##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended: September 30, 2008
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 001-31533
 DUSA PHARMACEUTICALS, INC.
  New Jersey
(State or Other Jurisdiction of 
Incorporation or Organization)
    
    22-3103129
(I.R.S. Employer Identification No.)
 25 Upton Drive, Wilmington, MA
(Address of Principal Executive Offices)
    
    01887
(Zip Code)
 
 
 þ o
  Large accelerated filer o

   

   Accelerated filer
þ


   Non-accelerated filer o
(Do not check if a smaller reporting company)


  Smaller reporting company
o
 o þ




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##### 



DUSA PHARMACEUTICALS, INC.
TABLE OF CONTENTS TO FORM 10-Q
 PageNumberPART I. FINANCIAL INFORMATIONItem 1. Financial Statements- Condensed Consolidated Balance Sheets at September 30, 2008
(Unaudited) and December 31, 2007
    
    
    3- Condensed Consolidated Statements of Operations for the three and
nine-month periods ended September 30, 2008 and 2007 (Unaudited)
    
    
    4- Condensed Consolidated Statements of Cash Flows for the nine-month
periods ended September 30, 2008 and 2007 (Unaudited)
    
    
    5- Notes to the Condensed Consolidated Financial Statements (Unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    15Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    26Item 4. Controls and Procedures
    
    
    26PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    27Item 1A. Risk Factors
    
    
    28Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    41Item 3. Defaults Upon Senior Securities
    
    
    41Item 4. Submission of Matters to a Vote of Security Holders
    
    
    41Item 5. Other Information
    
    
    41Item 6. Exhibits
    
    
    41SIGNATURES
    
    
    42Exhibit IndexEX-10.A: LICENSE AGREEMENT BETWEEN THE REGISTRANT AND RIVER'S EDGE PHARMACEUTICALS, LLCEX-31.A: SECTION 302 CERTIFICATION OF THE C.E.O.EX-31.B: SECTION 302 CERTIFICATION OF THE C.F.O.EX-32.A: SECTION 906 CERTIFICATION OF THE C.E.O.EX-32.B: SECTION 906 CERTIFICATION OF THE C.F.O.EX-99.1: PRESS RELEASE
  2




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##### Table of Contents



PART I.
 
 ITEM 1. FINANCIAL STATEMENTS
 DUSA PHARMACEUTICALS, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 September 30,
    
    
    December 31,2008
    
    
    2007ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    5,225,879
    
    
    $
    4,713,619Marketable securities
    
    
    15,004,901
    
    
    
    18,311,650Accrued interest receivable
    
    
    140,454
    
    
    
    97,243Accounts receivable, net of allowance for
doubtful accounts of $89,000 and $158,000
in 2008 and 2007, respectively
    
    
    1,911,968
    
    
    
    2,667,178Inventory
    
    
    2,999,468
    
    
    
    2,672,105Prepaid and other current assets
    
    
    1,739,689
    
    
    
    1,843,873TOTAL CURRENT ASSETS
    
    
    27,022,359
    
    
    
    30,305,668Restricted cash
    
    
    173,385
    
    
    
    170,510Property, plant and equipment, net
    
    
    2,034,357
    
    
    
    2,142,658Deferred charges and other assets
    
    
    193,258
    
    
    
    273,404TOTAL ASSETS
    
    $
    29,423,359
    
    
    $
    32,892,240LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIESAccounts payable
    
    $
    554,955
    
    
    $
    1,213,867Accrued compensation
    
    
    1,040,243
    
    
    
    491,529Other accrued expenses
    
    
    3,210,876
    
    
    
    3,322,642Deferred revenue
    
    
    873,505
    
    
    
    1,256,494TOTAL CURRENT LIABILITIES
    
    
    5,679,579
    
    
    
    6,284,532Deferred revenues
    
    
    4,051,249
    
    
    
    2,918,850Warrant liability
    
    
    486,964
    
    
    
    1,262,600Other liabilities
    
    
    266,657
    
    
    
    319,736TOTAL LIABILITIES
    
    
    10,484,449
    
    
    
    10,785,718COMMITMENTS AND CONTINGENCIES (NOTE 17)SHAREHOLDERS EQUITYCapital StockAuthorized: 100,000,000 shares;
40,000,000 shares designated as common
stock, no par, and 60,000,000 shares
issuable in Series or classes; and 40,000
junior Series A preferred shares. Issued
and outstanding: 24,078,452 and
24,076,110 shares of common stock, no
par, at September 30, 2008 and December
31, 2007, respectively
    
    
    151,652,941
    
    
    
    151,648,943Additional paid-in capital
    
    
    6,928,164
    
    
    
    5,885,353Accumulated deficit
    
    
    (139,860,271
    )
    
    
    (135,600,484
    )Accumulated other comprehensive income
    
    
    218,076
    
    
    
    172,710TOTAL SHAREHOLDERS EQUITY
    
    
    18,938,910
    
    
    
    22,106,522TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    29,423,359
    
    
    $
    32,892,240
  3




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##### Table of Contents



DUSA PHARMACEUTICALS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 Three-months ended
    
    Nine-months endedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007Product revenues and royalties
    
    $
    5,726,071
    
    
    $
    5,784,194
    
    
    $
    21,767,810
    
    
    $
    19,323,232Cost of product revenues and royalties
    
    
    1,462,028
    
    
    
    1,573,897
    
    
    
    4,950,039
    
    
    
    5,506,540GROSS MARGIN
    
    
    4,264,043
    
    
    
    4,210,297
    
    
    
    16,817,771
    
    
    
    13,816,692Operating Costs:Research and development
    
    
    1,487,816
    
    
    
