CONFIDENTIALITY; PUBLIC ANNOUNCEMENTS.

     16.1 Non-Disclosure of Confidential Information. Each of the Parties agrees
that it will not disclose any Confidential Information of the other Party that
it may acquire at any time during the term of this Agreement without the prior
written consent of such Party and that it shall use all reasonable efforts to
prevent unauthorized publication or disclosure by any person of such
Confidential Information including requiring its employees, consultants or
agents to enter into similar confidentiality agreements in relation to such
Confidential Information.

     16.2 Term for Maintaining Confidential Information. The obligations
undertaken by each Party under this Section 16 shall continue in force for a
period of [C.I.] ([C.I.]) years following the termination or expiration of this
Agreement.

     16.3 Exception to Confidential Information. The obligations contained in
this Section 16 do not apply to any information:

          (a) which was at the time of receipt by a Party in the public domain
or generally known in the pharmaceutical manufacturing industry otherwise than
by breach of a Party's duty of confidentiality;

          (b) which a Party can establish to have been known to it at the time
of receipt from the other Party and not to have been acquired directly or
indirectly from the other Party;

          (c) acquired by a Party from a Third Party otherwise than in breach of
an obligation of confidence to the other Party;

          (d) required by law to be provided to governmental agencies but only
for the purpose of providing it to such governmental agencies; and

It is understood and agreed that each Party may disclose Confidential
Information to those of its Affiliates that have a need to know such
Confidential Information in order to perform the



Note: Certain portions of this document have been marked "[C.I.]" to indicate
that confidential treatment has been requested for this confidential
information. The confidential portions have been omitted and filed separately
with the Securities and Exchange Commission.

obligations under this Agreement, and such Affiliates shall keep such
information confidential to the same extent as required of a Party under this
Agreement. Further each Party shall be fully responsible for its Affiliates'
compliance with the confidentiality obligations hereunder.

     16.4 Public Announcements. Except as required by law (including, without
limitation, disclosure requirements of the United States Securities and Exchange
Commission, the NASDAQ Stock Market or any other stock exchange on which
securities issued by a Party or a Party's Affiliates are traded) neither Party
shall make any public announcement concerning this Agreement or the subject
matter hereof without the prior written consent of the other, which shall not be
unreasonably withheld, provided that it shall not be unreasonable for a Party to
withhold consent with respect to any public announcement containing any of such
Party's Confidential Information. In the event a public announcement is required
by law, to the extent practicable under the circumstances, the Party making such
announcement shall provide the other Party with a copy of the proposed text not
less than [C.I.] ([C.I.]) business days prior to such announcement to afford
such other Party a reasonable opportunity to review and comment upon the
proposed text.

17.  AUDITS.

     17.1 Regulatory Audit. Each Party shall have the right to audit the other
Party's, and DUSA shall have the right to audit the STIEFEL's sub-distributors',
facilities and records which directly relate to the Products in order to
determine such other Party's compliance with Applicable Law and the terms of
this Agreement. Such audit right shall include the right to access and review
such records as well as the right to send reasonable numbers of representatives
and agents to examine such facilities, provided all such representatives and
agents execute and deliver to such other Party or sub-distributors, as
applicable, confidentiality non-disclosure non-use agreements acceptable to such
other Party or sub-distributors, as applicable, and all such examination of such
facilities are conducted during normal business hours and with the minimum of
disruption to ongoing operations. Except where any such audit is required to be
undertaken by Applicable Law or in connection with the auditing Party's
compliance therewith, such audits shall not take place more frequently than
[C.I.] and the auditing Party shall give at least [C.I.] ([C.I.]) business days
advance notice of the audit. In any case, any audit shall be conducted at such
facilities and [C.I.], as applicable, shall [C.I.] incur in connection with the
audit. Each Party, the sub-distributors, as applicable, and their respective
affiliates shall permit and cooperate with Regulatory audits required to
maintain Product Registrations in compliance with applicable laws and
regulations within the Territory.

