DUSA PHARMACEUTICALS INC, 424B3, 2000-03-28

DUSA PHARMACEUTICALS INC
424B3, 2000-03-28
PHARMACEUTICAL PREPARATIONS

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<PAGE> 1
Filed pursuant to Rule 424(b)(3)
Registration Statement No. 333-31676

PROSPECTUS

1,657,823 SHARES

DUSA PHARMACEUTICALS, INC.

COMMON STOCK

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This prospectus relates to an offering of 1,657,823 shares of common
stock by the selling shareholders listed on page 26.

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INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE
OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 1.

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Our common stock is traded on The NASDAQ National Market under the
symbol "DUSA."

The last reported sale price of our common stock on NASDAQ on March 27,
2000 was $21.50 per share.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.

The date of this prospectus is March 28, 2000

<PAGE> 2

TABLE OF CONTENTS
Page

DUSA........................................................................i
Risk Factors............................................................... 1
Business ..................................................................10
Use of Proceeds............................................................24
Dilution ................................................................. 25
Selling Shareholders...................................................... 26
Plan of Distribution...................................................... 27
Securities to be Offered...................................................27
Legal Matters............................................................. 28
Experts................................................................... 28
Where You Can Find More Information....................................... 29
Incorporation of Certain Documents by Reference........................... 29

We have registered the trademarks DUSA Pharmaceuticals, Inc.(R) in the
United States and Canada and Levulan(R) in the United States and the European
Union. We have trademark applications pending for the Kerastick(TM) and
BLU-U(TM) in the United States and the European Union. We are applying for the
Levulan, Kerastick and BLU-U marks in Canada. This prospectus also contains
product names, trade names and trademarks that belong to other organizations.

<PAGE> 3

DUSA

o 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.

o 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.

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 patents relating to methods for using
pharmaceutical formulations which contain our drug and related processes and
improvements. In addition to the Levulan(R) trademark, we also have published
trademark applications for our drug applicator, the Kerastick(TM) and one of our
light devices, the BLU-U(TM).

On December 3, 1999, the FDA approved our New Drug Application, or NDA,
to market our first product, the Levulan(R) Kerastick(TM) 20% Topical Solution
with PDT for the treatment of actinic keratoses, or AKs, of the face and scalp.
We also received approval of our pre-market approval application, or PMA, of the
clinical trial version of our first light device product, called the BLU-U(TM).
The commercial version of the BLU- U(TM) is a modified version of the unit used
in the clinical studies. We filed a supplement to the PMA covering these
modifications on March 20, 2000.

In November, 1999, we signed a marketing, development and supply
agreement with Schering AG, a German corporation. We granted to Schering AG the
right to promote, market, sell and distribute our Levulan(R) Kerastick(TM) with
PDT for AKs, on a worldwide basis, with the exception of Canada. Together we
intend to co-develop and commercialize additional Levulan(R) products for other
dermatology disorders. Subject to approval of the PMA supplement, Schering AG
has advised us that it expects to launch our first products during the second
quarter of 2000.

On February 23, 2000, we signed a definitive agreement with ten mutual
funds or collective trust funds advised by the INVESCO Funds Group, Inc. for a
private placement of 1.5 million shares of our common stock. The purchase price
is $28.50 per share. The closing occurred on March 23, 2000. We agreed to pay
at closing a commission of 4.5% on the gross proceeds plus a non-accountable
expense allowance of $25,000 to the placement agent.

Our principal executive offices are located at 25 Upton Drive,
Wilmington, Massachusetts, 01887 and our telephone number is (978) 657-7500.

<PAGE> 4

RISK FACTORS

Investing in our common stock is very speculative and involves a high
degree of risk. You should carefully consider the risks and uncertainties
described below before making an investment decision. 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, the
trading price of our common stock could decline, and you might lose all or part
of your investment.

This prospectus 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 prospectus. You should not place undue reliance on these
forward-looking statements, which apply only as of the date of this prospectus.

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(TM) WITH PDT FOR THE TREATMENT OF AKS.

WE NEED APPROVAL FROM THE FDA FOR OUR COMMERCIAL LIGHT SOURCE, THE
BLU-U(TM), BEFORE WE CAN BEGIN MARKETING OUR FIRST PRODUCT, THE
LEVULAN(R) KERASTICK(TM), AND WE MAY NOT RECEIVE IT IN TIME FOR OUR
PLANNED PRODUCT LAUNCH IN THE SECOND QUARTER OF 2000.

The FDA has approved our first drug product, Levulan(R) Kerastick(TM)
20% Topical Solution with PDT for AKs of the face and scalp. The FDA has also
approved the clinical trial version of our light device, the BLU-U(TM). The FDA
must still approve the commercial version of our light device, the BLU-U(TM),
before we can market it. Without this additional approval, the Levulan(R)
Kerastick(TM) cannot be widely marketed or used by physicians since the therapy
combines use of Levulan(R) with exposure to the BLU- U(TM). We must file a
supplement with the FDA so that the FDA may examine the differences between our
approved clinical version and our proposed commercial version of the BLU-U(TM).
The PMA supplement was filed on March 20, 2000. While we believe the
modifications we are making to our device do not affect its performance and FDA
review should take approximately two to three months, FDA regulations give the
agency up to six months to review a supplement. The agency also will inspect
our Wilmington, Massachusetts facility before giving its approval. The FDA also
may choose to reinspect our third-party manufacturer. We would incur additional
expenses if either of these facilities fail to pass inspection. The FDA may
also request additional testing information and can extend the time for review
of the PMA supplement. The launch of Levulan(R) Kerastick(TM) with PDT for AKs
will be delayed if we do not receive approval of our PMA supplement from the
FDA or if our facilities do not pass FDA inspection before the planned product
launch during the second quarter of 2000. Schering AG may choose to delay the
launch until the Fall of 2000 if product supplies are not available by the
middle of the second quarter. A delay in the launch will delay our receipt of
royalties and supply prices from sales of our product. We may not receive
approval of the BLU-U(TM).

BECAUSE NEITHER WE NOR SCHERING AG, OUR MARKETING PARTNER FOR
DERMATOLOGY PRODUCTS, HAS ANY EXPERIENCE MARKETING OR SELLING
DERMATOLOGY PRODUCTS IN THE UNITED STATES, OUR REVENUES FROM ROYALTIES
AND PRODUCT SALES MAY BE LIMITED.

The commercial success of Levulan(R) Kerastick(TM) with PDT for AKs of
the face and scalp will partly depend on the scope of the launch into the United
States market through promotional activities, a knowledgeable sales force and
adequate market penetration. The United States market introduction of Levulan(R)
Kerastick(TM) with PDT for AKs will be undertaken by Schering AG through its
affiliate, Berlex Laboratories, Inc. While Schering AG has experience marketing
dermatology products in Europe, neither Schering AG, Berlex nor DUSA has any
experience marketing dermatology products in the United States. Schering AG has
not agreed to hire specific numbers of sales representatives or committed to any
particular budget for the launch. Additionally, our competitors in the AK market
already have experienced, well-funded, marketing and sales operations in the
United States. If Schering AG fails to adequately fund the launch of our product
or fails to adequately develop, train and manage a sales force, the demand for
our product will be limited and our royalties from Schering AG on sales of the
product, our income from light device rentals, and our revenue on supply fees on
the Kerastick(TM) will be adversely affected.

<PAGE> 5

SINCE WE RELY HEAVILY ON OUTSIDE CONTRACTORS AS SOLE SUPPLIERS AND
MANUFACTURERS OF OUR LEVULAN(R) KERASTICK(TM) AND BLU-U(TM), 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. We rely on third-parties to manufacture our products. We
have only one source for Levulan(R), one source for our Kerastick(TM), and one
for the BLU-U(TM). While we have purchased equipment in order to establish a
second source with a limited production line for the manufacture of our
Kerastick(TM), if it becomes necessary, any new manufacturer would have to pass
inspection by the FDA. None of our manufacturers have produced our products in
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.

Under the terms of our agreement with Schering AG, our continuing
failure to supply Schering AG's requirements of Levulan(R), the Kerastick(TM)
and/or the BLU-U(TM) 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's cost to manufacture and we would continue to receive a
royalty payment on sales. Our business, financial condition and results of
operations would be adversely affected.

IF WE FAIL TO OBTAIN ADEQUATE LEVELS OF REIMBURSEMENT FOR OUR PRODUCTS
FROM THIRD-PARTY PAYORS, OUR REVENUES AND PROFITS COULD BE
SIGNIFICANTLY LIMITED.