    1,225,462
    
    
    
    5,049,327
    
    
    
    4,328,475Marketing and sales
    
    
    2,967,431
    
    
    
    2,887,370
    
    
    
    9,520,865
    
    
    
    9,727,660General and administrative
    
    
    1,911,028
    
    
    
    2,110,766
    
    
    
    6,603,989
    
    
    
    7,966,791Impairment
charge related to contingent consideration
    
    
    1,500,000
    
    
    
    
    
    
    
    1,500,000
    
    
    
    Net gain from settlement of litigation
    
    
    650
    
    
    
    
    
    
    
    (282,775
    )
    
    
    TOTAL OPERATING COSTS
    
    
    7,866,925
    
    
    
    6,223,598
    
    
    
    22,391,406
    
    
    
    22,022,926LOSS FROM OPERATIONS
    
    
    (3,602,882
    )
    
    
    (2,013,301
    )
    
    
    (5,573,635
    )
    
    
    (8,206,234
    )Other income, net
    
    
    114,260
    
    
    
    135,519
    
    
    
    538,212
    
    
    
    480,117Gain on change in fair value of warrants
    
    
    651,767
    
    
    
    
    
    
    
    775,636
    
    
    
    NET LOSS
    
    $
    (2,836,855
    )
    
    $
    (1,877,782
    )
    
    $
    (4,259,787
    )
    
    $
    (7,726,117
    )BASIC AND DILUTED NET LOSS PER COMMON
SHARE
    
    $
    (0.12
    )
    
    $
    (0.10
    )
    
    $
    (0.18
    )
    
    $
    (0.40
    )WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING, BASIC AND DILUTED
    
    
    24,078,610
    
    
    
    19,495,067
    
    
    
    24,078,546
    
    
    
    19,487,594
  4




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##### Table of Contents



DUSA PHARMACEUTICALS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 Nine-months endedSeptember 30,2008
    
    2007CASH FLOWS FROM OPERATING ACTIVITIESNet loss
    
    $
    (4,259,787
    )
    
    $
    (7,726,117
    )Adjustments to reconcile net loss to net cash used in operating activities:Amortization of premiums and discounts on marketable securities
    
    
    (95,139
    )
    
    
    (157,401
    )Realized loss on sales of marketable securities
    
    
    42,989
    
    
    
    2,533Share-based compensation
    
    
    1,042,811
    
    
    
    1,146,120Impairment charge related to contingent consideration
    
    
    1,500,000
    
    
    
    Inventory reserve
    
    
    88,947
    
    
    
    6,000Depreciation and amortization
    
    
    441,829
    
    
    
    512,471Gain on change in fair value of warrants
    
    
    (775,636
    )
    
    
    Deferred revenues recognized
    
    
    (761,302
    )
    
    
    (481,051
    )Changes in other assets and liabilities impacting cash flows used in
operations:Accounts receivable
    
    
    1,093,357
    
    
    
    343,489Accrued interest receivable
    
    
    (43,211
    )
    
    
    75,612Inventory
    
    
    (416,310
    )
    
    
    (1,092,824
    )Prepaid and other current assets
    
    
    (233,963
    )
    
    
    570,076Deferred charges and other assets
    
    
    80,146
    
    
    
    (74,618
    )Accounts payable
    
    
    (658,912
    )
    
    
    71,864Accrued compensation and other accrued expenses
    
    
    686,948
    
    
    
    (1,691,490
    )Deferred revenues
    
    
    1,510,712
    
    
    
    1,839,088Other liabilities
    
    
    (53,083
    )
    
    
    95,195NET CASH USED IN OPERATING ACTIVITIES
    
    
    (809,604
    )
    
    
    (6,561,053
    )CASH FLOWS FROM INVESTING ACTIVITIESCash paid for contingent consideration
    
    
    (1,750,000
    )
    
    
    (500,000
    )Purchases of marketable securities
    
    
    (22,964,544
    )
    
    
    (12,560,937
    )Proceeds from maturities and sales of marketable securities
    
    
    26,368,809
    
    
    
    17,546,115Restricted cash
    
    
    (2,875
    )
    
    
    (4,008
    )Purchases of property, plant and equipment
    
    
    (333,526
    )
    
    
    (223,451
    )NET CASH PROVIDED BY INVESTING ACTIVITIES
    
    
    1,317,864
    
    
    
    4,257,719CASH FLOWS FROM FINANCING ACTIVITIESProceeds from exercise of options
    
    
    4,000
    
    
    
    40,650NET CASH PROVIDED BY INVESTING ACTIVITIES
    
    
    4,000
    
    
    
    40,650NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    512,260
    
    
    
    (2,262,684
    )CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    4,713,619
    
    
    
    3,267,071CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    5,225,879
    
    
    $
    1,004,387
  5




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##### Table of Contents



DUSA PHARMACEUTICALS, INC.
 
