SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-K

                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 2001

                           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)


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


                         Commission File Number: 0-19777
       Registrant's telephone number, including area code: (978) 657-7500
        Securities registered pursuant to Section 12(b) of the Act: None

           Securities registered pursuant to section 12(g) of the Act:

                                  Common Stock
                                (Title of class)

         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 or 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. [ ]

         The aggregate market value of the voting stock held by non-affiliates
of the registrant computed by reference to the closing price of such stock as of
March 11, 2002 was $43,292,825.

         The number of shares of common stock outstanding of the Registrant as
of March 11, 2002 was 13,865,390.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Document incorporated by reference to this Report is:

         (1)      Proxy Statement for the 2002 Annual Meeting of Shareholders.
                  Part III, Items 10 through 13.

                                     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 24 through 35, 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.


ITEM 1. BUSINESS

GENERAL

         We are a pharmaceutical company developing drugs in combination with
light devices to treat or detect a variety of conditions in processes known as
photodynamic therapy or photodetection. We are engaged primarily in the research
and development of our first drug, the Levulan(R) brand of aminolevulinic acid
HCl, or ALA, 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 first 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
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.
Schering AG, our worldwide dermatology marketing partner (except Canada), has
made regulatory filings for approval of our therapy outside of the United States
including filings in Austria, Australia, and Brazil. We have brought the
BLU-U(R) into compliance with CE marking and ISO 9001 requirements in order to
be ready to supply these markets upon regulatory approval. The Levulan(R)
Kerastick(R) with PDT for AKs of the face or scalp has also been approved by the
Health Protection Branch - Canada. Our former Canadian affiliate, Draxis Health,
Inc., retained the marketing rights

                                       1

for Canada, and we are working to establish a supply arrangement with Draxis for
the Canadian market. We will also be entitled to royalties on any sales in that
country.

         In November 1999, we signed a marketing, development and supply
agreement with Schering AG, a German corporation, for our dermatology products.
We granted to Schering AG the right to promote, market, sell, and distribute our
Levulan(R) Kerastick(R) with PDT for AKs of the face or scalp on a worldwide
basis (with the exception of Canada). In the United States, Schering AG's United
States affiliate, Berlex Laboratories, Inc., is marketing these products.
Schering AG also promotes the BLU-U(R); however, we are responsible for
distributing the units, as well as for repairs and maintenance. We lease or rent
the BLU-U(R) to physicians, medical institutions and academic centers throughout
the country. We are also co-developing and will commercialize with Schering AG
additional Levulan(R) products for other dermatology disorders. Under the
agreement, Schering AG has the exclusive right to market, promote, sell and
distribute the products which are developed in the co-development program.
Schering AG has agreed to fund two-thirds of our co-development program for
dermatology in an amount up to $3,000,000 in 2002, subject to the results of
dermatology feasibility studies currently ongoing and further decisions by the
development committee, which meets quarterly. The parties may agree to continue
to fund the co-development program beyond this date. Under the terms of the
agreement, we have also received $30,000,000, including $23,750,000 in cash
milestones and unrestricted research payments and $6,250,000 for which a
Schering AG affiliate received 340,458 shares of our common stock. See "Business
-- Strategic Partners."

         For 2002, we have decided, in co-operation with Schering AG, to
continue funding development of Levulan(R) PDT to treat warts and onychomycosis,
more commonly known as nail fungus, and have begun development on broader
labeling for the AK indication. In 2001, we started trials in warts and
onychomycosis and had completed patient enrollment in both trials at the end of
the year. We also completed an acne trial during 2001 but have decided not to
fund further trials in acne during 2002. See "Business -- Dermatology
Indications."

         We are also carrying out two trials for the treatment of Barrett's
esophagus dysplasia, a precancerous condition of the esophagus. In addition, we
continue to support independent investigator trials to advance research in the
use of Levulan(R) PDT in indications such as colorectal cancers,
gastrointestinal tumors, prevention of restenosis and other internal disorders.

         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, Levulan(R), Kerastick(R) and BLU-U(R) are
registered trademarks. These trademarks are also registered in Europe and
applications are pending in other parts of the world. See "Business -- Licenses;
and -- Patents and Trademarks."

         We were incorporated on February 21, 1991, under the laws of the State
of New Jersey. Our principal executive offices are currently 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

                                       2

and development efforts. We financed our development stage operations, prior to
the market launch of our first products, primarily from sales of securities in
public offerings, and in private and offshore transactions that are exempt from
registration under the Securities Act of 1933, as amended, (the "Act"). See
"Management's Discussion and Analysis of Financial Condition -- Overview; --
Results of Operations; and -- Liquidity and Capital Resources."

BUSINESS STRATEGY

         The following are the key elements of our strategy:

         -        Support the Marketing of our First Products. We are working
                  with our dermatology marketing partner, Schering AG, to
                  optimize the marketing efforts of the Berlex team in the
                  United States for our first PDT system, the Levulan(R)
                  Kerastick(R) 20% Topical Solution with our BLU-U(R) for the
                  treatment of AKs of the face or scalp. We are also working on
                  plans for the future launch of our products in Europe,
                  Australia, Canada and elsewhere.

         -        Leveraging our Levulan(R) PDT/PD Platform to Develop
                  Additional Products. In dermatology, we intend, together with
                  Schering AG, to co-develop and commercialize additional
                  Levulan(R) products for other skin conditions. Outside
                  dermatology, we intend to (i) develop new drug formulations
                  and light devices to target large markets with unmet medical
                  needs, such as the treatment of Barrett's esophagus dysplasia,
                  (ii) explore collaborations relating to the detection of brain
                  cancer and bladder cancer, and (iii) explore cost-effective
                  approaches to the detection and/or treatment of a number of
                  gynecological conditions.

         -        Enter into Additional Strategic Alliances. When we believe
                  that the development program for a non-dermatology indication
                  may be beyond our own resources or may be advanced to market
                  more rapidly with the use of resources of a corporate partner,
                  we may seek opportunities to license, market or co-promote our
                  products. We have already decided to seek a marketing partner
                  for Barrett's esophagus dysplasia, commencing later this year,
                  after we have data from our current clinical trials.

         -        Use the Results of Independent Researchers to Identify New
                  Applications. We will continue to support independent
                  investigators' research so that we have the benefit of human
                  data when we evaluate potential indications for corporate
                  development. We will also continue to monitor independent
                  research in order to identify potential new indications.

         -        Pursue the Addition of Complimentary Products and/or
                  Businesses. We have been evaluating and pursuing various
                  licensing and acquisition opportunities for complementary
                  products and/or businesses which may include drugs, devices,
                  technologies or related businesses.

                                       3





PDT/PD OVERVIEW

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

         -        The first step is the application of a drug known as a
                  "photosensitizer," which collects in specific cells.

         -        The second step is activation of the photosensitizer by
                  controlled exposure to a selective light source.

         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:

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

         -        the efficiency of the light in activating the photosensitizer.

         Blue light does not penetrate deeply into tissues and is better suited
for treating superficial lesions. It is generally a potent activator of
photosensitizers. Red light penetrates more deeply into the skin. Therefore, it
is better suited for treating cancers and deeper tissues, but it is generally
not as strong an activator of photosensitizers. Different photosensitizers do
not absorb all 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 generally
be treated with a non-laser light source. Internal indications, which are often
more difficult to access, may require a laser in order to focus the light into a
small fiber optic delivery system which may be passed through an endoscope or
into a hollow organ.

         PDT can be a highly selective treatment that targets specific tissue
while minimizing damage to normal surrounding tissue. It allows for multiple
courses of therapy. Generally, the photosensitizer and the light separately have
no PDT/PD effect. The most common side effect of photosensitizers that are 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
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.

                                       4

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:

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

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

         -        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 and conversion
                  into PpIX and targeted light delivery make this a highly
                  selective process. Therefore, we can achieve clinical effects
                  in targeted tissue with minimal effects to normal surrounding
                  and underlying tissue.

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

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

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

         -        conditions characterized by rapidly proliferating cells and
                  certain microbes (i.e., fungus), such as onychomycosis and
                  psoriasis, and

         -        in certain normally fast-growing tissues, such as 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 ampules,

                                       5

one containing Levulan(R) powder and one containing a liquid vehicle, enclosed
within a 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
and shakes the Kerastick(R) according to directions to mix the contents into a
solution. The Kerastick(R) tip is then dabbed on to 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
the appropriate wavelengths and intensities. We intend to continue to develop
integrated drug and light device systems, in which the light sources:

         -        are compact and tailored to fit specific medical needs,

         -        are pre-programmed and easy to use, and

         -        provide cost-effective therapy.

         Our proprietary BLU-U(R) is a fluorescent light source that can treat
the entire face or scalp at one time, which has been specifically designed for
use with Levulan(R). The light source is compact and portable. It can be used in
a physician's office, requires minimal 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 and ISO 9001 requirements.

         We are using non-laser light sources whenever feasible because,
compared to lasers, they are:

         -        safer,

         -        simpler to use,

         -        more reliable, and

         -        far less expensive.

         For treatment of AKs, our BLU-U(R) uses blue light which penetrates
superficial skin lesions and is a potent activator of PpIX. 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 relatively low intensity, non-laser blue light sources, which
are designed to treat large areas, such as the entire face or body. For
treatment of diseases which have lesions which may penetrate several millimeters
into the skin or other tissue, e.g. for most forms of cancer, high-powered red
light is often preferable. We have United States and foreign patents and patent
applications pending which relate to devices and methods of using light devices
for use in Levulan(R) PDT and PD. See "Business -- Patents and Trademarks."

         Our Levulan(R) PDT/PD research and development team has experience in
the development and regulatory approval process of both drugs and devices for
use in clinical PDT/PD.

                                       6

OUR PRODUCTS

         The following table outlines our products and product candidates. Our
research and development expenses for the last three years were $10,789,906 in
2001, $8,163,419 in 2000 and $4,194,532 in 1999.




PRODUCT/INDICATION                                                          REGULATORY STATUS         MARKETING RIGHTS(1)
-------------------------------------------------------------------------------------------------------------------------

DERMATOLOGY
-------------------------------------------------------------------------------------------------------------------------
                                                                                                
Levulan(R) Kerastick(R) and BLU-U(R) for PDT of AKs                         Approved; Phase IV           Schering AG
-------------------------------------------------------------------------------------------------------------------------
Levulan(R) PDT for Onychomycosis (Nail Fungus)                                  Phase I/II               Schering AG
-------------------------------------------------------------------------------------------------------------------------
Levulan(R) PDT for Persistent Hand and Foot Wart Removal                        Phase I/II               Schering AG
-------------------------------------------------------------------------------------------------------------------------
Levulan(R) PDT for Broader Labeling of AK Indication                            Phase II2                Schering AG
-------------------------------------------------------------------------------------------------------------------------
Levulan(R) PDT for Acne                                                     Investigator Study           Schering AG
-------------------------------------------------------------------------------------------------------------------------

OTHER INDICATIONS
-------------------------------------------------------------------------------------------------------------------------
Levulan(R) PDT for Barrett's Esophagus Dysplasia                                Phase I/II                  DUSA
-------------------------------------------------------------------------------------------------------------------------
Levulan(R)-induced Fluorescence-guided Resection for Brain Cancer          Investigator Study(2)            DUSA
-------------------------------------------------------------------------------------------------------------------------
Levulan(R) PDT for Prevention of Restenosis                                 Investigator Study              DUSA
-------------------------------------------------------------------------------------------------------------------------


---------

         1 Draxis Health, Inc., our former parent, holds a license to PARTEQ's
           ALA patents for Canada.

         2 To commence in 2002.

DERMATOLOGY INDICATIONS

         Actinic Keratoses (AKs). AKs are superficial precancerous skin lesions
usually appearing as rough, scaly patches of skin with some underlying redness.
The traditional methods of treating AKs are cryotherapy, or the freezing of
skin, using liquid nitrogen, and 5-fluorouracil cream, or 5-FU. Although both
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 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 two to four weeks, resulting in
inflammation, redness and erosion or rawness of the skin. Following the
treatment an additional one to two weeks of healing is required. Our approved
treatment method involves applying Levulan(R) 20% topical solution using the
Kerastick(R) to the AK lesions, followed 14 to 18 hours later with exposure to
our BLU-U(R) for approximately 17 minutes. In 2001, we successfully completed
the first of two Phase IV trials required by the Food and Drug Administrations,
or FDA, testing for allergic skin reactions to our therapy. We expect to start
the second trial, to evaluate the long-term effects of our therapy, shortly.
Together with Schering AG, we have also started development activities to
broaden the labeling for the AK indication to enhance the Levulan(R) product
line.

                                       7

         As of January 1, 2002, the national reimbursement code for the BLU-U(R)
application procedure, along with a "J-code" that reimburses physicians for the
costs of the Levulan(R) Kerastick(R), became effective. Doctors can also bill
for any applicable visit fees. The codes will also facilitate electronic billing
for our therapy, eliminating paperwork involved with the previous manual billing
method. We believe that these changes, along with Berlex's ongoing education and
marketing programs, will help make Levulan(R) PDT a common therapy for AKs.

         Onychomycosis. This condition is more commonly known as nail fungus.
Current topical therapies are only effective in a small percentage of patients.
Oral prescription medications are more effective but must be taken over 12 weeks
or more, and pose risks of systemic side effects such as liver disease and
adverse interactions with other medications. In an unpublished investigator
study, 12 patients received a single treatment of Levulan(R) to their infected
nail, which was then exposed to a non-laser red light source. Three patients
showed a complete response to the Levulan(R) PDT. They lost their nail after one
week and regrew a new nail which was free of nail fungus. DUSA and Schering AG
commenced a vehicle-controlled, randomized, multicenter clinical feasibility
trial for this indication in 2001. Levulan(R) 20% topical solution or vehicle
was applied to infected toenails, followed in three to six hours by exposure to
broadband red light. Infected toenails are being evaluated for efficacy, and
will be retreated with Levulan(R) PDT, if necessary, at follow-up visits for up
to three months. Aggressive recruitment for the Phase I/II trial led to
completion of patient enrollment by year-end, with initial results expected in
the third quarter of this year.

         Persistent Hand and Foot Warts. Warts, which are characterized by
abnormal epidermal skin cell growth, are a common skin condition caused by the
human papilloma virus. Warts are usually treated first with over-the-counter
salicylic acid preparations. Often, these treatments are successful. However, in
cases where the warts do not clear, patients normally consult a physician. The
physician's next line of therapy is usually cryotherapy with liquid nitrogen,
which is applied by the doctor for anywhere from weeks to months to years in
rare cases. This treatment is painful and can occasionally leave scars. Some
dermatologists use lasers to treat warts, although this process can also take
many treatments with no guarantee of success. Sometimes warts still persist
despite all attempts at treatment. Warts that have been present for a year or
more, despite therapy, are termed recalcitrant warts.

         In a 1999 independent Danish randomized clinical trial using ALA PDT on
30 patients with 250 recalcitrant warts, the investigator reported that one of
the treatment groups showed a 70% elimination of recalcitrant warts through a
12-month period. In 2001, together with Schering AG, we began a
vehicle-controlled, randomized, multicenter clinical feasibility trial, to
enroll 64 patients with plantar warts persisting after a single standard
treatment. The trial involves applying Levulan(R) to the warts followed either
three to six or 16 to 24 hours later by light treatment using a broadband red
light. Patients receive up to three retreatments of partially responding and
non-responding warts at two-week intervals. Patient enrollment in the study was
completed at the end of 2001 and initial results are expected in the first half
of this year.

         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

                                        8

antibiotics for mild to moderate cases. An oral retinoid drug called
Accutane(R)(1) is the treatment of choice for cystic acne and can be used for
moderate to severe inflammatory acne. Over-the-counter treatments are often not
effective and can result in side effects, including drying, flaking and redness.
Prescription antibiotics lead to improvement in many cases, but patients must
often take them on a long-term basis. Accutane(R) can have a variety of side
effects, from dryness of the lips and joint pains, to birth defects, and
elevated levels of triglycerides and liver enzymes. With Levulan(R) PDT therapy
for acne 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.

         As part of the co-development program with Schering AG, a dose-ranging
clinical trial was completed in 2001. The specific low dose protocol tested was
not able to replicate the clinical results seen in previous independent research
using higher drug doses but which caused significant side effects. Further
development activity to better optimize the therapy is under consideration.

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.

         There is currently no approved therapy to halt or reverse Barrett's
esophagus dysplasia, or to slow its progression to esophageal cancer. Current
medical treatment of the condition commonly includes lifelong anti-reflux
therapy with drugs called proton pump inhibitors to reduce stomach acid. A
current treatment for more advanced, precancerous, Barrett's esophagus involves
surgery to remove affected areas of the esophagus. At least one company has
filed an NDA seeking approval of a PDT therapy for Barrett's esophagus. The role
of anti-reflux surgery is also being evaluated by the medical community.

         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, Levulan(R) PDT has
been shown to allow the conversion of early-stage Barrett's esophagus with
low-grade dysplasia and portions of Barrett's esophageal lining back to normal
esophageal lining. During 2001, patient accrual was completed in a
DUSA-supported randomized investigator study of the effects of differing
Levulan(R) doses with red laser light for the treatment of early-stage Barrett's
esophagus. Also, during the second half of 2001, we started two Phase I/II
studies using systemic Levulan(R) and red laser light in varying light doses for
the treatment of early and late-stage Barrett's esophagus dysplasia,
respectively. Patients are randomized to receive various light doses, may be
retreated, and will be followed for 24 months after the initial treatment. We
plan to do a preliminary analysis of the data after treating approximately 10
patients in each study.

---------

1  Accutane(R)is a registered trademark of Hoffmann La-Roche.

                                       9

         Bladder Cancer Detection. Bladder cancer is most often treated by
surgical removal of the tumor, but in many of these cases tumors recur within
two to three years. Doctors screen high-risk patients regularly for bladder
cancer, because of the risk of recurrence. One of the standard methods for
bladder cancer detection involves using a cystoscope to view the bladder with
white light.

         We concluded our own Phase I/II multi-center clinical trial for
enhancement of bladder cancer detection during 1999 using Levulan(R) PD and an
endoscope light source provided by Richard Wolf Medical Instruments Corp.

         The results suggested that significant further study would be necessary
to develop a commercially viable product to optimize bladder cancer detection
using Levulan(R) PD. We are currently exploring possible collaborations for the
development of Levulan(R)-induced fluorescence-guided resection for the
detection of bladder cancer.

         Prevention of Restenosis Following Balloon Angioplasty. Restenosis is
the re-narrowing of an artery after balloon angioplasty due to the rapid growth
of smooth muscle cells at the site of the angioplasty. Many patients who undergo
balloon angioplasty suffer restenosis within six months of the procedure.
Current forms of treatment for restenosis involve repeated angioplasty
procedures, stenting or by-pass surgery. Animal studies have shown that
Levulan(R) PDT prevents the rapid growth of smooth muscle cells within the
artery after balloon angioplasty. In October 1999, results were published in the
British Journal of Surgery from an investigator study using Levulan(R) PDT to
reduce restenosis after balloon angioplasty. The seven patients studied had been
selected because they each had developed restenosis within two to six months
following angioplasty in the past. After treatment with balloon angioplasty
followed by Levulan(R) PDT, all of the patients had symptomatic relief and,
during the six-month follow-up period, none of the patients had any recurrence
of symptoms. In June 2001, the investigators reported the long-term follow-up
results on these same seven patients. After following the treated patients for
over two years, six of the seven remained asymptomatic and only one had to
undergo another angioplasty procedure.

         In 2001, we began supporting a randomized controlled investigator study
for this indication. However, based on recent reports of significant progress in
the prevention of restenosis following balloon angioplasty using drug-coated
stents, we have reduced our support of the study. We intend to continue to
monitor the progress of the patients in the investigator study but we have
decided not to begin our own development program for this indication at this
time. We intend to follow the results of the drug-coated stent clinical trials
and reassess the market potential for the use of Levulan(R) PDT in the
prevention of restenosis following balloon angioplasty in the non-stentable
patient population after those results are available.

OTHER POTENTIAL DERMATOLOGY INDICATIONS

         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 tend to occur in areas of photodamaged skin. There are numerous
consumer cosmetic and herbal products which claim to lessen or relieve

                                       10

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)(2), to treat this common skin condition. Patients generally use the
product for between six and 24 weeks before improvement may be seen.

         As part of our AK clinical trials, we conducted a Phase II safety and
efficacy study, testing 64 patients with three to seven AK lesions of the face
or scalp within an area of photodamaged skin. The physician 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 two-thirds of the patients after treatment with Levulan(R) PDT as
well as some degree of improvement of wrinkles and brown spots. However, ten 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. Based on this data, we believe that this is a future potential
indication for Levulan(R) PDT.