     17.2 In the event of an audit by any Regulatory Authority, DUSA and STIEFEL
each shall supply the other with a copy of any report received from such
Regulatory Authority that pertains to the Product and its sale in the Territory
and shall use its [C.I.] efforts to provide such Regulatory Authority with a
prompt, accurate and complete response to any deficiencies noted during the
audit. Both Parties agree to use their [C.I.] efforts to promptly address, and
if necessary correct, any and all such deficiencies to the satisfaction of such
Regulatory Authority.



Note: Certain portions of this document have been marked "[C.I.]" to indicate
that confidential treatment has been requested for this confidential
information. The confidential portions have been omitted and filed separately
with the Securities and Exchange Commission.

18.  TERM AND TERMINATION.

     18.1 Term. This Agreement shall be for an initial term commencing as of the
date of this Agreement and continuing until the tenth (10th) anniversary of the
Effective Date (the "TERM"). STIEFEL shall have the option to extend the term of
the Agreement for an additional [C.I.] ([C.I.]) year term upon the Parties
reaching agreement in writing on the terms and conditions of such extension;
provided that any such agreement shall incorporate the Minimum (annual) Purchase
Requirements set forth on Schedule B.

     18.2 Early Termination. This Agreement may be terminated in its entirety:

          (a) by notice in writing by either Party if the other Party shall
default in the performance of any of its obligations under this Agreement and
such default shall continue for a period of not less than [C.I.] ([C.I.]) days
after written notice specifying such default shall have been given; provided,
however, that if such default is not capable of being cured within such [C.I.]
([C.I.]) day period but the Party in default initiates and [C.I.] continues
[C.I.] efforts to cure such default, such [C.I.] ([C.I.]) day period shall be
extended to [C.I.] ([C.I.]) days; or

          (b) by either Party if the other Party makes an arrangement with its
creditors or files bankruptcy, receivership or liquidation, or if a receiver or
a receiver and manager is appointed in respect of the whole or a major part of
the property or business of the Party in default; or

          (c) subject to Section 24.1, by either Party in [C.I.] of its voting
securities or if [C.I.] of the other Party are disposed of or acquired by
another person; or

          (d) by DUSA as set forth in Section 7.1(a)(ii) or Section 2.4(c); or

          (e) by STIEFEL as set forth in Section 2.4(b); or

          (f) by STIEFEL if [C.I.] during any calendar year are [C.I.] for that
year; provided DUSA may, [C.I.], during regular business hours, upon giving
reasonable prior written notice to STIEFEL audit or to have an independent
professionally qualified auditor audit STIEFEL's records relative to sales of
the Product in the Territory by STIEFEL and any sub-distributors solely in order
to verify the number of units of Product sold to Third Parties; and provided
further that nothing in this Agreement shall be deemed to obligate STIEFEL to
discount Products below their approved prices; or

          (g) by DUSA if the average of the Purchase Price Per Unit, as
expressed in U.S. Dollars using the then average daily applicable local currency
/ U.S. Dollar exchange rate on the date of each sale, for all sales to the
Territory in any [C.I.] during the Term (the "Average Price") is [C.I.] U.S.
Dollars (U.S.$[C.I.]), unless STIEFEL shall pay DUSA the difference between such
Average Price and [C.I.] U.S. Dollars (U.S.$[C.I.]) for each unit sold during
such [C.I.] within [C.I.] ([C.I.]) business days of DUSA giving STIEFEL notice
under this Section 18.2(g).

     18.3 Effects of Termination.



Note: Certain portions of this document have been marked "[C.I.]" to indicate
that confidential treatment has been requested for this confidential
information. The confidential portions have been omitted and filed separately
with the Securities and Exchange Commission.

          (a) [C.I.] ([C.I.]) days after notice of termination has been given as
herein provided, the right of STIEFEL to place orders for the Product with DUSA
shall cease.

