##### Table of Contents



FORM 10-QSECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

(Mark One)



|[X] |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
|--- |  | ---------------------------------------------------------------------------------------
|    |  | For the quarterly period ended                      September 30, 2001                 

OR



|[  ] |  | 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 0-19777

DUSA Pharmaceuticals, Inc.(Exact name of registrant as specified in its charter)

|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|New Jersey                                                     |  | 22-3103129                          
|                                                              
|                                                              
|                                                              
|                                                              
|(State or
other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer
Identification No.)



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



(978) 657-7500(Registrants telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 month (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes   X                   No

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 subsequent to the distribution of securities under a plan confirmed
by a court.

Yes                      No

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date.


13,852,890 shares as of November 5, 2001





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TABLE OF CONTENTS



|                                                  |                                                                                               |  |  |  |  |  |  | 
|------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART 1.                                          
|Item 1. FINANCIAL STATEMENTS                     
|                                                  | CONDENSED CONSOLIDATED BALANCE SHEETS                                                        
|                                                  | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS                                              
|                                                  | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                                              
|                                                  | NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)                         
|                                                  | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                                  | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|PART II- OTHER INFORMATION                       
|SIGNATURES                                       
|EX-10.A: AMENDMENT TO AGREEMENT DATED 9/26/2001  
|EX-10.B: MASTER SERVICE AGREEMENT DATED 10/4/2001



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##### Table of Contents









PART 1.
Item 1. FINANCIAL STATEMENTS

DUSA PHARMACEUTICALS, INC.




CONDENSED CONSOLIDATED BALANCE SHEETS

| |                                            |                                               |   |                                                                                                                                                                                      |             |               |            |              |             |   |            | 
| | ------------------------------------------ | --------------------------------------------- | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------- | ------------- | ---------- | ------------ | ----------- | - | ---------- | 
| |                                            |                                               |   |                                                                                                                                                                                      |             | September
30, |            | December
31,
| |                                            |                                               |   |                                                                                                                                                                                      |             | 2001          |            | 2000        
| |                                            |                                               |   |                                                                                                                                                                                      |             | (Unaudited)   |            |              |             |  
| |                                            |                                               |   |                                                                                                                                                                                      |             |               |            |             
| | ASSETS                                     |                                               |   |                                                                                                                                                                                      |             |               |            |              |            
|
|
|
|
| |                                            |                                               |   |                                                                                                                                                                                      |             |               |            |             
|
|
|
|
| | Current Assets                             |                                               |   |                                                                                                                                                                                      |             |               |            |              |            
|
|
|
|
| |                                            | Cash and cash equivalents                     |   | $                                                                                                                                                                                    | 6,064,306   |               |            | $            | 16,441,114  |  
|
|
|
|
| |                                            | U.S. government securities available for sale |   |                                                                                                                                                                                      | 60,669,875  |               |            |              | 58,055,463  |  
|
|
|
|
| |                                            | Accrued interest receivable                   |   |                                                                                                                                                                                      | 812,091     |               |            |              | 990,083     |  
|
|
|
|
| |                                            | Accounts receivable                           |   |                                                                                                                                                                                      | 131,141     |               |            |              | 914,959     |  
|
|
|
|
| |                                            | Receivable from co-development partner        |   |                                                                                                                                                                                      | 1,794,562   |               |            |              | 722,570     |  
|
|
|
|
| |                                            | Inventory                                     |   |                                                                                                                                                                                      | 2,051,226   |               |            |              | 1,331,966   |  
|
|
|
|
| |                                            | Other current assets                          |   |                                                                                                                                                                                      | 1,612,673   |               |            |              | 562,240     |  
| |                                            |                                               |   |                                                                                                                                                                                      |             |               |            |             
| |                                            |                                               |   | Total current assets                                                                                                                                                                 |             |               | 73,135,874 |              |             |   | 79,018,395 | 
|
|
|
|
| |                                            | Property and equipment, net                   |   |                                                                                                                                                                                      | 2,661,840   |               |            |              | 1,699,530   |  
|
|
|
|
| |                                            | Deferred charges                              |   |                                                                                                                                                                                      | 1,883,646   |               |            |              | 886,792     |  
|
|
|
|
| |                                            | Deferred royalty                              |   |                                                                                                                                                                                      | 694,392     |               |            |              | 739,671     |  
|
|
|
|
| |                                            | Other assets                                  |   |                                                                                                                                                                                      | 301,518     |               |            |              | 98,000      |  
| |                                            |                                               |   |                                                                                                                                                                                      |             |               |            |             
| | TOTAL ASSETS                               |                                               | $ | 78,677,270                                                                                                                                                                           |             |               | $          | 82,442,388   |            
| |                                            |                                               |   |                                                                                                                                                                                      |             |               |            |             
| |                                            |                                               |   |                                                                                                                                                                                      |             |               |            |             
|
|
|
|
| | LIABILITIES AND SHAREHOLDERS EQUITY       |                                               |   |                                                                                                                                                                                      |             |               |            |              |            
|
|
|
|
| |                                            |                                               |   |                                                                                                                                                                                      |             |               |            |             
|
|
|
|
| | Current Liabilities                        |                                               |   |                                                                                                                                                                                      |             |               |            |              |            
|
|
|
|
| |                                            | Accounts payable                              |   | $                                                                                                                                                                                    | 183,038     |               |            | $            | 100,500     |  
|
|
|
|
| |                                            | Accrued payroll and other accrued expenses    |   |                                                                                                                                                                                      | 1,433,675   |               |            |              | 1,810,047   |  
|
|
|
|
| |                                            | Deferred revenue                              |   |                                                                                                                                                                                      | 540,365     |               |            |              | 509,207     |  
|
|
|
|
| |                                            | Due to licensor                               |   |                                                                                                                                                                                      | 47,477      |               |            |              | 417,004     |  
| |                                            |                                               |   |                                                                                                                                                                                      |             |               |            |             
| |                                            |                                               |   | Total current liabilities                                                                                                                                                            |             |               | 2,204,555  |              |             |   | 2,836,758  | 
|
|
|
|
| |                                            | Deferred revenue                              |   |                                                                                                                                                                                      | 22,808,332  |               |            |              | 24,295,834  |  
|
|
|
|
| |                                            | Other deferred liability                      |   |                                                                                                                                                                                      | 833,332     |               |            |              |            |  
| |                                            |                                               |   |                                                                                                                                                                                      |             |               |            |             
| | TOTAL LIABILITIES                          |                                               |   | 25,846,219                                                                                                                                                                           |             |               |            | 27,132,592   |            
| |                                            |                                               |   |                                                                                                                                                                                      |             |               |            |             
| |                                            |                                               |   |                                                                                                                                                                                      |             |               |            |             
|
|
|
|
| | Commitments and Contingencies (Note 8)     |                                               |   |                                                                                                                                                                                      |             |               |            |              |            
|
|
|
|
| |                                            |                                               |   |                                                                                                                                                                                      |             |               |            |             
|
|
|
|
| | Shareholders Equity                       |                                               |   |                                                                                                                                                                                      |             |               |            |              |            
|
|
|
|
| |                                            | Capital Stock:                                |   |                                                                                                                                                                                      |             |               |            |              |             |  
|
|
|
|
| |                                            |                                               |   | Authorized: 100,000,000 shares;
40,000,000 shares designated as common
stock, no par, and 60,000,000 shares
issuable in series or classes. Issued
and outstanding: 13,847,890 (2000: |             |               |            |              |             |   |            | 
|
|
|
|
| |                                            |                                               |   | 13,730,890) shares of common stock, no
par                                                                                                                                           |             |               | 95,310,811 |              |             |   | 94,757,532 | 
|
|
|
|
| |                                            | Additional paid-in capital                    |   |                                                                                                                                                                                      | 1,860,519   |               |            |              | 1,860,519   |  
|
|
|
|
| |                                            | Accumulated deficit                           |   |                                                                                                                                                                                      | (47,119,773 | )             |            |              | (42,487,349 | )
|
|
|
|
| |                                            | Accumulated other comprehensive income        |   |                                                                                                                                                                                      | 2,779,494   |               |            |              | 1,179,094   |  
| |                                            |                                               |   |                                                                                                                                                                                      |             |               |            |             
| | TOTAL SHAREHOLDERS EQUITY                 |                                               |   | 52,831,051                                                                                                                                                                           |             |               |            | 55,309,796   |            
| |                                            |                                               |   |                                                                                                                                                                                      |             |               |            |             
| | TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |                                               | $ | 78,677,270                                                                                                                                                                           |             |               | $          | 82,442,388   |            
| |                                            |                                               |   |                                                                                                                                                                                      |             |               |            |             