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 1) BASIS OF PRESENTATION
   2) NEW ACCOUNTING PRONOUNCEMENTS
 Business
Combinations
 Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51
 Disclosures about Derivative
Instruments and Hedging Activities, as an amendment to SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities
 3) FAIR VALUE MEASUREMENTS
 Fair Value Measurements
 6




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##### Table of Contents



Level 2Assets:United States government-backed securities
    
    $
    10,729,000Corporate debt securities
    
    
    4,276,000Total assets
    
    $
    15,005,000Liabilities:Warrant liability
    
    $
    487,000Total liabilities
    
    $
    487,000
 4) WARRANTS
  7




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September 30,
    
    December 31,2008
    
    2007Expected volatility
    
    
    70.0
    %
    
    
    67.3
    %Remaining contractual term (years)
    
    
    4.58
    
    
    
    5.33Risk-free interest rate
    
    
    2.98
    %
    
    
    3.45
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %Common stock price
    
    $
    1.15
    
    
    $
    2.07
 5) MARKETABLE SECURITIES
  September 30, 2008Amortized
    
    Unrealized
    
    Faircost
    
    gains
    
    valueUnited States
government-backed securities
    
    $
    10,520,460
    
    
    $
    208,576
    
    
    $
    10,729,036Corporate securities
    
    
    4,266,365
    
    
    
    9,500
    
    
    
    4,275,865Total marketable securities
available-for-sale
    
    $
    14,786,825
    
    
    $
    218,076
    
    
    $
    15,004,901
 December 31, 2007Amortized
    
    Unrealized
    
    Faircost
    
    gains
    
    valueUnited States
government-backed securities
    
    $
    16,429,249
    
    
    $
    162,619
    
    
    $
    16,591,868Corporate securities
    
    
    1,709,691
    
    
    
    10,091
    
    
    
    1,719,782Total marketable securities
available-for-sale
    
    $
    18,138,940
    
    
    $
    172,710
    
    
    $
    18,311,650
  6) BUSINESS ACQUISITION
  8




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AdditionalCumulative Sales Milestone:
    
    Consideration:$25.0 million
    
    $1.5 million$35.0 million
    
    $1.0 million$45.0 million
    
    $1.0 millionTotal
    
    $3.5 million
     7) CONCENTRATIONS
  9




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##### Table of Contents



% of revenue
    
    % of revenueThree-months ended
    
    Nine-months ended
    
    % of accounts receivableSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,
    
    September 30,
    
    December 31,2008
    
    2007
    
    2008
    
    2007
    
    2008
    
    2007Customer A
    
    
    1
    %
    
    
    2
    %
    
    
    2
    %
    
    
    5
    %
    
    
    4
    %
    
    
    5
    %Customer B
    
    
    1
    %
    
    
    14
    %
    
    
    9
    %
    
    
    12
    %
    
    
    1
    %
    
    
    10
    %Customer C
    
    
    
    
    
    
    16
    %
    
    
    8
    %
    
    
    17
    %
    
    
    1
    %
    
    
    12
    %Customer D
    
    
    
    
    
    
    7
    %
    
    
    4
    %
    
    
    6
    %
    
    
    1
    %
    
    
    7
    %Customer E
    
    
    4
    %
    
    
    
    
    
    
    3
    %
    
    
    
    
    
    
    2
    %
    
    
    26
    %Customer F
    
    
    8
    %
    
    
    
    
    
    
    2
    %
    
    
    
    
    
    
    16
    %
    
    
    1
    %Other customers
    
    
    86
    %
    
    
    61
    %
    
    
    72
    %
    
    
    60
    %
    
    
    75
    %
    
    
    39
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
  ® ® ® ® ®
 ® ®
 8) INVENTORY
  September 30,
    
    December 31,2008
    
    2007Finished goods
    
    $
    1,260,000
    
    
    $
    1,625,000BLU-U® evaluation units
    
    
    322,000
    
    
    
    131,000Work in process
    
    
    785,000
    
    
    
    409,000Raw materials
    
    
    632,000
    
    
    
    507,000Total
    
    $
    2,999,000
    
    
    $
    2,672,000
 10




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##### Table of Contents



®
 9) OTHER ACCRUED EXPENSES
  September 30,
    
    December 31,2008
    
    2007Research and development costs
    
    $
    162,000
    
    
    $
    293,000Marketing and sales costs
    
    
    212,000
    
    
    
    334,000Reserve for sales returns and allowances
    
    
    519,000
    
    
    
    546,000Accrued FDA fees
    
    
    589,000
    
    
    
    Reserve for chargebacks and rebates
    
    
    110,000
    
    
    
    200,000Other product related costs
    
    
    748,000
    
    
    
    873,000Legal and other professional fees
    
    
    493,000
    
    
    
    484,000Employee benefits
    
    
    266,000
    
    
    
    236,000Other expenses
    
    
    112,000
    
    
    
    357,000Total
    
    $
    3,211,000
    
    
    $
    3,323,000
 10) SHARE-BASED COMPENSATION
  Three-months ended
    
    Nine-months endedSeptember 30, 2008
    
    September 30, 2007
    
    September 30, 2008
    
    September 30, 2007Cost of product revenues
    
    $
    18,000
    
    
    $
    25,000
    
    
    $
    59,000
    
    
    $
    75,000Research and development
    
    
    70,000
    
    
    
    94,000
    
    
    
    260,000
    
    
    
    280,000Marketing and sales
    
    
    88,000
    
    
    
    115,000
    
    
    
    61,000
    
    
    
    134,000General & administrative
    
    
    177,000
    
    
    
    194,000
    
    
    
    662,000
    
    
    
    657,000Share-based
compensation expense
    
    $
    353,000
    
    
    $
    428,000
    
    
    $
    1,042,000
    
    
    $
    1,146,000
  Three-months ended
    
    Nine-months endedSeptember 30, 2008
    
    September 30, 2007
    
    September 30, 2008
    
    September 30, 2007Volatility-directors and officers
    
    
    70.2
    %
    
    
    62.2
    %
    
    
    70.2
    %
    
    
    62.2
    %Volatility-non-officer employees
    
    
    70.8
    %
    
    
    62.2
    %
    
    
    70.8
    %
    
    
    
    %Risk-free interest rate
    
    
    2.98-3.61
    %
    
    
    4.70
    %
    
    
    2.98-3.61
    %
    
    
    4.53
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected life-directors and officers
    