OTHER POTENTIAL INTERNAL INDICATIONS

         Cervical Intraepitheleal Neoplasia. Cervical intraepitheleal neoplasia,
or CIN, is a common precancerous condition of the cervix. The pap smear
(cervical cytology specimens) is the test commonly used to screen for this and
other conditions of the cervix. Each year, millions of pap smear procedures are
performed in the United States. Approximately one-third of the test results
reveal some abnormality of the cervical tissue, and in many of these cases the
results are suspicious but not conclusive and therefore cannot be definitively
diagnosed. We believe that Levulan(R) PD could help doctors to locate and biopsy
the abnormal cervical tissue.

         A DUSA supported investigator study using topical application of
Levulan(R) to the cervix showed that Levulan(R)-induced fluorescence could be
highly selective for detecting CIN tissue. We have delayed support of any new
investigator-sponsored studies while we consider the cost-effectiveness of
developing various approaches to the use of Levulan(R) PD for CIN, including an
in vivo topical or systemic use of Levulan(R) for the fluorescence detection of
CIN visually on the cervix and/or an ex vivo use of Levulan(R) as an adjunct to
pap smears for microscopic examination.

         Brain Cancer. Despite standard therapies which 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 one 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 have 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. During 2002, we intend to support an investigator study to confirm
the European investigators' results and will also be examining the possibility
of collaborating with other companies on development of this indication.

--------

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


                                       11

         There may be numerous other potential therapeutic and cancer detection
uses for Levulan(R) PDT/PD, and we may support research in several of these
areas, as appropriate, with 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 these potential
uses in dermatology include treatment of skin cancers, such as squamous cell
carcinomas and cutaneous T-cell lymphomas, psoriasis, and genital warts; and
non-dermatology indications include detection and/or treatment gastro-intestinal
tumors, and oral cavity cancer.

STRATEGIC PARTNERS

         In November 1999, we signed a marketing, development and supply
agreement with Schering AG for the use of our Levulan(R) products to treat or
detect dermatology disorders. Schering AG is a large multi-national
pharmaceutical company which has significant dermatology sales outside the
United States. Under the agreement we granted to Schering AG the exclusive
worldwide right, except for Canada, to promote, market, sell and distribute our
Levulan(R) Kerastick(R) with PDT for AKs, and any additional dermatology
products developed under the co-development program. The parties have agreed to
jointly fund the dermatology co-development program through 2002, with Schering
AG contributing two-thirds of the joint committee-approved budget, up to
$3,000,000, while we contribute the remaining one-third, up to $1,500,000,
subject to the results of dermatology feasibility studies currently ongoing and
further decisions by development committee, which meets quarterly. Schering AG
also has limited rights to negotiate with us for rights to any non-dermatology
products that we intend to develop with corporate partners.

         We have received $30,000,000 from Schering AG, including $23,750,000 in
cash milestones and unrestricted research payments and $6,250,000 for which a
Schering AG affiliate received 340,458 shares of our common stock. No further
milestone payments are due for this first indication.

         We are responsible for the manufacture and supply of the Kerastick(R)
to Schering AG. Schering AG pays a supply price to us for the drug products, as
well as a royalty on drug sales. Schering AG also promotes the BLU-U(R), while
we have agreed to distribute, maintain and repair the BLU-U(R) units under
rental or lease/maintenance agreements. Initially, we leased the BLU-U(R) units
to dermatologists and other physicians, medical institutions and academic
centers throughout the United States and engaged a leasing company to complete
the leasing transactions. In September 2001, DUSA and Berlex began a new program
to rent the BLU-Us(R) to physicians for 36 months, with costs deferred for the
first six months, while Berlex provides physicians with a supply of Kerastick(R)
units at its cost. We are negotiating with a new leasing company to have them
manage the rental program. DUSA, Berlex and the current leasing company will
continue to support customers that remain on the initial program; however, the
majority of such customers have converted to the new rental program. Under the
initial program, customers have the right to cancel their leases after periods
of up to one year. Under the new program, customers may terminate the BLU-U(R)
rental at any time.

         On September 26, 2001, we reached agreement with Schering AG to amend
the marketing, development and supply agreement. With the execution of this
amendment, Schering and its United

                                       12

States affiliate, Berlex Laboratories, Inc., agreed to reimburse DUSA $1,000,000
for costs DUSA incurred to modify its manufacturing agreement with North Safety
Products, Inc. ("North"). See "Business -- Supply Partners." In consideration
for this amendment, we agreed to be responsible for certain additional
liabilities in the event of our failure to supply Schering AG's requirements of
finished product as defined in the original agreement. In addition, we agreed to
use our best efforts to qualify DUSA as the primary manufacturer and supplier of
the Kerastick(R) within six months following the date that North ceases
production. The amendment also terminated the guaranty by Schering AG to us of
BLU-U(R) lease payments by physicians, and the secured line of credit promissory
note from Schering to DUSA for up to $1,000,000 to finance inventory of BLU-U(R)
units.

         The marketing, development and supply agreement terminates on a
product-by-product basis in each country in the territory on the later of (a)
12-1/2 years after the first commercial sale of a respective product in such
country, or (b) the expiration of patents pertaining to the manufacture, sale or
use of such product in such country. It terminates in its entirety upon the
expiration of the agreement with respect to all products in all countries
covered by the agreement. Subject to various terms and conditions, the parties
may terminate the agreement earlier.

SUPPLY PARTNERS

         National Biological Corporation. In November 1998, we entered into a
purchase and supply agreement with National Biological Corporation ("NBC") for
the manufacture of some of our light sources, including the BLU-U(R). We have
agreed to order from NBC all of our supply needs of these light sources for the
United States and Canada and NBC has 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.

         NBC has granted to us a license to manufacture the light sources if NBC
fails to meet our supply needs. Under these circumstances, we would also have a
worldwide license to import, use, sell or dispose of the light sources under
NBC's technology within the field of PDT. Also, NBC has agreed that it will not
supply light sources that may be used to compete with our business. In early
2001, we prepaid NBC for raw material costs in the amount of $400,000 associated
with our then current order. This amount will be credited against the final
purchase price which will be due on delivery of finished units at a rate of
$1,000 per unit. In addition, we agreed that if we did not order a certain
number of BLU-U(R) brand units by January 2, 2002 for delivery in 2002, we would
pay NBC $100,000 to cover certain overhead costs. In consideration for this
payment, NBC agreed to maintain its BLU-U(R) manufacturing capabilities in a
state of readiness during 2002 with the capability of producing BLU-U(R) units
in accordance with established procedures. The payment was made in January 2002.

         The agreement has a 10-year term, subject to earlier termination for
breach or insolvency or for convenience. However, a termination for convenience
requires 12 months' prior written notice.

         North Safety Products. In September 1999, we entered into a purchase
and supply agreement with North Safety Products, Inc. ("North"), a unit of
Norcross Safety Products, LLC, for

                                       13

the manufacture and supply of our Kerastick(R) brand applicator. We have agreed
to purchase from North a significant portion of our total commercial
requirements for supply of the Kerastick(R) for sale in the United States and
Canada. Prices for the product are based on the quantities of Kerastick(R)
ordered which are subject to change depending on various product costs and
competitive market conditions.

         In February 2001, we agreed to compensate North for certain overhead
expenses associated with the manufacture of the Kerastick(R) to cover
underutilization of North's facilities in accordance with an amendment to the
purchase and supply agreement, since actual orders were below certain previously
anticipated levels. In July 2001, we revised this agreement with North and paid
$1,000,000 in up-front underutilization fees and agreed to make additional
payments totaling $400,000 covering the period through December 31, 2002. Of
these amounts, $1,000,000 of the underutilized fees were reimbursed through an
amendment to DUSA's agreement with Schering AG. See "Business -- Strategic
Partners." In consideration for the underutilization fees, North has agreed to
maintain its Kerastick(R) manufacturing capabilities in a state of readiness,
with the capability of producing at least 25,000 Kerastick(R) units per month in
accordance with established procedures. In addition, North is obligated to
provide us with manufacturing records, personnel support, and a list of
consultants and suppliers that have supported the development and manufacturing
of the Kerastick(R).

         The term of the purchase and supply agreement was also amended and will
end on December 31, 2002 unless DUSA exercises an option to extend the term
through June 30, 2003. If DUSA should decide to extend the term, North will be
entitled to payment of additional underutilization fees of up to $500,000,
prorated based on the level of Kerastick(R) units produced from July 1, 2001
through June 30, 2003. We also continue to have the right to terminate for
stated breaches of the agreement. Also see "Business -- Manufacturing."

         Sochinaz SA. Under an agreement dated December 24, 1993, Sochinaz SA
("Sochinaz") manufactures and supplies all of our requirements of Levulan(R)
worldwide from its FDA approved facility in Switzerland. In June 2000, we
amended the agreement to include an option to allow us to extend the term for an
additional three (3) years until December 3, 2007. As consideration for the
amendment, we agreed to reimburse Sochinaz for a portion of its costs to bring
its manufacturing facilities into compliance with the FDA current good
manufacturing practices, or cGMPs. We paid $250,000 in cash and issued 26,666.66
shares of our common stock having a fair market value of $750,000. While we can
obtain alternative supply sources in certain circumstances, any new supplier
would have to be inspected and qualified by the FDA.

LICENSES

         PARTEQ Research and Development Innovations. We license the patents
underlying our Levulan(R) PDT/PD systems under a license agreement with PARTEQ
Research and Development Innovations ("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 method 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

                                       14

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, such as Schering AG, 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. See Note 11a to the Company's Notes to the Consolidated Financial
Statements. We have the right to terminate the PARTEQ agreement with or without
cause upon 90 days notice.

         For 2000 and going forward, annual minimum royalties to PARTEQ on sales
of products must total at least CDN $100,000. See Note 11a 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 (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 license agreement to the extent they relate to Canada.
In addition, we have agreed to disclose to Draxis on an ongoing basis, any
technology which is available to us relating to the subject matter of the
license agreement which would assist Draxis in developing the Canadian market
under the assigned rights. Draxis is responsible for royalties which would
otherwise be payable by us in accordance with the license agreement for net
Canadian sales of products and sublicensing revenues. Draxis has also agreed to
pay us a royalty of 2% of net Canadian sales of products.

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 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

                                       15

we may not be able to afford the costs. We own or exclusively license patents
and patent applications related to the following:

         -        unique physical forms of ALA,

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

         -        compositions and apparatus for those methods.

         These patents expire no earlier than 2009, and certain patents are
entitled to terms beyond that date.

         Under the license agreement with PARTEQ and Draxis, we hold an
exclusive worldwide license to certain patent rights in the United States and a
limited number of foreign countries. See "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 counter-parts in only three foreign countries.
Even with the issuance of additional patents, other parties are free to develop
other uses of ALA, including medical uses, and to market ALA for such uses,
assuming that they have obtained appropriate regulatory marketing approvals.
Certain forms of ALA are commercially available chemical products. ALA in the
chemical form commercially supplied for decades is not itself subject to patent
protection. In fact, there are reports of several third-parties conducting
clinical studies with ALA for the treatment of certain conditions in countries
outside the United States where PARTEQ may not have patent protection.
Additionally, enforcement of a given patent may not be practicable or an
economically viable alternative.

         We can give 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 give no assurances 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, we can give no
assurances 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 such a claim.

         Except for the opposition of Japanese Patent No. 273032, which we
license from PARTEQ, we are not aware of any formal challenges to the validity
of PARTEQ's or our patents. However, we cannot guarantee that other challenges
or claims will not be asserted in the future. In 1999, Japanese Patent No.
273032, which relates to the basic method of using ALA, was opposed and, as

                                       16

a result, the Japanese Patent Office Board of Appeals revoked the patent. With
PARTEQ's assistance, we have been simultaneously pursuing an appeal at the Tokyo
High Court and an amendment trial before the Japanese Patent Office. We can at
this time give no assurance of the likelihood of success of either contest or
any assurance that we will decide to spend the funds required to complete the
contests. If our response does not allay the concerns of the Board, they may
limit our patent protection or finalize the cancellation. Japan is a major
pharmaceutical market and loss of this patent could adversely affect us in at
least two ways. First, if we seek to enter the Japanese market, the lack of a
patent would probably retard or diminish our market share. Second, even if we
did not seek to market in Japan, third-parties might not be interested in
licensing the product in Japan without patent protection, and this might limit
our potential revenues from this market.

         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 each employee, licensing partner, consultant,
university, pharmaceutical company and agent contain provisions designed to
protect the confidentiality of our proprietary information. However, we can give
no assurances 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 give no assurances 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
product (like PARTEQ's patents); (ii) patents relating to special compositions
and formulations; and (iii) limited marketing exclusivity that may be available
as a patent term extension under the Hatch/Waxman Act and any counterpart
protection available in foreign countries. See "Business -- Government
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 intend to seek registration of trademarks in the United States, and
other countries where we may market our products when it is sufficiently close
to commercialization so that appropriate brand names may be selected in light of
the circumstances then existing. To date, we have been issued 10 trademark
registrations, and other applications are pending.

                                       17

MANUFACTURING

         We do not currently operate any manufacturing facilities. Our drug,
Levulan(R), the Kerastick(R) brand applicator and the BLU-U(R) brand light
source are each manufactured by a single third-party supplier. See "Business --
Supply Partners." Under our agreement with Schering AG, we are obligated to
maintain certain inventory levels of our Levulan(R) products until we qualify a
second source of supply for ALA.

         Contemporaneously with the amendment of our agreement with North, which
provides for earlier termination of the current Kerastick(R) manufacturing
arrangement, we decided to build a Kerastick(R) manufacturing line at our
Wilmington facility. We believe that the development of our own manufacturing
capabilities should enable us to better manage and control the costs of
production; however, our unit cost per Kerastick(R) will increase, until product
sales increase significantly. We have begun the construction process, with the
initial build-out expected to take approximately six months, followed by the
facility and drug stability testing required for FDA approval of the site. FDA
inspection is expected to occur within approximately six months following the
construction and testing stages.

MARKETING AND SALES

         Under our agreement with Schering AG, marketing and sales of Levulan(R)
PDT products for use in dermatology in the United States will be the
responsibility of Schering AG's affiliate, Berlex Laboratories, Inc. Following
receipt of marketing approval in the United States, Schering AG must select the
country, countries or key territories in which it intends to seek regulatory
approval and to sell our products on a product-by-product basis. If Schering AG
elects not to market a product in a specific territory or country, we regain the
right to market the product. To date, Schering AG has filed for regulatory
approval of our first products in Austria (the initial step in obtaining
approval throughout the European Union), Australia, and Brazil. We retain the
rights to market and sell all future products for non-dermatology indications.
Subject to Schering AG's limited right to negotiate, we can enter into
marketing, co-promotional, distribution or similar type agreements with
corporate partners for our non-dermatology indications.

         Draxis has been granted the rights to market Levulan(R) PDT in Canada.
See "Business -- Licenses." The Health Protection Branch - Canada has granted
marketing approval for the Levulan(R) Kerastick(R) with PDT using the BLU-U(R)
for AKs of the face or scalp and we are working with Draxis to establish a
supply arrangement for the Canadian market.

COMPETITION

         Commercial development of PDT agents other than Levulan(R) are
currently being pursued by a number of companies. These include: QLT
PhotoTherapeutics Inc. (Canada); Axcan, Inc. (U.S.); Miravant, Inc. (U.S.);
Pharmacyclics, Inc. (U.S.); QuantaNova Canada Ltd. (formerly Scotia
Pharmaceuticals) (United Kingdom); and Photogen Technologies, Inc. (U.S.). We
are also aware of several overseas companies doing research with ALA or
ALA-related compounds, including: Medac GmbH (Germany) which is 25% owned by
Schering AG; and Photocure ASA (Norway).

                                       18

         Photocure has received marketing approval of its ALA precursor (ALA
methylester) compound with PDT for the treatment of AK's in the European Union,
New Zealand, and countries in Scandinavia. Photocure has also filed for
regulatory approvals in Australia and the United States. If Photocure receives
approval from the FDA to market its ALA AK product in the U.S., its entry into
the marketplace will represent direct competition for our products. We are also
aware that Medac is developing ALA PD for fluorescence-guided resection of brain
cancer and bladder cancer in Germany.

         Our position in the PDT field could be adversely affected by product
developments achieved by other companies. The pharmaceutical industry is highly
competitive. Many of our competitors have substantially greater financial and
technical and marketing resources than we have. In addition, several of these
companies have had 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 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.

         Our current primary competitors for our first products are the existing
therapies for treatment of AKs. See "Business -- Dermatology Indications,
Actinic Keratoses." We expect that our principal methods of competition with
these therapies will be cost and patient benefits including cosmetic results.

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:

         -        approval of manufacturing facilities, including adherence to
                  current good manufacturing, laboratory and clinical practices
                  during production and storage known as cGMPs, GLPs and GCPs
                  respectively,

         -        controlled research and testing of products,

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

         -        control of marketing activities, including advertising and
                  labeling.

                                       19

         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:

         -        preclinical studies

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

         -        human clinical trials, and

         -        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 typically is 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 two
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 one to three 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

                                       20

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
also may 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 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 are 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. 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) was approved on September 26,
2000.

         We are currently conducting Phase I/II studies on the use of ALA for
the treatment of warts, onychomycosis, and Barrett's esophagus dysplasia. Other
than the FDA-approved use of the Levulan(R) Kerastick(R) with PDT for treatment
of AKs, our other products still require significant development, including
additional preclinical and 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 (e.g., labeling and adherence to the cGMP
requirement for medical devices), and Class II devices are subject to general
controls and special controls (e.g., 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

                                       21

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) has been
classified as a Class III device. We anticipate that our other devices 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 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 Food, Drug and
Cosmetics Act, the FDA has 180 days to review a PMA application. The review of
PMA applications more often occur over a significantly protracted time period,
and the FDA may take up to two years or more from the date of filing to complete
its review.

         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" in the United
States. A combination product generally is defined as a product comprised of
components from two or more regulatory categories (drug/device, device/biologic,
drug/biologic, etc.) Each component of a combination product is subject to the
requirements established by the FDA for that type of component, whether a drug,
including a biologic drug, or device. Currently, PDT/PD treatments are defined
as drug/device combination products. The main responsibility for review of PDT
products (drugs and devices) is under the jurisdiction of the FDA's drug center,
the Center for Drug Evaluation and Research, with support from the Center for
Devices and Radiological Health. The FDA has not formally established the degree
and extent of the regulatory requirements for the various components of PDT/PD.

         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)

                                       22

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 provides for the return of up to five
years of patent term for a patent that covers a new product or its use, to
compensate for time lost during the regulatory review process. The application
for patent term extension is subject to approval by the U.S. Patent and
Trademark Office in conjunction with the FDA. It takes at least six months to
obtain approval of the application for patent term extension, and there can be
no guarantee that the application will be granted. We believe that the FDA's
December 3, 1999 approval of our NDA for the Levulan(R) Kerastick(R) with PDT is
the first marketing approval for a medical use of ALA. We therefore believe that
this approval may form the basis for extending the term of one of our patents.
However, there can be no assurance that we will receive a patent term extension.

         The Hatch-Waxman Act also establishes a five-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 will expire on December 3, 2004. During this Hatch-Waxman marketing
exclusivity period, no third-party may submit an "abbreviated NDA" or "paper
NDA" to the FDA.

         Finally, 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.

         We also intend to market our products outside of the United States.
Prior to marketing a product in other countries, approval by that nation's
regulatory authorities must be obtained. Our marketing partner, Schering AG,
will be responsible for applying for marketing approvals outside the United
States for Levulan(R) PDT for dermatology uses and has, to date, filed
applications for approval in Austria, Australia and Brazil. 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.

         With the enactment of the Drug Export Amendments Act of the United
States in 1986, products not yet approved in the United States 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 give you 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. While
we do not currently manufacture any products, we are subject to various laws and
regulations governing the use, manufacture, storage, handling and disposal of
hazardous materials and certain waste products. We believe that

                                       23

we are in material compliance with applicable environmental laws and
regulations. For the present, we have not made any material capital expenditures
for environmental control facilities. However, once we establish our own
production line for the manufacture of the Kerastick(R), we expect that
environmental laws will govern our facility. We can give you no assurance that
we will not have to make significant expenditures in order to comply with
environmental laws and regulations in the future. Also, we cannot assure you
that current or future environmental laws or regulations will not materially
adversely effect our operations, business or assets. In addition, although we
believe that our safety procedures for the handling and disposal of such
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.

EMPLOYEES

         At the end of 2001, we had 55 full-time employees. We have employment
agreements with our key executive officers. We have purchased, and are the named
beneficiary of, a key man life insurance policy having a face value of CDN
$2,000,000 on the life of our President. We also retain numerous independent
consultants and the services of key researchers at leading university centers
whose activities are coordinated by our employees. For example, in October 2001
the Company executed a master service agreement, effective June 15, 2001, with
Therapeutics, Inc. to manage the clinical development of DUSA's products in the
field of dermatology. We intend to hire other employees and consultants as
needed.