See the accompanying Notes to the Condensed Consolidated Financial Statements.





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##### Table of Contents






DUSA PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                     |                                                        |   |                    |           |                   |   |            |           |      |   |            |           |  |   |            |           | 
|---------------------------------------------------- | ------------------------------------------------------ | - | ------------------ | --------- | ----------------- | - | ---------- | --------- | ---- | - | ---------- | --------- |  | - | ---------- | --------- | 
|                                                     |                                                        |   | Three
Months Ended |           | Nine
Months Ended
|                                                     |                                                        |   | September
30,      |           | September
30,    
|                                                     |                                                        |   | (Unaudited)        |           | (Unaudited)      
|                                                     |                                                        |   |                    |           |                  
|                                                     |                                                        |   | 2001               |           | 2000              |   | 2001       |           | 2000
|                                                     |                                                        |   |                    |           |                   |   |            |           |     
|REVENUES                                             |                                                        |   |                    |           |                   |   |            |           |      |   |            |           |  |   |            |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Product sales                                          |   | $                  | 58,837    |                   |   | $          | 139,583   |      |   | $          | 469,516   |  |   | $          | 139,583   | 
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Research grant and milestone revenue                   |   |                    | 495,834   |                   |   |            |          |      |   |            | 1,487,502 |  |   |            |          | 
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Research revenue earned under
collaborative agreements |   |                    | 881,895   |                   |   |            |          |      |   |            | 2,186,262 |  |   |            | 602,504   | 
|                                                     |                                                        |   |                    |           |                   |   |            |           |      |   |            |           |  |   |            |          
|TOTAL REVENUES                                       |                                                        |   | 1,436,566          |           |                   |   | 139,583    |           |      |   | 4,143,280  |           |  |   | 742,087    |          
|                                                     |                                                        |   |                    |           |                   |   |            |           |      |   |            |           |  |   |            |          
|OPERATING COSTS                                      |                                                        |   |                    |           |                   |   |            |           |      |   |            |           |  |   |            |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Cost of product sales                                  |   |                    | 441,979   |                   |   |            | 139,583   |      |   |            | 1,818,064 |  |   |            | 139,583   | 
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Research and development                               |   |                    | 2,805,803 |                   |   |            | 2,027,420 |      |   |            | 7,068,130 |  |   |            | 5,496,268 | 
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | General and administrative                             |   |                    | 984,745   |                   |   |            | 531,142   |      |   |            | 2,902,931 |  |   |            | 1,671,322 | 
|                                                     |                                                        |   |                    |           |                   |   |            |           |      |   |            |           |  |   |            |          
|TOTAL OPERATING COSTS                                |                                                        |   | 4,232,527          |           |                   |   | 2,698,145  |           |      |   | 11,789,125 |           |  |   | 7,307,173  |          
|                                                     |                                                        |   |                    |           |                   |   |            |           |      |   |            |           |  |   |            |          
|LOSS FROM OPERATIONS                                 |                                                        |   | (2,795,961         | )         |                   |   | (2,558,562 | )         |      |   | (7,645,845 | )         |  |   | (6,565,086 | )        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                        |   |                    |           |                   |   |            |           |      |   |            |           |  |   |            |          
|                                                    
|                                                    
|                                                    
|                                                    
|OTHER INCOME                                         |                                                        |   |                    |           |                   |   |            |           |      |   |            |           |  |   |            |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                        |   |                    |           |                   |   |            |           |      |   |            |           |  |   |            |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Interest income                                        |   |                    | 978,932   |                   |   |            | 944,475   |      |   |            | 3,013,421 |  |   |            | 2,269,846 | 
|                                                     |                                                        |   |                    |           |                   |   |            |           |      |   |            |           |  |   |            |          
|NET LOSS                                             |                                                        | $ | (1,817,029         | )         |                   | $ | (1,614,087 | )         |      | $ | (4,632,424 | )         |  | $ | (4,295,240 | )        
|                                                     |                                                        |   |                    |           |                   |   |            |           |      |   |            |           |  |   |            |          
|BASIC AND DILUTED NET LOSS PER
COMMON SHARE          |                                                        | $ | (.13               | )         |                   | $ | (.12       | )         |      | $ | (.34       | )         |  | $ | (.33       | )        
|                                                     |                                                        |   |                    |           |                   |   |            |           |      |   |            |           |  |   |            |          
|                                                     |                                                        |   |                    |           |                   |   |            |           |      |   |            |           |  |   |            |          
|                                                    
|                                                    
|                                                    
|                                                    
|WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING |                                                        |   | 13,796,004         |           |                   |   | 13,619,731 |           |      |   | 13,770,494 |           |  |   | 13,136,280 |          
|                                                     |                                                        |   |                    |           |                   |   |            |           |      |   |            |           |  |   |            |          

See the accompanying Notes to the Condensed Consolidated Financial Statements.