Our profitability will depend on the availability of reimbursement to
patients or physicians for the cost of our products from third-party payors such
as governmental programs, private insurance and private health plans. We cannot
predict whether levels of reimbursement for our drug and light combination
therapy will be high enough to allow us to realize a reasonable profit margin.
Third-party payors may deny reimbursement if the payor determines that our
particular new therapy is unnecessary, inappropriate or not cost effective. If
patients or physicians are not entitled to receive reimbursements similar to
reimbursements for competing therapies, patients will have to pay for the
unreimbursed amounts. Some medicare providers may require physicians to
prescribe 5-FU to treat AKs because 5-FU is an inexpensive treatment, or limit
the number of AK treatments in a particular year. These reimbursement factors
could limit our revenues, and our profits, if physicians or patients choose
therapies with higher reimbursements than may be assigned to our therapy or if
government agencies or other third-party payors mandate a treatment regimen. The
reimbursement status of newly-approved health care products is highly uncertain.
We are relying on Schering AG to obtain reimbursement codes from third-party
payors. If levels of reimbursement are decreased in the future, the demand for
our products could diminish or our ability to sell our products on a profitable
basis could be hurt.

EVEN IF WE RECEIVE REGULATORY APPROVAL FOR OUR BLU-U(TM), ANY FAILURE
TO COMPLY WITH ONGOING GOVERNMENTAL REGULATIONS IN THE UNITED STATES OR
TO OBTAIN FOREIGN REGULATORY APPROVALS WILL LIMIT OUR ABILITY TO MARKET
OUR FIRST PRODUCT.

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
labelling.

<PAGE> 6

Both the manufacture and marketing of our first product, Levulan(R)
Kerastick(TM) with PDT for AKs, 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,
recordkeeping and quality control to assure that our products meet applicable
specifications and other requirements. If our third party manufacturer's 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 are required to conduct two
Phase IV follow-up studies; one to evaluate the long-term recurrence rate of AKs
after treatment with our new therapy, and the second to test for allergic skin
reactions to the Levulan(R) Kerastick(TM). 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 labelling changes and/or
product related problems;
o impose restrictions on our operations; or
o criminally prosecute us.

As part of our collaboration agreement with Schering AG, we will be
jointly seeking foreign regulatory approvals for Levulan(R) Kerastick(TM) PDT
for AKs. 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 product in foreign
countries. The introduction of our product in foreign markets will subject us to
foreign regulatory clearances, which may be unpredictable and uncertain, and
which may impose substantial additional costs and burdens which we and Schering
AG 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(TM), must be
manufactured in compliance with the current requirements of ISO 9000. Our third-
party manufacturer is not currently qualified under ISO 9000. 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 obtain foreign regulatory approval could adversely affect
our financial condition and operations.

WE HAVE SIGNIFICANT LOSSES AND MAY NEVER BE PROFITABLE.

We have a history of operating losses. We expect to have continued
losses over the next 12 months as we expand our research and development of new
products and establish ourselves in the marketplace. We may never become
profitable. As of December 31, 1999, our accumulated deficit was approximately
$35,947,000. We cannot predict whether any of our products will achieve market
acceptance to generate sufficient revenues to become profitable. Our commercial
success will depend on whether:

o Our products are more effective therapies that currently
available treatments;
o We receive sufficient reimbursement for our products; and
o We can, either together with a partner or alone, successfully
market our products.

<PAGE> 7

WE HAVE ONLY ONE PRODUCT 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(TM) WITH PDT FOR 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 Levulan(R)
Kerastick(TM) with PDT for 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.

Except for the Levulan(R) Kerastick(TM) with PDT for AKs, which is
already approved, all of our other potential products, including the commercial
version of the BLU-U(TM), 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. We may not achieve or
be able to sustain a positive cash flow or profits from the sales of our first
product. 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 two 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 our 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.

BECAUSE WE ARE RELYING ON OUR CORPORATE PARTNER, SCHERING AG, TO ASSIST
US WITH AND TO PROVIDE FUNDS TO DEVELOP OUR POTENTIAL DERMATOLOGY
PRODUCTS, WE COULD EXPERIENCE DELAYS IN OUR DEVELOPMENT IF SCHERING AG
FAILS TO PROVIDE US WITH ADEQUATE SUPPORT.

We are relying on Schering AG to provide funds and co-develop with us
our other potential dermatology products. Under the terms of the agreement,
Schering AG can terminate its funding for the co-development program after two
years. We cannot be certain that Schering AG will continue to fund the
co-development program. If Schering AG's fails to co-develop our products or
fails to make milestone or royalty payments as required, we may not be able to
continue our development program as we have planned.

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 and if we do not
enter an agreement with a corporate partner who has the experience and resources
to perform these roles for other products, 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. Our direct marketing and sales efforts may be unsuccessful. In
addition, we compete with many companies that currently have extensive and
well-funded marketing and sales operations. Any marketing and sales efforts we
make may be unsuccessful against these companies.

<PAGE> 8

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 and/or if Schering
AG terminates funding of the co-development program, then we will need
substantial additional funds to fully develop, manufacture, market and sell all
of our other potential products. We cannot predict exactly 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
PATENTS AND PROPRIETARY RIGHTS, COMPETITORS MIGHT BE ABLE TO TAKE
ADVANTAGE OF OUR RESEARCH AND DEVELOPMENT EFFORTS TO DEVELOP SIMILAR
PRODUCTS TO COMPETE WITH OURS.

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-parts in only four 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 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. The
Japanese Patent Office Board of Appeals, acting upon its review of an opposition
to Japanese Patent No. 273032 which we have licensed from PARTEQ Research and
Development Innovation, issued a document titled "Notice of Reasons for
Cancellation" which DUSA received on February 12, 1999. With PARTEQ's
assistance, we prepared and filed our response to this action. If our response
does not allay the concerns of the Board, they may limit our patent protections
or finalize the cancellation. 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.

5
<PAGE> 9

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 on 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.

Thermolase Corporation has patents that may affect our ability to
commercialize the use of ALA for hair removal. We are aware that Thermolase has
nine related issued United States patents, some of which claim methods for
removing or inhibiting the growth of hair. We do not know whether any of these
patents cover our plans to market hair removal using ALA because we have not
developed a final formulation or method of removing hair with ALA and light. If,
after finalizing our formulation and method, we find that any of these patents
do cover our planned use of ALA, Thermolase may either prevent us from using our
system or they may require us to take a license for a fee.

BECAUSE OF THE NATURE OF OUR BUSINESS, THE LOSS OF OUR REGULATORY CONSULTANT OR
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 24 employees. We are highly dependent on
several key employees with specialized scientific and technical skills
including: D. Geoffrey Shulman, MD, FRCPC, Chairman of the Board, President,
Chief Executive Officer and Chief Financial Officer of the Company; Ronald L.
Carroll, Executive Vice President and Chief Operating Officer; Stuart L. Marcus,
MD, PhD, Senior Vice President, Scientific Affairs; and Scott Lundahl, Vice
President, Technology. At least one of them receives regular solitications for
employment from industry competitors. While we have entered employment
agreements with these four executive officers, they may not remain with us. 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.
We currently do not employ anyone who could replace them. The photodynamic
therapy industry is still quite small and the number of experts is limited. The
loss of Dr. Shulman, Mr. Carroll, Dr. Marcus or Mr. Lundahl 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.

We also must identify, attract and retain additional qualified
management and technical personnel to manage and support our business.
Competition for top management and technical personnel is intense, and we may
not be able to recruit and retain the personnel we need. Our future success
depends to a significant extent on the ability of our executive officers and
other members of our management team to operate effectively, both individually
and as a group. We cannot be certain that we will be able to satisfactorily
allocate responsibilities and that the new members of our executive team will
succeed in their roles.

OUR LEVULAN(R) APPROVAL AND CO-DEVELOPMENT RELATIONSHIP IS ALLOWING
RAPID GROWTH AND IS CREATING ADDITIONAL STRESS FOR OUR ALREADY
OVERBURDENED STAFF WHICH MAY RESULT IN UNANTICIPATED DELAYS IN OUR
BUSINESS AND RESEARCH OBJECTIVES.

We have recently begun an aggressive growth plan that includes
substantial and increased investment in research and development and additional
personnel that we will require to support our growth. This rapid growth and
increased scope of operations presents a number of risks, including:

o an increase in operating expenses,
o the complexities associated with managing a larger and faster
growing organization; and
o unanticipated and substantial costs and time delays.