          (b) [C.I.], STIEFEL shall have the obligation to accept any Product in
transit or subject to an accepted purchase order at the time of giving of
written notice of termination.

          (c) DUSA shall not be responsible for [C.I.] Product after the
termination or expiration of this Agreement, provided, that STIEFEL, may [C.I.]
the Product for [C.I.] ([C.I.]) months following the termination of this
Agreement.

          (d) Termination or expiration of this Agreement for any reason shall
be without prejudice to any rights that shall have accrued to the benefit of a
Party prior to such termination or expiration. Such termination or expiration
shall not relieve a Party from obligations that are expressly indicated to
survive the termination or expiration of this Agreement.

          (e) All of the Parties' rights and obligations under Sections 2.3,
2.5(b) through (c) (inclusive), 3, 4.1(b), 4.2, 4.3, 4.5, 4.6, 8, and 10 through
29 (inclusive) shall survive termination, relinquishment or expiration of this
Agreement.

19.  FORCE MAJEURE.

     Neither Party shall be liable or be in breach of any provision of this
Agreement for any failure or delay on its part to perform any obligation where
such failure or delay has been occasioned by any act of God, war, riot, fire,
explosion, flood, sabotage, unavailability of fuel, labor, containers or
transportation facilities, accidents of navigation or breakdown or damage of
vessels or other conveyances for air land or sea, other impediments or
hindrances to transportation, government intervention (other than that of
duly-authorized Regulatory Authority), strikes or other labor disturbances or
any other cause beyond the control of the parties.

20.  INSURANCE.

     DUSA and STIEFEL each shall maintain adequate product liability insurance
[C.I.] to cover product liability claims against it, respectively, as
manufacturer of the Product and distributor of the Product.

21.  NOTICES.

     Notices provided under this Agreement to be given or served by either Party
on the other shall be given in writing and served personally or by prepaid
registered airmail post or by express mail or by means of facsimile to the
following respective addresses or to such other addresses as the Parties may
hereafter advise each other in writing. It being agreed and understood by the
Parties that any such notice shall be deemed given and served the day
transmitted by facsimile or a date three (3) days after the date of express mail
or mail by courier.



Note: Certain portions of this document have been marked "[C.I.]" to indicate
that confidential treatment has been requested for this confidential
information. The confidential portions have been omitted and filed separately
with the Securities and Exchange Commission.

     If to DUSA, to:    DUSA Pharmaceuticals, Inc.
                        25 Upton Drive
                        Wilmington, MA 01887
                        Attn: Bob Doman
                        P: 978-909-2216
                        F: 978-909-1016

     With a copy to:    Nanette Mantell, Esq.
                        Reed Smith LLP
                        Princeton Forrestal Village
                        136 Main Street - Suite 250
                        Princeton, NJ 08543
                        P: 609-514-8542
                        F: 609-951-0824

     If to STIEFEL, to: Stiefel Laboratories, Inc.
                        255 Alhambra Circle, Suite 1000
                        Coral Gables, Florida, USA 33134
                        Attn: Vice President - Area 2
                        P: 305-443-3800
                        F: 305-443-3467

                        And Attn: General Counsel
                        P: 305-443-3800
                        F: 305-443-3467

22.  EXECUTION OF ALL NECESSARY ADDITIONAL DOCUMENTS.

     Each Party agrees that it will forthwith upon the request of the other
Party execute and deliver all such instruments and agreements and will take all
such other actions as the other Party may reasonably request from time to time
in order to effectuate the provision and purposes of this Agreement.

23.  WAIVER.

     The failure of either of the Parties to insist upon a strict performance of
any other terms and provisions therein shall not be deemed a waiver of any
subsequent breach of default in the terms or provisions of this Agreement.