                                  RISK FACTORS

         This section of our Annual Report on Form 10-K contains forward-looking
statements that involve risks and uncertainties, such as 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 factors described below and elsewhere in this Annual
Report. You should not place undue reliance on these forward-looking statements,
which apply only as of the date of this Annual Report.

         The following are among the risk factors we face related to our
business, assets and operations. They are not the only ones we face. Additional
risks and uncertainties that we are not aware of or that we currently deem
immaterial also may impair our business. If any of the following risks actually
occur, our business, financial condition and operating results could be
materially adversely affected.


                                       24

                              RISKS RELATED TO DUSA

WE ARE NOT CURRENTLY PROFITABLE AND MAY NOT BE PROFITABLE IN THE FUTURE UNLESS
WE CAN SUCCESSFULLY MARKET AND SELL OUR FIRST PRODUCT, THE LEVULAN(R)
KERASTICK(R) WITH PDT FOR THE TREATMENT OF AKS OF THE FACE OR SCALP.

         BECAUSE WE AND SCHERING AG, OUR MARKETING PARTNER FOR DERMATOLOGY
         PRODUCTS, HAVE ONLY LIMITED EXPERIENCE MARKETING OR SELLING DERMATOLOGY
         PRODUCTS IN THE UNITED STATES, OUR REVENUES FROM ROYALTIES AND PRODUCT
         SALES MAY SUFFER.

         The commercial success of Levulan(R) Kerastick(R) with PDT for AKs of
the face or scalp will partly depend on the effective marketing of our products
in the United States by Schering AG through its affiliate, Berlex Laboratories,
Inc. While Schering AG has experience marketing dermatology products in Europe,
prior to the September 2000 launch of our first products, neither Schering AG,
Berlex nor DUSA had any experience marketing dermatology products in the United
States. Schering AG has 39 sales representatives and area managers who are
dedicated to the marketing of the Levulan(R) PDT system. If Schering AG ceases
to fund or fails to adequately fund marketing efforts or develop, train and
manage a sufficiently large sales force, the demand for our product will be
limited and our royalties from Schering AG on sales of the product, our income
from our light device, and our revenue on supply fees on the Kerastick(R) will
be adversely affected. Additionally, Schering AG has the right to terminate our
agreement on 12-months written notice. If Schering AG were to decide to
terminate our agreement early, we would have to establish a marketing capability
at significant expense.

         IF SCHERING AG DECIDES TO DISCONTINUE FUNDING THE DERMATOLOGY
         DEVELOPMENT PROGRAM, WE MAY NOT BE ABLE TO ADVANCE THE VARIOUS PROGRAMS
         AS QUICKLY WHICH WOULD DELAY THE APPROVAL PROCESS AND MARKETING OF NEW
         POTENTIAL PRODUCTS.

         The development and commercialization process is costly and delays
and/or unanticipated costs could adversely affect our financial condition. There
can be no guarantee that Schering AG will continue to fund the dermatology
co-development program beyond its current commitment for 2002. If Schering
decides, for any reason, to cease funding the co-development program, continued
development of our potential dermatology products would require DUSA to commit
substantially greater capital to research and development of such dermatology
products and we may not have sufficient funds to complete all of our programs.

         SINCE WE RELY HEAVILY ON OUTSIDE CONTRACTORS AS SOLE SUPPLIERS AND
         MANUFACTURERS OF OUR LEVULAN(R) KERASTICK(R) AND BLU-U(R), OUR
         MARKETING EFFORTS AND SALES MAY SUFFER IF THESE THIRD-PARTIES FAIL IN
         ANY WAY TO ADEQUATELY SUPPLY US WITH THE QUALITY AND QUANTITY OF THE
         PRODUCTS WE NEED.

         We do not currently have the capacity to manufacture any of our
products on our own and rely on third-parties to manufacture our products. We
have only one source for Levulan(R), one source for our Kerastick(R), and one
for the BLU-U(R). So far, our manufacturers have not been


                                       25

required to produce our products in large commercial quantities. Manufacturers
often encounter difficulties when large quantities of new products are
manufactured for the first time, 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 our manufacturers seek to increase production. Any
manufacturing problems could delay or limit our supplies or prevent
commercialization of our products. If any of these suppliers fail to meet our
needs, our business, financial condition and results of operations would suffer.

         If any facility or equipment in the facility of our manufacturers is
damaged or destroyed, we will not be able to quickly or inexpensively replace
it. If there are any quality or supply problems with any components supplied to
our manufacturers for our products, we may not be able to quickly replace them.

         Under the terms of our agreement with Schering AG, our continuing
failure to supply Schering AG's requirements of Levulan(R), the Kerastick(R)
and/or the BLU-U(R) would release Schering AG from its obligation to purchase
supplies from us. The supply fees Schering AG is required to pay to us would be
reduced by Schering AG's cost to manufacture and we would receive only a royalty
payment on sales. Our business, financial condition and results of operations
would be adversely affected.

         IF WE ARE UNABLE TO COMPLETE THE CONSTRUCTION OF OUR MANUFACTURING SITE
         IN A TIMELY MANNER, ANY RESULTING INTERRUPTION IN THE SUPPLY OF
         KERASTICKS(R) COULD HAVE AN ADVERSE EFFECT ON OUR REVENUE.

         Recently, we decided to build our own, commercial-scale, Kerastick(R)
manufacturing capabilities at our Wilmington facility in order to replace our
current third-party manufacturer. Our current supply agreement with North Safety
Products, Inc. shall terminate, at our option, on the later of December 31, 2002
or June 30, 2003. We have begun the construction process, with the initial
build-out expected to take approximately six months, followed by the facility
and drug stability testing required for FDA approval of the site. FDA
inspection is expected to occur within approximately six months following
the construction and testing stages. If we encounter difficulties or delays in
completing our manufacturing facility, obtaining FDA approval of the facility,
or in manufacturing commercial quantities of the Kerastick(R), such difficulties
or delays could adversely affect our business, financial condition or results of
operations. Also, the cost to build and complete testing of such manufacturing
capabilities, including equipment, will be approximately $2,700,000. If we do
not have sufficient sales, the financing and other costs associated with the
construction could have an adverse effect on our liquidity and financial
situation.


                                       26

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

         Our products are subject to continued and comprehensive regulation by
the FDA and by state and local regulations. 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.

         Both the manufacture and marketing of our first products, the
Levulan(R) Kerastick(R) and the BLU-U(R) are subject to continuing FDA review.
Our manufacturers must continue to comply with the FDA's current Good
Manufacturing Practices, commonly known as cGMP, and foreign regulatory
requirements. The cGMP requirements govern quality control and documentation
policies and procedures. In complying with cGMP and foreign regulatory
requirements, 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. If our
third-party manufacturers fail to comply with these requirements, we would be
subject to possible regulatory action and may be limited in the jurisdictions in
which we are permitted to sell our products.

         As part of our approval from the FDA, we were required to conduct two
Phase IV follow-up studies. We have successfully completed the first study; the
second study, to evaluate the long-term recurrence rate of AKs after treatment
with our new therapy, is scheduled to begin shortly. If we discover a previously
unknown problem with the product, a manufacturer or its facility, 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 give you any assurance
that our third-party sole sources will continue to meet all applicable FDA
regulations in the future. If any of our manufacturers fail to maintain
compliance with FDA regulatory requirements, it would be time consuming and
costly to qualify other sources. These consequences could have an adverse effect
on our financial condition and operations. If we fail to comply with applicable
regulatory approval requirements, a regulatory agency may:

         o        send us warning letters,

         o        impose fines and other civil penalties on us,

         o        suspend our regulatory approvals,

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

         o        refuse to permit exports or 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, or

         o        criminally prosecute us.


                                       27

         ANY FAILURE TO FILE FOR OR OBTAIN FOREIGN REGULATORY APPROVALS COULD
         ADVERSELY AFFECT OUR REVENUES FROM FUTURE PRODUCT SALES.

         As part of our collaboration agreement with Schering AG, we will be
jointly seeking foreign regulatory approvals for Levulan(R) Kerastick(R) PDT for
AKs. To date, we have filed applications in Austria, Australia and Brazil. We
cannot give you any assurances that we will receive foreign approvals on a
timely basis, or at all, or that problems will not arise that could delay or
prevent the commercialization of our products in foreign countries. The
introduction of our products in foreign markets will subject us to foreign
regulatory clearances, and reimbursement reviews, which may be unpredictable and
uncertain, and which may impose substantial additional costs and burdens which
Schering AG and/or DUSA may be unwilling or unable to pay. At present,
applications for foreign marketing authorizations are made at the national
level, although certain registration procedures are available within the
European Union to companies wishing to market a product in more than one member
country. A regulatory authority must be satisfied that adequate evidence of
safety, quality, and efficacy of the product has been presented before marketing
authorization is granted. In addition, electrical medical devices, such as the
BLU-U(R), must be manufactured in compliance with the current requirements of
ISO 9000. Our third-party manufacturer has brought the BLU-U(R) into compliance
with CE marking and ISO 9001 requirements, but we can give you no assurance as
to continued compliance with future requirements. The foreign regulatory
approval process includes all of the risks associated with obtaining FDA
marketing approval and approval by the FDA does not ensure approval by other
countries. Failure to file for and/or obtain foreign regulatory approvals could
adversely affect our financial condition and operations.

         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 2002 as we expand research and development of new products and
establish ourselves in the marketplace. As of December 31, 2001, our accumulated
deficit was $49,845,445. We cannot predict whether any of our products will
achieve significant market acceptance or generate sufficient revenues to become
profitable. Our commercial success will depend on whether:

         o        our products are more effective therapies than currently
                  available treatments,

         o        physicians receive sufficient reimbursement for our products,
                  and

         o        we can, either together with partners or alone, successfully
                  market our products.

WE HAVE ONLY ONE THERAPY THAT HAS RECEIVED REGULATORY APPROVAL 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) FOR PDT TO
         TREAT AKS, ALL OF OUR PRODUCTS ARE IN EARLY STAGES OF DEVELOPMENT AND
         MAY NEVER RESULT IN ANY COMMERCIALLY SUCCESSFUL PRODUCTS.

         Currently, we are developing a single drug compound for a number of
different medical conditions. To be profitable, we must successfully research,
develop, obtain regulatory approval for, manufacture, introduce, market and
distribute our products. All of our products, except for the


                                       28

Levulan(R) Kerastick(R) with the BLU-U(R) for PDT to treat AKs, are at an early
stage of development. We cannot predict how long the development for these
products will take or whether they will be medically effective. We cannot be
sure that a successful market will ever develop for our new drug technology. We
do not know if any of our products will ever be commercially successful.

         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 other potential 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 other potential products our revenues will be limited.
Before an NDA, which is an application to the FDA seeking approval to market a
new drug, can be filed with the FDA, 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 one
to three 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 new technology. To the best of our knowledge, the FDA has approved only
three 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 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. 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.

         OUR LACK OF SALES AND MARKETING EXPERIENCE COULD AFFECT OUR ABILITY TO
         MARKET OUR NON-DERMATOLOGY PRODUCTS, WHICH COULD ADVERSELY AFFECT OUR
         REVENUES FROM FUTURE PRODUCT SALES.

         We are lacking the experience and capacity to market, sell and
distribute our products. In order to market non-dermatology products and/or if
Schering AG abandons its rights to any dermatology products, or terminates our
agreement, and if we do not enter an agreement with a corporate partner who has
the experience and resources to perform these roles, we would be required to
hire our own staff and a sales force. We have no experience in developing,
training or managing a sales force. We will incur substantial additional
expenses if we have to develop, train and manage these business activities. We
may be unable to build a sales force and the costs of establishing a sales force
may exceed our product revenues. In addition, companies that may compete with us
currently have extensive and well-funded marketing and sales operations. Any
marketing and sales efforts we make may be unsuccessful.


                                       29

         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.

         If our sales goals for our first product are not met, we may need
substantial additional funds to fully develop, manufacture, market and sell all
of our other potential products. We cannot predict exactly if or when additional
funds will be needed. We may obtain funds through a public or private financing,
including equity financing, and/or through collaborative arrangements. We cannot
predict whether any financing will be available on acceptable terms when we need
it because investors may be unwilling to invest in DUSA if we have setbacks in
the development program or if the public fails to use our products.

         If funding is insufficient, we will have to delay, reduce in scope or
eliminate some or all of our research and development programs. We cannot
predict which programs will be affected since it will depend upon the status of
clinical trials at that time. We may license rights to third-parties to
commercialize products or technologies that we would otherwise have attempted to
develop and commercialize on our own.

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 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. We own or exclusively license patents and patent applications related
to the following:

         o        unique physical forms of ALA,

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

         o        compositions and apparatus for those methods.

         Some of the indications we are developing may not be covered by the
claims in our existing patents. In addition, a number of third-parties are
seeking patents for additional uses of ALA. These additional uses, whether
patented or not, could limit the scope of our future operations because other
ALA products might become available which would not infringe our patents. These
products would compete with ours even though they are marketed for a different
use.

         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 counter-


                                       30

parts in only three foreign countries. Absent patent protection, third-parties
may freely market ALA, subject to appropriate regulatory approval. There are
reports of several third-parties conducting clinical studies using ALA, or ALA
precursors, in countries where DUSA lacks patent protection. These studies could
provide the clinical data necessary to gain regulatory approval, resulting in
competition.

         Our patent protection in Japan may be diminished or lost entirely.
Japanese Patent No. 273032, which we have licensed from PARTEQ, has been opposed
and the Japanese Patent Office Board of Appeals revoked this patent. With
PARTEQ's assistance, we are simultaneously pursuing an appeal of the revocation
before the Tokyo High Court and an amendment trial before the Japanese Patent
Office. Japan is a major pharmaceutical market and loss of this patent could
adversely affect DUSA in at least two ways. First, should DUSA seek to enter the
Japanese market, the lack of a patent would probably diminish our market share.
Second, even if we did not seek to market in Japan, third-parties might not be
interested in licensing the product in Japan without patent protection, and this
might affect DUSA's revenues.

         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 one or more of our patents, that
third-party could challenge the validity of our patent(s). Defending our patents
could also result in the expenditure of significant resources. We cannot
guarantee that a third-party or parties 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 could also involve considerable
expense.

         If a third-party were to file a United States patent application, 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 invention. A third-party also could request the declaration of a
patent interference between one of our issued patents, and a third-party United
States patent application. Any interference proceedings likely would require
participation by us and/or PARTEQ, and could involve substantial legal fees.


                                       31

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

         IF ANY OF THE KEY MEMBERS OF OUR MANAGEMENT WERE TO END HIS
         RELATIONSHIP WITH US, WE COULD EXPERIENCE SIGNIFICANT DELAYS IN OUR
         BUSINESS AND RESEARCH OBJECTIVES.

         We are a small company with only approximately 55 employees. We are
highly dependent on several key officer/employees with specialized scientific
and technical skills. 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 these qualified personnel in our specialty drug and light
device areas. 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 business, financial
condition and results of operations could suffer.

                          RISKS RELATED TO OUR INDUSTRY

PRODUCT LIABILITY AND OTHER CLAIMS AGAINST US MAY REDUCE DEMAND FOR OUR PRODUCTS
OR RESULT IN DAMAGES.

         IF WE BECOME SUBJECT TO A PRODUCT LIABILITY CLAIM WE MAY NOT HAVE
         ADEQUATE INSURANCE COVERAGE AND THE CLAIM COULD ADVERSELY AFFECT OUR
         BUSINESS.

         The development, manufacture and sale of medical products exposes us to
the risk of significant damages from product liability claims. Although we
currently maintain product liability insurance for coverage of our products in
amounts we believe to be commercially reasonable we cannot be certain that the
coverage amounts are adequate or that continued coverage will be available at
acceptable costs. If the cost is too high, we will have to self-insure. A
successful claim in excess of our insurance coverage could have a materially
adverse effect on our business, financial condition and results of operations.

         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. Even though we do
not currently manufacture any products, 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. When we
establish our own production line for the manufacture of the Kerastick(R), we
expect that additional environmental laws and regulations will apply to our
facility. We believe that we are in compliance in all material respects with
currently applicable environmental laws and regulations and we have not made any
material capital expenditures for environmental control facilities to date.
However, we cannot guarantee that we will not incur significant costs to comply
with environmental laws and


                                       32

regulations in the future. We also cannot guarantee that current or future
environmental laws or regulations will not materially adversely effect our
operations, business or assets. In addition, although we believe our safety
procedures for handling and disposing of these materials comply with federal,
state and local laws and regulations, we cannot completely eliminate the risk of
accidental contamination or injury from these materials. In the event of such an
accident, we could be held liable for any resulting damages, and this liability
could exceed our resources.

WE MAY NOT BE ABLE TO 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 MAY MAKE SOME OR ALL OF OUR
         PROGRAMS OR POTENTIAL PRODUCTS NONCOMPETITIVE OR OBSOLETE.

         Our industry is subject to rapid, unpredictable and significant
technological change. Competition is intense. Well-known pharmaceutical,
biotechnology and chemical companies are marketing well-established therapies
for the treatment of various dermatological conditions including AKs. Doctors
may prefer familiar methods that they are comfortable using rather than try our
products. Many companies are also seeking to develop new products and
technologies for medical conditions for which we are developing treatments. 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. We anticipate that we will face increased competition as new
companies enter our markets and as the scientific development of PDT/PD
advances.

         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 photodynamic therapy,

         o        the degree of generalized skin sensitivity to light,

         o        the number of required doses,

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

         o        the type and cost of our light systems.

         We cannot give you any assurance that new drugs or future developments
in PDT or in other 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 have an adverse effect on our business. Further, we cannot
give you any assurance that developments by our competitors or future
competitors will not render our technology obsolete.


                                       33

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

         Several companies are developing PDT agents other than Levulan(R).
These include: QLT PhotoTherapeutics Inc. (Canada); Axcan, Inc. (U.S.);
Miravant, Inc. (U.S.); Pharmacyclics, Inc. (U.S.); QuantaNova Canada Ltd.
(formerly Scotia Pharmaceuticals) (United Kingdom); and Photogen Technologies,
Inc. (U.S.). We are also aware of several overseas companies doing research with
ALA, including: Medac GmbH (Germany) which is 25% owned by Schering AG; and
Photocure ASA (Norway).

         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.

         Photocure has received marketing approval of its ALA precursor (ALA
methylester) compound with PDT for the treatment of AKs in the European Union,
New Zealand and countries in Scandinavia and has applications pending for
approval in Australia and the United States. If Photocure receives approval from
the FDA to market its ALA AK product in the U.S., its entry into the marketplace
will represent direct competition for our products. We are also aware that Medac
is developing ALA PD for fluorescence-guided resection of brain cancer and
bladder cancer in Germany.

                           RISKS RELATED TO OUR STOCK

IF OUTSTANDING OPTIONS AND WARRANTS ARE CONVERTED, THE VALUE OF THOSE SHARES OF
COMMON STOCK OUTSTANDING JUST PRIOR TO THE CONVERSION WILL BE DILUTED.

         As of February 15, 2002 there were outstanding options and warrants to
purchase 2,497,899 shares of common stock, with exercise prices ranging from
U.S. $3.25 to $31.00 per share, respectively, and ranging from CDN $4.69 to CDN
$10.875 per share, respectively. If the holders exercise a significant number of
these securities at any one time, the market price of the common stock could
fall. The value of the common stock held by other shareholders will be diluted.
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. If the market price of the
common stock does not rise above the exercise price of these securities, then
they will expire without exercise. 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.


                                       34

RESULTS OF OUR OPERATIONS AND GENERAL MARKET CONDITIONS FOR BIOTECHNOLOGY STOCK
COULD RESULT IN THE SUDDEN CHANGE IN THE MARKET VALUE OF OUR STOCK.

         From time to time and in particular during the last few years, 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, 2001 to February 15, 2002, our stock price has ranged
from a high of $18.938 to a low of $4.26. Factors that contributed to the
volatility of our stock during the last 12 months included:

         o        disappointing first year product sales,

         o        general market conditions,

         o        timing in achieving third-party payor reimbursement for our
                  first therapy, and

         o        clinical trial results.

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

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.

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. On February 1, 2001, we entered into a five year lease for an
additional 24,000 square feet of space at our Wilmington facility. As part of
our planned build-out of the facility, in December 2001 we replaced the two five
year leases with a new 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
seven and one-half months prior to the date on which the termination would be
effective. Our wholly-owned subsidiary, DUSA Pharmaceuticals New York, Inc.,
relocated from Tarrytown, New York, to larger facilities, approximately 4,000
sq. ft., in Valhalla, New York in October 1997 under the terms of a five year
lease. In 1999, we also entered into a three year lease for approximately 1,300
sq. ft. of office space in Toronto in the same building DUSA previously
occupied. This facility accommodates the offices of our President, shareholder
services and other staff. See Note 11b to the Company's Notes to the
Consolidated Financial Statements.

                                       35

ITEM  3. LEGAL PROCEEDINGS

         We are not involved in any material legal proceedings.