<PAGE> 10

Our recent FDA approvals, and preparations for the launch of our
products together with our commitment to accelerate our research and development
programs has placed and, if sustained, will continue to place, a significant
strain on our management and operations. Accordingly, our future operating
results will depend on the ability of our officers and other key employees to
continue to implement and improve our operational, customer service and internal
control systems, and to effectively expand, train and manage our employee base.

Demands placed on our clinical and light device staff have increased
and are expected to continue to increase as result of the numerous investigator
studies and clinical trials in development. There can be no guarantee that we
will be able to effectively oversee and monitor all of these investigator
studies and clinical trials. If we are unable to manage multiple studies and
clinical trials at the same time, we could have increased costs or significant
delays in our development program. In addition, as a result of our recent and
anticipated growth, we will need to recruit and hire additional personnel at all
operating levels. There can be no guarantee that we will be able to identify
suitable candidates to fill these positions.

BECAUSE WE ARE DEPENDENT UPON OUR INDEPENDENT CONSULTANTS, GUIDELINES,
INC., FOR OUR REGULATORY AFFAIRS EXPERTISE, IF THEY STOPPED PROVIDING
SERVICES, IT COULD BE COSTLY AND TIME-CONSUMING FOR US TO REPLACE THEM.

Our clinical development program is being implemented by our senior
management, with the assistance of consultants, primarily Guidelines, Inc., a
Florida-based company, specializing in drug development and regulatory affairs.
While we have improved our regulatory affairs expertise, we still rely on
Guidelines to act as liaison with the FDA. A loss of Guidelines' services would
force us to expand our regulatory affairs capacity quickly. This could prove to
be costly and time-consuming which could cause a material adverse effect on our
development program.

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. We maintain
product liability insurance for coverage of our clinical trial activities. We
intend to obtain coverage for our products when they enter the marketplace but
we do not know if it will be available at acceptable costs. If the cost is too
high, we will have to self-insure. While we have not experienced any product
liability claims, a successful claim in excess of our clinical trial insurance
coverage or any coverage for commercial use of our products 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 use 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. We believe that we
are in compliance in all material respects with applicable environmental laws
and regulations and we do not expect to make material capital expenditures for
environmental control facilities in the near-term. However, we cannot guarantee
that we will not incur significant costs to comply with environmental laws and
regulations in the future. We also cannot guarantee that our operations,
business or assets will not be materially adversely effected by current or
future environmental laws or regulations. 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.

<PAGE> 11

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.

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); Miravant, Inc. (U.S.);
Pharmacyclics, Inc. (U.S.); 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; ESC Medical Systems Ltd. (Israel); and Photocure (Norway).

Many of our competitors have substantially greater financial and
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 is also conducting late-stage clinical trials using a related
ALA compound with PDT for dermatological uses. We are aware that medac is
developing ALA PDT for bladder cancer detection in Germany and may receive
regulatory approval in Germany prior to the time that we could receive approval
from the FDA. We believe that our United States patents may be infringed if
medac sells its products in the United States.

We also know from published reports that an Israeli firm, ESC Medical
Systems Ltd., has entered into a worldwide distribution and supply agreement for
a medical grade of ALA (ALA Fine(TM)) for PDT applications. ESC has indicated
that it has used ALA Fine(TM) and its Versalight(R) to treat skin cancer in over
1,000 patients. These products are not available in the United States and we
believe that the PARTEQ patents would be infringed if the ESC products were
made, used or sold in the United States. However, these ESC products could
compete with some of our products, if approved by health regulatory authorities
outside of the United States or other countries covered by PARTEQ patents.

<PAGE> 12

RISKS RELATED TO THIS OFFERING

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, 2000 there were outstanding options and warrants to
purchase 2,087,500 shares of common stock, with exercise prices ranging from
U.S. $3.25 to $15.875 per share, respectively, and ranging from CDN. $4.69 to
CDN. $12.875 per share, respectively. In addition, there are 32,575 outstanding
underwriter's purchase options from offerings completed in 1995 and 1996 and
7,109 outstanding placement agent warrants from a private placement completed in
1999. 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.

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 several months, 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, 1999 to January 31, 2000, our stock price has ranged
from a high of $31.875 to a low of $5.531. Over approximately the past six (6)
months our stock price has ranged from a high of $32.751 to a low of $13.063
Factors that contributed to the volatility of our stock during the last twelve
(12) months included:

o announcement of "approvability" from the FDA;
o new competitors entering the marketplace;
o execution of a collaboration agreement;
o release by us and our competitors of the results of clinical
trials; and
o receipt of marketing approval from the FDA.

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 million shares of stock, 40 million 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 million
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.

We also have a shareholder rights plan. The plan may have the effect of
delaying, deterring, or preventing changes the management or control of DUSA,
which may discourage potential acquirers who otherwise might wish to acquire us
without the consent of the board of directors. Under the plan, if a person or
group acquires 15% or more of our common stock, all holders of rights (other
than the acquiring shareholder) may, upon payment of the purchase price then in
effect, purchase common stock having a value of twice the purchase price. In the
event that we are involved in a merger or other similar transaction where DUSA
is not the surviving corporation, all holders of rights (other than the
acquiring shareholder) shall be entitled, upon payment of the then in effect
purchase price, to purchase common stock of the surviving corporation having a
value of twice the purchase price. The rights will expire on September 26, 2007,
unless previously redeemed.

<PAGE> 13

BUSINESS

OVERVIEW

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.

On December 3, 1999, the FDA approved our New Drug Application, called
an NDA, to market our first product, the Levulan(R) Kerastick(TM) 20% Topical
Solution with PDT for the treatment of actinic keratoses, or AKs, of the face
and scalp. AKs are precancerous skin lesions caused by chronic sun exposure. AKs
can develop over time into a form of skin cancer called squamous cell carcinoma.
We also received approval of our pre-market approval application, or PMA, of the
clinical trial version of our first light device product, called the BLU-U(TM).
The commercial version of the BLU-U(TM) which we intend to market is a modified
version of the unit used in the clinical studies. We filed a supplement to the
PMA covering these modifications on March 20, 2000.

In November, 1999, we signed a marketing, development and supply
agreement with Schering AG, a German corporation, for dermatology products. We
granted to Schering AG the right to promote, market, sell and distribute our
Levulan(R) Kerastick(TM) with PDT for AKs of the face and scalp on a worldwide
basis, except for Canada. Schering AG will also promote the BLU-U(TM); however,
we are responsible for leasing or selling the units, as well as for repairs and
maintenance. Schering AG, and its United States affiliate, Berlex Laboratories,
Inc., have advised us that Berlex plans to launch Levulan(R) PDT for AKs in the
United States during the second quarter of 2000, subject to approval of the PMA
supplement for the BLU-U(TM). We also intend to co-develop and commercialize
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 the co-development program, up to a
total of $3.0 million per year, through 2001. The parties may agree to continue
to fund the co-development program beyond this date. Under the terms of the
agreement, we have received $15 million, including $8.75 million in cash
milestone payments and $6.25 million for which a Schering AG affiliate received
340,458 shares of our common stock. Schering AG is obligated to pay $8 million
for future research and development support to be used at our discretion and an
additional milestone payment of $7 million within 30 days after the first
commercial sale of the Levulan(R) Kerastick(TM), provided that the FDA has
approved the commercial model of the BLU-U(TM).

We have submitted Levulan(R) PDT development proposals to Schering AG
for acne, photodamaged skin, warts, hair removal and onychomycosis, more
commonly known as nail fungus. Together, we expect to finalize the development
program for 2000 to include several of these conditions and to begin new
clinical trials shortly. Also during this year, we expect to begin a new Phase
I/II clinical trial using Levulan(R) for the detection of bladder cancer. We are
also currently supporting independent investigator trials to advance clinical
programs such as the use of Levulan(R) PDT to prevent restenosis, a narrowing of
blood vessels following balloon angioplasty; to treat dysfunctional uterine
bleeding; and to detect and/or treat precancer of the cervix, known as CIN. We
may also consider supporting other independent investigator clinical trials this
year to advance clinical programs such as use of Levulan(R) PDT to treat
Barrett's esophagus, a potentially precancerous condition of the throat.

<PAGE> 14

BUSINESS STRATEGY

The following are the key elements of our strategy:

o Successfully Launch our First Product. We are working with our
dermatology marketing partner, Schering AG, to begin selling,
in the United States, our first PDT system, the Levulan(R)
Kerastick(TM) 20% Topical Solution with our BLU-U(TM) for the
treatment of AKs of the face and scalp.

o 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 develop new drug formulations and
light devices to target large markets with unmet medical
needs, such as bladder cancer detection, prevention of
restenosis and the detection and/or treatment of a number of
gynecological conditions.

o 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.

o 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.

o Consider the Addition of Complimentary Products. We intend to
evaluate and pursue licensing and acquisition opportunities
for complementary products which may include drugs, devices,
technologies or related businesses.