    6.3 years
        
    5.9 years
    
    6.3 years
    
    5.9 yearsExpected life-non-officer employees
    
    5.9 years
    
    5.5 years
    
    5.9 years
    
    5.5 years
 11




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Nine-monthsended September 30,
    
    Weighted average2008
    
    exercise priceOutstanding, beginning of period
    
    
    2,855,125
    
    
    $
    10.76Options granted
    
    
    309,500
    
    
    
    2.17Options forfeited
    
    
    (16,000
    )
    
    
    7.43Options expired
    
    
    (122,625
    )
    
    
    11.04Options exercised
    
    
    (2,500
    )
    
    
    1.60Outstanding, end of period
    
    
    3,023,500
    
    
    $
    9.90Exercisable, end of period
    
    
    2,262,939
    
    
    $
    11.68Options vested and expected to vest, end of period
    
    
    2,937,106
    
    
    $
    10.08
    11) BASIC AND DILUTED NET LOSS PER SHARE
  12) SEGMENT REPORTING
  Three-months ended
    
    Nine-months endedSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007REVENUESPDT drug and device
product revenues
    
    $
    5,157,000
    
    
    $
    3,489,000
    
    
    $
    16,416,000
    
    
    $
    12,107,000Non-PDT product revenues
    
    
    569,000
    
    
    
    2,295,000
    
    
    
    5,352,000
    
    
    
    7,216,000Total revenues
    
    
    5,726,000
    
    
    
    5,784,000
    
    
    
    21,768,000
    
    
    
    19,323,000COSTS OF REVENUESPDT drug and device
cost of product
revenues
    
    
    1,146,000
    
    
    
    1,155,000
    
    
    
    3,589,000
    
    
    
    3,608,000Non-PDT cost of product
revenues
    
    
    316,000
    
    
    
    419,000
    
    
    
    1,361,000
    
    
    
    1,898,000Total costs of
product revenues
    
    
    1,462,000
    
    
    
    1,574,000
    
    
    
    4,950,000
    
    
    
    5,506,000
 12




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##### Table of Contents



Three-months ended
    
    Nine-months endedSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007GROSS MARGINPDT drug and device
product gross margin
    
    
    4,011,000
    
    
    
    2,334,000
    
    
    
    12,827,000
    
    
    
    8,499,000Non-PDT product gross
margin
    
    
    253,000
    
    
    
    1,876,000
    
    
    
    3,991,000
    
    
    
    5,318,000Total gross margin
    
    $
    4,264,000
    
    
    $
    4,210,000
    
    
    $
    16,818,000
    
    
    $
    13,817,000
  Three-month period ended
    
    Nine-month period endedSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007United States
    
    
    93
    %
    
    
    98
    %
    
    
    93
    %
    
    
    97
    %Canada
    
    
    1
    %
    
    
    2
    %
    
    
    2
    %
    
    
    3
    %Korea
    
    
    4
    %
    
    
    
    
    
    
    3
    %
    
    
    Other
    
    
    2
    %
    
    
    
    
    
    
    2
    %
    
    
    Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
  13) COMPREHENSIVE LOSS
  Three-month period ended
    
    Nine-month period endedSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007NET LOSS
    
    $
    (2,836,855
    )
    
    $
    (1,877,782
    )
    
    $
    (4,259,787
    )
    
    $
    (7,726,117
    )Change in net
unrealized gains on
marketable securities
available-for-sale
    
    
    58,042
    
    
    
    94,312
    
    
    
    45,366
    
    
    
    106,316COMPREHENSIVE LOSS
    
    $
    (2,778,813
    )
    
    $
    (1,783,470
    )
    
    $
    (4,214,421
    )
    
    $
    (7,619,801
    )
 14) STIEFEL AGREEMENT
 ®
 13




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##### Table of Contents



15) DAEWOONG AGREEMENT
 ®
 16) DEFERRED COMPENSATION PLAN
  17) COMMITMENTS AND CONTINGENCIES
 LEGAL MATTERS:
 RIVERS EDGE LITIGATION SETTLEMENT
 ® ® ®
 ® ®
 14




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##### Table of Contents



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




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##### Table of Contents



®
 ® ® ® ® ® ®
 ® ® ® ® ® ®
  ® ® ® ® ® ® ® ® ® ® ®
  CRITICAL ACCOUNTING POLICIES
  16




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##### Table of Contents



RESULTS OF OPERATIONS  THREE AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2008 VERSUS THREE AND
NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2007
 REVENUES
 Three-months ended
    
    
    
    
    
    Nine-months endedSeptember 30,
        
    INCREASE/
    

September 30,
    
    INCREASE/2008
    
    2007
    
    (DECREASE)
    
    2008
    
    2007
    
    (DECREASE)PDT PRODUCT REVENUESLEVULAN® KERASTICK® PRODUCT REVENUESUnited States
    
    $
    4,374,000
    
    
    $
    2,923,000
    
    
    $
    1,451,000
    
    
    $
    13,720,000
    
    
    $
    10,108,000
    
    
    $
    3,612,000Canada
    
    
    72,000
    
    
    
    143,000
    
    
    
    (71,000
    )
    
    
    449,000
    
    
    
    536,000
    
    
    
    (87,000
    )Korea
    
    
    186,000
    
    
    
    
    
    
    
    186,000
    
    
    
    710,000
    
    
    
    
    
    
    
    710,000Rest of World
    
    
    99,000
    
    
    
    
    
    
    
    99,000
    
    
    
    289,000
    
    
    
    
    
    
    
    289,000Subtotal Levulan® Kerastick® product revenues
    
    
    4,731,000
    
    
    