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##### Table of Contents






DUSA PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                                          |                                                                               |                                                                                          |                                            |             |                           |            |             |             |            |          |  
|--------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | ------------------------------------------ | ----------- | ------------------------- | ---------- | ----------- | ----------- | ---------- | -------- | -
|                                                                                                          |                                                                               |                                                                                          |                                            |             | Nine
Months Ended        
|                                                                                                          |                                                                               |                                                                                          |                                            |             | September 30,
(Unaudited)
|                                                                                                          |                                                                               |                                                                                          |                                            |             |                          
|                                                                                                          |                                                                               |                                                                                          |                                            |             | 2001                      |            | 2000       
|                                                                                                          |                                                                               |                                                                                          |                                            |             |                           |            |            
|OPERATING ACTIVITIES                                                                                      |                                                                               |                                                                                          |                                            |             |                           |            |             |            
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                          | Net loss                                                                      |                                                                                          | $                                          | (4,632,424  | )                         |            | $           | (4,295,240  | )         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|Adjustments
to reconcile net loss to net cash used in operating
activities                                |                                                                               |                                                                                          |                                            |             |                           |            |             |            
|Amortization of premiums and accretion of discounts on U.S. government
securities available for sale, net |                                                                               |                                                                                          | 759,428                                    |             |                           |            | (225,934    | )          
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                          | Depreciation and amortization expense                                         |                                                                                          |                                            | 721,344     |                           |            |             | 181,887     |           
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                          | Amortization of deferred revenue                                              |                                                                                          |                                            | (1,487,502  | )                         |            |             |            |           
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                          | Changes in other assets and liabilities impacting cash flows from operations: |                                                                                          |                                            |             |                           |            |             |             |           
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                          |                                                                               |                                                                                          | Accrued interest receivable                |             |                           | 177,992    |             |             |            | (585,107 | )
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                          |                                                                               |                                                                                          | Accounts receivable                        |             |                           | 783,818    |             |             |            | (139,583 | )
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                          |                                                                               |                                                                                          | Receivable from co-development partner     |             |                           | (71,992    | )           |             |            | (602,504 | )
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                          |                                                                               |                                                                                          | Inventory                                  |             |                           | (719,260   | )           |             |            | (882,711 | )
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                          |                                                                               |                                                                                          | Other current assets                       |             |                           | (1,050,433 | )           |             |            | (252,672 | )
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                          |                                                                               |                                                                                          | Deferred charges                           |             |                           | (1,400,000 | )           |             |            |         |  
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                          |                                                                               |                                                                                          | Accounts payable                           |             |                           | 82,538     |             |             |            | 144,533  |  
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                          |                                                                               |                                                                                          | Accrued payroll and other accrued expenses |             |                           | (376,372   | )           |             |            | 265,165  |  
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                          |                                                                               |                                                                                          | Due to licensor                            |             |                           | (369,527   | )           |             |            | (370,936 | )
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                          |                                                                               |                                                                                          | Deferred revenue                           |             |                           | 31,158     |             |             |            |         |  
|                                                                                                          |                                                                               |                                                                                          |                                            |             |                           |            |             |            
|Net cash used in operating activities                                                                     |                                                                               |                                                                                          | (7,551,232                                 | )           |                           |            | (6,763,102  | )          
|                                                                                                          |                                                                               |                                                                                          |                                            |             |                           |            |             |            
|                                                                                                          |                                                                               |                                                                                          |                                            |             |                           |            |             |            
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|INVESTING ACTIVITIES                                                                                      |                                                                               |                                                                                          |                                            |             |                           |            |             |            
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                          | Purchases of U.S. government securities                                       |                                                                                          |                                            | (21,276,198 | )                         |            |             | (50,506,441 | )         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                          | Proceeds from maturing U.S. government securities                             |                                                                                          |                                            | 19,502,758  |                           |            |             | 11,450,000  |           
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                          | Payment to restructure supplier contract                                      |                                                                                          |                                            |            |                           |            |             | (250,000    | )         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                          | Purchases of property and equipment                                           |                                                                                          |                                            | (1,401,897  | )                         |            |             | (990,652    | )         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                          | Deposits on equipment                                                         |                                                                                          |                                            | (203,518    | )                         |            |             | (85,088     | )         
|                                                                                                          |                                                                               |                                                                                          |                                            |             |                           |            |             |            
|Net cash used in investing activities                                                                     |                                                                               |                                                                                          | (3,378,855                                 | )           |                           |            | (40,382,181 | )          
|                                                                                                          |                                                                               |                                                                                          |                                            |             |                           |            |             |            
|                                                                                                          |                                                                               |                                                                                          |                                            |             |                           |            |             |            
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|FINANCING ACTIVITIES                                                                                      |                                                                               |                                                                                          |                                            |             |                           |            |             |            
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                          |                                                                               | Issuance of common stock and underwriters options, net of offering costs
of $2,051,714: |                                            |             |                          |            |             |             | 40,698,286 |         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                          |                                                                               | Proceeds from exercise of options and warrants                                           |                                            |             | 553,279                   |            |             |             | 1,522,402  |         
|                                                                                                          |                                                                               |                                                                                          |                                            |             |                           |            |             |            
|                                                                                                         
|                                                                                                         
|                                                                                                         
|                                                                                                         
|Net cash provided by financing activities                                                                 |                                                                               |                                                                                          | 553,279                                    |             |                           |            | 42,220,688  |            
|                                                                                                          |                                                                               |                                                                                          |                                            |             |                           |            |             |            
|NET DECREASE IN CASH                                                                                      |                                                                               |                                                                                          | (10,376,808                                | )           |                           |            | (4,924,595  | )          
|                                                                                                          |                                                                               |                                                                                          |                                            |             |                           |            |             |            
|CASH AT BEGINNING OF PERIOD                                                                               |                                                                               |                                                                                          | 16,441,114                                 |             |                           |            | 7,028,618   |            
|                                                                                                          |                                                                               |                                                                                          |                                            |             |                           |            |             |            
|CASH AT END OF PERIOD                                                                                     |                                                                               | $                                                                                        | 6,064,306                                  |             |                           | $          | 2,104,023   |            
|                                                                                                          |                                                                               |                                                                                          |                                            |             |                           |            |             |            

See the accompanying Notes to the Condensed Consolidated Financial Statements.





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##### Table of Contents






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

1)      BASIS OF PRESENTATION



| |  | The Condensed Consolidated Balance Sheet as of September 30, 2001, Condensed
Consolidated Statements of Operations for the three and nine months ended
September 30, 2001 and 2000, and Condensed Consolidated Statements of Cash
Flows for the nine months ended September 30, 2001 and 2000 have been
prepared in accordance with accounting principles generally accepted in the
United States of America. These condensed financial statements are
unaudited but include all normal recurring adjustments which the management
of DUSA Pharmaceuticals, Inc. (DUSA or the Company) believes to be
necessary for fair presentation of the periods presented.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted.
These condensed financial statements should be read in conjunction with the
Companys December 31, 2000 audited consolidated financial statements and
notes thereto.                                                                                                                                                                                                                                                                   

2)      UNITED STATES GOVERNMENT SECURITIES



| |  | The Companys United States government securities available for sale consist
of securities of the United States government and its agencies, with current
yields ranging from 4.39% to 6.91% and maturity dates ranging from October
1, 2001 to August 15, 2006.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Accumulated other comprehensive income consists of net unrealized gains or
losses on United States government securities available for sale, which is
reported as part of shareholders equity in the Condensed Consolidated
Balance Sheets.                    