PDT/PD OVERVIEW

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

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

o 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:

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

o 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 a multiple
course of therapy. 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

<PAGE> 15

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.

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 the 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 enzyme
pathway.

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

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

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

o Highly Selective. Levulan(R) is not itself a photosensitizer,
but is a pro-drug that is converted through a cell-based
process into the photosensitizer PpIX. The combination of
topical application, tissue specific uptake 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.

o 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:

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

o conditions characterized by rapidly proliferating inflammatory
cells, such as acne and psoriasis, and

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

OUR KERASTICK(TM) BRAND APPLICATOR

We designed our proprietary Kerastick(TM) 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(TM) has two separate glass ampules, 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(TM) according to directions to mix the contents into a
solution. The Kerastick(TM) tip is then dabbed on to the individual AK lesions,
releasing a predetermined amount of Levulan(R) 20% 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:

o are compact and tailored to fit specific medical needs;
o are pre-programmed and easy to use; and
o provide cost-effective therapy.

Our proprietary BLU-U(TM) 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 easily portable. It can be
used in a physician's office,

<PAGE> 16

requires minimal floor space, and plugs into a standard electrical outlet. The
BLU-U(TM) 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.

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

o safer;
o simpler to use;
o more reliable; and
o far less expensive.

For treatment of AKs, our BLU-U(TM) 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 and acne, 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 destruction of hair follicles or 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 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.

We also have an agreement with Richard Wolf Medical Instruments Corp.
for the supply of proprietary non-laser light sources and cystoscopes to be used
in our clinical trial for bladder cancer detection. The Wolf light device was
utilized by the investigators in our Phase I/II clinical trial for bladder
cancer detection.

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.

OUR PRODUCTS

The following table outlines our products and product candidates.

<TABLE>
<CAPTION>
PRODUCT/INDICATION REGULATORY STATUS MARKETING RIGHTS(1)

DERMATOLOGY

<S> <C> <C>
Levulan(R)Kerastick(TM)and BLU-U(TM)for PDT of AKs Approved; Phase IV - Planned Schering AG
Levulan(R)PDT for Acne Phase I/II2 Schering AG
Levulan(R)PDT for Facial Photodamaged Skin Phase I/II - Proposed(2) Schering AG
Levulan(R)PDT for Recalcitrant Wart Removal Phase I/II - Proposed(2) Schering AG
Levulan(R)PDT for Onychomycosis (Nail Fungus) Phase I/II - Proposed(2) Schering AG
Levulan(R)PDT for Hair Removal Phase I/II - Proposed(2) Schering AG
Levulan(R)PDT for Psoriasis Investigator Study Schering AG
Levulan(R)PDT for Cutaneous T-Cell Lymphoma Investigator Study Schering AG

OTHER INDICATIONS

Levulan(R)for Bladder Cancer Detection Phase I/II DUSA
Levulan(R)PDT for Prevention of Restenosis Investigator Study DUSA
Levulan(R)PDT for Barrett's Esophagus Investigator Study DUSA
Levulan(R)PDT for Dysfunctional Uterine Bleeding Investigator Study DUSA
Levulan(R)PDT/PD for Cervical Intraepitheleal Neoplasia Investigator Study DUSA
</TABLE>

1 Draxis Health, Inc., our former parent, holds a license to PARTEQ's ALA
patents for Canada.
2 Under consideration for co-development with Schering AG.

<PAGE> 17

DERMATOLOGY INDICATIONS

Actinic Keratoses (AKs). AKs are superficial precancerous skin lesions
usually appearing as rough, scaly patches of skin with some underlying redness.
The current preferred methods of treating AKs are cryotherapy, or the freezing
of skin, using liquid nitrogen, and 5-flourouracil 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(TM) to the AK lesions, followed 14-18 hours later
with exposure to our BLU-U(TM) for approximately 17 minutes. In 1998, we
completed two identical Phase III trials to test the safety and efficacy of our
therapy. Over 240 patients were treated at a total of 16 sites across the U.S.
Each patient had at least four and not more than 15 AKs. We treated patients in
the control group with solution without the active drug. The results showed
clearing (no visual or palpable evidence of the AK) in 83% of the AK lesions
after one treatment with Levulan(R). We repeated treatment of any remaining AK
lesions after eight weeks. At 12 weeks, after one or two treatments, 91% of
lesions had cleared as compared to 25% of the lesions in the control group. The
only adverse medical effect of our treatment was a stinging/burning sensation of
the AK lesions during exposure to our BLU-U(TM). This discomfort subsided
shortly after the light treatment ended. During the next several years, we plan
to carry out two Phase IV trials, as required by the FDA; one to evaluate the
long-term effects of our therapy, and the second to test for allergic skin
reactions to our therapy.

Acne. Acne is a common skin condition caused by the blockage and/or
inflammation of sebaceous, or oil, glands. In our ongoing clinical trials, we
are targeting patients with mild to moderate facial inflammatory acne.
Traditional treatments for this form of acne include over-the-counter topical
medications for mild cases, and prescription topical medications or oral
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, 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.

Based on pre-existing knowledge about ALA activity in sebaceous glands,
we carried out a small study in acne patients in 1994. The preliminary results
showed specific localization and conversion of Levulan(R) to PpIX in the acne
lesions, which suggested that we may be able to treat acne with Levulan(R) PDT.
In 1995, we sponsored a Phase I/II human clinical trial which confirmed the
selective accumulation of PpIX in acne lesions after application of Levulan(R)
in a small number of patients. As a next step, we conducted a Phase I/II
dose-ranging clinical trial using topical Levulan(R) and a proprietary non-laser
red light. We designed the study primarily to test safety and to help guide the
design of Phase II clinical trials. The clinical response was encouraging.
Patients tolerated the treatments well, and no adverse events were reported. In
October 1999, we began a new Phase I/II clinical trial designed to test the
safety and efficacy of repeated doses of Levulan(R) 20% topical solution
followed by light exposure using the BLU-U(TM).

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 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 to treat
this common skin condition, Renova(R)(2). 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% solution over the entire area including the photodamaged
skin. After 14-18 hours, the patients were treated with blue light at differing
light doses. Investigators noticed marked improvement in the roughness of skin
and some degree of improvement of wrinkles and brown spots in two-thirds of the
patients. 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 one reported a serious

- ----------------------

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

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

<PAGE> 18
treatment-related adverse event. Based upon these results, we have proposed two
studies on the treatment of photodamaged skin to Schering AG for this year's
development program.

Recalcitrant 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 (HPV). 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. Often, the
warts still persist despite all attempts at treatment and we refer to them as
recalcitrant warts.

In an independent Danish randomized clinical trial using ALA PDT on 30
patients with 250 warts, the investigator reported, in 1999, that one of the
treatment groups showed a 70% elimination of recalcitrant warts through a 12
month period. Based on these results, we have proposed to Schering AG that we
include development of Levulan(R) PDT for warts in the dermatology co-
development program.

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. Based on this
investigator study, DUSA and Schering AG are considering co-development of a
therapy for this indication.

Hair Removal. Unwanted hair is a common problem that is experienced by
both men and women of all races and skin colors. Currently, permanent hair
removal involves procedures using electrolysis or lasers. Electrolysis requires
insertion of an electrified needle into each hair follicle. It requires numerous
treatments over extended periods of time that can have varying degrees of
success. Laser treatments do not require a needle but, instead, heat the hairs
by absorption of laser light energy. Laser treatments work best for individuals
with light skin and dark hair, but usually they do not work as well for
individuals with darker skin tones.