    3,066,000
    
    
    
    1,665,000
    
    
    
    15,168,000
    
    
    
    10,644,000
    
    
    
    4,524,000BLU-U® PRODUCT REVENUESUnited States
    
    
    376,000
    
    
    
    423,000
    
    
    
    (47,000
    )
    
    
    1,198,000
    
    
    
    1,369,000
    
    
    
    (171,000
    )Canada
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    94,000
    
    
    
    (94,000
    )Korea
    
    
    50,000
    
    
    
    
    
    
    
    50,000
    
    
    
    50,000
    
    
    
    
    
    
    
    50,000Subtotal BLU-U® product revenues
    
    
    426,000
    
    
    
    423,000
    
    
    
    3,000
    
    
    
    1,248,000
    
    
    
    1,463,000
    
    
    
    (215,000
    )TOTAL PDT PRODUCT REVENUES
    
    
    5,157,000
    
    
    
    3,489,000
    
    
    
    1,668,000
    
    
    
    16,416,000
    
    
    
    12,107,000
    
    
    
    4,309,000TOTAL NON-PDT DRUG PRODUCT REVENUES
    
    
    569,000
    
    
    
    2,295,000
    
    
    
    (1,726,000
    )
    
    
    5,352,000
    
    
    
    7,216,000
    
    
    
    (1,864,000
    )TOTAL PRODUCT REVENUES
    
    $
    5,726,000
    
    
    $
    5,784,000
    
    
    $
    (58,000
    )
    
    $
    21,768,000
    
    
    $
    19,323,000
    
    
    $
    2,445,000
 ® ® ®
 ® ® ® ® ® ® ® ®
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® ® ® ® ® ® ® ® ® ® ® ® ® ®
 ® ® ® ® ® ® ®
 ® ® ® ®
 ® ®
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##### Table of Contents



COST OF PRODUCT REVENUES
 Three-months endedSeptember 30,
    
    Increase/2008
    
    2007
    
    (Decrease)Levulan® Kerastick® cost of product revenues and royaltiesDirect Levulan® Kerastick® product costs
    
    $
    547,000
    
    
    $
    433,000
    
    
    $
    114,000Other Levulan® Kerastick® production costs including internal
costs assigned to support products
    
    
    2,000
    
    
    
    231,000
    
    
    
    (229,000
    )Royalty and supply fees (1)
    
    
    197,000
    
    
    
    138,000
    
    
    
    59,000Subtotal Levulan® Kerastick® cost of product revenues and royalties
    
    
    746,000
    
    
    
    802,000
    
    
    
    (56,000
    )BLU-U® cost of product revenuesDirect BLU-U® product costs
    
    
    205,000
    
    
    
    133,000
    
    
    
    72,000Other BLU-U® product costs including internal costs assigned to
support products; as well as costs incurred to ship, install and
service the BLU-U® in physicians offices
    
    
    195,000
    
    
    
    219,000
    
    
    
    (24,000
    )Subtotal BLU-U® cost of product revenues
    
    
    400,000
    
    
    
    352,000
    
    
    
    48,000TOTAL PDT DRUG AND DEVICE COST OF PRODUCT REVENUES AND ROYALTIES
    
    
    1,146,000
    
    
    
    1,154,000
    
    
    
    (8,000
    )Non-PDT cost of product revenues and royalties
    
    
    316,000
    
    
    
    420,000
    
    
    
    (104,000
    )TOTAL COST OF PRODUCT REVENUES AND ROYALTIES
    
    $
    1,462,000
    
    
    $
    1,574,000
    
    
    $
    (112,000
    )
 Nine-months endedSeptember 30,
    
    Increase/2008
    
    
    2007
    
    
    (Decrease)Levulan® Kerastick® cost of product revenues and royaltiesDirect Levulan® Kerastick® product costs
    
    $
    1,778,000
    
    
    $
    1,508,000
    
    
    $
    270,000Other Levulan® Kerastick® production costs including internal
costs assigned to support products
    
    
    5,000
    
    
    
    386,000
    
    
    
    (381,000
    )Royalty and supply fees (1)
    
    
    668,000
    
    
    
    486,000
    
    
    
    182,000Subtotal Levulan® Kerastick® cost of product revenues and royalties
    
    
    2,451,000
    
    
    
    2,380,000
    
    
    
    71,000BLU-U® cost of product revenuesDirect BLU-U® product costs
    
    
    553,000
    
    
    
    555,000
    
    
    
    (2,000
    )Other BLU-U® product costs including internal costs assigned to
support products; as well as costs incurred to ship, install and
service the BLU-U® in physicians offices
    
    
    585,000
    
    
    
    673,000
    
    
    
    (88,000
    )Subtotal BLU-U® cost of product revenues
    
    
    1,138,000
    
    
    
    1,228,000
    
    
    
    (90,000
    )TOTAL PDT DRUG AND DEVICE COST OF PRODUCT REVENUES AND ROYALTIES
    
    
    3,589,000
    
    
    
    3,608,000
    
    
    
    (19,000
    )Non-PDT cost of product revenues and royalties
    
    
    1,361,000
    
    
    
    1,899,000
    
    
    
    (538,000
    )TOTAL COST OF PRODUCT REVENUES AND ROYALTIES
    
    $
    4,950,000
    
    
    $
    5,507,000
    
    
    $
    (557,000
    )
 
 1)
    
    Royalty and supply fees reflect amounts paid to our licensor, PARTEQ
Research and Development Innovations, the licensing arm of Queens
University, Kingston, Ontario, and amortization of an upfront fee and
ongoing royalties paid to Draxis Health, Inc. on sales of the Levulan®
Kerastick® in Canada. 19