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

         None.


                                     PART II

ITEM  5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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

Price range per common share by quarter, 2000:



                                                   First           Second            Third           Fourth
                                                   -----           ------            -----           ------
                                                                                         
Nasdaq
High                                              $36.00            $30.00           $31.250           $31.00
Low                                                21.50             16.00            25.813            14.50



Price range per common share by quarter, 2001:



                                                   First           Second            Third           Fourth
                                                   -----           ------            -----           ------
                                                                                         
Nasdaq
High                                              $18.938           $17.500          $14.140           $11.150
Low                                                10.438            11.125            8.730             7.290


         On March 11, 2002, the closing price of our common stock was $4.75 per
share on the Nasdaq Stock Market. On March 11, 2002, there were approximately
671 holders of record of the common stock.

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


                                       36

ITEM 6.  SELECTED FINANCIAL DATA

         The following information is qualified by reference to and should be
read in conjunction with the Company's Consolidated Financial Statements and the
Notes thereto and Management's Discussion and Analysis of Financial Condition
and Results of Operations included elsewhere herein. The selected financial data
for the Company set forth below as of and for the years ended December 31, 2001,
2000, 1999, 1998 and 1997 have been derived from the Company's audited
consolidated financial statements.

CONSOLIDATED STATEMENT OF OPERATIONS DATA



                                                                 Year ended December 31,
                                         -------------------------------------------------------------------
                                            2001          2000         1999           1998         1997
                                         -------------------------------------------------------------------
                                                                                  

Revenues                                 $  5,390,736   $  2,120,557   $        --  $        --  $        --
Cost of product sales and royalties         2,148,994      1,104,664            --           --           --
Research and development costs             10,789,906      8,163,419     4,194,532    4,502,391    6,252,830
General and administrative costs            3,654,792      2,615,502     1,818,193    1,729,741    1,760,409
Loss from operations                      (11,202,956)    (9,763,028)   (6,012,725)  (6,232,132)  (8,013,239)
Other income                                3,844,860      3,222,273       574,098      515,184      893,147
Income tax expense                                 --             --        90,000           --           --
Net loss                                   (7,358,096)    (6,540,755)   (5,528,627)  (5,716,948)  (7,120,092)
Basic and diluted net loss per common
   share                                 $      (0.53)  $      (0.49)  $     (0.50) $     (0.61) $     (0.76)

Weighted average number of shares
   outstanding                             13,791,735     13,285,472    11,061,016    9,365,950    9,358,038


CONSOLIDATED BALANCE SHEETS DATA


                                                                      As of December 31,
                                         ----------------------------------------------------------------------------
                                            2001             2000            1999             1998            1997
                                         ----------------------------------------------------------------------------
                                                                                           
Total Assets                             $ 75,864,221   $ 82,442,388   $  28,156,845      $7,140,675      $13,081,248
Cash and investment securities             64,709,625     74,496,577      26,897,580       6,722,132       12,767,142
Deferred revenue                           22,585,856     24,805,041       9,791,667              --               --
Shareholders' equity                       49,834,537     55,309,796      17,059,928       6,416,146       12,019,351



                                       37

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 herein.
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

         We are a pharmaceutical company focused on research and development of
our drug, Levulan(R), combined with exposure to light, to treat and detect
various medical conditions. In September 2000, we launched our first commercial
products, Levulan(R) Kerastick(R) 20% Topical Solution and the BLU-U(R) brand
light device, in the United States in cooperation with Berlex Laboratories, Inc.
("Berlex"), the United States affiliate of Schering AG, a German corporation. As
of December 2001, approximately 300 BLU-U(R) brand light units were in place, an
increase of approximately 200 units as compared to the end of 2000. We primarily
rent or lease the BLU-U(R) to physicians, medical institutions and academic
centers throughout the country.

         We have primarily devoted our resources to funding research and
development in order to advance the Levulan(R) PDT/PD technology platform, and
as a result, we have experienced significant operating losses. As of December
31, 2001, we had an accumulated deficit of approximately $49,845,000. Achieving
our goal of becoming a profitable operating company is dependent upon the market
penetration of our products in the United States by Berlex and Schering AG in
the rest of world (except Canada), acceptance of our therapy by the medical and
consumer constituencies, our ability to meet the supply needs of our customer
base, and our ability to develop new products.

         While Schering AG has significant expertise in dermatology markets
outside the United States, and Berlex has significant expertise in
non-dermatology markets in the United States, our products represent Berlex's
first dermatology marketing effort in the United States. At the current time,
Berlex has 39 sales representatives and area managers who are assigned to the
Levulan(R) PDT system.

         We have been encouraged by the positive response from many physicians
and patients who have used our therapy. However, we recognize that market
acceptance has taken longer than we originally anticipated, and has not yet
reached the levels that were originally anticipated. We believe that the
entrenched nature of other AK therapies, and uncertainties related to the
availability and level of third-party reimbursement, has caused potential users
of our therapy to delay or decline the use of our therapy. In addition, we also
recognize that Berlex has to demonstrate to physicians the clinical value of our
new and unique therapy, and the benefits compared to other well-established
conventional therapies, in order for the medical community to accept our
products on a large scale. As of January 1, 2002, the national reimbursement
code for the BLU-U(R) application procedure, along with a "J-code" that
reimburses physicians for the costs of the Levulan(R) Kerastick(R) became
effective. Doctors can also bill for any applicable visit fees. The codes will
facilitate electronic


                                       38

billing for our therapy, eliminating paperwork involved with the previous
billing method. We are hopeful that these changes, along with Berlex's ongoing
education and marketing programs, will help make Levulan(R) PDT a therapy of
choice for AKs.

         We have incurred scale-up and certain fixed costs resulting in
under-absorbed overhead, which are included in cost of product sales. Management
plans to maintain a program to continuously monitor the cost of product sales
with the goal of reducing our cost of product sales over time. It is with this
focus that management has decided to construct our own Kerastick(R)
manufacturing operation in our leased Wilmington, Massachusetts facility. We
expect that the development of our own facility will enable us to better manage
and control the costs of production; however, our unit cost per Kerastick(R)
will increase, until product sales increase significantly. Pre-construction
activities associated with architectural and engineering plans for our
manufacturing facility commenced in the fourth quarter of 2001 and construction
of the facility started in January 2002. The initial build-out is expected to
take approximately six months, followed by the facility and drug stability
testing as required for FDA approval, which is expected to occur within
approximately six months from the completion of the initial build-out. FDA
inspection is expected to occur within six months following the construction and
testing stages. This new facility will serve to supplant our Kerastick(R)
manufacturer.

         In February 2001, we agreed to compensate North Safety Products, Inc.
("North"), the manufacturer of our Kerastick(R) brand applicator, for certain
overhead expenses associated with the manufacture of the Kerastick(R) to cover
underutilization of North's facilities in accordance with an amendment to the
purchase and supply agreement, since our recent orders have been below certain
previously anticipated levels. In July 2001, we revised this agreement and paid
North $1,000,000 in up-front underutilization fees and agreed to make additional
payments totaling $400,000 covering the period from the execution of this
amendment to the agreement through December 31, 2002. Through December 31, 2001,
we had paid North $1,200,000 of the underutilization fees. DUSA has reported the
total commitment of $1,400,000 in deferred charges, which is recognized in cost
of product sales on a straight-line basis over the term of the amendment. In
consideration for the underutilization fees, North has agreed to maintain its
Kerastick(R) manufacturing capabilities in a state of readiness through December
31, 2002, with the capability of producing at least 25,000 Kerastick(R) units
per month in accordance with established procedures. The term of the agreement
ends on December 31, 2002 unless DUSA exercises an option to extend the term
through June 30, 2003. If DUSA should decide to extend the term, North will be
entitled to payment of additional underutilization fees of up to $500,000,
prorated based on the level of Kerastick(R) units produced from July 1, 2001
through June 30, 2003. In addition, North is obligated to provide us with
manufacturing records, personnel support, and a list of consultants and
suppliers that have supported the development and manufacturing of the
Kerastick(R).

         On September 26, 2001, we amended our Marketing, Development and Supply
Agreement with Schering AG, dated November 1999. With the execution of this
amendment, Schering AG and Berlex reimbursed DUSA in the amount of $1,000,000
for costs incurred by DUSA to modify our manufacturing agreement with North.
This amount has been reported in deferred liabilities and is being recognized as
an offset to cost of product sales on a straight-line basis over the term of the
agreement with North. In consideration for this amendment, DUSA agreed to be
liable to Schering AG for all consequential damages, including, but not limited
to, lost profits, attributed to DUSA's


                                       39

failure to supply Schering AG's requirements of finished product as defined in
the original agreement. In addition, DUSA agreed to qualify itself as the
primary manufacturer and supplier of the Kerastick(R) within six months
following the date that North ceases production. DUSA and Schering AG also
agreed to terminate the guaranty by Schering AG to DUSA of BLU-U(R) lease
payments by physicians, and the secured line of credit promissory note from
Schering AG to DUSA for up to $1,000,000 to finance inventory of BLU-U(R) units.

         We expect to continue to incur operating losses as we continue to
invest in our research and development programs until product sales increase
significantly. DUSA's research and development efforts are continuing to expand
in both in dermatology (in partnership with Schering AG), and in our internal
indication development program for Barrett's esophagus dysplasia. During 2001,
we increased our staff to 55 full-time employees by year end as compared to 41
at the end of the previous year, in order to properly support all activities
including production, maintenance, customer support, and financial operations
for our products, as well as the research and development programs for
dermatology and internal indications. We expect to slightly increase our staff
in 2002 to support the development of our drug manufacturing facility. While our
financial position is strong, DUSA cannot predict when royalties and supply fees
that we are entitled to under our Schering AG agreement, along with interest
and/or other income may offset the cost of these efforts.

         For non-dermatology indications, we may enter into joint development or
licensing arrangements, both domestically and internationally, with
pharmaceutical companies. To the extent that we do not enter into such
arrangements, we may require separate funding to complete the regulatory
approval process for non-dermatology products and would likely need additional
funds to market these potential products. See "Risk Factors - Our lack of sales
and marketing experience could affect our ability to market our non-dermatology
products, which could adversely affect our revenues from future product sales."

         Our financial position and results of operations are affected by
subjective and complex judgments, particularly in the areas of revenue
recognition, deferred revenue and the carrying value of deferred charges and
prepaid royalties. Changes to the useful lives being used to amortize deferred
revenue and charges could materially affect our financial position and results
of operations.

         As more fully described below and in the Company's Notes to the
Consolidated Financial Statements, we derive revenue from several sources
including Kerastick(R) sales, rental income from BLU-U(R) brand light sources,
research co-development programs and previously received milestone payments.
Kerastick(R) sales are recognized upon shipment. Revenues from BLU-U(R) leasing
programs are generally deferred for six months until demonstration periods are
complete or rights of return expire. Co-development revenue is earned as we
perform the research. Deferred revenue relating to previously received milestone
payments amounted to $22,300,000 at December 31, 2001 and is being amortized
into income over the 12-1/2 year life of our Marketing, Development and Supply
Agreement with Schering AG.

         At December 31, 2001, we had recorded an intangible asset amounting to
approximately $1,600,000, representing payments to suppliers for manufacturing
underutilization charges and facilities reimbursement costs, both of which
provide us with future benefits over the lives of the underlying agreements. Of
this amount, $1,159,000 will be charged to operations in 2002 and the


                                       40

remainder in 2003 and 2004. We are also amortizing a prepaid royalty over an
estimated life of 12-1/2 years, which matches the full-term of the agreement
with Schering AG mentioned above.

RESULTS OF OPERATIONS

Comparison of Years ended December 31, 2001, 2000 and 1999

         Revenues - Revenues recognized by DUSA in 2001 were $5,391,000, as
compared to $2,121,000 in 2000. Of these amounts, we earned research and
development revenue of $2,893,000 during 2001 as compared to $723,000 in 2000
from Schering AG to support our dermatology co-development program. Also
included in revenues is amortization of up-front milestone and unrestricted
grant payments from Schering AG of $1,983,000 in 2001 compared to $496,000 in
2000, reflecting a full year of amortization in 2001. These increases were
offset by lower product sales of $515,000 in 2001 as compared to $902,000 in
2000, as Berlex met its distributor's initial Kerastick(R) supply needs in the
fourth quarter of 2000 subsequent to DUSA's September 2000 product launch. No
revenue was recognized in 1999, as DUSA had not yet launched its first products.

         Product sales during 2001 and 2000 primarily reflected sales of the
Kerastick(R). Royalty revenues are earned and recognized by DUSA when the
Kerastick(R) is sold by Berlex to its distributor, and are payable to DUSA
during the quarter following the quarter in which the sales are made. DUSA
recognizes supply fee revenue related to these sales when DUSA's supplier ships
the Kerastick(R) to Berlex.

         Product sales during 2001 also included rental income on BLU-U(R) units
of approximately $78,000. There was no rental income recognized in 2000.
Initially, DUSA generally leased its BLU-U(R) brand light units for use with the
Levulan(R) Kerastick(R). In July 2001, DUSA and Berlex test-marketed a new
program, which was then launched nationally in mid-September 2001. Under this
program, DUSA rents the BLU-U(R) to physicians for 36 months with no rental
payments incurred by physicians and no rental revenue recognized by DUSA for the
first six months, while Berlex provides physicians with a supply of Kerastick(R)
samples. Physicians have the right to terminate the rental at any time during
the 36 month period. We are negotiating with a medical device leasing company to
manage the rental program including coordinating payment plans with the
physicians. Berlex is actively working to convert physicians to this new
marketing program. As of December 31, 2001, 207 BLU-U(R) units are in
physicians' offices under the new program. Under this new marketing program,
revenues will be recognized over the last 30 months of the rental period. Under
our previous marketing program, we sold the BLU-U(R) to a medical device leasing
company. We then engaged the leasing company to complete the leasing and/or
rental transactions, including coordinating payment plans with the physicians.
The leasing company had been paying us for the units within 30 days after
installation in the physicians' offices. DUSA, Berlex and the leasing company
will continue to support customers that remain on this initial program; however,
the majority of such customers have converted to the new program. Under the
initial program, physicians have the right to cancel their leases after periods
of up to one year. Therefore, payments received by DUSA upon sale of the
BLU-U(R) to the leasing company are reported as deferred revenues until the
physician's right to cancel the lease has expired. Under the initial program, 45
contracts with physicians have been canceled. 32 of the BLU-U(R) brand light
units


                                       41

under these contracts have been returned as of December 31, 2001. In the event
that a customer does cancel a lease, we have agreed to repurchase the units from
the leasing company at an agreed upon price. As of December 31, 2001, 102
customers from the initial program have converted to the new program. These
units have been repurchased from the leasing company and the corresponding
deferred revenue has been reversed from the financial statements. 75 units
leased or rented by physicians remain under the initial program, and 13 units
are in the field based on direct sales and demonstration units.

         Under our agreement with Schering AG, two-thirds of the agreed upon
dermatology research and development expenses, up to $3,000,000 per year for
2000 and 2001, were reimbursable to DUSA by Schering AG. Total research and
development reimbursement earned by DUSA in 2001 was $2,893,000. For 2002,
Schering AG has agreed to fund the co-development program up to $3,000,000,
subject to the results of dermatology feasibility studies currently ongoing and
further decisions by the development committee, which meets quarterly. Based on
the agreed upon development plan and the timing of the start of the clinical
trials, we were only entitled to reimbursement of $723,000 for the year ended
December 31, 2000. Future spending levels are subject to mutual agreement of
Schering AG and DUSA.

         The total amount of up front milestone and unrestricted grant payments
received in 2000 and 1999 have been recorded as deferred revenue upon receipt
and are recognized as income on a straight-line basis over the term of DUSA's
alliance agreement with Schering AG. For the years ended December 31, 2001 and
2000, approximately $1,983,000 and $496,000, respectively, of up front milestone
and unrestricted grant payments were reflected in revenues in the Consolidated
Statement of Operations.

         Cost of Product Sales and Royalties - Cost of product sales and
royalties for 2001 were $2,149,000 including $358,000 in direct Kerastick(R)
related product costs, $266,000 in shipping and installing the BLU-U(R) in
physicians offices, and $226,000 in amortization of deferred charges reflecting
consideration paid by us in 2000 to amend our Supply Agreement with Sochinaz SA,
the manufacturer of the bulk drug ingredient used in Levulan(R). Also included
in 2001 cost of product sales is $534,000 in net underutilization costs paid to
our drug manufacturer, North Safety Products, Inc, due to orders to North
falling below certain previously anticipated levels. In 2001, cost of product
sales and royalties also included royalties and supply fees of approximately
$63,000 reflecting minimum royalty payments due to DUSA's licensor, PARTEQ
Research and Development Innovations, the licensing arm of Queen's University,
Kingston, Ontario. In 2001, we began to allocate personnel costs to product sale
operations and/or general and administrative functions, as a significant
percentage of manufacturing development activities have been completed for our
current products. Such personnel-related costs allocated to cost of product
sales were approximately $691,000 in 2001. Cost of product sales and royalties
for 2000 were $1,105,000, including Kerastick(R) sales to Berlex in the amount
of $796,000, royalties and supply fees of $68,000, amortization of deferred
charges of $113,000, and approximately $127,000 in costs associated with
shipping and installing the BLU-U(R) in physician's offices. There were no
product sales and therefore no cost of product sales during 1999.

         Inventory costs related to the BLU-U(R) commercial light sources under
rental or lease are deferred and recorded in other current assets until the
BLU-U(R) is no longer returnable to DUSA by


                                       42

the physician, which is one year under the initial marketing program. Under the
new marketing program, costs of BLU-U(R) inventory will be recognized over the
36 month term of the rental. As of December 31, 2001 and 2000, deferred
inventory costs were approximately $764,000 and $262,000.

         The higher cost of product sales as compared to revenues from product
sales is primarily a result of the lower than anticipated level of Kerastick(R)
sales, coupled with overhead attributed to the payment of underutilization costs
to our Kerastick(R) supplier, as noted above, and the allocation of personnel to
product sales operations. Management expects that such costs will initially
increase in our own facility but would be covered by product revenue assuming
the level of Kerastick(R) sales significantly increases, which is dependent upon
the market penetration of our products.

         In early 2001, in order to meet the production scheduling needs of our
third-party manufacturer of the BLU-U(R), National Biological Corporation
("NBC"), we prepaid raw material costs in the amount of $400,000 associated with
our orders. This amount is being credited against the final purchase price of
finished units, which is due on delivery at the rate of $1,000 per completed
unit. At the end of December 2001, approximately $42,000 of this prepayment
remained outstanding and was recorded in other current assets. In addition,
since we did not order a certain number of BLU-U(R) brand units on January 2,
2002 for delivery in 2002, we paid $100,000 to NBC for certain of its overhead
costs. In consideration for this payment, NBC has agreed to maintain its
BLU-U(R) manufacturing capabilities in a state of readiness during 2002 with the
capability of producing BLU-U(R) units in accordance with established
procedures. We will recognize this payment in cost of product sales on a
straight-line basis during 2002.

         Research and Development Costs - DUSA's research and development costs
for the years ended 2001, 2000, and 1999 were approximately $10,790,000,
$8,163,000, and $4,195,000, respectively. The increase in 2001 as compared to
2000 is attributable to higher third-party expenditures for dermatology and
internal indications coupled with increased personnel costs related to on-going
development activities. During 2001, this increase was partially offset by the
reassignment of personnel costs to product sale operations and/or general and
administrative functions, rather than to research and development costs, as a
significant percentage of the development activities were completed for our
currently marketed dermatology products in 2000. The increase in 2000 as
compared to 1999 is mainly attributed to manufacturing development expenses,
reflecting increased personnel costs and pre-production activities for our
products prior to market launch. As stated above under "Management's Discussion
and Analysis - Revenues," under our agreement with Schering AG, two-thirds, or
$2,893,000, of the agreed upon dermatology research and development expenses
were reimbursable to DUSA by Schering AG for 2001 as compared to $723,000 for
2000.

         In July 2001, the United States Food and Drug Administration ("FDA")
completed its review of three Investigational New Drug applications allowing
initiation of clinical trials using Levulan(R) PDT for the treatment of
onychomycosis (nail fungus), warts, and Barrett's esophagus dysplasia. On
October 10, 2001, we initiated a second Phase I/II clinical trial for the
treatment of Barrett's esophagus dysplasia. Subject to success in these Phase
I/II feasibility studies, DUSA plans to move forward with more expensive
pre-pivotal Phase II studies for some or all of these indications,


                                       43


RELATED PARTY TRANSACTIONS

starting in late 2002. DUSA expects that 2002 research and development costs
will increase to approximately $13,500,000 due to increased expenditures for
dermatology and internal indications and Phase IV studies mandated by the FDA in
connection with our first product approval. Costs and development fees
associated with agreements for research projects and clinical studies commit us
to make payments of $3,284,000, and $629,000 for 2002, and 2003, respectively.
If Schering AG decides to eliminate all, or a portion of the reimbursement
budget for the dermatology co-development program our research and development
costs could increase significantly unless we delayed or curtailed some or all of
these programs. See "Management's Discussion and Analysis - Contractual
Obligations and Other Commercial Commitments."