We believe that due to the selective properties of Levulan(R) PDT for
targeting rapidly growing cells, such as hair follicle cells, we may be able to
achieve biologically targeted permanent hair removal without the need for
heating or burning the individual hairs. In an independent pilot study performed
by researchers from Massachusetts General Hospital-Harvard Medical School using
a Levulan(R) formulation that we supplied and a laser light source, researchers
achieved hair removal in 12 subjects who were followed for up to six months. In
June 1999, we announced the results of our first Phase I/II clinical study
examining the ability of Levulan(R) PDT to permanently remove human hair. Thirty
patients were enrolled in this study at three clinical trial sites in the United
States. Investigators counted the hairs on a portion of each patient's upper leg
(thigh region) to establish a baseline. These areas were then treated with
Levulan(R) 20% topical solution. Patients then received a dose of light from a
non-laser red light source which we developed, or a dose of red laser light. The
patient's other thigh received only placebo treatment. Patients were followed
for six months after the single Levulan(R) PDT treatment. The study results
showed that when the non-laser light source was used, patients who received the
highest intensity and duration of light showed a reduction in hair count from
the baseline of approximately 10-15% as compared with that seen in the
non-treated control site. Levulan(R) plus laser light delivered at high doses
showed the best result, a 20-24% reduction in hair count as compared with
control sites. Because only 25-28% of the hairs on the thigh are actively
growing at any one time, it appears that Levulan(R) with non-laser light was
able to affect a significant portion of the actively growing hair and Levulan(R)
with laser light appeared to affect essentially all of the actively growing
hair. A majority of patients treated with each type of light source experienced
mild to moderate burning and stinging during light exposure. Hyperpigmentation
or freckling of the skin was also observed in the majority of patients treated
using this protocol. In some cases the freckling remained throughout the 6 month
follow-up. Therefore, we have proposed a new protocol to Schering AG seeking to
reduce the freckling and increase the amount of hair removed.

OTHER INDICATIONS

Bladder Cancer Detection. According to the American Cancer Society,
there will be more than 50,000 new cases of bladder cancer diagnosed this year
in the United States. Bladder cancer is most often treated by surgical removal
of the tumor, but in many 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 believe that Levulan(R) PD for bladder cancer may complement current
white light cystoscopy methods, giving urologists an additional tool to help
detect bladder cancer. Two independent European studies of bladder cancer in 82
patients showed the selective accumulation of PpIX in human bladder tumors and
precancerous lesions following ALA application. These tumors and

15
<PAGE> 19
lesions showed fluorescence when exposed to certain wavelengths of light,
allowing the identification of malignant and precancerous lesions, including
lesions which were missed by routine visual examination using white light. Based
upon this early clinical data, we decided to undertake our own Phase I/II
multi-center clinical trial for enhancement of bladder cancer detection using
Levulan(R) PD and an endoscope light source provided by Richard Wolf Medical
Instruments Corp.

The study was completed in December 1999. Based on preliminary analysis
of the data, we found a total of 109 cancers in 73 patients. Levulan(R) plus
blue light detected 12 cancers which were not identified by any other method. In
this study, areas which appeared normal under white light were also biopsied by
the investigator (random biopsy method). An additional 15 cancers were detected
using this random biopsy method, only one of which was also detected using blue
light and Levulan(R). There were no significant side effects reported
attributable to the Levulan(R) PD procedure. These results suggest that for
optimal detection of bladder cancer, it appears that Levulan(R) and blue light
should be used together with white light cystoscopy and random biopsy. However,
biopsies are not normally carried out during office-based cystoscopies, due to
the increased risks of this procedure. We believe, based upon a review of the
clinical trial data with a panel of urology experts, that there may be an
opportunity to develop Levulan(R) PD as an adjunct to white light cystoscopies
for office-based surveillance procedures. We are currently planning the design
of clinical trials with the goal of optimizing this technique. We intend to
begin new trials during late 2000.

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 of the 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 investigators studied seven
patients with a total of eight blockages of the femoral (leg) artery. Each of
the patients had undergone conventional balloon angioplasty for blockages in the
femoral artery within the previous two to six months, and all of the patients
had developed restenosis and associated symptoms, including leg pains, calf
pains, and muscle cramps while walking. In the study, patients received oral
doses of Levulan(R) and then underwent a second balloon angioplasty procedure.
After the angioplasty procedure, red laser light was delivered to the site
through the transparent angioplasty balloon. There were no reported
complications from the procedure. All of the patients had symptomatic relief
and, during the six month follow-up period, none of the patients had any
recurrence of symptoms. At the end of the six month period, the investigators
examined all the treated arteries, each of which remained open to some degree.
Testing showed no evidence of restenosis at three sites; 25% restenosis at three
sites; and 40% restenosis at two sites. We are currently assisting with the
design of a randomized controlled investigator study to further evaluate the use
of Levulan(R) PDT in the prevention of restenosis following balloon angioplasty.
This study is expected to begin in 2000.

Barrett's Esophagus. Barrett's esophagus is a potentially precancerous
condition of the esophagus which occurs when the lining of the esophagus
converts to stomach-type tissue in response to chronic exposure to stomach acid.
Over time, the area of the esophagus affected can develop precancerous and
eventually cancerous cells. The condition is often undetected until the disease
reaches later stages. According to the American Cancer Society, patients with
this condition have an increased risk of esophageal cancer which is 50 times
higher than that of the overall population. Esophageal cancer is one of the
deadliest forms of cancer, with five-year survival rates of less than one
percent for late-stage patients.

There are no effective treatments for early-stage Barrett's esophagus.
Doctors treat milder forms of the condition with medication, to reduce stomach
acid. A current treatment for more advanced, pre-cancerous, Barrett's esophagus
involves surgery to remove affected areas of the esophagus.

Since European studies have shown that Barrett's esophagus cells have a
high degree of selectivity for Levulan(R), we intend to continue to support
investigator studies involving the use of Levulan(R) PDT for the treatment of
Barrett's esophagus lesions. We believe that potential damage to the muscle wall
of the esophagus should not occur with Levulan(R) since PpIX accumulation has
not been observed in the underlying muscle tissue.

Dysfunctional Uterine Bleeding. Dysfunctional uterine bleeding occurs
when the lining of the uterus (the endometrium) responds abnormally to the
hormonal changes associated with menstruation. Treatments for dysfunctional
uterine bleeding include hysterectomy, or removal of the uterus by surgery, or
endometrial ablation, the destruction of the lining of the uterus by surgical or
thermal methods. In endometrial ablation treatments where the uterus is not
removed, incomplete ablation and/or damage to the muscle wall of the uterus can
result. Therefore, we propose to use Levulan(R) PDT as a less invasive and less
costly treatment for dysfunctional uterine bleeding. We have supported research
by independent investigators using Levulan(R) to treat this condition in
clinical studies at centers in the United Kingdom and the United States. These
studies have shown that endometrial tissue selectively absorbs Levulan(R) with
no evidence of toxicity. We believe our product system is a good candidate for
clinical trials because Levulan(R) is selectively absorbed by the lining of the
uterus and activated by light sources which can be inserted into the uterus
without the need to anesthetize the patient. We are currently supporting a pilot
human trial for treatment of dysfunctional uterine bleeding which began in
January 2000.
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<PAGE> 20

Cervical Intraepitheleal Neoplasia. Cervical intraepitheleal neoplasia,
or CIN, is a common precancerous condition of the cervix. Doctors use the pap
smear (cervical cytology specimens) to screen for cancerous and precancerous
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.

In March 1997, an investigator-sponsored study showed the selectivity
of Levulan(R) PDT/PD for CIN tissue. We are considering supporting a new
investigator-sponsored study to examine the use of Levulan(R) as an adjunct to
pap smears to begin sometime in 2000.

OTHER POTENTIAL INDICATIONS

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 may include detection and/or treatment of brain
cancer, 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(TM) 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 for at least two years,
with Schering AG contributing two-thirds of the joint committee-approved budget,
while we contribute the remaining one-third. For the years 2000 and 2001, the
parties have committed to a budget of $4.5 million, subject to final agreement
on the development program. Schering AG also has limited rights to negotiate
with us for rights to non-dermatology products which we intend to develop with
other corporate partners.

We have already received $15 million, including $8.75 million in cash
milestone payments and $6.25 million for which a Schering AG affiliate received
340,458 shares of our common stock. Schering AG is obligated to pay $8 million
for future research and development support to be used at our discretion and an
additional milestone payment of $7 million within 30 days after the first
commercial sale of the Levulan(R) Kerastick(TM), provided that the FDA has
approved the commercial model of our BLU-U(TM).

Schering AG has indicated that it initially plans to target
dermatologists in the United States using dedicated sales representatives. The
launch of Levulan(R) PDT by Schering AG's United States affiliate, Berlex
Laboratories, Inc., represents our partner's entree into the U.S. dermatology
marketplace. We will be responsible for the manufacture and supply of the
Kerastick(TM) to Schering AG. Schering AG will pay a supply price to us for the
drug products, as well as a royalty on drug sales. Schering AG will also promote
the BLU-U(TM) which we expect to lease directly to dermatologists and other
physicians. We have agreed to maintain and repair the BLU-U(TM) units under
lease/maintenance agreements with the end-users. Under the terms of a guaranty,
Schering AG has agreed to guarantee the lease payments by each lessee up to our
cost of the BLU-U(TM) from our third-party manufacturer. The guaranty will
expire on the second anniversary of the first delivery to an end-user of a
BLU-U(TM). In addition, Schering AG has agreed to provide us with an
interest-free line of credit for up to $1 million to finance inventory of
BLU-U(TM) units. Our repayment of amounts borrowed under the line of credit is
secured by the BLU-U(TM) units. Any amounts we draw on the line of credit must
be repaid within 12 months.