24.  ASSIGNMENT AND AMENDMENT.

     24.1 Non-assignability by STIEFEL and Binding Effect. A mutually agreed
consideration for DUSA's entering into this Agreement is the reputation,
business standing, and



Note: Certain portions of this document have been marked "[C.I.]" to indicate
that confidential treatment has been requested for this confidential
information. The confidential portions have been omitted and filed separately
with the Securities and Exchange Commission.

goodwill already honored and enjoyed by STIEFEL under STIEFEL's present
ownership, and, accordingly, STIEFEL agrees that STIEFEL's rights and
obligations under this Agreement may not be transferred or assigned directly or
indirectly without the prior written consent of DUSA. DUSA may freely assign and
otherwise transfer this Agreement, or any right or obligation of DUSA hereunder,
without obtaining the written consent of STIEFEL. Any attempted assignment not
in accordance with this Section 24.1 shall be void. Subject to the foregoing in
this Section 24.1, this Agreement shall be binding upon and inure to the benefit
of the Parties hereto and their successors and assigns.

     24.2 Amendment. No amendment hereof shall be binding unless made in writing
and signed by the parties hereto.

25.  ENTIRE AGREEMENT.

     This Agreement incorporates the entire understanding of the parties and
revokes and supersedes any and all agreements, contracts, understandings or
arrangements that might have existed heretofore between the parties regarding
the subject matter hereof.

26.  GOVERNING LAW; LANGUAGE.

     26.1 Governing Law and Venue. This Agreement shall be construed in
accordance with and governed by the internal laws of the [C.I.] without regard
to conflict of laws principles. Any litigation arising from disputes regarding
the subject matter of the Agreement shall be brought in United States federal
court in the federal judicial district encompassing [C.I.]. The Parties will
consent to venue and jurisdiction in such federal courts.

     26.2 Language. The parties hereto agree that this Agreement shall be in the
English language.

27.  SEVERABILITY.

     If any term or provision of this Agreement shall be held invalid or
unenforceable, the remaining terms hereof shall not be affected, but shall be
valid and enforced to the fullest extent permitted by law.

28.  HEADINGS.

     The headings used in this Agreement are intended for guidance only and
shall not be considered part of this written understanding between the parties
hereto.

29.  INTERPRETATIVE RULES.

     For the purpose of this Agreement, except as otherwise expressly provided
herein or unless the context otherwise requires: (a) defined terms include the
plural as well as the singular and the use of any gender shall be deemed to
include the other gender; (b) references to Articles, Sections and other
subdivisions and to Schedules and Exhibits without reference to a document,



Note: Certain portions of this document have been marked "[C.I.]" to indicate
that confidential treatment has been requested for this confidential
information. The confidential portions have been omitted and filed separately
with the Securities and Exchange Commission.

are to designated Articles, Sections and other subdivisions of and to Schedules
and Exhibits to this Agreement; (c) the use of the term "including" means
"including but not limited to"; and (d) the words "herein", "hereof",
"hereunder" and other words of similar import refer to this Agreement in whole
and not to any particular provision.

                                      * * *



Note: Certain portions of this document have been marked "[C.I.]" to indicate
that confidential treatment has been requested for this confidential
information. The confidential portions have been omitted and filed separately
with the Securities and Exchange Commission.

     IN WITNESS WHEREOF, this Agreement has been executed by the Parties on the
date first above written.

                                        DUSA PHARMACEUTICALS, INC.


                                        By: /s/ Robert F. Doman
                                            ------------------------------------
                                            Robert F. Doman
                                            President, Chief Operating Officer


                                        STIEFEL LABORATORIES, INC.


                                        By: /s/ Bresly F. Jaramillo
                                            ------------------------------------
                                            Bresly F. Jaramillo
                                            Vice President Latin America



Note: Certain portions of this document have been marked "[C.I.]" to indicate
that confidential treatment has been requested for this confidential
information. The confidential portions have been omitted and filed separately
with the Securities and Exchange Commission.