3)      INVENTORY



| |  | Inventory consisted of the following at September 30, 2001 and December 31,
2000:
| |  | ---------------------------------------------------------------------------------

|                                  |  |               |           |              |  |   |           | 
|--------------------------------- |  | ------------- | --------- | ------------ |  | - | --------- | 
|                                  |  | September 30, |           | December 31,
|                                  |  | 2001          |           | 2000        
|                                  |  | (Unaudited)   |           |              |  |  
|                                  |  |               |           |             
|Finished goods                    |  | $             | 1,891,856 |              |  | $ | 1,151,537 | 
|                                 
|                                 
|                                 
|                                 
|Raw materials                     |  |               | 159,370   |              |  |   | 175,344   | 
|                                 
|                                 
|                                 
|                                 
|Purchased parts and subassemblies |  |               |          |              |  |   | 5,085     | 
|                                  |  |               |           |              |  |   |           | 
|                                  |  | $             | 2,051,226 |              |  | $ | 1,331,966 | 
|                                  |  |               |           |              |  |   |           | 





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4)      OTHER CURRENT ASSETS



| |  | Other current assets consisted of the following at September 30, 2001 and
December 31, 2000:
| |  | --------------------------------------------------------------------------------------------

|                                               |  |               |           |              |  |   |         | 
|---------------------------------------------- |  | ------------- | --------- | ------------ |  | - | ------- | 
|                                               |  | September 30, |           | December 31,
|                                               |  | 2001          |           | 2000        
|                                               |  | (Unaudited)   |           |              |  |  
|                                               |  |               |           |             
|Prepaid expenses and deposits                  |  | $             | 690,843   |              |  | $ | 293,069 | 
|                                              
|                                              
|                                              
|                                              
|Commercial light sources under lease
or rental |  |               | 593,562   |              |  |   | 261,923 | 
|                                              
|                                              
|                                              
|                                              
|Other current assets                           |  |               | 328,268   |              |  |   | 7,248   | 
|                                               |  |               |           |              |  |   |         | 
|                                               |  | $             | 1,612,673 |              |  | $ | 562,240 | 
|                                               |  |               |           |              |  |   |         | 

5)      DEFERRED REVENUE



| |  | Deferred revenue associated with the Companys milestone payments,
unrestricted research grants, and the sale of commercial light sources, sold
primarily through a third-party leasing company, consisted of the following
at September 30, 2001 and December 31, 2000:
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                          |  |               |            |              |  |   |            | 
|----------------------------------------- |  | ------------- | ---------- | ------------ |  | - | ---------- | 
|                                          |  | September 30, |            | December 31,
|                                          |  | 2001          |            | 2000        
|                                          |  | (Unaudited)   |            |              |  |  
|                                          |  |               |            |             
|Milestone and unrestricted grant payments |  | $             | 22,808,332 |              |  | $ | 24,295,834 | 
|                                         
|                                         
|                                         
|                                         
|Sale of commercial light sources          |  |               | 540,365    |              |  |   | 509,207    | 
|                                          |  |               |            |              |  |   |            | 
|                                          |  | $             | 23,348,697 |              |  | $ | 24,805,041 | 
|                                          |  |               |            |              |  |   |            | 

6)      BASIC AND DILUTED NET LOSS PER SHARE



| |  | Basic net loss per common share is based on the weighted average number of
shares outstanding during each period. Stock options and warrants calculated
under the treasury stock method were not included in the computation of the
weighted average number of shares outstanding for dilutive net loss per
common share during the period, as the effect would be antidilutive. For
the three and nine-month periods ended September 30, 2001, approximately
647,000 and 764,000 stock options and warrants were excluded from the
computation of diluted net loss per share. For the three and nine-month
periods ended September 30, 2000, approximately 1,420,000 and 1,368,000
stock options and warrants were excluded from the computation of diluted net
loss per share.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





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##### Table of Contents



7)      COMPREHENSIVE LOSS



| |  | For the three and nine months ended September 30, 2001 and 2000,
comprehensive loss consisted of the following:
| |  | ---------------------------------------------------------------------------------------------------------------

|                   |                                                                     |   |                           |           |                           |   |            |         |      |   |            |           |  |   |            |         | 
|------------------ | ------------------------------------------------------------------- | - | ------------------------- | --------- | ------------------------- | - | ---------- | ------- | ---- | - | ---------- | --------- |  | - | ---------- | ------- | 
|                   |                                                                     |   | Three
Months Ended        |           | Nine
Months Ended        
|                   |                                                                     |   | September 30,
(Unaudited) |           | September 30,
(Unaudited)
|                   |                                                                     |   |                           |           |                          
|                   |                                                                     |   | 2001                      |           | 2000                      |   | 2001       |         | 2000
|                   |                                                                     |   |                           |           |                           |   |            |         |     
|NET LOSS           |                                                                     | $ | (1,817,029                | )         |                           | $ | (1,614,087 | )       |      | $ | (4,632,424 | )         |  | $ | (4,295,240 | )      
|                  
|                  
|                  
|                  
|                   | Net unrealized
gains on United
States
securities
available for
sale |   |                           | 1,445,831 |                           |   |            | 385,400 |      |   |            | 1,600,400 |  |   |            | 453,084 | 
|                   |                                                                     |   |                           |           |                           |   |            |         |      |   |            |           |  |   |            |        
|COMPREHENSIVE LOSS |                                                                     | $ | (371,198                  | )         |                           | $ | (1,228,687 | )       |      | $ | (3,032,024 | )         |  | $ | (3,842,156 | )      
|                   |                                                                     |   |                           |           |                           |   |            |         |      |   |            |           |  |   |            |        

8)      COMMITMENTS AND CONTINGENCIES



| |  | The Company has entered into a series of agreements for research projects
and clinical studies. As of September 30, 2001, future payments to be made
pursuant to these agreements, under certain terms and conditions, total
approximately $697,000 for the remainder of 2001 and $2,366,000 thereafter.
On October 4, 2001, the Company executed a master service agreement,
effective June 15, 2001, with Therapeutics, Inc. for an initial term of two
years to engage Therapeutics to manage the clinical development of the
Company products in the field of dermatology. Minimum payments under this
agreement have been included in the total future payments as noted above.
In addition, with the execution of this agreement, Therapeutics received
5,000 shares of the Companys common stock and also has the opportunity for
additional grants, bonuses, and other incentives for each indication ranging
from $250,000 to $1,250,000 depending on the phase of development for each
indication.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In February 2001, the Company agreed to compensate North Safety Products,
Inc. (North), the manufacturer of our Kerastick® brand applicator, for
certain overhead expenses associated with the manufacture of the Kerastick®
to cover underutilization of Norths facilities since current orders are
below certain previously anticipated levels. Approximately $401,000 of
underutilization charges were recorded in cost of product sales based on the
production levels through June 2001. In July 2001, DUSA revised its
agreement with North pertaining to the payment of underutilization fees as
current orders have been below certain previously anticipated levels. With
the execution of this amendment, the Company paid North $1,000,000 in
up-front underutilization fees and agreed to pay $400,000 covering the
period from the execution of this amendment to the agreement through
December 31, 2002 of which $100,000 has already been paid. The Company has
reported the total commitment of $1,400,000 in deferred charges, which is
being recognized in cost of product sales on a straight-line basis over the
term of the amendment. Of this amount, $1,000,000 of the underutilized fees
has been reimbursed through an amendment to the Companys Marketing,
Development and Supply agreement with Schering AG as discussed in Note 9,
Collaboration Agreement Amendment. In consideration for the underutilization
fees, North has agreed to maintain its Kerastick® manufacturing capabilities
in