         General and Administrative Cost - General and administrative expenses
for the years ended December 31, 2001, 2000, and 1999 were $3,655,000,
$2,616,000, and $1,818,000, respectively. The increases in 2001 and 2000 were
mainly attributable to the hiring of additional staff commencing in second half
of 2000 through the first half of 2001, including key management personnel in
administrative, financial, information technology, and operations functions.
General and administrative costs are expected to remain stable for 2002 compared
to 2001 as staffing levels for these functions have been established.

         Interest Income - Interest income was approximately $3,845,000,
$3,222,000, and $574,000 for the years ended December 31, 2001, 2000, and 1999,
respectively, and is primarily earned on United States government securities.
The increase for 2001 reflects earnings on higher investable cash balances as a
result of the $15,000,000 received from Schering AG during the fourth quarter of
2000, and the full year impact of approximately $40,700,000 in net proceeds
received from a private placement in March 2000. Similarly, the increase for
2000 was also due to $15,000,000 received from Schering AG during the fourth
quarter of 1999. Interest income will decline as our investable cash balances
are reduced to support DUSA's operating activities.

         Income Taxes - As of December 31, 2001, we had net operating loss
carryforwards of approximately $29,479,000 and tax credit carryforwards of
approximately $1,264,000 for Federal reporting purposes. These amounts expire at
various times through 2021. See Note 7 to the Company's Notes to the
Consolidated Financial Statements. A provision for alternative minimum tax was
recorded in 1999 for $90,000.

         Net Losses - DUSA incurred net losses of approximately $7,358,000, or
$0.53 per share, $6,541,000, or $0.49 per share, and $5,529,000, or $0.50 per
share, for the years ended December 31, 2001, 2000 and 1999, respectively. These
losses were within management's expectations, and are expected to continue
unless market penetration of our first products increases significantly. DUSA
expects an estimated loss in 2002 between $12,300,000 and $13,300,000. This does
not include any additional new spending that may be required during the year,
such as costs related to the potential acquisition or development of new
products or companies; any decision, in cooperation with Schering AG, to
increase Levulan(R) PDT dermatology spending levels; any additional Levulan(R)
PDT internal clinical trial costs that become justified later in the year; and
any extraordinary miscellaneous costs and expenses.



                                       44

RELATED PARTY TRANSACTIONS

         DUSA's Vice President of Business Development and Vice President of
Technology are principal shareholders of Lumenetics, Inc., our former light
device consultants. During 2000 and 1999, DUSA paid $2,000 and $46,000,
respectively, for certain equipment leased under operating leases from
Lumenetics. In 2001, DUSA purchased this equipment for $52,000. In addition, we
reimbursed Lumenetics for office space and related expenses totaling
approximately $146,000 in 1999. All transactions were executed at prices
estimated to be fair market values.

QUARTERLY RESULTS OF OPERATIONS

         The following is a summary of the quarterly results of operations for
the years ended December 31, 2001 and 2000, respectively:


                                                        Quarterly Results For Year Ended December 31, 2001
                                                  ------------------------------------------------------------------
                                                   March 31          June 30          September 30       December 31
                                                  ------------------------------------------------------------------
                                                                                             
             Total revenues                      $1,189,960        $1,516,754         $1,436,566         $1,247,456
             Loss from operations                (2,354,838)       (2,495,046)        (2,795,961)        (3,557,111)
             Net loss                            (1,252,060)       (1,563,335)        (1,817,029)        (2,725,672)
             Basic and diluted loss per
                 share                                (0.09)            (0.11)             (0.13)             (0.20)



                                                        Quarterly Results For Year Ended December 31, 2000
                                                  ------------------------------------------------------------------
                                                   March 31           June 30         September 30       December 31
                                                  ------------------------------------------------------------------
                                                                                             
             Total revenues                      $  435,157        $  167,347         $  139,583         $1,378,470
             Loss from operations                (1,623,969)       (2,382,555)        (2,558,562)        (3,197,942)
             Net loss                            (1,241,225)       (1,439,928)        (1,614,087)        (2,245,515)
             Basic and diluted loss per
                 share                                (0.10)            (0.11)             (0.12)             (0.16)


LIQUIDITY AND CAPITAL RESOURCES

         We are in a strong cash position to continue and expand our research
and development activities for our Levulan(R) PDT/PD platform. Our total assets
were $75,864,000 as of December 31, 2001 compared to $82,442,000 as of December
31, 2000. This decrease is mainly attributable to the funding of net operating
activities during 2001 with limited product sales.

         As of December 31, 2001, we had inventory of $2,333,000, representing
finished goods and raw materials, as compared to $1,332,000 as of December 31,
2000. Also, as of December 31, 2001, we had net property and equipment of
$3,384,000, as compared to $1,700,000 as of December 31, 2000, due primarily to
the installation of new financial and operations systems, and pre-construction
costs associated with architectural and engineering plans for our manufacturing
facility. DUSA expects to incur costs of approximately $2,700,000 during 2002
for the construction of this facility.

         As of December 31, 2001, we had accounts receivable of $121,000 as
compared to $915,000 as of December 31, 2000, representing net sales associated
with product sales. In addition, a receivable of $865,000 has been recorded as a
current asset as of December 31, 2001 as compared


                                       45

to $723,000 at the end of the same period in the previous year for amounts which
are reimbursable by Schering AG for research and development costs under our
agreement.

         As of December 31, 2001, we had current liabilities of $3,051,000, as
compared to $2,837,000 as of December 31, 2000. Since our inception, we have had
no long-term debt; however, DUSA is in the process of evaluating financing
options for the construction of its manufacturing facility in its Wilmington
headquarters. We have been approved for a loan of $2,700,000 to finance such
development.

         We invest our cash in United States government securities, all of which
are classified as available for sale. These securities have an aggregate cost of
$54,917,000, and a current aggregate market value of $57,141,000 as of December
31, 2001, resulting in a net unrealized gain on securities available for sale of
$2,224,000, which has been included in shareholders' equity. As of December 31,
2000, government securities had an aggregate cost of $56,876,000 and an
aggregate market value of $58,055,000, resulting in a net unrealized gain of
$1,179,000. Due to fluctuations in interest rates and depending upon the timing
of our need to convert government securities into cash to meet our working
capital requirements, some gains or losses could be realized. As of December 31,
2001, these securities had interest rates and yields ranging from 4.26% to 7.00%
and maturity dates ranging from January 14, 2002 to November 15, 2006. We expect
to use approximately $13,000,000 in cash to fund net operating activities during
2002.

         We believe that we have sufficient capital resources to proceed with
our current development program for Levulan(R) PDT/PD, and to fund operations
and capital expenditures for the foreseeable future. We have invested our funds
in liquid investments, so that we will have ready access to these cash reserves,
as needed, for the funding of development plans on a short-term and long-term
basis. DUSA is actively seeking to expand or enhance its business by using its
resources to acquire by license, purchase or other arrangements, businesses,
technologies, or products. We also plan to continue to actively seek
relationships with pharmaceutical or other suitable organizations to help
develop and/or market some of our potential non-dermatology products and
technologies.

         As of December 31, 2001, DUSA had deferred revenues of $22,586,000 as
compared to $24,805,000 at December 31, 2000, reflecting net milestone and
unrestricted grant payments of $22,312,000 and the deferral of $273,000 in
product sales related to our customer's one-year right of return on leases of
our commercial light sources. Commencing with our product launch in September
2000, we began to amortize the Schering AG milestone and unrestricted grant
payments into revenue. The amortization period is expected to be 12-1/2 years,
the term of the Schering AG agreement, based upon current revenue recognition
principles. See Note 10 to the Company's Notes to the Consolidated Financial
Statements.

         We are currently focusing our efforts on providing support to Berlex in
its effort to penetrate the marketplace with our unique Levulan(R) PDT therapy
for AKs, on conducting the expanded dermatology co-development program with
Schering AG, and on furthering development of our internal research and
development program. Full development and testing of all potential indications
that are currently under development or being considered for development may
require additional funding. The timing of expenditures will be dependent on
various factors, including:


                                       46

         o        progress of our research and development programs,

         o        continuing support from Schering AG,

         o        the results of preclinical and clinical trials,

         o        the timing of regulatory marketing approvals,

         o        competitive developments,

         o        the level of sales of our first products,

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

         o        the availability of other financing.

         We cannot accurately predict the magnitude of revenues from sales of
our products. While the net proceeds of the January 1999 and March 2000
offerings coupled with payments received from Schering AG will enable us to
maintain our current research program as planned and support the
commercialization of Levulan(R) PDT for AKs for the foreseeable future, in order
to maintain and expand continuing research and development programs, DUSA may
need to raise additional funds through future corporate alliances, financings,
or other sources, depending upon the amount of revenues we receive from our
first product.

         Additionally, Schering AG has the right to terminate our agreement on
12-months written notice. If Schering AG were to decide to terminate our
agreement early, we could incur significant additional research and development
expenses, and we may have to establish a marketing capability, also at
significant expense. In addition, the balance of the deferred revenue mentioned
above, and deferred royalty would be recognized in the year of termination.

         As of December 31, 2001, we had 55 full-time employees. We have
employment agreements with our key executive officers. We have purchased and are
the named beneficiary of a key man life insurance contract having a face value
of CDN $2,000,000 on the life of our President. We expect only moderate
increases in our staff in 2002 to support the development of our drug
manufacturing facility as staffing levels related to key management personnel in
administrative, financial, technical and operations functions have been
established for the commercialization of Levulan(R) PDT.

         We have not made any material capital expenditures for environmental
control facilities. However, as we are in the process of developing a production
line for Kerastick(R) manufacturing, we expect that environmental laws will
govern our facility. We have estimated that the capital costs to develop this
facility, including equipment, will be approximately $2,700,000. There can be no
assurance, however, that we will not be required to incur significant additional
costs to comply with environmental laws and regulations in the future, or any
assurance that our operations, business or assets will not be materially
adversely affected by current or future environmental laws or regulations. See
"Business -- Government Regulation."


                                       47

CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS

         DUSA's contractual obligations and other commercial commitments to make
future payments under contracts, such as lease agreements, research and
development contracts, manufacturing contracts, or other related agreements are
as follows at December 31, 2001:



            Contractual                                         Obligations Due by Period
            Commitments

                                         Total       1 Year or Less     2-3 Years       4-5 Years      After 5 Years
                                         ----------------------------------------------------------------------------
                                                                                           
Operating lease obligations (1)          $4,486,000        $450,000         $668,000        $765,000      $2,603,000
Research and development projects        $3,913,000      $3,284,000         $629,000              --               --
  (2)

Manufacturing facility development       $2,700,000      $2,700,000               --              --               --
  (3)

Other short-term obligations (4,5)         $300,000        $300,000               --              --               --


         1)       In 2001, DUSA extended its lease commitment for its office and
                  manufacturing space in its Wilmington, Massachusetts
                  headquarters 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 seven
                  and one-half months prior to the date on which the termination
                  would be effective. The operating lease obligations disclosed
                  above include payments for the non-cancelable term of the
                  lease. In addition, as our Valhalla and Toronto lease
                  commitments expire during 2002, the Company is evaluating its
                  alternatives for new office facilities.

         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 during its management.

         3)       DUSA has commenced the development of a Kerastick(R)
                  manufacturing facility at our Wilmington, Massachusetts
                  location. Construction started in January 2002. The initial
                  build-out is expected to be completed by June 2002, followed
                  by facility and drug stability testing, which is expected to
                  take approximately six months. FDA inspection, which is
                  expected to occur within approximately six months following
                  the construction and testing stages. The Company has estimated
                  that the costs to construct this facility, including
                  equipment, are approximately $2,700,000 and is evaluating
                  financing options. This cost includes estimates to build the
                  facility and all costs of calibration, validation testing and
                  equipment, and any related FDA approval costs.

         4)       In January 2002, DUSA paid $100,000 to its third-party
                  manufacturer of the BLU-U(R), National Biological Corporation,
                  since we did not order a certain number of BLU-U(R) brand
                  units for delivery in 2002. In consideration for this payment,
                  NBC has agreed to


                                       48

                  maintain its BLU-U(R) manufacturing capabilities in a state of
                  readiness during 2002 with the capability of producing
                  BLU-U(R) units in accordance with established procedures.

         5)       DUSA has agreed to make additional payments totaling $200,000
                  during 2002 to its third-party manufacturer of the
                  Kerastick(R), North Safety Products, Inc., covering
                  underutilization fees associated with recent orders falling
                  below certain previously anticipated levels. In consideration
                  for the underutilization fees, North has agreed to maintain
                  its Kerastick(R) manufacturing capabilities in a state of
                  readiness, with the capability of producing at least 25,000
                  Kerastick(R) units per month in accordance with established
                  procedures through December 31, 2002 unless DUSA exercises an
                  option to extend the term through June 30, 2003. If DUSA
                  should decide to extend the term, North will be entitled to
                  payment of additional underutilization fees of up to $500,000,
                  prorated based on the level of Kerastick(R) units produced
                  from July 1, 2001 through June 30, 2003.

RECENTLY ISSUED ACCOUNTING GUIDANCE

         In September 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." On January 1, 2001, DUSA adopted
SFAS No. 133, which did not have any effect on our financial position or results
of operations.

         In August 2001, the Financial Accounting Standards Board issued SFAS
No. 144, "Accounting for the Impairment of Disposal of Long-lived Assets." This
statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." SFAS 144 establishes a
single accounting model, based on the framework established in SFAS 121, for
long-lived assets to be disposed of by sale, and resolves implementation issues
related to SFAS 121. SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001 and interim periods within those fiscal years. On January 1,
2002, DUSA adopted this statement, which will have no effect on our financial
position or results of operations.

         In July 2001, the Financial Accounting Standards Board issued SFAS No.
141, "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible
Assets." SFAS No. 141 requires that the purchase method of accounting be used
for all business combinations initiated after September 30, 2001 and that the
use of the pooling-of-interest method is no longer allowed. SFAS No. 142
requires that upon adoption, amortization of goodwill will cease and instead,
the carrying value of goodwill will be evaluated for impairment on an annual
basis. Identifiable intangible assets will continue to be amortized over their
useful lives and reviewed for impairment in accordance with SFAS No. 121. SFAS
No. 142 is effective for fiscal years beginning after December 15, 2001. On
January 1, 2002, DUSA adopted these statements, which will have no effect on our
financial position or results of operations.


                                       49

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

         We hold fixed income United States government securities that are
subject to interest rate market risks. However, we do not believe that the risk
is material as we make our investments in relatively short-term instruments and
we strive to match the maturity dates of these instruments to our cash flow
needs. A 10% decline in the average yield of these instruments would not have a
material effect on our results of operations or cash flows.

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 which represent our expectations or beliefs
concerning future events, including, but not limited to statements regarding
management's beliefs regarding the unique nature of Levulan(R), expectations
regarding the timing of results of clinical trials and future development of
warts, onychomycosis and Barrett's esophagus dysplasia, intention to evaluate
and pursue licensing and acquisition opportunities, status of clinical programs
for all other indications and beliefs regarding potential efficacy,
commercialization of additional Levulan(R) dermatology products with Schering
AG, hope that our products will be an AK therapy of choice, beliefs regarding
revenues from approved and potential products and Levulan's(R) competitive
properties, intention to commence clinical trials in 2002, expectations of
exclusivity under the Hatch/Waxman Act and other patent laws, intentions to seek
additional United States and foreign regulatory approvals, trademarks, and to
market outside the United States, beliefs regarding environmental compliance,
beliefs concerning patent disputes, the impact of a third-parties regulatory
compliance and fulfillment of contractual obligations, the expectations
regarding the future funding by Schering AG, plans to monitor cost of product
sales, expectations of increases in cost of product sales, expected use of cash
resources in 2002, requirements of cash resources for our future liquidity,
anticipation of hiring additional personnel, dependence on Schering AG's and
Berlex's marketing and third-party suppliers, as well as reimbursement policies
for significant revenues, expectations to support independent investigators,
expectations for future strategic opportunities and research and development
programs, expectations for continuing operating losses, stable administrative
costs, increasing research and development costs, levels of interest income and
our capital resource needs, expectations for completion of our new manufacturing
facilities, expected costs, and anticipated dates for inspection and testing,
belief regarding interest rate risks to our investments and effects of inflation
and new accounting standards, dependence on key personnel, beliefs concerning
product liability insurance, intention to continue to develop integrated drug
and light device systems, belief that our new facility will help control costs
and intention to hire employees and consultants. 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 impact of competitive products and
pricing, the commitment of Schering AG to the marketing of and research and
development activities for our products, the timely development, FDA and foreign
regulatory approval, and market acceptance of our products, reliance on
third-parties for the production, manufacture, sales and marketing of our
products, the securities regulatory process, the maintenance of our patent
portfolio and 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.


                                       50

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                                                                                                  
Independent Auditors' Report...............................................................          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-6
Notes to the Consolidated Financial Statements.............................................          F-8



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

         None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         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 2002
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 2001," "Aggregate Option Exercises in 2001 and Option
Values at December 31, 2001," and "Other Compensation" of Registrant's 2002
Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information required by Item 12 is hereby incorporated by reference
to the section entitled "Security Ownership of Certain Beneficial Owners and
Management" of the Registrant's 2002 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 Transactions" of the Registrant's 2002 Proxy
Statement.


                                       51

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

         A.       List of Financial Statements and Schedules



                                                                                                          Page
                                                                                                         Number
                                                                                                         ------
                                                                                                      
         INCLUDED IN ANNUAL REPORT TO SHAREHOLDERS
         INCORPORATED HEREIN BY REFERENCE:

         Independent Auditors' Report......................................................................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-6
         Notes to the Consolidated Financial Statements....................................................F-8


         Schedules are omitted because they are not required or the information
is included in Notes to the Consolidated Financial Statements.

         B.       Reports on Form 8-K

                  1. Form 8-K filed on October 10, 2001, which announced an
update to investors at the UBS Warburg Global Life Sciences Conference and
initiation of DUSA's second clinical trial for the treatment of Barrett's
esophagus using Levulan(R) PDT.

         C.       Exhibits filed as part of this Report

         3(a)     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(b)     By-laws of the Registrant, filed as Exhibit 3(ii) to the
                  Registrant's Quarterly Report on Form 10-Q for the fiscal
                  quarter ended September 30, 1997, filed November 12, 1997 and
                  are incorporated herein by reference;

         4(a)     Common Stock specimen, filed as Exhibit 4.1 to the
                  Registrant's Quarterly Report on Form 10-Q for the fiscal
                  quarter ended September 30, 1997 filed November 12, 1997, 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;


                                       52

         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(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 hereby 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(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;


                                       53

         10(j)    Marketing Development and Supply Agreement between the Company
                  and Schering AG dated November 22, 1999, filed as Exhibit 10.1
                  to the Registrant's Current Report on Form 8-K dated November
                  22, 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(j.1)  Letter Amendment to the Marketing Development and Supply
                  Agreement between the Company and Schering AG dated September
                  26, 2001, filed as Exhibit 10(a) 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
                  pursuant to Rule 24b-2 of the Securities Exchange Act of 1934,
                  as amended, and is incorporated herein by reference;

         10(k)    Common Stock Purchase Agreement between the Company and
                  Schering Berlin Venture Corporation dated as of November 22,
                  1999, filed as Exhibit 10.2 to the Registrant's Current Report
                  on Form 8-K dated November 22, 1999, portions of which have
                  been omitted pursuant to a request for confidential treatment
                  pursuant to Rule 24b of the Securities Exchange Act of 1934,
                  as amended, and is incorporated herein by reference;

         10(l)    Light Source Agreement between the Company and Schering AG
                  dated as of November 22, 1999, filed as Exhibit 10.3 to the
                  Registrant's Current Report on Form 8-K dated November 22,
                  1999, portions of which have been omitted pursuant to a
                  request for confidential treatment pursuant to Rule 24b of the
                  Securities Exchange Act of 1934, as amended, and is
                  incorporated herein by reference;

         10(m)    Guaranty dated as of November 22, 1999 by Schering AG in favor
                  of the Company, filed as Exhibit 10.4 to the Registrant's
                  Current Report on Form 8-K dated November 22, 1999, portions
                  of which have been omitted pursuant to a request for
                  confidential treatment pursuant to Rule 24b of the Securities
                  Exchange Act of 1934, as amended, and is incorporated herein
                  by reference;

         10(n)    Secured Line of Credit Promissory Note dated November 22, 1999
                  with the Company as payee and Schering AG as Holder filed as
                  Exhibit 10.5 to the Registrant's Current Report on Form 8-K
                  dated November 22, 1999, portions of which have been omitted
                  pursuant to a request for confidential treatment pursuant to
                  Rule 24b of the Securities Exchange Act of 1934, as amended,
                  and is incorporated herein by reference;

         10(o)    Security Agreement dated as of November 22, 1999 between the
                  Company and Schering AG filed as Exhibit 10.6 to the
                  Registrant's Current Report on Form 8-K


                                       54

                  dated November 22, 1999, portions of which have been omitted
                  pursuant to a request for confidential treatment pursuant to
                  Rule 24b of the Securities Exchange Act of 1934, as amended,
                  and is incorporated herein by reference;

         10(p)    Purchase and Supply Agreement between the Company and North
                  Safety Products, Inc. dated as of September 13, 1999, filed as
                  Exhibit 10.1 to the Registrant's Current Report on Form 8-K
                  dated October 14, 1999, portions of which have been omitted
                  pursuant to a request for confidential treatment pursuant to
                  Rule 24b of the Securities Exchange Act of 1934, as amended,
                  and is incorporated herein by reference;

         10(p.1)  Amendment to Purchase and Supply Agreement between the Company
                  and North Safety Products, Inc. dated as of February 15, 2001,
                  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;

         10(p.2)  Second Amendment to Purchase and Supply Agreement between the
                  Company and North Safety Products, Inc. dated as of July 26,
                  2001, 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;

         10(q)    Supply Agreement between the Company and Sochinaz SA dated
                  December 24, 1993, filed as Exhibit 10(q) to Registrant's Form
                  10K/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(q.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 Form 10K for the fiscal year ended December 31,
                  1999, and is incorporated herein by reference;

         10(q.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(r)    Master Vendor Operating Agreement between the Company and
                  International Leasing Corporation dated September 21, 2000,
                  filed as Exhibit 10 to the Registrant's quarterly report on
                  Form 10-Q for the fiscal quarter ended September 30, 2000,
                  filed November 14, 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(s)    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,


                                       55

                  2001, 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; and

         23.1     Consent of Deloitte & Touche LLP.


                                       56

INDEPENDENT AUDITORS' REPORT

Board of Directors
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, 2001
and 2000, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 2001. 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 auditing standards generally accepted
in the United States of America. 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 the Company as of December 31, 2001
and 2000, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.