                                   SCHEDULE A

                                   THE PRODUCT

LEVULAN(R) KERASTICK(R):

DUSA Trademarks: Levulan(R) Kerastick(R)

                 DUSA(R)

                 DUSA Pharmaceuticals, Inc.(R)

Dosage Strength / Administration: 20% topical solution

Competing Products: Any and all products [C.I.] the use of [C.I.] or [C.I.] any
of the foregoing or [C.I.].



Note: Certain portions of this document have been marked "[C.I.]" to indicate
that confidential treatment has been requested for this confidential
information. The confidential portions have been omitted and filed separately
with the Securities and Exchange Commission.

                                   SCHEDULE B

                          MINIMUM PURCHASE OBLIGATIONS

The Minimum Purchase Obligations for Levulan(R) Kerastick(R) shall be as
follows:



                                                                          MINIMUM NUMBER
                              TIME PERIOD                                    OF UNITS
                              -----------                                 --------------
                                                                       
First Time Period    beginning on the earlier of (a) the [C.I.], or (b)   [C.I.] units
                     [C.I.], and in each case continuing for [C.I.]
                     thereafter

Second Time Period   subsequent [C.I.] period following the end of the    [C.I.] units
                     First Time Period

Third Time Period    subsequent [C.I.] period following the end of the    [C.I.] units
                     Second Time Period

Fourth Time Period   subsequent [C.I.] period following the end of the    [C.I.] units
                     Third Time Period

Fifth Time Period    subsequent [C.I.] period following the end of the    [C.I.] units
                     Fourth Time Period

Other subsequent time periods                                             see below


For the remainder of the Term following the end of the Fifth Time Period, the
Minimum Purchase Obligations for Levulan(R) Kerastick(R) shall be determined by
[C.I.] no later than [C.I.] ([C.I.]) months prior to the end of the Fifth Time
Period.



Note: Certain portions of this document have been marked "[C.I.]" to indicate
that confidential treatment has been requested for this confidential
information. The confidential portions have been omitted and filed separately
with the Securities and Exchange Commission.

                                   SCHEDULE C

                        SUPPLY PRICE AND [C.I.] OF SUPPLY

ALL COUNTRIES IN THE TERRITORY

     "PURCHASE PRICE PER UNIT", with respect to units of the Product that are
purchased for sale in a country in the Territory, shall mean [C.I.] Percent
([C.I.]%) of the final selling price to Third Parties in the applicable local
currency which has been established by STIEFEL [C.I.] by STIEFEL on units of the
Product sold.

     In the event at any time the Purchase Price Per Unit for sales to a country
in the Territory in a given calendar quarter, as expressed in U.S. Dollars using
the then current average daily applicable local currency / U.S. Dollar exchange
rate, is [C.I.] U.S. Dollars (U.S.$[C.I.]) (the "Event"), then STIEFEL shall (a)
[C.I.] in the applicable local currency [C.I.] of such Purchase Price Per Unit
[C.I.] U.S. Dollars (U.S.$[C.I.]) or (b) otherwise pay to DUSA the [C.I.] price;
provided that upon [C.I.] ([C.I.]) days prior written notice from STIEFEL given
after such the Event, STIEFEL [C.I.]; provided further that upon giving such
notice to DUSA, [C.I.] beginning [C.I.] and continuing until the [C.I.] U.S.
Dollars (U.S.$[C.I.]) for a period of not less than [C.I.] ([C.I.]) weeks.



Note: Certain portions of this document have been marked "[C.I.]" to indicate
that confidential treatment has been requested for this confidential
information. The confidential portions have been omitted and filed separately
with the Securities and Exchange Commission.

                                   SCHEDULE D

                    FORM(S) OF REPORTS AND TIMING OF REPORTS

EX-21.A

                                                                   EXHIBIT 21(a)

                   SUBSIDIARIES OF DUSA PHARMACEUTICALS, INC.