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. Subject to the terms of the agreement, the
parties may terminate the agreement earlier.

SUPPLY PARTNERS

National Biological Corporation. In November 1998, we entered into a
purchase and supply agreement with NBC for the manufacture of some of our light
sources, including the BLU-U(TM). 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.

<PAGE> 21

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. The
agreement has a ten year term, subject to earlier termination for breach or
insolvency or for convenience.

We have also entered a co-development agreement with NBC to develop
light devices meeting particular specifications for use in PDT. NBC has the
exclusive right to manufacture and supply these light sources to us, subject to
the terms of the purchase and supply agreement between the parties.

North Safety Products. In September 1999, we entered into a purchase
and supply agreement with North, a unit of Norcross Safety Products, LLC., for
the manufacture and supply of our Kerastick(TM) brand applicator. We have agreed
to purchase from North a significant portion of our total commercial
requirements for supply of the Kerastick(TM) for sale in the United States and
Canada. Prices for the product are based on the quantities of Kerasticks(TM)
ordered, which are subject to change depending on various product costs and
competitive market conditions. The agreement has a five year term which may be
extended.

Sochinaz S.A. Under an agreement dated December 24, 1993, Sochinaz
manufactures and supplies all of our requirements of Levulan(R) worldwide from
its FDA approved facility in Switzerland. The agreement remains in effect for
five years from the receipt of our first drug approval, or until December 3,
2004.

LICENSES

PARTEQ Research and Development Innovations. We license the patents
underlying our Levulan(R) PDT/PD systems under a license agreement with PARTEQ,
the licensing arm of Queen's University, Kingston, Ontario. Under the agreement,
we have been granted an exclusive worldwide license, with a right to sublicense,
under PARTEQ patent rights, to make, have made, use and sell products which are
precursors of PpIX, including ALA. The agreement covers certain use patent
rights. It also includes any improvements discovered, developed or acquired by
or for PARTEQ, or Queen's University, to which PARTEQ has the right to grant a
license. Effective October 7, 1991, we assigned to our former parent, Draxis
Health, Inc., our rights and obligations under the original PARTEQ license
agreement to the extent they relate to Canada.

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. We have the right to terminate the PARTEQ agreement with or without
cause upon 90 days notice.

Other License. We acquired a license from a British technology firm in
April 1997 to develop and market an incoherent or non-laser light source which
is a candidate for use in our dysfunctional uterine bleeding, bladder cancer
detection and/or other clinical programs. On February 24, 2000, we were served
with legal papers relating to a lawsuit filed by Photo Therapeutics Limited in
the British High Court of Justice - Chancery Division, Claim No.: HC 2000 00
777. Photo Therapeutics is the assignee of the license agreement. The agreement
dated April 8, 1997 grants us exclusive rights in North, Central and South
American countries and non-exclusive rights in numerous European countries to
develop, manufacture, market and sell a patented incoherent light device and
improvements to the device. We paid a fee of 10,000 British Pounds ($16,421)
upon execution, and will pay royalties on sales ranging from 1.25% to 5%
depending on the patent status and territory in which sales may occur. The
lawsuit alleges that we breached the agreement by failing to use our best
endeavors to develop the device. Photo Therapeutics is seeking unspecified
damages, return of the technology and information relating to the device and a
declaration that the agreement has been terminated. We are reviewing the
complaint and while we believe we have meritorious defenses, we cannot determine
the outcome at this early stage of the litigation. We do not believe that this
matter will have a material adverse effect on our business, results of
operations or financial condition.

MANUFACTURING

We do not currently operate any manufacturing facilities. Our drug,
Levulan(R), the Kerastick(TM) brand applicator and the BLU-U(TM) brand light
source are each manufactured by a single third-party supplier. 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. We have purchased key pieces of equipment to prepare for the establishment
of a limited production line so that a second source could manufacture the
Kerastick(TM).

<PAGE> 22

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. 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.

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 its proprietary information and
products.

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

o 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.

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

We entered into a license agreement effective August 27, 1991 with
PARTEQ and Draxis Health, Inc. We hold an exclusive worldwide license to certain
patent rights from PARTEQ in the United States and a limited number of foreign
countries.

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 four 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 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 of America 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.

<PAGE> 23

developed a final formulation or method of removing hair with ALA and light. If,
after finalizing our formulation and method, we find that these patents do cover
our planned use of ALA, Thermolase may either prevent us from using our system
or they may require us to obtain a license for a fee.

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. Japanese Patent No. 273032, which
relates to the basic method of using ALA, has recently been opposed and, as a
result, the Japanese Patent Office Board of Appeals issued a "Notice of Reasons
for Cancellation," which we received on February 12, 1999. With PARTEQ's
assistance, we prepared and filed our response to this action. We can give no
assurance of the likelihood of success of such a contest or any assurance that
we will decide to spend the funds required to complete the contest. 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 affect our revenues.

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 its
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:

o patents relating to the use of such product, like PARTEQ's
patents;

o patents relating to special compositions and formulations; and

o 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.

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 four trademark
registrations, and other applications are pending.

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); Miravant, Inc. (U.S.); Pharmacyclics, Inc.
(U.S.); 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; ESC Medical
Systems Ltd. (Israel); and Photocure (Norway). Photocure is also conducting
late-stage clinical trials using ALA PDT for dermatological uses.

We are aware that other companies are involved in competitive
activities in countries where we do not have patent protection. See "Risk
Factors".

<PAGE> 24

GOVERNMENT REGULATION

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

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

o controlled research and testing of products;

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

o control of marketing activities, including advertising and
labeling.

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

o preclinical studies,

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

o human clinical trials; and

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

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

The human clinical testing program involves three phases. Each clinical
study 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 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 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

<PAGE> 25

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 via 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, there may be other types of drug applications that 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(TM) 20% Topical Solution with PDT for treatment of AKs of the face and
scalp.

We are currently conducting Phase I/II studies on the use of ALA for
bladder cancer detection and treatment of acne. Other than the FDA-approved use
of Levulan(R) Kerastick(TM) 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 devices, 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 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(TM) 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 "file it". Once the submission is filed, the FDA begins a review of
the PMA application. Under the Food, Drug and Cosmetic 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
devices other companies have sought premarket approval 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

<PAGE> 26

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

The BLU-U(TM) PMA, which covered the devices used in the AK clinical
trials was approved by the FDA on December 3, 1999. The commercial light device
unit we intend to market is a modified version of the BLU-U(TM) units used in
the clinical studies. We filed a supplement to the PMA covering these
modifications on March 20, 2000. The FDA has six months to review the PMA
supplement which must be approved before we can market the commercial units of
the BLU-U(TM). While we believe that the changes to the BLU-U(TM) do not affect
its performance and we expect the FDA to approve the PMA supplement
application, the FDA may request additional information or may decide not to
approve the supplement.

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(TM) 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 marketing
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 market our products marketed 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. 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 involve 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 we are in
material compliance with applicable environmental laws and regulations. For the
present, we do not have any plans to make any material capital expenditures for
environmental control facilities. However, 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 our operations, business or assets will not be materially adversely
effected by current or future environmental laws or regulations. 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.

<PAGE> 27

EMPLOYEES

We have 24 full-time employees. We have employment agreements with our
four 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 million on the
life of our President. We have also retained numerous independent consultants
and the services of key researchers at leading university centers whose
activities are coordinated by our employees. We intend to hire other employees
and consultants as needed.

PROPERTIES

In May 1999 we entered into a new five year lease for 16,000 square
feet plus an option on an additional 2,000 square feet of office/warehouse space
to be used for offices and manufacturing in Wilmington, Massachusetts. This
facility will accommodate the expansion of operational, technical and marketing
personnel for the scale-up of the manufacturing process. In October 1997, our
wholly owned subsidiary, DUSA Pharmaceuticals New York, Inc., relocated from
Tarrytown, New York, to larger facilities, approximately 4,000 square feet, in
Valhalla, New York under the terms of a five year lease. We have also entered
into a new three year lease for approximately 1,300 square feet of office space
in Toronto in the building DUSA currently occupies. This facility accommodates
the offices of our President, Controller and shareholder services personnel.