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| |  | a state of readiness, with the capability of producing at least 25,000
Kerastick® units per month in accordance with established procedures. In
addition, North is obligated to provide the Company with manufacturing
records, personnel support, and a list of consultants and suppliers that
have supported the development and manufacturing of the Kerastick®. The
term of the agreement ends on December 31, 2002 unless DUSA exercises an
option to extend the term through June 30, 2003. If DUSA should decide to
extend the term, North will be entitled to payment of additional
underutilization fees of up to $500,000, prorated based on the level of
Kerastick® units produced from July 1, 2001 through June 30, 2003.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9)      COLLABORATION AGREEMENT AMENDMENT



| |  | On September 26, 2001, DUSA and Schering AG, a German corporation, agreed to
amend their Marketing, Development and Supply agreement, dated November 22,
1999. With the execution of this amendment, Schering and its United States
affiliate, Berlex Laboratories, Inc., agreed to reimburse DUSA $1,000,000
for costs DUSA incurred to modify its manufacturing agreement with North as
discussed in Footnote 8, Commitments and Contingencies. This amount has been
reported in deferred liabilities and is being recognized as an offset to
cost of product sales on a straight-line basis over the term of the
amendment. In consideration for this amendment, DUSA agreed to be
responsible for certain additional liabilities in the event of DUSAs
failure to supply Schering AGs requirements of finished product as defined
in the original agreement. In addition, DUSA agreed to use its best efforts
to qualify itself as the primary manufacturer and supplier of the Kerastick®
within six months following the date that North ceases production. DUSA and
Schering also agreed to terminate the guaranty by Schering AG to DUSA of
BLU-U®lease payments by physicians, and the secured line of credit
promissory note from Schering to DUSA for up to $1,000,000 to finance
inventory of BLU-U® units.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10)   RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS



| |  | In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141, Business Combinations and
SFAS No. 142 Goodwill and Other Intangible Assets. SFAS No. 141 requires
that the purchase method of accounting be used for all business combinations
initiated after September 30, 2001 and that the use of the
pooling-of-interest method is no longer allowed. SFAS No. 142 requires that
upon adoption, amortization of goodwill will cease and instead, the carrying
value of goodwill will be evaluated for impairment on an annual basis.
Identifiable intangible assets will continue to be amortized over their
useful lives and reviewed for impairment in accordance with SFAS No. 121
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of. SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001. The Company is evaluating the impact of
the adoption of these standards and does not believe the effect of adoption
of these statements will have any material effect on the Companys financial
position or results of operation.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | On January 1, 2001, the Company adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, which was issued by the
Financial Accounting Standards                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  





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| |  | Board. The adoption of this statement did not have any effect on the
Companys financial position or results of operation.
| |  | --------------------------------------------------------------------------------------------------------------------------





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

Overview

The following discussion should be read in conjunction with the Companys
Consolidated Financial Statements and Notes to the Consolidated Financial
Statements for the year ended December 31, 2000 and its Condensed Consolidated
Financial Statements and Notes to the Condensed Consolidated Financial
Statements for the three and nine-month periods ended September 30, 2001. DUSA
is engaged primarily in the research and development of a drug named
5-aminolevulinic acid, or ALA, used in combination with appropriate light
devices in order to detect or treat a variety of medical conditions. The
trademark for our brand of ALA is Levulan®. When Levulan® is used and is
followed with exposure to light to produce a therapeutic effect, the technology
is called photodynamic therapy, or PDT. When Levulan® is used and followed
with exposure to light to detect medical conditions, the technology is called
photodetection, or PD. Our first products are Levulan® 20% topical solution
using our Kerastick® brand applicator, with photodynamic therapy, for treatment
of non-hyperkeratotic actinic keratoses (AKs) of the face or scalp, and our
BLU-U® brand light source. From our inception in 1991 until September 2000 we
were classified as a development stage enterprise. In late September 2000, we
launched our first commercial products, Levulan® Kerastick® and the BLU-U®
brand light device, in the United States, in cooperation with Berlex
Laboratories, Inc. (Berlex), the United States affiliate of Schering AG. At
the end of September 2001, 231 BLU-U® brand light units were in place in
physicians offices. We lease or rent the BLU-U® to physicians, medical
institutions and academic centers throughout the country. Our other dermatology
and internal potential indications are at exploratory, Phase I or Phase II
stages. Our current products have now also been approved by the Health
Protection Branch  Canada. Our former Canadian affiliate, Draxis Health,
Inc., retained the marketing rights for Canada, and we will be entitled to
royalties on its sales in that country. We will be working to establish a
supply arrangement for the Canadian market in the near future. In addition,
Schering AG has made regulatory filings for approval of our therapy outside of
the United States including the first filings in Austria, Australia, and
Brazil. We are bringing our products into compliance with CE marking and ISO
9001 requirements in order to be ready to supply these markets upon regulatory
approval which Schering AG expects to occur next year.

We have primarily devoted our resources to funding research and
development in order to advance the Levulan® PDT/PD technology platform and, as
a result, we have experienced significant operating losses. As of September
30, 2001, we had an accumulated deficit of approximately $47,120,000.

Achieving our goal of becoming a profitable operating company is dependent
upon the market penetration by Berlex and Schering AG of our products,
acceptance of our therapy by the medical and consumer constituencies, and our
ability to meet the supply needs of our customer base. We have manufactured
sufficient inventory of Kerastick® units and BLU-U® brand light devices to meet
Berlexs supply requirements in the United States for the balance of 2001 and
into 2002. However, any significant delays in delivery of sufficient product
supplies from our sole source third-party suppliers of Levulan®, the Kerastick®
and/or the BLU-U®, in the future,





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could have a significant adverse impact on our financial results. In
February 2001 we leased additional space in our Wilmington, Massachusetts
facilities, to provide warehouse, office space, and production areas, so we can
be in a position to develop our own Kerastick® manufacturing capabilities. We
are also investigating other suppliers for components or the complete
manufacture of our products so that we could react more quickly if our supply
was interrupted for any reason. Also see discussion of relationship with North
Safety Products, Inc., below.

We are encouraged by the early positive response from physicians and patients
who have used our therapy, but we recognize that market acceptance is taking
longer than we originally anticipated. We believe that the uncertainty of
third-party reimbursement has caused potential users of our therapy to delay
the use of our therapy. We also believe that reimbursement for our therapy will
have to be competitive with other reimbursement rates for treatment of actinic
keratoses of the face and scalp, in order for the medical community to accept
our products on a large scale. In addition, we also recognize that Berlex has
to demonstrate to physicians the clinical value of our therapy, and the
benefits compared to other therapies, in order for the medical community to
accept our products on a large scale. On November 2, 2001, the American Medical
Association issued a new Current Procedural Terminology code for Levulan® PDT
and the Centers for Medicare & Medicaid Services (CMS) proposed national fees
for the procedure and the expected drug reimbursement levels. Subject to any
final revisions, the fee proposals will come into effect on January 1, 2002.
This will also allow doctors offices to use the new codes electronically,
rather than having to use the current manual miscellaneous codes for the
procedure. The CMS has a 60-day comment period during which they will accept
input regarding the proposed values they have placed on this application
process. Berlex plans to work closely with medical professionals and policy
makers to examine the proposed reimbursement levels, and make additional
submissions if appropriate. At this time, management believes that the
proposed reimbursement fees will allow the therapy to gain increasing
acceptance in the marketplace.

We expect to continue to incur operating losses as we continue to invest
in our research and development programs until product sales increase
significantly. We have incurred scale-up and certain fixed costs resulting in
under-absorbed overhead, which are included in cost of product sales.
Management plans to maintain a program to continuously monitor the cost of
product sales with the goal of reducing our cost of product sales over time.
It is with this focus that we are gathering cost estimates associated with
development of our own manufacturing operation in our leased Wilmington,
Massachusetts facilities. The development of our own facility should enable us
to better manage and control the costs of production; however, cost of product
sales will increase as we incur capital expenditures associated with developing
our own facility and if product sales do not increase significantly. Our
research and development efforts are expanding, both in dermatology (in
partnership with Schering AG), and in our internal indication development
programs. We have increased our staff in our Wilmington, Massachusetts
headquarters and in our Valhalla, New York clinical research and development
center in order to properly support all activities relating to production,
maintenance, customer support for our products, as well as the research and
development programs for dermatology and internal indications.