1.    DUSA Pharmaceuticals New York, Inc., a New York corporation.

2.    DUSA Acquisition Corp., a New Jersey corporation.

EX-23.A

                                                                   EXHIBIT 23(a)

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement Nos.
333-73039, 333-84071, 333-31676, 333-33118 and 333-113913 on Form S-3 and
Registration Statement Nos. 333-126345, 333-92259 and 333-57890 on Form S-8 of
our reports dated March 10, 2006, relating to the financial statements of DUSA
Pharmaceuticals, Inc. and management's report on the effectiveness of internal
control over financial reporting appearing in this Annual Report on Form 10-K of
DUSA Pharmaceuticals, Inc. for the year ended December 31, 2005.

/s/ DELOITTE & TOUCHE LLP
- --------------------------

Boston, Massachusetts
March 10, 2006

EX-31.A

                                                                   EXHIBIT 31(a)

                           DUSA PHARMACEUTICALS, INC.
                                 CERTIFICATIONS

I, D. Geoffrey Shulman, certify that:

1.    I have reviewed this annual report on Form 10-K of DUSA Pharmaceuticals,
      Inc.;

2.    Based on my knowledge, this report does not contain any untrue statement
      of a material fact or omit to state a material fact necessary to make the
      statements made, in light of the circumstances under which such statements
      were made, not misleading with respect to the period covered by this
      report;

3.    Based on my knowledge, the financial statements, and other financial
      information included in this report, fairly present in all material
      respects the financial condition, results of operations and cash flows of
      the registrant as of, and for, the periods presented in this report;

4.    The registrant's other certifying officer and I are responsible for
      establishing and maintaining disclosure controls and procedures (as
      defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
      control over financial reporting (as defined in Exchange Act Rules
      13a-15(f) and 15d-15(f)) for the registrant and have:

      a)    Designed such disclosure controls and procedures, or caused such
            disclosure controls and procedures to be designed under our
            supervision, to ensure that material information relating to the
            registrant, including its consolidated subsidiary, is made known to
            us by others within those entities, particularly during the period
            in which this report is being prepared;

      b)    Designed such internal control over financial reporting, or caused
            such internal control over financial reporting to be designed under
            our supervision, to provide reasonable assurance regarding the
            reliability of financial reporting and the preparation of financial
            statements for external purposes in accordance with generally
            accepted accounting principles;

      c)    Evaluated the effectiveness of the registrant's disclosure controls
            and procedures and presented in this report our conclusions about
            the effectiveness of the disclosure controls and procedures, as of
            the end of the period covered by this report based on such
            evaluation; and

      d)    Disclosed in this report any change in the registrant's internal
            control over financial reporting that occurred during the
            registrant's most recent fiscal quarter (the registrant's fourth
            fiscal quarter in the case of an annual report) that materially
            affected, or is reasonably likely to materially affect, the
            registrant's internal control over financial reporting; and

5.    The registrant's other certifying officer and I have disclosed, based on
      our most recent evaluation of internal control over financial reporting,
      to the registrant's auditors and the audit committee of the registrant's
      board of directors (or persons performing the equivalent functions):

      a)    All significant deficiencies and material weaknesses in the design
            or operation of internal control over financial reporting which are
            reasonably likely to adversely affect the registrant's ability to
            record, process, summarize and report financial information; and

      b)    Any fraud, whether or not material, that involves management or
            other employees who have a significant role in the registrant's
            internal control over financial reporting.



Date: March 10, 2006                      /s/ D. Geoffrey Shulman
                                            ------------------------------------
                                            D. Geoffrey Shulman
                                            Chairman and Chief Executive Officer
                                            (principal executive officer)

EX-31.B

                                                                   EXHIBIT 31(b)

                           DUSA PHARMACEUTICALS, INC.
                                 CERTIFICATIONS

I, Richard C. Christopher, certify that:

1.    I have reviewed this annual report on Form 10-K of DUSA Pharmaceuticals,
      Inc.;

2.    Based on my knowledge, this report does not contain any untrue statement
      of a material fact or omit to state a material fact necessary to make the
      statements made, in light of the circumstances under which such statements
      were made, not misleading with respect to the period covered by this
      report;