/s/ DELOITTE & TOUCHE LLP


Boston, Massachusetts
February 20, 2002

                                      F-1

DUSA PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------


                                                                                                              DECEMBER 31,
                                                                                                   --------------------------------
                                                                                                       2001                 2000
                                                                                                   -----------          -----------
                                                                                                                  
ASSETS

CURRENT ASSETS
   Cash and cash equivalents                                                                       $ 7,568,500          $16,441,114
   United States government securities                                                              57,141,125           58,055,463
   Accrued interest receivable                                                                         923,459              990,083
   Accounts receivable                                                                                 121,280              914,959
   Receivable under co-development program                                                             864,534              722,570
   Inventory                                                                                         2,333,080            1,331,966
   Other current assets                                                                              1,254,950              562,240
                                                                                                   -----------          -----------
      TOTAL CURRENT ASSETS                                                                          70,206,928           79,018,395
   Property and equipment, net                                                                       3,384,286            1,699,530
   Deferred charges                                                                                  1,593,708              886,792
   Deferred royalty                                                                                    679,299              739,671
   Other assets                                                                                             --               98,000
                                                                                                   -----------          -----------
TOTAL ASSETS                                                                                       $75,864,221          $82,442,388
                                                                                                   ===========          ===========

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
   Accounts payable                                                                                   $314,889             $100,500
   Accrued payroll                                                                                     681,190              615,873
   Other accrued expenses                                                                            1,718,293            1,194,174
   Deferred revenue                                                                                    273,358              509,207
   Due to licensor                                                                                      62,792              417,004
                                                                                                   -----------          -----------
      TOTAL CURRENT LIABILITIES                                                                      3,050,522            2,836,758
   Deferred revenue                                                                                 22,312,498           24,295,834
   Other deferred reimbursement                                                                        666,664                   --
                                                                                                   -----------          -----------
TOTAL LIABILITIES                                                                                   26,029,684           27,132,592
                                                                                                   ===========          ===========
COMMITMENTS AND CONTINGENCIES (NOTE 11)

SHAREHOLDERS' EQUITY
   Capital Stock
       Authorized: 100,000,000 shares; 40,000,000 shares designated as common stock,
       no par, and 60,000,000 shares issuable in series or classes. Issued and                      95,440,561           94,757,532
       outstanding: 13,865,390 (2000: 13,730,890) shares of common stock, no par.
   Additional paid-in capital                                                                        2,015,586            1,860,519
   Accumulated deficit                                                                             (49,845,445)         (42,487,349)
   Accumulated other comprehensive income                                                            2,223,835            1,179,094
                                                                                                   -----------          -----------
TOTAL SHAREHOLDERS' EQUITY                                                                          49,834,537           55,309,796
                                                                                                   -----------          -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                                         $75,864,221          $82,442,388
                                                                                                   ===========          ===========



         See the accompanying Notes to the Consolidated Financial Statements.


                                      F-2

DUSA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------


                                                                                        YEAR ENDED DECEMBER 31,
                                                                          ------------------------------------------------
                                                                                2001             2000              1999
                                                                          ------------------------------------------------
                                                                                                      
REVENUES

   Product sales and rental income                                        $     514,584     $    902,154       $        --
   Research grant and milestone revenue                                       1,983,336          495,833                --
   Research revenue earned under collaborative agreement                      2,892,816          722,570                --
                                                                          ------------------------------------------------
TOTAL REVENUES                                                                5,390,736        2,120,557                --
                                                                          ------------------------------------------------

OPERATING COSTS

   Cost of product sales and royalties                                        2,148,994        1,104,664                --
   Research and development                                                  10,789,906        8,163,419         4,194,532
   General and administrative                                                 3,654,792        2,615,502         1,818,193
                                                                          ------------------------------------------------
TOTAL OPERATING COSTS                                                        16,593,692       11,883,585         6,012,725
                                                                          ------------------------------------------------
LOSS FROM OPERATIONS                                                       (11,202,956)      (9,763,028)        (6,012,725)
                                                                          ------------------------------------------------

OTHER INCOME

   Interest income                                                            3,844,860        3,222,273           574,098
                                                                          ------------------------------------------------
LOSS BEFORE INCOME TAX EXPENSE                                              (7,358,096)      (6,540,755)       (5,438,627)
                                                                          ------------------------------------------------

   Income tax expense                                                                --               --            90,000
                                                                          ------------------------------------------------
NET LOSS                                                                  $ (7,358,096)     $(6,540,755)       $(5,528,627)
                                                                          ------------------------------------------------
BASIC AND DILUTED NET LOSS PER COMMON SHARE                                      $(.53)          $ (.49)       $      (.50)
                                                                          ------------------------------------------------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING                         13,791,735       13,285,472        11,061,016
                                                                          ------------------------------------------------


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          TOTAL
                                              ----------   -----------  ----------    ------------    -------------   -----------
                                                                                                    
BALANCE, JANUARY 1, 1999                       9,365,950   $36,746,993  $   81,586    $(30,417,967)   $       5,534   $ 6,416,146
                                              ----------   -----------  ----------    ------------    -------------   -----------
Comprehensive loss:

   Net loss for period                                                                  (5,528,627)                    (5,528,627)

   Net unrealized loss on United States
     government securities available for
     sale                                                                                                   (87,853)      (87,853)
                                                                                                                      -----------
Total comprehensive loss                                                                                              $(5,616,480)

Issuance of common stock for cash through
 a private placement (net of offering          1,500,000     5,397,139                                                  5,397,139
 costs of $2,102,861)

Issuance of common stock to placement
 agent in connection with the private            130,435       900,784                                                    900,784
 placement

Issuance of 163,043 warrants to placement
 agent in connection with the private                                      905,094                                        905,094
 placement

Issuance of additional common stock to
 placement agent in connection with the           15,000       143,445                                                    143,445
 private placement

Issuance of additional 1,630 warrants to
 placement agent in connection with the                                      9,050                                          9,050
 private placement

Issuance of common stock in connection           340,458     5,208,333                                                  5,208,333
 with collaborative agreement

Exercises of options                             398,922     2,565,333                                                  2,565,333

Exercises of warrants                            157,592       787,960                                                    787,960

Stock based compensation                                                   343,124                                        343,124
                                              ----------   -----------  ----------    ------------    -------------   -----------
BALANCE, DECEMBER 31, 1999                    11,908,357   $51,749,987  $1,338,854    $(35,946,594)   $     (82,319)  $17,059,928
                                              ----------   -----------  ----------    ------------    -------------   -----------



See the accompanying Notes to the Consolidated Financial Statements.


                                      F-4

DUSA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)






                                                    COMMON STOCK                                         ACCUMULATED
                                             --------------------------  ADDITIONAL                            OTHER
                                               NUMBER OF                   PAID-IN     ACCUMULATED     COMPREHENSIVE
                                                  SHARES     AMOUNT        CAPITAL        DEFICIT             INCOME        TOTAL
                                              ----------   -----------   ----------    ------------         --------    -----------
                                                                                                      
BALANCE, DECEMBER 31, 1999                    11,908,357   $51,749,987   $1,338,854    $(35,946,594)        $(82,319)   $17,059,928
                                              ----------   -----------   ----------    ------------         --------    -----------
Comprehensive loss:
   Net loss for period                                                                   (6,540,755)                    (6,540,755)
   Net unrealized gain on United States
     government securities available for
     sale                                                                                                   1,261,413     1,261,413
                                                                                                                       -------------
Total comprehensive loss                                                                                               $(5,279,342)
Issuance of common stock for cash (net
  of offering costs of $2,051,714)             1,500,000    40,698,286                                                   40,698,286
Issuance of common stock in connection
   with supply agreement                          26,667       750,000                                                      750,000
Issuance of common stock to consultant             2,500        64,533                                                       64,533
Exercises of options                             248,350     1,264,646                                                    1,264,646
Exercises of warrants                             45,016       230,080                                                      230,080
Stock based compensation                                                    521,665                                         521,665
                                              ----------   -----------   ----------    ------------         --------    -----------
BALANCE, DECEMBER 31, 2000                    13,730,890   $94,757,532   $1,860,519    $(42,487,349)       $1,179,094   $55,309,796
                                              ----------   -----------   ----------    ------------         --------    -----------
Comprehensive loss:
   Net loss for period                                                                   (7,358,096)                    (7,358,096)
   Net unrealized gain on United States
     government securities available for
     sale                                                                                                   1,044,741     1,044,741
                                                                                                                       -------------
Total comprehensive loss                                                                                               $(6,313,355)
Issuance of common stock to consultant             5,000        54,750                                                       54,750
Exercises of options                             104,500       478,279                                                      478,279
Exercises of warrants                             25,000       150,000                                                      150,000
Stock based compensation                                                    155,067                                         155,067
                                              ----------   -----------   ----------    ------------         --------    -----------
BALANCE, DECEMBER 31, 2001                    13,865,390   $95,440,561   $2,015,586    $(49,845,445)       $2,223,835   $49,834,537
                                              ==========   ===========   ==========    ============        ==========   ===========


See the accompanying Notes to the Consolidated Financial Statements.



                                      F-5

DUSA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS



                                                                                             YEAR ENDED DECEMBER 31,
                                                                                   ------------------------------------------------
                                                                                        2001            2000            1999
                                                                                   ------------    ------------    -------------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES

                                                                                                          
   Net loss                                                                        $ (7,358,096)   $ (6,540,755)   $ (5,528,627)
   Adjustments to reconcile net loss to net cash used in operating
     activities
     Amortization of premiums and accretion of discounts on United States
       government securities available for sale and investment securities,
       net                                                                              738,699        (318,647)       (166,500)
     Depreciation and amortization expense                                            1,066,915         410,473         102,895
     Amortization of deferred revenue                                                (1,983,336)       (495,833)             --
     Stock based compensation                                                           155,067         521,665         343,124
     Issue of shares of common stock and warrants to non-employees                       54,750          64,533         152,495
   Changes in other assets and liabilities impacting cash flows from operations:
     Accrued interest receivable                                                         66,624        (723,463)       (247,092)
     Accounts receivable                                                                793,679        (914,959)             --
     Receivable under co-development program                                           (141,964)       (722,570)             --
     Inventory                                                                       (1,001,114)     (1,331,966)             --
     Other current assets                                                              (692,710)       (429,407)        (24,840)
     Deferred charges                                                                  (400,000)             --              --
     Accounts payable                                                                   214,389         (16,609)       (149,628)
     Accrued payroll and other accrued expenses                                         589,436       1,081,906         270,349
     Income taxes payable                                                                    --         (90,000)         90,000
     Due to licensor                                                                     (4,212)         47,004         370,000
     Deferred revenue                                                                  (235,849)     15,509,207       9,791,667
                                                                                     ----------       ---------       ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES                                  (8,137,722)      6,050,579       5,003,843
                                                                                     ----------       ---------       ---------


CASH FLOWS USED IN INVESTING ACTIVITIES

   Purchases of United States government securities                                 (23,282,378)    (50,506,441)    (28,481,940)
   Proceeds from maturing United States government securities                        24,502,758      13,900,000      14,200,000
   Purchases of property and equipment                                               (2,331,551)     (1,553,350)       (362,779)
   Deposits on equipment                                                                 98,000         (70,369)         94,924
   Payment to restructure supplier contract                                                  --        (250,000)             --
   Payments to licensor                                                                (350,000)       (350,936)       (403,830)
                                                                                     ----------       ---------       ---------
NET CASH USED IN INVESTING ACTIVITIES                                                (1,363,171)    (38,831,096)    (14,953,625)
                                                                                     ----------       ---------       ---------


See the accompanying Notes to the Consolidated Financial Statements.


                                      F-6

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



                                                                                      YEAR ENDED DECEMBER 31,
                                                                           --------------------------------------------
                                                                                2001            2000          1999
                                                                           -------------   ------------   -------------
 CASH FLOWS PROVIDED BY FINANCING ACTIVITIES

                                                                                                 
     Issuance of common stock and underwriters' options, net of offering             --      40,698,286     12,411,350
      costs of $2,051,714 and $2,102,861 for 2000 and 1999, respectively
     Proceeds from exercise of options and warrants                             628,279       1,494,727      3,353,293
                                                                           -------------   ------------   -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES                                       628,279      42,193,013     15,764,643
NET INCREASE (DECREASE) IN CASH                                              (8,872,614)      9,412,496      5,814,861
CASH AT BEGINNING OF PERIOD                                                  16,441,114       7,028,618      1,213,757
                                                                           -------------   ------------   -------------
CASH AT END OF PERIOD                                                      $  7,568,500    $ 16,441,114   $  7,028,618
                                                                           ============    ============   ============

SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION

     Issuance of common stock and warrants to placement agent                                               $1,805,878
     Income tax payments                                                                       $90,000    ------------
                                                                                           ------------


During 2000, in connection with the amendment of a supply agreement, the Company
issued 26,667 unregistered shares of DUSA's Common Stock, at a fair market value
of $750,000, to Sochinaz SA (See Note 11).

See the accompanying Notes to the Consolidated Financial Statements.



                                      F-7

DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31,
2001, 2000, AND 1999


1)       NATURE OF BUSINESS

         DUSA Pharmaceuticals, Inc. (the "Company" or "DUSA") was established to
         develop prescription pharmaceutical products for all markets, primarily
         in the field of photodynamic therapy ("PDT") and photodetection ("PD"),
         which combines the use of a pharmaceutical product with exposure to
         light to induce a therapeutic or detection effect. The Company has
         concentrated its initial efforts on topical and/or local uses of
         aminolevulinic acid HCl ("Levulan(R)") PDT/PD. On September 28, 2000,
         the Company launched its first commercial products, Levulan(R)
         Kerastick(R) 20% Topical Solution and the BLU-U(R) brand light source
         for the treatment of actinic keratoses (AKs) of the face or scalp in
         cooperation with Berlex Laboratories ("Berlex"), the United States
         affiliate of Schering AG, a German corporation.

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., which was
         formed on March 3, 1994 to be the research and development center for
         the Company. 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 of America. 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)                   Reclassifications - Certain prior year amounts have been
         reclassified to conform to the current year presentation. Such
         reclassifications had no impact on the net loss or shareholders' equity
         for any period presented.

d)                 Cash Equivalents - Cash equivalents include short-term highly
         liquid investments purchased with remaining maturities of 90 days or
         less. In December 2001, the Company executed a short-term, renewable,
         irrevocable and unconditional letter of credit for $136,018 in lieu of
         a security deposit for the construction of the Company's Kerastick(R)
         manufacturing facility at its Wilmington, Massachusetts location. The
         cash is held in a separate bank account and is recorded in cash and
         cash equivalents in the Consolidated Balance Sheets.

e)                 United States Government Securities Available for Sale - The
         Company follows the provisions of Statement of Financial Accounting
         Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt
         and Equity Securities." This Statement requires the Company to record
         securities which management has classified as available for sale at
         fair


                                      F-8

DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS
ENDED DECEMBER 31, 2001, 2000 and 1999
-------------------------------------------------------------------------------


         market value and to record unrealized gains and losses on securities
         available for sale as a separate component of shareholders' equity
         until realized.

         As the Company's United States government securities are available for
         sale, and as management expects to sell a portion of its United States
         government securities in the next fiscal year in order to meet its
         working capital requirements, it has classified all securities as
         current assets. The premiums paid and discounts allowed on the purchase
         of the securities are amortized into interest income over the life of
         the securities using the level-yield method.

f)                Inventory - Inventory is stated at the lower of cost
         (first-in, first-out method) or market. Inventory consisting of
         BLU-U(R) commercial light sources is reclassified to other assets when
         the BLU-U(R) is shipped to physicians under rental, leasing, or
         demonstration programs. Inventory identified for research and
         development activities is expensed in the period in which that
         inventory is designated for such use.

g)                Property and Equipment - Property and equipment are carried at
         cost less accumulated depreciation. 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)                 Deferred Charges and Royalties - Deferred charges and
         royalties which include costs paid in advance to third parties under
         various agreements are being amortized on a straight-line basis over
         their expected terms (1-1/2 - 12 years).

         Deferred charges, which are being amortized over 18 months and 4-1/2
         years, respectively, at December 31, 2001 and 2000 are as follows:



                                                                  2001                2000
                                                                            
                  Facilities underutilization costs           $933,333                  $-
                  Facilities reimbursement costs               660,375             886,792
                                                            ----------            --------
                                                            $1,593,708            $886,792
                                                            ==========            ========


         Prepaid royalties to PARTEQ are being amortized over 12-1/2 years.

i)               Impairment 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. Recoverability of assets to be held and used is
         measured by a comparison of the carrying amount of an asset to future
         net cash flows expected to be generated by the asset. If such assets
         are considered to be impaired, the impairment to be recognized is
         measured by the amount by which the carrying amount of the assets
         exceeds the fair value of the assets. Assets to be disposed of are
         reported at the lower of the carrying amount of fair value less
         estimated cost to sell.



                                      F-9

DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS
ENDED DECEMBER 31, 2001, 2000 and 1999
-------------------------------------------------------------------------------



j)               Revenue Recognition - Revenues on product sales of the drug
         applicator are recognized upon shipment. Revenue earned under the
         Company's and third parties' rental and lease agreements are recognized
         in income when free demonstration periods are completed and payments
         are due and determined to be collected. Research revenue earned under
         collaborative agreements consists of non-refundable research and
         development funding from a corporate partner. Research revenue
         generally compensates the Company for a portion of agreed-upon research
         and development expenses and is recognized as revenue at the time the
         research and development activities are performed under the terms of
         the related agreements and when no future performance obligations
         exist. Milestone or other up-front payments have been recorded as
         deferred revenue upon receipt and are recognized as income on a
         straight-line basis over the term of the Company's agreement with
         Schering AG (Note 10).

         Deferred revenue associated with the Company's milestone payments,
         unrestricted research grants, and the sale of commercial light sources
         at December 31, 2001 and 2000 is as follows:



                                                                          2001                2000
                                                                                 
                  Milestone and unrestricted grant payments        $22,312,498         $24,295,834
                  Sale of commercial light sources                     273,358             509,207
                                                                   -----------         -----------
                                                                   $22,585,856         $24,805,041
                                                                   ===========         ===========



k)               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.

l)               Income Taxes - The Company follows the provisions of SFAS No.
         109, "Accounting for Income Taxes," which requires the Company to
         compute deferred income taxes based on the difference between the
         financial statement and tax basis of assets and liabilities using tax
         rates expected to be in effect in the years in which these differences
         are expected to reverse (Note 7).

m)               Basic and Diluted Net Loss Per Share - The Company follows the
         provisions of SFAS No. 128, "Earnings Per Share." Basic net loss per
         common share is based on 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, 2001, 2000, and 1999,
         stock options and warrants totaling approximately 2,548,000, 2,340,000,


                                      F-10


DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS
ENDED DECEMBER 31, 2001, 2000 and 1999
-------------------------------------------------------------------------------
         and 2,120,000 shares, respectively, have been excluded from the
         computation of diluted net loss per share.

n)               Stock-based compensation - SFAS No. 123, "Accounting for
         Stock-Based Compensation," addresses the financial accounting and
         reporting standards for stock or other equity-based compensation
         arrangements. The Company has 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 No. 25, and to
         provide disclosures based on the fair value method in the Notes to the
         Consolidated Financial Statements as permitted by SFAS No. 123. 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 date of grant. The resulting
         compensation cost is recognized and charged to operations over the
         service period, which is generally the vesting period.

o)               Comprehensive Income - The Company has reported comprehensive
         income (loss) and its components as part of its statement of
         shareholders' equity. The only element of comprehensive income, apart
         from net loss, relates to unrealized gains or losses on United States
         government securities available for sale.