In February 2001, we agreed to compensate North Safety Products, Inc.
(North), the manufacturer of our Kerastick® brand applicator, for certain
overhead expenses associated with the manufacture of the Kerastick® to cover
underutilization of Norths facilities, since current orders





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are below certain previously anticipated levels. In July 2001, we revised this
agreement and paid North $1,000,000 in up-front underutilization fees and
agreed to make additional payments totaling $400,000 covering the period from
the execution of this amendment to the agreement through December 31, 2002.
Through September 30, 2001, we have paid $1,100,000 of the underutilization
fees. DUSA has reported the total commitment of $1,400,000 in deferred
charges, which is recognized in cost of product sales on a straight-line basis
over the term of the amendment. Of this amount, $1,000,000 of the
underutilized fees will be reimbursed through an amendment to DUSAs Marketing,
Development and Supply agreement with Schering AG. In consideration for the
underutilization fees, North has agreed to maintain its Kerastick®
manufacturing capabilities in a state of readiness, with the capability of
producing at least 25,000 Kerastick® units per month in accordance with
established procedures. In addition, North is obligated to provide us with
manufacturing records, personnel support, and a list of consultants and
suppliers that have supported the development and manufacturing of the
Kerastick®. The term of the agreement ends on December 31, 2002 unless DUSA
exercises an option to extend the term through June 30, 2003. If DUSA should
decide to extend the term, North will be entitled to payment of additional
underutilization fees of up to $500,000, prorated based on the level of
Kerastick® units produced from July 1, 2001 through June 30, 2003.

On September 26, 2001, DUSA and Schering AG agreed to amend our Marketing,
Development and Supply agreement, dated November 1999. With the execution of
this amendment, Schering and Berlex agreed to reimburse DUSA $1,000,000 for
costs incurred by DUSA to modify our manufacturing agreement with North. This
amount has been reported in deferred liabilities and is being recognized as an
offset to cost of product sales on a straight-line basis over the term of the
amendment. In consideration for this amendment, DUSA agreed to be liable to
Schering AG for all consequential damages, including, but not limited to, lost
profits, attributed to DUSAs failure to supply Schering AGs requirements of
finished product as defined in the original agreement. In addition, DUSA agreed
to qualify itself as the primary manufacturer and supplier of the Kerastick®
within six months following the date that North ceases production. DUSA and
Schering also agreed to terminate the guaranty by Schering AG to DUSA of BLU-U®
lease payments by physicians, and the secured line of credit promissory note
from Schering to DUSA for up to $1,000,000 to finance inventory of BLU-U®
units.

Results of Operations
         Revenues. Total revenues recognized for the three and nine-month periods
ended September 30, 2001 were approximately $1,437,000 and $4,143,000, and
include product sales of $59,000 and $470,000, respectively, primarily
reflecting direct sales of the Kerastick® to Berlex. Based on the agreed upon
development plan and the timing of the start of the clinical trials, revenues
for the current three and nine-month periods also include research and
development revenue of approximately $882,000 and $2,186,000, reflecting
revenue earned payments from Schering AG to support our dermatology
co-development program. Under our agreement with Schering AG, two-thirds of the
agreed upon dermatology research and development expenses, up to $3,000,000 per
year, are reimbursable to DUSA by Schering AG for 2001. In early 2001, both
parties agreed upon the development program that will be subject to
reimbursement for 2001. The total budget for approved co-development, research
and development projects totals $3,954,000 so far for 2001, which will entitle
us to a reimbursement from Schering of $2,636,000, assuming the full budget is





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spent. Also included in revenues for the current three and nine-month
periods are $496,000 and $1,488,000 of milestone and unrestricted grant
payments, also from Schering AG, reflecting the amortization of up front
payments that have been recorded as deferred revenue upon receipt and are
recognized as income on a straight-line basis over the term of the Companys
alliance agreement with Schering AG. During the comparative three and
nine-month periods in 2000, total revenues recognized were approximately
$140,000 and $742,000, respectively, reflecting direct sales of the Kerastick®
to Berlex of $140,000 and $603,000 of earned revenue payments from Schering to
support our dermatology co-development program.

Based on Berlexs current forecast, we have met Berlexs Kerastick® supply
needs into 2002. We earn royalties when Berlex sells the Kerastick® into the
marketplace; however, such royalties were minimal during the first nine months
of 2001 as Berlex had met its distributors initial supply needs in the fourth
quarter of 2000, and the royalties on those sales were received in the first
quarter of 2001. Management is unable to predict the timing of royalties on
future Kerastick® sales by Berlex as DUSA does not control the distribution
channel of the Kerastick® and Berlexs forecast for the manufacturing of
Levulan®.

During the current three and nine-month periods, the number of BLU-U®
brand light units in place in physicians offices increased by 41 and 134,
respectively to 231. In July 2001, DUSA and Berlex test-marketed a new program,
which was then launched nationally in mid-September 2001. Under this program,
DUSA rents the BLU-U®to physicians for 36 months with costs deferred for the
first six months, while Berlex provides physicians with Kerastick® samples at
its cost. Physicians have the right to terminate the rental at any time. We
are negotiating with a medical device leasing company to manage the rental
program including coordinating payment plans with the physicians. Berlex is
actively working to convert physicians to the new marketing program. Under the
new marketing arrangement, revenues will be recognized ratably over the last 30
months of the rental period. In the initial marketing program, we leased or
rented the BLU-U®to our customers and engaged a medical device leasing company
to complete the leasing and/or rental transactions, including coordinating
payment plans with the physicians. We have been selling the leased BLU-U®to
the leasing company, which usually pays us for the units within thirty (30)
days after installation in the physicians offices. DUSA, Berlex and the
leasing company will continue to support customers that remain on this initial
program; however, we expect that the majority of such customers will convert to
the new program. Under the initial program, physicians have the right to cancel
their leases after periods of up to one year. Therefore, these revenues are
reported as deferred revenues until the right to cancel the lease has expired.
In the event a customer does cancel a lease, we have agreed to repurchase the
units from the leasing company at an agreed upon price. As of September 30,
2001, 66 customers from the initial program have converted to the new program
and the units have been repurchased from the leasing company and the
corresponding deferred revenue has been reversed from the financial statements.

Cost of Product Sales. Cost of product sales for the three and nine-month
periods ended September 30, 2001 were approximately $442,000 and $1,818,000,
respectively, including $358,000 in direct Kerastick® related product costs in
the current nine-month period, and $66,000 and $467,000 of underutilization
costs due to orders to our Kerastick® manufacturer falling below certain
previously anticipated levels. During the current three and nine-month periods,
cost of





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product sales also includes $56,000 and $169,000 in amortization of
deferred charges reflecting consideration paid by us in 2000 to amend our
Supply Agreement with Sochinaz SA, the manufacturer of the bulk drug ingredient
used in Levulan®, as well as costs incurred for shipping and installing the
BLU-U® in physicians offices. In 2001, we commenced allocating personnel to
product sale operations and/or general and administrative functions, as a
significant percentage of manufacturing development activities have been
completed for our current products. Such personnel-related costs allocated to
cost of product sales were approximately $178,000 and $564,000 for the three
and nine-month periods ended September 30, 2001. Inventory costs related to
the BLU-U® units that are leased under the initial marketing program are
deferred and recorded in other current assets until the customers right to
cancel its lease after periods of up to one year expires. As of September 30,
2001, deferred inventory costs were approximately $242,000.