3.    Based on my knowledge, the financial statements, and other financial
      information included in this report, fairly present in all material
      respects the financial condition, results of operations and cash flows of
      the registrant as of, and for, the periods presented in this report;

4.    The registrant's other certifying officer and I are responsible for
      establishing and maintaining disclosure controls and procedures (as
      defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
      control over financial reporting (as defined in Exchange Act Rules
      13a-15(f) and 15d-15(f)) for the registrant and have:

      a)    Designed such disclosure controls and procedures, or caused such
            disclosure controls and procedures to be designed under our
            supervision, to ensure that material information relating to the
            registrant, including its consolidated subsidiary, is made known to
            us by others within those entities, particularly during the period
            in which this report is being prepared;

      b)    Designed such internal control over financial reporting, or caused
            such internal control over financial reporting to be designed under
            our supervision, to provide reasonable assurance regarding the
            reliability of financial reporting and the preparation of financial
            statements for external purposes in accordance with generally
            accepted accounting principles;

      c)    Evaluated the effectiveness of the registrant's disclosure controls
            and procedures and presented in this report our conclusions about
            the effectiveness of the disclosure controls and procedures, as of
            the end of the period covered by this report based on such
            evaluation; and

      d)    Disclosed in this report any change in the registrant's internal
            control over financial reporting that occurred during the
            registrant's most recent fiscal quarter (the registrant's fourth
            fiscal quarter in the case of an annual report) that materially
            affected, or is reasonably likely to materially affect, the
            registrant's internal control over financial reporting; and

5.    The registrant's other certifying officer and I have disclosed, based on
      our most recent evaluation of internal control over financial reporting,
      to the registrant's auditors and the audit committee of the registrant's
      board of directors (or persons performing the equivalent functions):

      a)    All significant deficiencies and material weaknesses in the design
            or operation of internal control over financial reporting which are
            reasonably likely to adversely affect the registrant's ability to
            record, process, summarize and report financial information; and

      b)    Any fraud, whether or not material, that involves management or
            other employees who have a significant b role in the registrant's
            internal control over financial reporting.



Date:  March 10, 2006        /s/ Richard C. Christopher
                             ---------------------------------------------------
                             Richard C. Christopher
                             Vice President, Finance and Chief Financial Officer
                             (principal financial officer)

EX-32.A

                                                                   EXHIBIT 32(a)

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

      In connection with the annual report of DUSA Pharmaceuticals, Inc. (the
"Company") on Form 10-K for the year ended December 31, 2005, as filed with the
Securities and Exchange Commission (the "Report"), I, D. Geoffrey Shulman,
Chairman and Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:

      1)    The Report fully complies with the requirements of Section 13(a) or
            15(d) of the Securities Exchange Act of 1934; and

      2)    The information contained in the Report fairly presents, in all
            material respects, the financial condition and results of operations
            of the Company.

Date: March 10, 2006                       /s/ D. Geoffrey Shulman
                                           -------------------------------------
                                           D. Geoffrey Shulman
                                           Chairman and Chief Executive
                                           Officer (principal executive officer)

EX-32.B

                                                                   EXHIBIT 32(b)

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

      In connection with the annual report of DUSA Pharmaceuticals, Inc. (the
"Company") on Form 10-K for the year ended December 31, 2005, as filed with the
Securities and Exchange Commission (the "Report"), I, Richard C. Christopher,
Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:

      1)    The Report fully complies with the requirements of Section 13(a) or
            15(d) of the Securities Exchange Act of 1934; and

      2)    The information contained in the Report fairly presents, in all
            material respects, the financial condition and results of operations
            of the Company.

Date: March 10, 2006                 /s/ Richard C. Christopher
                                     -------------------------------------------
                                     Richard C. Christopher
                                     Vice President, Finance and Chief Financial
                                     Officer (principal financial officer)