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.

q)                Fair Value of Financial Instruments - The carrying value of
         the Company's financial assets and liabilities approximate their fair
         values due to their short-term nature. Marketable securities 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 is subject to credit
         risk through short-term investments and mitigates this risk by
         investing in United States government securities. To date,
         substantially all of the Company's revenues have been earned from the
         Company's single collaborator (Note 10).

s)                Recently Issued Accounting Guidance - On January 1, 2001, the
         Company adopted SFAS No. 133, "Accounting for Derivative Instruments
         and Hedging Activities," which was issued by the Financial Accounting
         Standards Board. The adoption of this statement did not have any effect
         on the Company's financial position or results of operations.


                                      F-11

DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS
ENDED DECEMBER 31, 2001, 2000 and 1999
-------------------------------------------------------------------------------

         In August 2001, the Financial Accounting Standards Board issued SFAS
         No. 144, "Accounting for the Impairment of Disposal of Long-lived
         Assets." This statement supercedes SFAS No. 121, "Accounting for the
         Impairment of Long-Lived Assets and for Long-Lived Assets to Be
         Disposed Of." SFAS 144 establishes a single accounting model, based on
         the framework established in SFAS 121, for long-lived assets to be
         disposed of by sale and resolves implementation issues related to SFAS
         121. SFAS No. 144 is effective for fiscal years beginning after
         December 15, 2001 and interim periods within those fiscal years. On
         January 1, 2002, the Company adopted this statement, which will have no
         effect on the Company's financial position or results of operations.

         In July 2001, the Financial Accounting Standards Board issued SFAS No.
         141, "Business Combinations" and SFAS No. 142 "Goodwill and Other
         Intangible Assets." SFAS No. 141 requires that the purchase method of
         accounting be used for all business combinations initiated after June
         30, 2001 and that the use of the pooling-of-interest method is no
         longer allowed. SFAS No. 142 requires that upon adoption, amortization
         of goodwill will cease and instead, the carrying value of goodwill will
         be evaluated for impairment on an annual basis. Identifiable intangible
         assets will continue to be amortized over their useful lives and
         reviewed for impairment in accordance with SFAS No. 121. SFAS No. 142
         is effective for fiscal years beginning after December 15, 2001. On
         January 1, 2002, the Company adopted these statements, which will have
         no effect on the Company's financial position or results of operations.

3)       UNITED STATES GOVERNMENT SECURITIES

         Securities available for sale consist of United States Treasury Bills,
         Notes, and other United States government securities with yields
         ranging from 4.26% to 7.00% and maturity dates ranging from January 14,
         2002 to November 15, 2006. As of December 31, 2001 and 2000, the fair
         market value and cost basis on such securities were as follows:



                                                            2001                2000
                                                                   
                           Fair market value         $57,141,125         $58,055,463
                           Cost basis                 54,917,290          56,876,369



         Net unrealized gains on such securities for the years ended December
         31, 2001 and 2000 were $1,044,741 and $1,261,413, respectively, and
         have been recorded in accumulated other comprehensive income, which is
         reported as part of shareholders' equity in the Consolidated Balance
         Sheets.



                                      F-12

DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS
ENDED DECEMBER 31, 2001, 2000 and 1999
-------------------------------------------------------------------------------




4)       INVENTORY

         Inventory consisted of the following at December 31, 2001 and 2000:



                                                 2001         2000
                                              -----------  ----------
                                                     
          Finished goods                      $2,013,799   $1,151,537
          Raw materials                          319,281      175,344
          Purchased parts and subassemblies           --        5,085
                                              -----------  ----------
                                              $2,333,080   $1,331,966
                                              ==========   ==========



5)       OTHER CURRENT ASSETS

         Other current assets consisted of the following at December 31, 2001
         and 2000:



                                                              2001        2000
                                                          ----------   ----------
                                                                 
         Prepaid expenses and deposits                    $  447,520   $  293,069
         Commercial light sources under lease or rental      764,025      261,923
         Other current assets                                 43,405        7,248
                                                          ----------   ----------
                                                          $1,254,950   $  562,240
                                                          ==========   ==========




6)       PROPERTY AND EQUIPMENT

         Property and equipment consisted of the following at December 31, 2001
         and 2000:



                                                   USEFUL LIVES
                                                        (YEARS)                2001                 2000
                                                                                     
Computer equipment and software                              3            $1,703,482            $564,288
Furniture, fixtures and equipment                            5               517,465             382,685
Manufacturing equipment                                      5             1,334,769             822,872
Leasehold improvements                             Term of lease             627,109             485,809
Construction work-in-progress                               --               397,783                  --
                                                                          ----------            --------
                                                                           4,580,608           2,255,654
                                                                          ----------            --------
Accumulated depreciation and amortization                                 (1,196,322)           (556,124)
                                                                          ----------            --------
                                                                          $3,384,286          $1,699,530
                                                                          ==========          ==========








                                      F-13

DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS
ENDING DECEMBER 31, 2001, 2000, AND 1999
--------------------------------------------------------------------------------



7)       INCOME TAXES

         The tax effect of significant temporary differences representing
         deferred tax assets and liabilities at December 31, 2001 and 2000 is as
         follows:



                                                             2001            2000
                                                          -----------     -----------
DEFERRED TAX ASSETS
                                                                   
    Deferred revenue                                     $  9,484,363    $ 10,178,889
    Intangible assets                                         652,366         653,318
    Accrued charges                                            17,339              --
    Research and development tax credits carryforwards      1,393,428         928,131
    Operating loss carryforwards                           10,853,611       5,911,149
    Capital loss carryforwards                                    666         165,240
    Charitable contribution carryforward                        4,198              --
    Fixed assets                                                   --          59,668
                                                          -----------     -----------
         Total deferred tax assets                         22,405,971      17,896,395



DEFERRED TAX LIABILITIES
    Deferred charges                                          (79,011)             --
    Fixed assets                                              (58,142)             --
                                                          -----------     -----------
                                                         $   (137,153)   $         --
                                                          -----------     -----------
         Total deferred tax liabilities
    Net deferred tax assets before allowance               22,268,818      17,896,395
                                                          (22,268,818)    (17,896,395)
                                                          -----------     -----------
    Valuation allowance
         Total deferred tax asset                             $    --        $     --
                                                           ==========      ==========


         During the years ended December 31, 2001, 2000, and 1999, the valuation
         allowance was increased by approximately $4,372,000, $2,631,000, and
         $2,462,000, respectively, due to the uncertainty of future realization
         of the net deferred tax assets.

         Included in deferred tax assets at December 31, 2001 is approximately
         $1,600,000 of future benefits which, if realized, will be credited to
         additional paid in capital rather than results of operations.



                                      F-14

DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS
ENDING DECEMBER 31, 2001, 2000, AND 1999
--------------------------------------------------------------------------------

         As of December 31, 2001, the Company has Federal net operating loss
         carryforwards for tax purposes of approximately $29,479,000 and
         research and development tax credits of approximately $1,264,000, both
         of which, if not utilized, will expire for Federal tax purposes as
         follows:



                                                                RESEARCH AND
                                     OPERATING LOSS          DEVELOPMENT TAX
                                      CARRYFORWARDS                  CREDITS
                                     --------------          ---------------
                                                       
            2006                          $       -                   $6,731
            2007                                  -                   57,111
            2008                                  -                   65,795
            2009                                  -                   83,961
            2010                                  -                   43,825
            2011                          8,962,772                  102,481
            2012                          6,840,914                  235,314
            2018                          5,738,119                  144,701
            2019                              1,000                   80,724
            2020                             27,991                  158,745
            2021                          7,907,926                  284,315
                                        -----------               ----------
                                        $29,478,722               $1,263,703
                                        ===========               ==========




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



                                                                 2001                   2000                   1999
                                                   ------------------    -------------------    -------------------
                                                            $       %              $       %              $       %
                                                   ------------------    -------------------    -------------------
                                                                                           
Income tax expense (benefit) at statutory rates   (2,502,000)  (34.0)    (2,205,000)  (34.0)    (1,849,000)  (34.0)
State taxes                                         (500,000)   (6.8)      (425,000)   (6.5)      (326,000)   (6.0)
(Increase) decrease in tax credit carryforwards     (335,000)   (4.6)        38,000     0.5       (264,000)   (4.8)
Increase in valuation allowance                    3,265,000    44.4      2,631,000    40.6      2,462,000    45.3
Other                                                 72,000     1.0        (39,000)   (0.6)        67,000     1.2
                                                   ------------------    -------------------    -------------------
                                                           --      --            --      --         90,000     1.7
                                                   ==================    ===================    ===================



         Income tax expense incurred for the year ended December 31, 1999 was
         classified as current.

8)       SHAREHOLDERS' EQUITY

         On January 15, 1999, the Company issued 1,500,000 shares of its common
         stock at $5.00 per share in a private placement pursuant to Regulation
         D of the Securities Act of 1933. In connection with the placement,
         130,435 shares of common stock were issued as commission to the
         placement agent. Additional commission was paid to the placement agent
         in the form of 163,043 five-year warrants, each of which are
         exercisable into one share of common stock


                                      F-15

DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS
ENDING DECEMBER 31, 2001, 2000, AND 1999
--------------------------------------------------------------------------------

         at $5.00 per share. These shares and warrants have been valued at
         $1,805,878 and have been recorded as stock offering costs.

         Since the Form S-3 Registration Statement which was filed to register
         the shares in the private placement was not effective as of June 1,
         1999, the Company was obligated to issue and did issue 15,000 shares of
         common stock to the investors and 1,630 additional warrants to the
         placement agent, i.e. 1% of the shares issued to the investors and 1%
         of the warrants issued to placement agent. These warrants have the same
         terms and conditions as the original placement agent warrants. These
         shares and warrants have been valued at $152,495 and both have been
         recorded as part of general and administrative costs in the
         Consolidated Statements of Operations for the year ended December 31,
         1999.

         On March 22, 2000, the Company issued 1,500,000 shares of its common
         stock in a private placement pursuant to Regulation D of the Securities
         Act of 1933. The Company received gross proceeds of $42,750,000. The
         offering costs associated with the placement were $2,051,714. The
         shares were registered on a Form S-3 Registration Statement which
         became effective on March 22, 2000.

         In June 2000, the Company amended its Supply Agreement with Sochinaz
         SA, the manufacturer of the bulk drug ingredient used in Levulan(R). As
         partial consideration for the amendment, DUSA issued 26,667
         unregistered shares of DUSA's Common Stock, at a fair market value of
         $750,000 (Note 11).

         On September 18, 2000, the Company granted 2,500 shares of unregistered
         common stock, without par value, to an outside consultant for
         compensation of services. These shares were valued at approximately
         $65,000 and recorded as part of general and administrative costs in the
         Consolidated Statements of Operations.

         On October 4, 2001, the Company granted 5,000 shares of unregistered
         common stock, without par value, to Therapeutics, Inc., a clinical
         research organization, engaged to manage the clinical development of
         the Company's products in the field of dermatology. These shares were
         valued at approximately $55,000, and are being recognized in research
         and development expense in the Consolidated Statement of Operations.

9)       STOCK OPTIONS AND WARRANTS

a)       1996 Omnibus Plan - On April 11, 1996, the 1996 Omnibus Plan ("Omnibus
         Plan") was adopted by the Board of Directors, subsequently approved by
         the shareholders on June 6, 1996, and superceded the Company's
         previously adopted 1994 Restricted Stock Option Plan and the Incentive
         Stock Option Plan adopted in 1991. No further grants will be made under
         the superceded plans. The Omnibus Plan was amended and approved by
         shareholders on


                                      F-16

DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS
ENDING DECEMBER 31, 2001, 2000, AND 1999
--------------------------------------------------------------------------------

         June 14, 2001 and 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 2,753,328. 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 ("SAR"),
         restricted stock ("RS") or other securities determined by the Company,
         to directors, employees and consultants. To date, the Company has made
         awards of NQSOs, ISOs, and RSs under the Omnibus Plan.

         Non-qualified stock options - All the non-qualified stock options
         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. The Company grants each individual
         who agrees to become a director 15,000 NQSO to purchase common stock of
         the Company. These initial grants vest annually over a four-year
         period. Thereafter, each director reelected at an Annual Meeting of
         Shareholders will automatically receive an additional 10,000 NQSO on
         June 30 of each year except for 2001, for which each director received
         5,000 NQSO based on an agreement at the June 14, 2001 shareholder
         meeting. These grants immediately vest on the date of the grant.

         Incentive stock options - Incentive stock options granted under the
         Omnibus Plan and the superceded 1991 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, 2001:



                                                                OPTIONS OUTSTANDING                   OPTIONS EXERCISABLE
                                               -------------------------------------------------------------------------------
                                                       NUMBER                        WEIGHTED          NUMBER
                                               OUTSTANDING AT   WEIGHTED AVERAGE      AVERAGE     EXERCISABLE         WEIGHTED
                                                 DECEMBER 31,          REMAINING     EXERCISE     AT DECEMBER          AVERAGE
               RANGE OF EXERCISE PRICE                   2001   CONTRACTUAL LIFE        PRICE        31, 2001   EXERCISE PRICE
               -------------------------       -------------------------------------------------------------------------------
                                                                                                 
               $3.25 to 7.75                          992,450        5.20  years        $7.00         824,200            $6.93
               8.05 to 17.63                          624,000        7.13  years        12.60         357,750            11.24
               22.00 to 31.00                         581,000        8.38  years        29.27         182,750            28.63
                                                      -------                                         -------
                                                    2,197,450        6.58  years        14.48       1,364,700            10.97
                                                    =========                                       =========



                                      F-17

DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS
ENDING DECEMBER 31, 2001, 2000, AND 1999
--------------------------------------------------------------------------------

         Activity under stock option plans during the years ended December 31,
         2001, 2000 and 1999 was as follows:



                                                        WEIGHTED                  WEIGHTED                  WEIGHTED
                                                         AVERAGE                   AVERAGE                   AVERAGE
                                                         EXERCISE                 EXERCISE                  EXERCISE
                                            2001          PRICE      2000          PRICE          1999       PRICE
                                          ---------------------------------------------------------------------------
                                                                                         
Options outstanding, beginning of year    2,140,450    $   13.54    1,757,800    $    7.58    1,375,300    $   7.27
Options granted                             215,500        14.53      641,500        28.44      465,000        8.30
Options exercised                          (104,500)        5.95     (188,350)        5.57      (72,500)       6.66
Options cancelled                           (54,000)        7.66      (70,500)       16.38      (10,000)       5.25
                                          ---------------------------------------------------------------------------
Options outstanding, end of year          2,197,450    $   14.30    2,140,450    $   13.54    1,757,800    $   7.58
                                          ---------------------------------------------------------------------------
Options exercisable, end of year          1,364,700    $   10.97    1,195,013    $    8.36    1,007,800    $   7.06
                                          ===========================================================================




         Options that were granted during 2001 have exercise prices ranging from
         $8.05 to $17.63 per share. Those granted during 2000 have exercise
         prices ranging from $16.88 to $31.00 per share. During 1999, options
         were granted with exercise prices ranging from $6.375 to $20.50 per
         share.

         Options which were exercised during these years were exercised at per
         share prices ranging from $3.25 to $7.25 during 2001, $3.25 to $11.50
         during 2000, and $3.25 to $11.25 during 1999.

         On August 16, 2000, the Company issued 2,500 fully-vested options to an
         outside consultant for compensation of services. These options were
         valued at approximately $26,000, and recorded as part of general and
         administrative costs in the Consolidated Statements of Operations.
         These options expired in 2001.

         As discussed in Note 11a, on October 21, 1997, the Company issued
         85,000 options to PARTEQ. These options were valued at approximately
         $155,000, $496,000, and $259,000 in 2001, 2000, and 1999, respectively
         and recorded as part of research and development costs in the
         Consolidated Statements of Operations in accordance with EITF 96-18. As
         of December 31, 2001, all of these options remained outstanding.

         Also as discussed in Note 11a, on June 23, 1999, the Company issued
         10,000 options to PARTEQ. In 1999, these options were valued at
         approximately $84,000 and recorded as part of research and development
         costs in the Consolidated Statements of Operations. As of December 31,
         2001, all of these options remained outstanding.



                                      F-18

DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS
ENDING DECEMBER 31, 2001, 2000, AND 1999
--------------------------------------------------------------------------------

         Additionally, during the years ended December 31, 2000 and 1999,
         underwriters' purchase options of 60,000 and 326,422, respectively,
         were exercised. At December 31, 2001, there are no remaining
         underwriters' purchase options outstanding.

         As described in Note 2, the Company uses 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 loss per share would have been reported
         as follows:



                                                                             2001                  2000                  1999
                                                                    -------------         --------------       --------------
        NET LOSS
                                                                                                       
             As reported                                             ($7,358,096)          ($6,540,755)          ($5,528,627)
             Proforma                                               ($12,993,304)         ($12,147,732)          ($8,307,285)
        BASIC AND DILUTED NET LOSS PER COMMON SHARE
             As reported                                                  ($0.53)               ($0.49)               ($0.50)
             Proforma                                                     ($0.94)               ($0.91)               ($0.75)



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



                                     2001     2000    1999
                                    ------   ------   -------
                                             
          Expected life (years)         7       10       10
          Risk free interest rate    4.88%    5.76%    6.22%
          Expected volatility       70.87%   74.55%   80.70%
          Dividend yield               --       --       --


         Using these assumptions, the weighted-average fair value per option for
         the years ended December 31, 2001, 2000, and 1999, was $10.29, 23.07
         and $7.50, respectively.

b)                 Warrants - In consideration of efforts related to the
         negotiation and execution of various agreements, the Company issued
         warrants to purchase 350,000 shares of common stock of the Company at
         CDN $6.79 ($4.21 at December 31, 2001) per share to the Chief Executive
         Officer of the Company on January 17, 1992. As of December 31, 2001,
         all 350,000 of the warrants, which were due to expire in January 2002,
         were outstanding. In January 2002, 50,000 warrants expired and the term
         on the remaining 300,000 warrants was extended to January 29, 2007.

         In connection with an agreement dated October 6, 1993, the Company
         issued its investor relations firm a warrant to purchase up to 50,000
         shares of the authorized stock of the Company at $6 per share. During
         2001 and 2000, the investor relations firm exercised 25,000 shares in
         each year.

                                      F-19

DUSA PHARMACEUTICALS, INC. NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS FOR THE YEARS ENDING DECEMBER 31, 2001, 2000, AND 1999
--------------------------------------------------------------------------------

         In connection with an agreement with its international investor
         relations advisor, in 1995 the Company issued warrants for 20,000
         shares of the Company's common stock, exercisable at a price of $4.00
         per share. During 2000, all 20,000 warrants were exercised.

         As discussed in Note 8, in 1999 the Company issued 163,043 warrants
         with an exercise price of $5.00 per share. As of December 31, 2001, 449
         of the warrants were outstanding and expire in 2004.

10)      COLLABORATION AGREEMENT

         In November 1999, DUSA signed a dermatology Marketing, Development and
         Supply Agreement with Schering AG. DUSA granted to Schering AG the
         right to promote, market, sell and distribute the Levulan(R)
         Kerastick(R) 20% Topical Solution with PDT for non-hyperkeratotic AKs
         of the face or scalp on a worldwide basis (with the exception of
         Canada). Schering AG and DUSA intend to co-develop and commercialize
         additional ALA products for other dermatology disorders. Under the
         agreement, Schering AG has the exclusive right to market, promote and
         sell the products that are developed in the co-development program. The
         co-development program reflects agreed upon dermatology research and
         development projects with total spending, subject to the agreement of
         the Development Committee, of $4,500,000 annually. Due to timing of the
         start of clinical trials, the reimbursement for 2000 and 2001 was
         approximately $723,000, and $2,892,000, respectively. For 2002,
         Schering AG has agreed to fund the co-development program up to
         $3,000,000, subject to the results of dermatology feasibility studies
         currently ongoing and further decisions by the development committee,
         which meets quarterly.