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MARGINS
 Three-monthsended September 30,
    
    
    
    
    
    
    INCREASE/2008
    
    
    
    
    
    
    2007
    
    
    
    
    
    
    (DECREASE)Levulan® Kerastick® gross
margin
    
    $
    3,986,000
    
    
    
    84
    %
    
    $
    2,263,000
    
    
    
    74
    %
    
    $
    1,723,000BLU-U® gross margin
    
    
    25,000
    
    
    
    6
    %
    
    
    71,000
    
    
    
    17
    %
    
    
    (46,000
    )Total PDT drug & device
gross margin
    
    $
    4,011,000
    
    
    
    78
    %
    
    $
    2,334,000
    
    
    
    67
    %
    
    $
    1,677,000Total Non-PDT gross margin
    
    
    253,000
    
    
    
    44
    %
    
    
    1,876,000
    
    
    
    82
    %
    
    $
    (1,623,000
    )TOTAL GROSS MARGIN
    
    $
    4,264,000
    
    
    
    74
    %
    
    $
    4,210,000
    
    
    
    73
    %
    
    $
    54,000
 Nine-monthsended September 30,
    
    
    
    
    
    
    INCREASE/2008
    
    
    
    
    
    
    2007
    
    
    
    
    
    
    (DECREASE)Levulan® Kerastick® gross
margin
    
    $
    12,717,000
    
    
    
    84
    %
    
    $
    8,264,000
    
    
    
    78
    %
    
    $
    4,453,000BLU-U® gross margin
    
    
    110,000
    
    
    
    9
    %
    
    
    235,000
    
    
    
    16
    %
    
    
    (125,000
    )Total PDT drug & device
gross margin
    
    $
    12,827,000
    
    
    
    78
    %
    
    $
    8,499,000
    
    
    
    70
    %
    
    $
    4,328,000Total Non-PDT gross margin
    
    
    3,991,000
    
    
    
    75
    %
    
    
    5,318,000
    
    
    
    74
    %
    
    $
    (1,327,000
    )TOTAL GROSS MARGIN
    
    $
    16,818,000
    
    
    
    77
    %
    
    $
    13,817,000
    
    
    
    72
    %
    
    $
    3,001,000
 ® ® ®
 ® ®
 ® ®
 ®
 ® ® ®
 RESEARCH AND DEVELOPMENT COSTS
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® ® ® ® ®
 ® ®
   MARKETING AND SALES COSTS ®
 GENERAL AND ADMINISTRATIVE COSTS
 NET GAIN FROM SETTLEMENT OF LITIGATION ® ®
 21




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##### Table of Contents



OTHER INCOME, NET
 GAIN ON CHANGE IN FAIR VALUE OF WARRANTS
 NET LOSS ®
 LIQUIDITY AND CAPITAL RESOURCES
   22




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##### Table of Contents



AdditionalCumulative Sales Milestone:
    
    Consideration:$25.0 million
    
    $1.5 million$35.0 million
    
    $1.0 million$45.0 million
    
    $1.0 millionTotal
    
    $3.5 million
  ® ® ®
 CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
 ACTAVIS TOTOWA, LLC
 ® ® ® ® ®
 ® ®
 L. PERRIGO COMPANY
 ®
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##### Table of Contents



MERGER WITH SIRIUS LABORATORIES, INC.
  PHOTOCURE ASA
 ® ® ® ® ® ® ® ® ®
 WINSTON LABORATORIES, INC.
 ® ® ® ® ®
 PARTEQ AGREEMENT
 ®
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##### Table of Contents



NATIONAL BIOLOGICAL CORPORATION AMENDED AND RESTATED PURCHASE AND SUPPLY AGREEMENT
 ®
 SOCHINAZ SA
 ®
 LEASE AGREEMENTS
  RESEARCH AGREEMENTS
   1 Year or
    
    
    
    
    
    
    
    
    
    After 5Total
    
    less
    
    2-3 Years
    
    4-5 Years
    
    YearsOperating lease obligations (1)
    
    $
    1,779,000
    
    
    $
    454,000
    
    
    $
    936,000
    
    
    $
    389,000
    
    
    $
    Purchase obligations (2, 3)
    
    
    3,577,000
    
    
    
    2,817,000
    
    
    
    760,000
    
    
    
    
    
    
    
    Minimum royalty obligations (4)
    
    
    1,053,000
    
    
    
    348,000
    
    
    
    509,000
    
    
    
    196,000
    
    
    
    Total obligations
    
    $
    6,409,000
    
    
    $
    3,619,000
    
    
    $
    2,205,000
    
    
    $
    585,000
    
    
    $
    
 
 1)
    
    Approximately $74,000 of future operating lease commitments relate to
the Toronto and Valhalla offices, which will be closed during 2008.2)
    
    Research and development projects include various commitments
including remaining obligations for our Phase II clinical study for
moderate to severe acne.3)
    
    In addition to the obligations disclosed above, we have contracted
with Therapeutics, Inc., a clinical research organization, to manage
the clinical development of our products in the field of dermatology.
This organization has the opportunity for additional stock grants,
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##### Table of Contents



indication ranging from $250,000 to $1,250,000, depending on
the regulatory phase of development of products under Therapeutics
management.4)
    
    Minimum royalty obligations relate to our agreements with
PARTEQ, Winston and Perrigo described above.  INFLATION
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
 ITEM 4. CONTROLS AND PROCEDURES
   Forward-Looking Statements Safe Harbor
 ® ® ® ® ® ® ® ®
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® ® ® ® ® ® ® ® ® ® ®
 
 PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS.
  27




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##### Table of Contents



ITEM 1A. RISK FACTORS
    Risks Related To DUSA
 We Are Not Currently Profitable And May Not Be Profitable In The Future Unless We Can Successfully
Market And Sell Significantly Higher Quantities Of Our Products.
 If Product Sales Do Not Increase Significantly, We May Not Be Able To Advance Development Of Our
Other Potential Products As Quickly As We Would Like To, Which Would Delay The Approval Process And
Marketing Of New Potential Products.
  Our Ability To Become Profitable Will Be Delayed Since We Will No Longer Promote Nicomide® As A
Prescription Product And Since Other Generic Products Entered the Market.
 ® ® ® ®
 ® ® ®
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® ®
 ® ®
 We Have Not Yet Secured A Manufacturer for a DSHEA Nicomide ® Product, And, As A Result, Our
Revenues From Nicomide® Sales May Suffer.
 ® ® ® ® ®
 Any Failure To Comply With Ongoing Governmental Regulations In The United States And Elsewhere Will
Limit Our Ability To Market Our Products And Become Profitable.
  
    
    approval of manufacturing facilities, including adherence to good manufacturing
and laboratory practices during production and storage,
    
    controlled research and testing of some of these products even after approval, and
    
    control of marketing activities, including advertising and labeling.
  
    
    send warning letters, as received by the manufacturer of our BLU-U®,
    
    impose fines and other civil penalties on us,
    
    seize our products,
    
    suspend our regulatory approvals,
    
    cease the manufacture of our products, as Actavis Totowa is doing with Nicomide®,
    
    refuse to approve pending applications or supplements to approved applications filed by us,
 29




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##### Table of Contents




    
    refuse to permit exports of our products from the United States,
    
    require us to recall products,
    
    require us to notify physicians of labeling changes and/or product related problems,
    
    impose restrictions on our operations, and/or
    
    criminally prosecute us.
  ® ® ® ® ® ®
 ® ® ® ®
 Litigation Is Expensive And We May Not Be Able To Afford The Costs.
  30




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##### Table of Contents



®
 If We Are Unable To Obtain The Necessary Capital To Fund Our Operations, We Will Have To Delay Our
Development Programs And May Not Be Able To Complete Our Clinical Trials.
   Since We Now Operate The Only FDA Approved Manufacturing Facility For The Kerastick® And Continue
To Rely Heavily On Sole Suppliers For The Manufacture Of Levulan®, The BLU-U®, And Meted®, Any
Supply Or Manufacturing Problems Could Negatively Impact Our Sales As With Nicomide®.
 ® ® ® ® ® ® ®
 ® ® ® ® ®
 ® ®
 31




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##### Table of Contents




    
    product yields,
    
    quality control,
    
    component and service availability,
    
    compliance with FDA regulations, and
    
    the need for further FDA approval if manufacturers make material changes to
manufacturing processes and/or facilities.
  We Have Only Limited Experience Marketing And Selling Pharmaceutical Products And No Experience
Marketing Dietary Supplements, As A Result, Our Revenues From Product Sales May Suffer.
 ® ® ® ® ®
 The Commercial Success Of Any Products That We May Develop Will Depend Upon The Degree Of Market
Acceptance Of Our Products Among Physicians, Patients, Health Care Payors, Private Health Insurers
And The Medical Community.
  
    
    the effectiveness, or perceived effectiveness, of our products in comparison to competing products;
    
    the existence of any significant side effects, as well as their severity in comparison to
any competing products;
    
    potential advantages over alternative treatments;
    
    the ability to offer our products for sale at competitive prices;
 32




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##### Table of Contents




    
    relative convenience and ease of administration;
    
    the strength of marketing and distribution support; and
    
    sufficient third-party coverage or reimbursement.
 If We Cannot Improve Physician Reimbursement And/Or Convince More Private Insurance Carriers To
Adequately Reimburse Physicians For Our Product, Sales May Suffer.
 ® ®
 ®
 We Have Significant Losses And Anticipate Continued Losses
  We Have Limited Patent Protection, And If We Are Unable To Protect Our Proprietary Rights,
Competitors Might Be Able To Develop Similar Products To Compete With Our Products And Technology.
 ®
 
    
    methods of using ALA and its unique physical forms in combination with light,
    
    compositions and apparatus for those methods, and
    
    unique physical forms of ALA.
   33




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®
 ® ® ®
 ® ®
 ® ®
 ® ® ® ® ®
  
    
    these persons or entities might breach the agreements,
    
    we might not have adequate remedies for a breach, and/or
    
    our competitors will independently develop or otherwise discover our trade secrets;
  We Have Only Three Therapies That Have Received Regulatory Approval Or Clearance, And We Cannot
Predict Whether We Will Ever Develop Or Commercialize Any Other Levulan® Products.
 Our Potential Products Are In Early Stages Of Development And May Never Result In Any Commercially
Successful Products.
 ® ® ® ®
 34




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##### Table of Contents




    
    delays in product development, clinical testing or manufacturing,
    
    unplanned expenditures in product development, clinical testing or manufacturing,
    
    failure in clinical trials or failure to receive regulatory approvals,
    
    emergence of superior or equivalent products,
    
    inability to market products due to third-party proprietary rights, and
    
    failure to achieve market acceptance.
 ®
 We Must Receive Separate Approval For Each Of Our Potential Products Before We Can Sell Them
Commercially In The United States Or Abroad.
 ® ® ®
 ®
 ® ® ® ® ®
 ® ®
 35