The higher cost of product sales as compared to product sales is primarily
a result of the lower than anticipated level of Kerastick® sales, and
under-absorbed overhead attributed to the payment of underutilization costs to
our Kerastick® supplier, as noted above, and the allocation of personnel to
product sales operations. Management expects that such costs may initially
increase in our own facility but will be covered by product revenue as the
level of Kerastick® sales increases.

In early 2001, in order to meet the production scheduling needs of our
third-party manufacturer of the BLU-U®, we prepaid raw material costs in the
amount of $400,000 associated with our current orders. This amount is being
credited against the final purchase price, which will be due on delivery of
finished units at the rate of $1,000 per completed unit. At the end of
September 2001, approximately $151,000 of this prepayment remained outstanding
and was recorded in other current assets. In addition, if we do not order a
certain number of BLU-U® brand units for delivery in 2002, we have agreed to
pay $100,000 to our manufacturer for certain overhead costs. We do not know at
this time whether we will be required to make this payment as we depend upon
Berlex to market our products. Accordingly, we have not recorded an accrual of
this liability at this point in time.

Research and Development Costs. Research and development costs for the
three and nine-month periods ended September 30, 2001 increased approximately
$778,000 and $1,572,000, respectively, to $2,806,000 and $7,068,000, as
compared to the same periods in 2000. These increases were attributed to
higher expenditures for dermatology and internal indications coupled with
increased personnel costs related to certain on-going development activities.
During the 2001 periods, this increase was partially offset by the reassignment
of personnel costs to product sale operations and/or general and administrative
functions, rather than to research and development costs, as a significant
percentage of the development activities were completed for our current
products in 2000.

As we implement our dermatology program with Schering AG, and expand our
internal indication programs, we expect clinical research and development
expenses to continue to increase significantly. In order to better manage the
significantly increased number of indications under development, and to provide
dedicated staff to our dermatology development program with Schering, on
October 4, 2001, the Company executed a master service agreement, effective
June 15, 2001, with Therapeutics, Inc. for an initial term of two years to
engage Therapeutics to manage the clinical





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development of the Companys products in the field of dermatology including the
Phase I/II clinical trial of Levulan® PDT for moderate to severe acne vulgaris
of the face. Minimum payments under this agreement are $65,500 per month. In
addition, with the execution of this agreement, Therapeutics received 5,000
shares of the Companys common stock and also has the opportunity for
additional grants, bonuses, and other incentives for each indication ranging
from $250,000 to $1,250,000 depending on the phase of development for each
indication.

In July 2001, the United States Food and Drug Administration completed its
review of three Investigational New Drug applications allowing initiation of
clinical trials using Levulan® Photodynamic Therapy for the treatment of
onychomycosis (nail fungus), warts, and Barretts esophagus. On October 10,
2001, we initiated a second Phase I/II clinical trial for the treatment of
Barretts esophagus. Subject to success in these Phase I/II feasibility
studies, DUSA plans to move forward with more expensive pre-pivotal Phase II
studies for some or all of these indications, starting in 2002.

With respect to Levulan® PDT for brain cancer, although we also originally
intended to initiate a clinical study during 2001, we have decided to first
examine the market opportunities for various brain cancers. DUSA is also
supporting and collaborating in new investigator studies on Barretts esophagus
and restenosis inhibition. In addition, independent investigators have reported
to DUSA that positive long-term results were achieved in a pilot study using
Levulan® PDT following balloon angioplasty to inhibit arterial restenosis.
There have been no further developments regarding bladder cancer detection, but
DUSA continues to evaluate possible approaches for this indication. Additional
indications are being considered for future development including detection and
treatment of cervical dysplasia and dysfunctional uterine bleeding.

General and Administrative Costs. General and administration costs for the
three and nine-month periods ended September 30, 2001 increased approximately
$454,000 and $1,232,000, respectively, to $985,000 and $2,903,000, as compared
to the same periods in 2000. These increases were mainly attributed to the
hiring of additional staff, including key management personnel in
administrative, financial, technical and operations functions, during the
second half of 2000 and first nine months of 2001. In addition, this increase
also reflects the aforementioned reassignment of personnel to general and
administrative functions and/or product sale operations, as a significant
percentage of the manufacturing development activities have been completed for
our current products. General and administrative costs are expected to continue
to increase during the remainder of 2001, and into 2002, as we continue to add
personnel as needed at various levels throughout the organization.

Interest Income. Interest income for the three-month period ended
September 30, 2001 increased slightly to $979,000 as compared to $944,000 in
the comparable period in 2000, attributable to higher investable cash balances,
offset partly by lower interest rates. During the nine-month period ended
September 30, 2001, interest income increased significantly to $3,013,000 as
compared to $2,270,000 for the same period in 2000 mainly due to earnings on
the $15,000,000 received from Schering AG during the fourth quarter of 2000 and
net proceeds of approximately $40,700,000 received from a private placement in
March 2000. If our product





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sales, which are dependent upon the market penetration by Berlex in the
United States and Schering AG in the rest of the world, excluding Canada, and
our ability to meet the supply needs of our customer base, do not offset our
expenditures, interest income will decline as our investable cash balances are
reduced to support DUSAs operating activities.

Net Losses. The Company incurred a net loss of approximately $1,817,000,
or $0.13 per share, and $4,632,000, or $0.34 per share, for the three and
nine-month periods ended September 30, 2001, as compared to a net loss of
$1,614,000, or $0.12 per share, and $4,295,000, or $0.33 per share, for the
three and nine-month periods ended September 30, 2000. These losses were within
managements expectations and losses are expected to be incurred until the
successful market penetration of our first products occurs. As previously
reported, management expects DUSAs net loss for 2001 to be between $6 million
and $7 million.

Liquidity and Capital Resources
         We are in a strong cash position to continue to expand our research and
development activities for our Levulan® PDT/PD platform. Our total assets were
approximately $78,677,000 at September 30, 2001, compared to $82,442,000 as of
December 31, 2000. This decrease is mainly the result of net operating
activities costs incurred during the first nine months of 2001.

As of September 30, 2001, we had inventory of approximately $2,051,000,
representing finished goods and raw materials, as compared to $1,332,000 as of
December 31, 2000. Also, at the end of the current quarter we had net fixed
assets of $2,662,000, compared to $1,700,000 as of December 31, 2000, due
primarily to the acquisition of equipment and software. We expect to make
additional capital expenditures during the last three months of 2001 and 2002
in order to acquire equipment for the manufacture of the Kerastick® for either
a back up second source of supply or the development of our own manufacturing
capabilities. As of September 30, 2001, the Company has acquired or incurred
deposits of approximately $248,000 in manufacturing equipment, which has been
recorded in other assets.

As of September 30, 2001, we had accounts receivable of $131,000,
representing net sales associated with product sales, compared to $915,000 at
the end of 2000. In addition, based on our Marketing, Development and Supply
agreement with Schering AG, a receivable of $1,795,000 has been recorded during
the current quarter for reimbursable research and development costs and certain
costs associated with restructuring the supply agreement with our Kerastick®
manufacturer. As of December 31, 2000, we recorded a co-development receivable
of $723,000.