USE OF PROCEEDS

We will not receive any of the proceeds from the sale of the shares of
common stock by the selling shareholders. We will receive the exercise price for
the shares of common stock that underlie the options if those securities are
converted with cash payments into shares by their holders. Potential proceeds to
DUSA if all holders options convert their securities into shares of common stock
total approximately $1,464,907, as follows:

o $120,000 upon the exercise of nonqualified stock options to
purchase 20,000 shares with an exercise price of CDN.
$6.79/U.S.$6.00 per share;

o $636,067.87 upon the exercise of nonqualified stock options to
purchase 58,489 shares with an exercise price of $10.875 per
share;

o $63,214.50 upon the exercise of nonqualified stock options to
purchase 6,834 shares with an exercise price of $9.25 per
share;

o $223,125 upon the exercise of nonqualified stock options to
purchase 30,000 shares with an exercise price of $7.4375 per
share;

o $133,750 upon the exercise of nonqualified stock options to
purchase 10,000 shares with an exercise price of $13.375 per
share;

o $83,750 upon the exercise of nonqualified stock options to
purchase 10,000 shares with an exercise price of $8.375 per
share;

o $33,750 upon the exercise of nonqualified stock options to
purchase 10,000 shares with an exercise price of $3.375 per
share; and

o $98,750 upon the exercise of nonqualified stock options to
purchase 10,000 shares with an exercise price of $9.875 per
share.

o $77,500 upon the exercise of nonqualified stock options to
purchase 2,500 shares with an exercise price of $31.00 per
share

Any proceeds that we may receive upon any exercise of options will be
used for working capital, to fund our clinical development programs, capital
expenditures and other general corporate purposes. We may also use a portion of
the proceeds to acquire or invest in businesses, technologies or products that
are complementary to our business. We currently have no commitments or
agreements with respect to any acquisitions.

<PAGE> 28

DILUTION

Our net tangible book value at December 31, 1999 was approximately
$16.7 million, or $1.40 per share. Net tangible book value per share is
determined by dividing our tangible net worth (total tangible assets less total
liabilities) by the number of shares of common stock outstanding. After giving
effect to our sale of the 1.5 million shares of common stock offered by this
prospectus at an offering price of $28.50 per share (less underwriting discounts
and commissions and estimated offering expenses we expect to pay in connection
with this offering), our net tangible book value at December 31, 1999 would have
been approximately $57.3 million, or $4.27 per share. This represents an
immediate increase in net tangible book value of $2.87 per share to existing
stockholders and an immediate dilution in net tangible book value of $24.23 per
share to new investors purchasing shares at the offering price. The following
table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Offering price per share............................................... $28.50
Net tangible book value per share before the offering............... $1.40
Increase per share attributable to existing investors............... $2.87
----

Net tangible book value per share after the offering................... $ 4.27
------
Dilution per share to new investors.................................... $24.23
======
</TABLE>

At December 31, 1999, we had outstanding options and warrants to
purchase shares of common stock as follows:

<TABLE>
<CAPTION>
Number of Shares
Subject to Weighted Average
Options/Warrants Exercise Price
---------------- --------------

<S> <C> <C>
Stock option plans........................................ 1,712,500 $7.80
Underwriters' Options and Placement Agent Warrants........ 69,532 $7.46
Other Options and Warrants................................ 420,000 $5.90
------- -----
Total............................................ 2,202,032 $7.43
========= =====
</TABLE>

Additionally, as of December 31, 1999, there were 638,753 shares
available for future grants under our employee stock option plans. To the extent
option holders exercise outstanding options, or any options we grant in the
future, there will be further dilution to new investors.

<PAGE> 29

SELLING SHAREHOLDERS

The following table sets forth the names of the selling shareholders,
the number of shares of common stock beneficially owned by each selling
shareholder as of February 29, 2000, the number of shares of common stock that
each may offer from time to time and the number of shares of common stock
beneficially owned by each selling shareholder upon completion of the offering,
assuming all of the shares offered are sold. The number of shares sold by each
selling shareholder may depend on a number of factors, including, among other
things, the market price of the common stock.

The table is based upon information obtained from the selling
shareholders and upon information in our possession regarding the issuance and
sale of securities offered by this prospectus and the registration rights
granted to the selling shareholders. The selling shareholders listed in the
table as numbers 1 through 10 are related to the INVESCO Funds Group, Inc.(1).

<TABLE>
<CAPTION>
DUSA Shares Number of DUSA Shares
Beneficially Owned Number of Shares that May be Beneficially Owned
Prior to Offering Shares Offered Upon After Offering
Name Shares Percent Offered Exercise of Options Shares Percent
- ----------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C> <C> <C>
1. INVESCO Global Health Sciences Fund 321,900 2.4 308,000 0 13,900 *
2. INVESCO Health Sciences Fund ...... 682,500 5.0 682,500 0 0 0
3. INVESCO VIF - Health Sciences Fund 22,000 * 19,500 0 2,500 *
4. AIM Global Health Sciences Fund ... 195,000 1.4 195,000 0 0 0
5. AIM Global Health Sciences Class .. 95,000 * 95,000 0 0 0
6. INVESCO Small Company
Growth Fund .................... 366,030 2.7 81,430 0 284,600 2.1
7. INVESCO VIF -
Small Company Growth Fund ...... 2,200 * 500 0 1,700 *
8. IRT Small Cap Growth Fund ......... 11,950 * 1,850 0 10,100 *
9. Maxim INVESCO
Small-Cap Growth Portfolio ..... 72,120 * 16,220 0 55,900 *
10. INVESCO Endeavor Fund ............ 120,000 * 100,000 0 20,000 *
11. Nanette W. Mantell(2) ............ 43,500 * 0 42,500 1,000 *
12. PARTEQ Research &
Development Innovations(3) ..... 85,323 * 0 85,323 0 0
13. Mid-Ocean Investments Ltd.(4) .... 30,000 * 0 30,000 0 0
</TABLE>

* Less than 1%

(1) Selling shareholders numbered one through ten, inclusive, are mutual funds
or collective trust funds advised by INVESCO Funds Group, Inc. a registered
investment advisor. INVESCO has represented to DUSA that each fund is the owner
of its own shares of DUSA, and no fund has any ownership interest in the shares
of DUSA held by any other fund.

(2) Ms. Mantell is DUSA's secretary. The securities being offered represent
42,500 shares that may be issued upon the exercise of non-qualified stock
options, 37,500 of which are vested, 2,500 of which vest on June 7, 2000 and 625
of which will vest on each of the 1st, 2nd, 3rd and 4th anniversary dates of the
grant, being March 7, 2000.

(3) PARTEQ is the licensor of various ALA patents which underlie DUSA's
Levulan(R) PDT/PD systems. The securities being offered represent 85,323 shares
that may be issued upon the exercise of non-qualified stock options, 49,244.5 of
which are vested and the remainder of which vest as follows:

o 14,622.25 options on each of the 3rd and 4th anniversary date
of the grant, being October 21, 1997; and

o 1,708.5 options on each of the 1st, 2nd, 3rd and 4th
anniversary dates of the grant, being June 23, 1999.

(4) Mid-Ocean Investments Ltd. acts as an investor relations consultant under an
agreement dated October 1, 1997. The securities being offered represent 30,000
shares that may be issued upon the exercise of non-qualified stock options,
15,000 of which are vested and the remainder of which vest 7,500 options on each
of the 3rd and 4th anniversary date of the grant, being September 26, 1997.

<PAGE> 30

PLAN OF DISTRIBUTION

The selling shareholders are offering shares of common stock which they
have agreed to purchase from us in a private placement or which are issuable to
them upon conversion of options that we have issued to them. The shares may be
sold from time to time in public transactions, on or off The NASDAQ National
Market, or in private transactions, at prevailing market prices or at privately
negotiated prices or through a combination of such methods of sale, at fixed
prices which may be changed, at prices related to prevailing market prices or at
negotiated prices. In addition, any shares of the common stock may be sold
according to Rule 144 of the Securities Act of 1933, as amended, rather than as
part of this prospectus.

The shares may be sold directly by the selling shareholders or through
underwriters, broker-dealers or agents. Such broker-dealers may receive
compensation in the form of discounts, concessions or commissions from the
selling shareholders and/or the purchaser of the shares for whom such
broker-dealer may act as agent, or to whom they sell as principals, or both
(which compensation might be in excess of commission that brokers usually
receive). In addition, the selling shareholders may enter into hedging
transactions with broker-dealers who may engage in short sales of common stock
in the course of hedging the positions they assume with a selling shareholder.
There can be no assurance that all or any of the common stock offered by this
prospectus will be issued to, or sold by, the selling shareholders. The selling
shareholders and any brokers, dealers or agents, who sell any of the common
stock offered by this prospectus, may be deemed "underwriters" as that term is
defined under the Securities Act or the Securities Exchange Act of 1934, as
amended, or the rules and regulations which pertain to these laws. Any
commissions which these persons or firms receive and any profits on the resale
of the shares purchased by them may be deemed to be underwriting commissions or
discounts under such acts. As of the date of this prospectus, the selling
shareholders have advised us that there are no special selling arrangements
between any broker-dealer or other person and any of the selling shareholders.