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##### Table of Contents



Because Of The Nature Of Our Business, The Loss Of Key Members Of Our Management Team Could Delay
Achievement Of Our Goals.
  Collaborations With Outside Scientists May Be Subject To Restriction And Change.
  Risks Related To Our Industry
 Product Liability And Other Claims Against Us May Reduce Demand For Our Products Or Result In
Damages.
 We Are Subject To Risk From Potential Product Liability Lawsuits Which Could Negatively Affect Our
Business.
  Our Business Involves Environmental Risks And We May Incur Significant Costs Complying With
Environmental Laws And Regulations.
 ®
 36




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##### Table of Contents



We May Not Be Able To Compete Against Traditional Treatment Methods Or Keep Up With Rapid Changes
In The Biotechnology And Pharmaceutical Industries That Could Make Some Or All Of Our Products
Non-Competitive Or Obsolete.
 Competing Products And Technologies Based On Traditional Treatment Methods May Make Some Or All Of
Our Programs Or Potential Products Noncompetitive Or Obsolete.
    
    
    price reductions,
    
    lower levels of third-party reimbursements,
    
    failure to achieve market acceptance, and
    
    loss of market share, any of which could adversely affect our business. Further, we cannot
give any assurance that developments by our competitors or future competitors will
not render our technology obsolete.
 ® ® ® ® ®
 We Have Learned That Some Compounding Pharmacies Are Producing A Form Of Aminolevulinic Acid HCl
And Are Marketing It To The Medical Community.
 ®
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##### Table of Contents



Our Competitors In The Biotechnology And Pharmaceutical Industries May Have Better Products,
Manufacturing Capabilities Or Marketing Expertise.
 ®
 ®
 ®
  
    
    the ease of administration of our method of PDT,
    
    the degree of generalized skin sensitivity to light,
    
    the number of required doses,
    
    the selectivity of our drug for the target lesion or tissue of interest, and
    
    the type and cost of our light systems.
 ®
 38




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Risks Related To Our Stock
 If Outstanding Options, Warrants And Rights Are Converted, The Value Of Those Shares Of Common
Stock Outstanding Just Prior To The Conversion Will Be Diluted.
  Our Results Of Operations And General Market Conditions For Specialty Pharmaceutical And
Biotechnology Stocks Could Result In Sudden Changes In The Market Value Of Our Stock.
  
    
    quarterly levels of product sales;
    
    clinical trial results;
    
    general market conditions;
    
    patent litigation;
    
    increased marketing activities or press releases; and
    
    changes in third-party payor reimbursement for our therapy.
  Significant Fluctuations In Orders For Our Products, On A Monthly And Quarterly Basis, Are Common
Based On External Factors And Sales Promotion Activities. These Fluctuations Could Increase The
Volatility Of Our Stock Price.
  39




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Our Common
Stock May Not Continue To Trade On The Nasdaq Global Market, Which Could Reduce The
Value Of Your Investment And Make Your Shares More Difficult To Sell.
  Effecting A Change Of Control Of DUSA Would Be Difficult, Which May Discourage Offers For Shares Of
Our Common Stock.
     40




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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
  
 ITEM 5. OTHER INFORMATION.
  
 ITEM 6. EXHIBITS.
 EXHIBIT
 NO.
    
    DESCRIPTION OF EXHIBIT3(a.1)
    
    Certificate of Incorporation, as amended, filed as Exhibit
3(a) to the Registrants Form 10-K for the fiscal year ended
December 31, 1998, and is incorporated herein by reference.3(a.2)
    
    Certificate of Amendment to the Certificate of Incorporation,
as amended, dated October 28, 2002 and filed as Exhibit 99.3
to the Registrants Quarterly Report on Form 10-Q for the
fiscal quarter ended September 30, 2002, filed November 12,
2002, and is incorporated herein by reference3(b)
    
    By-laws of the Registrant, filed as Exhibit 3.1 to the
Registrants current report on Form 8-K, filed on November 2,
2007, and is incorporated herein by reference.10(a)
    
    License Agreement between the Registrant and Rivers Edge
Pharmaceuticals LLC entered into August 12, 2008 portions of
which have been omitted pursuant to a request for confidential
treatment under Rule 24b-2 of the Securities Exchange Act of
1934, as amended.31(a)
    
    Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.31(b)
    
    Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.32(a)
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.32(b)
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.99.1
    
    Press Release dated November 3, 2008
 41




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##### Table of Contents



SIGNATURES
  DUSA Pharmaceuticals, Inc.By:
    /s/ Robert F. DomanRobert DomanPresident and Chief Executive Officer

(principal executive officer)  By:
    /s/ Richard C. ChristopherRichard C. ChristopherVice President, Finance and Chief Financial
Officer (principal financial officer)  42




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##### Table of Contents



EXHIBIT INDEX
 3(a.1)
    
    Certificate of Incorporation, as amended, filed as Exhibit 3(a) to the Registrants Form
10-K for the fiscal year ended December 31, 1998, and is incorporated herein by
reference.3(a.2)
    
    Certificate of Amendment to the Certificate of Incorporation, as amended, dated October
28, 2002 and filed as Exhibit 99.3 to the Registrants Quarterly Report on Form 10-Q for
the fiscal quarter ended September 30, 2002, filed November 12, 2002, and is incorporated
herein by reference.3(b)
    
    By-laws of the Registrant, filed as Exhibit 3.1 to the Registrants current report on
Form 8-K, filed on November 2, 2007, and is incorporated herein by reference.10(a)
    
    License Agreement between the Registrant and Rivers Edge Pharmaceuticals LLC entered
into August 12, 2008 portions of which have been omitted pursuant to a request for
confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934, as
amended.31(a)
    
    Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.31(b)
    
    Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.32(a)
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.32(b)
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.99.1
    
    Press Release dated November 3, 2008.
 43