As of September 30, 2001, we had current liabilities of $2,205,000,
compared to $2,837,000 as of December 31, 2000. Since our inception, we have
had no long-term debt.

We invest our cash in United States government securities, which are
classified as available for sale. As of September 30, 2001, we held securities
with an aggregate cost of approximately $57,891,000 and a current aggregate
market value of $60,670,000, resulting in a net unrealized gain on securities
available for sale of $2,779,000, which has been included in shareholders
equity. As of December 31, 2000, these securities had an aggregate cost of
$56,876,000 and a current aggregate market value of $58,055,000 resulting in a
net unrealized gain on securities available for sale of





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$1,179,000. Due to fluctuations in interest rates and depending upon the
timing of our need to convert government securities into cash to meet our
working capital requirements, some gains or losses could be realized. These
securities currently have yields ranging from 4.39% to 6.91% and maturity dates
ranging from October 1, 2001 to August 15, 2006.

We believe that we have sufficient capital resources to proceed with our
current development program for Levulan® PDT/PD for the foreseeable future. We
have invested our funds in liquid investments, so that we will have ready
access to these cash reserves, as needed, for the funding of development plans
on a short-term and long-term basis. DUSA is actively seeking to expand or
enhance its business by using its resources to acquire by license, purchase or
other arrangements, businesses, technologies, or products. However, no such
transaction is imminent. We also plan to continue to actively seek
relationships with pharmaceutical or other suitable organizations to help
develop and/or market some of our potential non-dermatology products and
technologies.

As of September 30, 2001, we had deferred revenues of approximately
$23,349,000, compared to $24,805,000 at December 31, 2000. At the end of the
current quarter, deferred revenues reflected unamortized milestone and
unrestricted grant payments received from Schering AG in 1999 and 2000 of
$22,808,000, and the deferral of $540,000 of BLU-U® product sales until the
expiration of our customers right of return on our commercial light sources.
Commencing with our product launch, we began to amortize the Schering AG
milestone and unrestricted grant payments over approximately 12 years, the term
of the Schering AG agreement, based upon current revenue recognition
principles.

While the current amount of our liquid assets will enable us to maintain
our current research program as planned and support the commercialization of
Levulan® PDT for AKs for the foreseeable future, in order to maintain and
expand continuing research and development programs, and/or acquire products
and/or new businesses, DUSA may need to raise additional funds in the future
through corporate alliances, financings, or other sources, depending upon the
amount of revenues we receive from our first product and the opportunities
available.

As of September 30, 2001, we had 54 full-time employees. We expect that we
will continue to hire more employees as commercialization of Levulan® PDT
continues, particularly in the operations, research and development, financial
and regulatory areas.

We have not made any material capital expenditures for environmental
control facilities. However, if we establish our own production line for the
manufacture of the Kerastick®, we expect that environmental laws will govern
our facility. We are currently obtaining estimates for the capital costs
associated with this effort. There can be no assurance, however, that we will
not be required to incur significant costs to comply with environmental laws
and regulations in the future, or any assurance that our operations, business
or assets will not be materially adversely affected by current or future
environmental laws or regulations.

Recently Issued Accounting Pronouncements
         In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141, Business Combinations and
SFAS No. 142





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Goodwill and Other Intangible Assets. SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after September 30, 2001 and that the use of the pooling-of-interest method is
no longer allowed. SFAS No. 142 requires that upon adoption, amortization of
goodwill will cease and instead, the carrying value of goodwill will be
evaluated for impairment on an annual basis. Identifiable intangible assets
will continue to be amortized over their useful lives and reviewed for
impairment in accordance with SFAS No. 121 Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of. SFAS No. 142 is
effective for fiscal years beginning after December 15, 2001. DUSA is
evaluating the impact of the adoption of these standards and does not believe
the effect of adoption of these statements will have any material effect on our
financial position or results of operation.

In September 1998, the Financial Accounting Standards Board issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. On
January 1, 2001, the Company adopted SFAS No. 133, which did not have any
effect on our financial position or results of operation.

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




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We hold fixed income U.S. government securities that are subject to
interest rate market risks. We do not believe that the risk is material at this
time as we have apportioned our investments in short-term and longer-term
instruments, up to five years, and we strive to match the maturity dates of
these instruments to our cash flow needs. A ten percent decline in the average
yield of these instruments would not have a material effect on our results of
operations or cash flows. As noted above, if significant, sudden fluctuations
in interest rates occur, losses could be realized. We do not hold derivative
securities. Accordingly, we do not believe that there is a material market
risk exposure with respect to derivative or other financial instruments that
would require disclosure under this item.

Forward-Looking Statements

This report, including the Managements Discussion and Analysis, contains
various forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 which represent our expectations or beliefs concerning
future events, including, but not limited to statements regarding the timing of
the establishment of a Canadian supply arrangement, expectations for regulatory
approval of our products in non-U.S. countries, the achievement of market
acceptance of our products, belief that reimbursement levels will have to be
competitive





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with other AK products reimbursement levels and that the proposed
reimbursement fees will allow the therapy to gain acceptance, the goal of
reducing cost of product sales, timing of royalties on Kerastick® sales and
recognition of revenue on BLU-U® distribution, expectations of the ability to
cover under-absorbed overhead, beliefs regarding environmental compliance,
expectations regarding the future funding of dermatology Phase II studies,
anticipation of hiring additional personnel, dependence on reimbursement
policies for significant revenues, expectations for continuing operating
losses, increasing research and development costs, levels of interest income,
additional capital expenditures, and beliefs regarding the sufficiency of our
capital resources. These forward-looking statements are further qualified by
important factors that could cause actual results to differ materially from
those in the forward-looking statements. These factors include, without
limitation, changing market and regulatory conditions, actual clinical results
of our trials, the impact of competitive products and pricing, the timely
development, FDA and foreign regulatory approval, and market acceptance of our
products, reliance on third parties for the production, manufacture, sales and
marketing of our products, the securities regulatory process, the maintenance
of our patent portfolio and levels of reimbursement by third-party payors, none
of which can be assured. Results actually achieved may differ materially from
expected results included in these statements as a result of these or other
factors mentioned from time to time in our SEC filings.




PART II- OTHER INFORMATION

Items 1 - 5.



| |      
| | -----
| | None.

Item 6. Exhibits and Reports on Form 8-K.



|a) |  | i) Exhibit 10 (a)  Amendment to Marketing, Development and Supply
Agreement between the Company and Schering AG, dated September 26, 2001,
portions of which have been omitted pursuant to a request for confidential
treatment under Rule 24(b) of the Securities Exchange Act of 1934, as
amended.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | ii) Exhibit 10 (b)  Master Service Agreement with Therapeutics, Inc. dated
as of October 4, 2001, portions of which have been omitted pursuant to a
request for confidential treatment under Rule 24(b) of the Securities
Exchange Act of 1934, as amended.                                         
|  
|b) |  | (i) Form 8-K dated and filed on July 17, 2001 reporting the Registrants
conference call with shareholders on research and development program
advancements.                                                                                                                                         





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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

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|                       |  | DUSA Pharmaceuticals, Inc.                                                                                        
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|Date: November 7, 2001 |  | By:                                                                                                                | /s/John E. Mattern
|                       |  |                                                                                                                    |                   
|                       |  | John E. Mattern
Vice President, Finance,
and Chief Financial Officer(Chief
Financial and Chief Accounting
Officer)