         In December 1999, under the terms of this agreement, DUSA received
         $15,000,000, reflecting an $8,750,000 cash milestone payment and
         $6,250,000 for which a Schering AG affiliate purchased 340,458 shares
         of DUSA's common stock. In December 2000, the Company received an
         additional $15,000,000 from Schering AG that reflected an unrestricted
         research grant of $8,000,000 for future research and development
         support to be used at DUSA's discretion, and a milestone payment of
         $7,000,000 based on receiving FDA approval of the commercial model of
         the BLU-U(R) and the first commercial sale of a Levulan(R)
         Kerastick(R). This is the final payment due from Schering AG related to
         DUSA's initial products for the treatment of non-hyperkeratotic actinic
         keratoses (AK's) of the face or scalp. The Company will continue to
         receive royalties and supply fees from Schering AG based upon the sales
         levels of the Kerastick(R).

         The milestone payments of $15,750,000, the $8,000,000 for future
         research and development support, and the premium on the issuance of
         shares, $1,041,667, have been recorded as deferred revenue and are
         being recognized over the term of the agreement, approximately 12
         years.



                                      F-20

DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS
ENDING DECEMBER 31, 2001, 2000, AND 1999
--------------------------------------------------------------------------------

         The Marketing, Development and Supply Agreement terminates on a
         product-by-product basis in each country in the territory on the later
         of (i) 12-1/2 years after the first commercial sale of a respective
         product in such country, or (ii) the expiration of patents pertaining
         to the manufacture, sale or use of such product in such country. It
         terminates in its entirety upon the expiration of the agreement with
         respect to all products in all countries covered by the agreement.
         Subject to various terms and conditions, the parties may terminate the
         agreement earlier.

         DUSA is responsible for the manufacture and supply of the Levulan(R)
         Kerastick(R) to Schering AG for resale to the medical community.
         Schering AG pays DUSA a supply price for products, as well as a royalty
         on product sales. Schering AG has also agreed to promote the BLU-U(R),
         which DUSA rents or leases to dermatologists and other physicians,
         medical facilities and academic centers throughout the country. DUSA is
         responsible for maintenance and repair of the BLU-U(R) units.

         On September 26, 2001, DUSA and Schering AG agreed to amend their
         Marketing, Development and Supply Agreement, dated November 22, 1999.
         With the execution of this amendment, Schering AG and its United States
         affiliate, Berlex Laboratories, Inc., agreed to reimburse DUSA
         $1,000,000 for costs DUSA incurred to modify its manufacturing
         agreement with North Safety Products, Inc. ("North"), the manufacturer
         of the Company's Kerastick(R) brand applicator, as discussed in Note
         11. This amount has been reported in deferred liabilities and is being
         recognized as an offset to cost of product sales on a straight-line
         basis over the term of the amendment. In consideration for this
         amendment, DUSA agreed to be responsible for certain additional
         liabilities in the event of DUSA's failure to supply Schering AG's
         requirements of finished product as defined in the original agreement.
         In addition, DUSA agreed to use its best efforts to qualify itself as
         the primary manufacturer and supplier of the Kerastick(R) within six
         months following the date that North ceases production. DUSA and
         Schering AG also agreed to terminate a guaranty by Schering AG to DUSA
         of BLU-U(R) lease payments by physicians, and the secured line of
         credit promissory note from Schering AG to DUSA for up to $1,000,000 to
         finance inventory of BLU-U(R) units.

11)      COMMITMENTS AND CONTINGENCIES

a)                PARTEQ Agreements - 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-21

DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS
ENDING DECEMBER 31, 2001, 2000, AND 1999
--------------------------------------------------------------------------------

         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, such as Schering AG, 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, 2001 and 2000, actual royalties based
         on product sales were approximately $3,300 and $5,800, however, based
         on the minimum royalty requirements, the Company incurred a total
         liability of $62,000, $68,000, and $70,000 in 2001, 2000, and 1999,
         respectively. This expense has been recorded in cost of product sales
         and royalties in 2001 and 2000, and research and development costs in
         1999. Commencing with the initial product launch, annual minimum
         royalties to PARTEQ on sales of products must total at least CDN
         $100,000 ($62,000 as of December 31, 2001).

         The Company is also obligated to pay 5% of any lump sum sublicense fees
         paid to the Company, such as milestone payments, excluding amounts
         designated by the sublicensee for future research and development
         efforts.

         In October 1997, the Company and PARTEQ revised the License Agreement
         and the parties signed an Amended and Restated License Agreement on
         March 11, 1998. PARTEQ received options on October 27, 1997 to purchase
         85,000 shares of common stock of the Company at an exercise price of
         $10.875 per share which vested over four years on the anniversary date
         of the granting of the option. The value of the options included in the
         Consolidated Statements of Operations as part of research and
         development costs was $155,000, $496,000, and $259,000 for 2001, 2000
         and 1999, respectively.

         The Company entered into an extension of the Research Agreement
         effective April 1, 1999 with PARTEQ. As partial consideration, the
         Company granted fully vested options to PARTEQ to purchase 10,000
         shares of common stock of the Company at an exercise price of $9.25 per
         share. The options have a term of 10 years and have been valued at
         $84,000 and recorded as part of research and development costs in the
         Consolidated Statements of Operations in 1999.

         The Company has also provided PARTEQ with additional funding support of
         $29,000 and $50,000 in 2000 and 1999, respectively. The cash funding
         has been included in the Consolidated Statements of Operations as part
         of research and development costs.

b)                 Lease Agreements - The Company has entered into lease
         commitments for office space rental in Wilmington, Massachusetts,
         Valhalla, New York, and in Toronto, Ontario including an extended lease
         commitment for its office and manufacturing space in its Wilmington


                                      F-22

DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS
ENDING DECEMBER 31, 2001, 2000, AND 1999
--------------------------------------------------------------------------------

         headquarters through November 2016. The Company has the ability to
         terminate the Wilmington lease after the 10th year (2011) of the lease
         by providing the landlord with notice at least seven and one-half
         months prior to the date on which the termination would be effective.
         The minimum lease payments disclosed below include the non-cancelable
         term of the lease. As the Valhalla and Toronto lease commitments expire
         during 2002, the Company is evaluating its options on these
         commitments. Future minimum lease payments related to these agreements
         for years subsequent to December 31, 2001 are as follows:



                                                 MINIMUM LEASE
                                                      PAYMENTS
                                                    -----------
                                              
                           2002                       $450,000
                           2003                        327,000
                           2004                        341,000
                           2005                        375,000
                           2006                        390,000
                           Beyond 2006               2,603,000
                                                    -----------
                                                    $4,486,000
                                                    ===========




         Rent expense incurred under these operating leases was approximately
         $461,000, $297,000, and $240,000 for the years ended December 31, 2001,
         2000, and 1999, respectively.

c)              Light Source Supply - Effective November 5, 1998, the Company
         entered into a purchase and supply agreement with National Biological
         Corporation ("NBC"), under which the Company has agreed to order all of
         its supply of certain light sources from NBC. The agreement has a 10
         year term, subject to earlier termination for breach or insolvency or
         for convenience. In order to meet the production scheduling needs of
         NBC, DUSA has prepaid for raw material costs in the amount of $400,000
         associated with the Company's then existing order. This amount has and
         will be credited against the final purchase price, which will be due on
         the delivery of finished units at the rate of $1,000 per unit. At the
         end of December 2001, approximately $43,000 of this prepayment remained
         outstanding and was recorded in other current assets.

         In January 2002, the Company paid NBC $100,000 to cover certain
         overhead costs as the Company will not order the minimum required
         number of BLU-U(R) brand units for delivery in 2002. In consideration
         for this payment, NBC has agreed to maintain its BLU-U(R) manufacturing
         capabilities in a state of readiness during 2002 with the capability of
         producing BLU-U(R) units in accordance with established procedures. The
         Company will recognize this payment in cost of product sales on a
         straight-line basis during 2002.

d)              Research Agreements - The Company has entered into a series of
         agreements for research projects and clinical studies. As of December
         31, 2001, future payments to be made pursuant to these agreements,
         under certain terms and conditions, totaled approximately $3,284,000,
         and $629,000 for 2002 and 2003, respectively. On October 4, 2001, the



                                      F-23

DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS
ENDED DECEMBER 31, 2001, 2000, AND 1999
--------------------------------------------------------------------------------

         Company executed a master service agreement, effective June 15, 2001,
         with Therapeutics, Inc. for an initial term of two years to engage
         Therapeutics to manage the clinical development of the Company's
         products in the field of dermatology. Minimum payments under this
         agreement have been included in the total future payments as noted
         above. In addition, with the execution of this agreement, Therapeutics
         received 5,000 shares of the Company's common stock valued at $55,000,
         and also 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 its management.

e)                North Safety Products Inc. - In September 1999, DUSA entered
         into a purchase and supply agreement with North for the manufacture and
         supply of the Kerastick(R) brand applicator. The Company agreed to
         purchase from North a certain portion of its total commercial
         requirements for supply of the Kerastick(R) for sale in the United
         States and Canada. Prices for the product are based on the quantities
         of Kerastick(R) ordered, which are subject to change depending on
         various product costs and competitive market conditions. The Company
         also reimbursed North for the construction of certain facilities at
         North's manufacturing facilities in the amount of $311,000. The initial
         agreement had a five-year term, which could be extended for additional
         one-year periods.

         In February 2001, the Company agreed to compensate North for certain
         overhead expenses associated with the manufacture of the Kerastick(R)
         to cover underutilization of North's facilities since recent orders
         have been below certain previously anticipated levels. Approximately
         $401,000 of underutilization charges were recorded in cost of product
         sales based on the production levels through June 2001 in accordance
         with an amendment to the purchase and supply agreement. In July 2001,
         DUSA revised this agreement with North pertaining to the payment of
         underutilization fees as recent orders have been below certain
         previously anticipated levels. With the execution of this amendment,
         the Company paid North $1,000,000 in up-front underutilization fees,
         and agreed to pay an additional $400,000 covering the period from the
         execution of this amendment to the agreement through December 31, 2002
         of which $200,000 has been paid as of December 31, 2001. The Company
         has reported the total commitment of $1,400,000 in deferred charges,
         which is being recognized in cost of product sales on a straight-line
         basis over the term of the amendment. Of this amount, $1,000,000 of the
         underutilized fees were reimbursed through an amendment to the
         Company's Marketing, Development and Supply Agreement with Schering AG
         as discussed in Note 10. In consideration for the underutilization
         fees, North has agreed to maintain its Kerastick(R) manufacturing
         capabilities in a state of readiness, with the capability of producing
         at least 25,000 Kerastick(R) units per month in accordance with
         established procedures. In addition, North is obligated to provide the
         Company with manufacturing records, personnel support, and a list of
         consultants and suppliers that have supported the development and
         manufacturing of the Kerastick(R). The term of the agreement ends on
         December 31, 2002 unless DUSA exercises an option to extend the term
         through


                                      F-24

DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS
ENDED DECEMBER 31, 2001, 2000, AND 1999
--------------------------------------------------------------------------------

         June 30, 2003. If DUSA should decide to extend the term, North will be
         entitled to payment of additional underutilization fees of up to
         $500,000, prorated based on the level of Kerastick(R) units produced
         from July 1, 2001 through June 30, 2003.

f)                Supply Agreement Modification - In June 2000, the Company
         amended its Supply Agreement with Sochinaz SA, the manufacturer of the
         bulk active drug ingredient used in Levulan(R). The amendment grants an
         option to DUSA to extend the term of the Supply Agreement for an
         additional three years to December 3, 2007. As consideration for the
         amendment, DUSA agreed to reimburse Sochinaz SA for a portion of its
         costs to bring its manufacturing facilities in Switzerland into
         compliance with the FDA's cGMPs. DUSA paid $250,000 in cash and issued
         26,667 unregistered shares of DUSA's common stock, at a fair market
         value of $750,000. The $1,000,000 has been reported as a deferred
         charge and is being recognized in cost of product sales on a
         straight-line basis over the original term of the contract, through
         November 2004.

g)                Kerastick(R) Manufacturing Line - Following the amendments to
         the Company's agreement with North that will lead to the expiration of
         the Company's current Kerastick(R) manufacturing arrangement by June
         30, 2003, and the Company's commitment to Schering AG through its
         Marketing, Development and Supply Agreement, as amended, the Company
         commenced the development of a Kerastick(R) manufacturing facility at
         its Wilmington facility to ensure certainty of supply in the future.
         Construction started in January 2002, and is expected to be completed
         during 2002. As of December 31, 2001, the Company has expended $398,000
         for certain pre-construction activities, which have been classified as
         construction work-in-progress in property and equipment in the
         Consolidated Balance Sheets.

12)      OTHER AGREEMENT

                  Third-party Leasing Company - In September 2000, the Company
         engaged a medical device leasing company to complete the leasing
         transactions, including coordinating payment plans with the physicians,
         for its BLU-U(R) brand light device. The Company will sell the
         BLU-U's(R) to the leasing company, and will be paid for the units by
         the leasing company shortly after installation in the physician's
         offices. However, since physicians have the right to cancel their
         leases after one year, such revenues will be deferred until their right
         to cancel has expired. In the event a physician does cancel a lease,
         the Company has agreed to repurchase the units at an agreed upon price.


                                      F-25

DUSA PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS
ENDED DECEMBER 31, 2001, 2000, AND 1999
--------------------------------------------------------------------------------

13)      RELATED PARTY TRANSACTIONS

                  The Company's Vice President of Business Development and Vice
         President of Technology are principal shareholders of Lumenetics, Inc.,
         the Company's former light device consultants. During 2000 and 1999,
         the Company paid $2,000 and $46,000, respectively, for certain
         equipment leased under operating leases from Lumenetics. In 2001, the
         Company purchased this equipment for $52,000. In addition, the Company
         also reimbursed Lumenetics for office space and related expenses
         totaling approximately $146,000 in 1999.




                                      F-26



EXHIBIT INDEX



      
3(a)     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(b)     By-laws of the Registrant, filed as Exhibit 3(ii) to the
                  Registrant's Quarterly Report on Form 10-Q for the fiscal
                  quarter ended September 30, 1997,
                  and are incorporated herein by reference..............................................................

4(a)     Common Stock specimen, filed as Exhibit 4.1 to the
                  Registrant's Quarterly Report on Form 10-Q for the fiscal
                  quarter ended September 30, 1997, and
                  are 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....................................

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 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(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 hereby 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 and Rule 406 of the Securities
                  Act of 1933, 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(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 and Rule 406 of the
                  Securities Act of 1933, and is incorporated herein by reference.......................................

10(j)    Marketing Development and Supply Agreement between the Company and
                  Schering AG dated November 22, 1999, filed as Exhibit 10.1 to
                  the Registrant's Current Report on Form 8-K dated November 22,
                  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 and is incorporated herein by reference...........................





      
10(j.1)  Letter Amendment to Marketing Development and Supply Agreement
                  between the Company and Schering AG dated September 26, 2001,
                  filed as Exhibit 10(a) to the Registrant's quarterly report on
                  Form 10Q 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 pursuant to
                  Rule 24b-2 of the Securities Exchange Act of 1934,
                  and is incorporated herein by reference...............................................................

10(k)    Common Stock Purchase Agreement between the Company and
                  Schering Berlin Venture Corporation dated as of November 22,
                  1999, filed as Exhibit 10.2 to the Registrant's Current Report
                  on Form 8-K dated November 22, 1999, portions of which have
                  been omitted pursuant to a request for confidential treatment
                  pursuant to Rule 24b of the Securities Exchange Act of 1934,
                  and is incorporated herein by reference...............................................................

10(l)    Light Source Agreement between the Company and Schering AG
                  dated as of November 22, 1999, filed as Exhibit 10.3 to the
                  Registrant's Current Report on Form 8-K dated November 22,
                  1999, portions of which have been omitted pursuant to a
                  request for confidential treatment pursuant to Rule 24b of the
                  Securities Exchange Act of 1934, and is incorporated herein by reference..............................

10(m)    Guaranty dated as of November 22, 1999 by Schering AG in favor
                  of the Company, filed as Exhibit 10.4 to the Registrant's
                  Current Report on Form 8-K dated November 22, 1999, portions
                  of which have been omitted pursuant to a request for
                  confidential treatment pursuant to Rule 24b of the Securities
                  Exchange Act of 1934, and is incorporated herein by reference.........................................

10(n)    Secured Line of Credit Promissory Note dated November 22, 1999 with the Company
                  as payee and Schering AG as Holder filed as Exhibit 10.5 to the Registrant's
                  Current Report on Form 8-K dated November 22, 1999, portions of which
                  have been omitted pursuant to a request for confidential treatment pursuant
                  to Rule 24b of the Securities Exchange Act of 1934, and is incorporated herein
                  by reference..........................................................................................







      
10(o)    Security Agreement dated as of November 22, 1999 between the
                  Company and Schering AG filed as Exhibit 10.6 to the
                  Registrant's Current Report on Form 8-K dated November 22,
                  1999, portions of which have been omitted pursuant to a
                  request for confidential treatment pursuant to Rule 24b of the
                  Securities Exchange Act of 1934, and is incorporated herein by reference..............................

10(p)    Purchase and Supply Agreement between the Company and North
                  Safety Products, Inc. dated as of September 13, 1999, filed as
                  Exhibit 10.1 to the Registrant's Current Report on Form 8-K
                  dated October 13, 1999, portions of which have been omitted
                  pursuant to a request for confidential treatment pursuant to
                  Rule 24b of the Securities Exchange Act of 1934, and is
                  incorporated herein by reference......................................................................

10(p.1)  Amendment to Purchase and Supply Agreement between the Company and
                  North Safety Products, Inc. dated as of February 15, 2001, portions of which
                  have been omitted pursuant to a request for confidential treatment
                  pursuant to Rule 24b of the Securities Exchange Act of 1934, as amended...............................

10(p.2)  Second Amendment to Purchase and Supply Agreement between the Company and
                  North Safety Products, Inc. dated as of July 26, 2001, portions of which
                  have been omitted pursuant to a request for confidential treatment
                  pursuant to Rule 24b of the Securities Exchange Act of 1934, as amended...............................

10(q)    Supply Agreement between the Company and Sochinaz SA dated
                  December dated December 24, 1993, filed as Exhibit 10(q) to
                  Registrants Form 10K/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, and is incorporated herein by reference.........................................

10(q.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 Form 10K for the fiscal year ended December 31,
                  1999, and is incorporated herein by reference.........................................................






      
10(q.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(r)    Master Vendor Operating Agreement between the Company and
                  International Leasing Corporation dated September 21, 2000,
                  filed as Exhibit 10 to the Registrant's Quarterly Report on
                  Form 10-Q for the fiscal quarter ended September 30, 2000,
                  filed November 14, 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, and is
                  incorporated herein by reference......................................................................

10(s)    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 24(b) of the Securities
                  Exchange Act of 1934, as amended and is incorporated herein by reference..............................

23.1     Consent of Deloitte & Touche LLP ..............................................................................







                                   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                  President

Date: March 15, 2002

         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,        March 15, 2002
------------------------------              President, Chief Executive Officer,     ---------------------------
D. Geoffrey Shulman, MD,                    (Principal Executive Officer)           Date
FRCPC

/s/Mark  C. Carota                          Vice President, Operations               March 15, 2002
-------------------------------                                                      ---------------------------
Mark C. Carota


/s/Ronald L. Carroll                        Vice President, Business                 March 15, 2002
-------------------------------             Development                             ---------------------------
Ronald L. Carroll

/s/Scott L. Lundahl                         Vice President, Technology               March 15, 2002
-------------------------------                                                      ---------------------------
Scott L. Lundahl

/s/Stuart L. Marcus                         Vice President, Scientific Affairs       March 15, 2002
-------------------------------                                                      ---------------------------
Stuart L. Marcus, MD, PhD

/s/John E. Mattern                          Vice President of Finance and Chief      March 15, 2002
-------------------------------             Financial Officer (Principal Financial   ---------------------------
John E. Mattern                             and Accounting Officer)


/s/William R. McIntyre                      Vice President, Regulatory Affairs       March 15, 2002
-------------------------------                                                      ---------------------------
William R. McIntyre


/s/Paul A. Sowyrda                          Vice President, Product                  March 15, 2002
-------------------------------             Development and Marketing                ---------------------------
Paul A. Sowyrda

/s/John H. Abeles                           Director                                 March 15, 2002
-------------------------------                                                      ---------------------------
John H. Abeles

/s/David Bartash                            Director                                 March 15, 2002
-------------------------------                                                      ---------------------------
David Bartash







                                                                              
/s/Jay M. Haft                              Director                                 March 15, 2002
-------------------------------                                                      -------------------------
Jay M. Haft, Esq.

/s/Richard C. Lufkin                        Director                                 March 15, 2002
-------------------------------                                                      ---------------------------
Richard C. Lufkin

/s/Nanette W. Mantell                       Secretary                                March 15, 2002
-------------------------------                                                      -------------------------
Nanette W. Mantell