Under the Exchange Act, any person taking part in the distribution of
the shares may not simultaneously engage in market-making activities with
respect to the common stock for five business days prior to the start of the
distribution. In addition, each selling shareholder and any other person taking
part in the distribution will be subject to the Exchange Act which may limit the
timing of purchases and sales of common stock by them. These rules may affect
the marketability of the common stock and the ability of brokers or dealers to
engage in market-making activities.

At the time a particular offer of shares is made, a supplemental
prospectus will be distributed, if required, which will set forth the number of
shares being offered and the terms of the offering, including the name or names
of any underwriters, dealers or agents, the purchase price paid by any
underwriter for the shares purchased from the selling shareholders, any
discounts, commissions or other items constituting compensation from the selling
shareholders in any discount, commission or concession allowed or reallowed or
paid to dealers.

In order to comply with the securities laws of certain states, if
applicable, the shares will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
shares may not be sold unless they have been registered or qualified for sale in
the applicable state or an exemption from the registration or qualification
requirement is available and complied with.

The selling shareholders may be entitled under agreements entered into
with us to indemnification from us against liabilities under the Securities Act.

SECURITIES TO BE OFFERED

A total of 1,500,000 of the 1,657,823 securities being offered in this
prospectus are shares of common stock, no par value, being offered by the
participants of a private placement under Rule 506 of Regulation D.

The remaining 157,823 securities being offered in this prospectus are
offered pursuant to options to purchase shares of common stock as follows:

o PARTEQ is offering a total of 85,323 securities in connection
with three individual grants of options to purchase DUSA
common stock and pursuant to:

o A stock option agreement dated September 30, 1991 to
purchase 20,000 shares of DUSA common stock. The
options vest 25% on each of the 1st, 2nd, 3rd, and
4th anniversary dates of the grant. The options have
an exercise price of CDN. $6.79/U.S. $6.00 per share,
are 100% vested and remain outstanding. The options
had an original expiration date of September 30,
1996, which was extended for five years until 5:00
p.m. New York time on September 30, 2001.

<PAGE> 31

o A nonqualified stock option agreement dated October
21, 1997 to purchase 85,000 shares of DUSA common
stock, of which 58,489 options remain outstanding in
PARTEQ's name. The options vest 25% on each of the
1st, 2nd, 3rd, and 4th anniversary dates of the
grant. The options have an exercise price of $10.875
per share and are 50% vested. These options have a
ten year term and can be exercised until 5:00 p.m.
New York time on October 20, 2007.

o A nonqualified stock option agreement dated June 23,
1999 to purchase 10,000 shares of DUSA common stock,
of which 6,834 options remain outstanding in PARTEQ's
name. The options vest 25% on each of the 1st, 2nd,
3rd, and 4th anniversary dates of the grant. The
options have an exercise price of $9.25 per share and
none are vested. These options have a ten year term
and can be exercised until 5:00 p.m. New York time on
June 22, 2009.

o Mid-Ocean Investments Limited is offering 30,000 securities in
connection with a grant of options and pursuant to a
nonqualified stock option agreement dated September 26, 1997.
The options vest 25% on each of the 1st, 2nd, 3rd, and 4th
anniversary dates of the grant. The options have an exercise
price of $7.4375 per share, are 50% vested and remain
outstanding. These options have a ten year term and can be
exercised until 5:00 p.m. New York time on September 25, 2007.

o Nanette W. Mantell is offering 42,500 securities in
connection with five individual grants of options to
purchase DUSA common stock. The options vest 25% on each of
the 1st, 2nd, 3rd and 4th anniversary dates of the grant and
have a ten year term. More specifically the options were
issued pursuant to:

o A stock option agreement dated February 18, 1992
to purchase 10,000 shares at an exercise price of
$13.375 per share, 100% of which are vested and
remain outstanding, and expire at 5:00 p.m. New York
time on February 18, 2002.

o A stock option agreement dated February 1, 1993
to purchase 10,000 shares at an exercise price of
$8.375 per share, 100% of which are vested and
remain outstanding, and expire at 5:00 p.m. New York
time on February 1, 2003.

o A stock option agreement dated August 2, 1994 to
purchase 10,000 shares at an exercise price of
$3.375 per share, 100% of which are vested and
remain outstanding, and expire at 5:00 p.m. New York
time on August 2, 2004.

o A nonqualified stock option agreement dated June 7,
1996 to purchase 10,000 shares at an exercise
price of $9.875 per share, 75% of which are vested
and remain outstanding, and expire at 5:00 p.m.
New York time on June 6, 2006.

o A nonqualified stock option agreement dated March 7,
2000 to purchase 2,500 shares at an exercise
price of $31.00 per share, none of which are vested
and expire at 5:00 p.m. New York time on March 6,
2010.

LEGAL MATTERS

The validity of the securities offered hereby will be passed upon by
Lane and Mantell, a professional corporation, Somerville, New Jersey. As of
March 22, 2000, shareholders and associates of Lane and Mantell beneficially
own, directly or indirectly, less than 1% of DUSA common stock.

EXPERTS

The financial statements incorporated by reference in this prospectus
from DUSA's Annual Report on Form 10-K for the year ended December 31, 1999 have
been audited by Deloitte & Touche, LLP independent auditors, as stated in their
report (which report expressed an unqualified opinion and includes an
explanatory paragraph indicating that DUSA is in the development stage), which
is incorporated herein by reference, and have been so incorporated in reliance
upon their authority as experts in accounting and auditing.

<PAGE> 32

WHERE YOU CAN FIND MORE INFORMATION

We file annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission in Washington,
D.C. You may read and copy any document we file at the SEC's public reference
facilities maintained by the SEC at Room 1024, 450 Fifth Street, NW, Washington,
D.C., 20549. The SEC has prescribed rates for copying. Please call the SEC at
1-800-SEC-0330 for further information on the public reference room. Our SEC
filings are also available to the public at the SEC's website at
http://www.sec.gov.

Our reports and other information can also be inspected at the offices
of the National Association of Securities Dealers at 1735 K Street, NW,
Washington, DC 20006-1506.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The SEC allows us to "incorporate by reference" into this prospectus
information we file with the SEC in other documents. This means that we can
disclose important information to you by referring you to those documents. The
information incorporated may include documents filed after the date of this
prospectus which will update and supercede the information you read in this
prospectus. We incorporate by reference the documents listed below, except to
the extent information contained in those documents is different from the
information contained in this prospectus.

o Annual report on Form 10-K for the year ended December 31,
1999 filed on March 3, 2000 and Form 10 K/A for the year
ended December 31, 1999 filed on March 21, 2000

o Three Current Reports on Form 8-K, including the exhibits:
one dated and filed on February 23, 1999; one dated March 22,
2000 and filed on March 23, 2000; and one dated and filed on
March 27, 2000.

o The description of DUSA's common stock contained in its
registration statement on Form 8-A which was filed on January
3, 1992 and amended on October 24, 1997 and in DUSA's report
on Form 10-Q which was filed on November 12, 1997.

We also incorporate by reference all other documents which we file in
the future with the SEC under Sections 13(a), 13(c), 14 and 15(d) of the
Securities Exchange Act of 1934, as amended, prior to the termination of this
offering.

You may request a copy of these filings, at no cost, by writing or
telephoning us at:

181 UNIVERSITY AVENUE, SUITE 1208
TORONTO, ONTARIO M5H 3M7 CANADA
ATTENTION: MS. SHARI LOVELL
(416) 363-5059
E-MAIL TO: [email protected]

This prospectus is part of a registration statement on Form S-3 that we
filed with the SEC. You should rely only on the information and representations
provided in this prospectus or on the information incorporated by reference in
this prospectus. Neither we nor the selling shareholders have authorized anyone
to provide you with different information. Neither we nor the selling
shareholders are making an offer of these securities in any state where the
offer is not permitted. You should not assume that the information in this
prospectus is accurate as of any date other than the date on the front of this
document.

<PAGE> 33

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1,657,823 SHARES

DUSA
PHARMACEUTICALS, INC.

Common Stock

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PROSPECTUS

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March 28, 2000

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