<PAGE>

                                    FORM 10-Q
                       SECURITIES 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, 2003

                                       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                  (I.R.S. Employer
              incorporation or organization)                 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.

                    13,965,247 shares as of November 10, 2003

<PAGE>

PART I.
ITEM 1. FINANCIAL STATEMENTS

DUSA PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                SEPTEMBER 30,   DECEMBER 31,
                                                                                   2003            2002
                                                                                (UNAUDITED)
                                                                                ------------    ------------
<S>                                                                             <C>             <C>
ASSETS

CURRENT ASSETS

   Cash and cash equivalents                                                    $  3,643,546    $  7,064,596
   United States government securities available for sale                         37,968,316      45,814,947
   Accrued interest receivable                                                       434,905         699,664
   Accounts receivable                                                                95,386          36,720
   Inventory                                                                         953,161       1,188,659
   Prepaids and other current assets                                                 566,956         915,704
                                                                                ------------    ------------
      TOTAL CURRENT ASSETS                                                        43,662,270      55,720,290
   Property and equipment, net                                                     4,552,267       5,229,683
                                                                                ------------    ------------
TOTAL ASSETS                                                                    $ 48,214,537    $ 60,949,973
                                                                                ============    ============

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES

   Accounts payable                                                             $    529,766    $    552,891
   Accrued payroll                                                                   478,407         476,602
   Other accrued expenses                                                          1,165,868       2,070,150
   Current maturities of long-term debt                                              270,000         270,000
   Deferred revenue                                                                   53,040           5,100
                                                                                ------------    ------------
     TOTAL CURRENT LIABILITIES                                                     2,497,081       3,374,743
   Long-term debt, net of current maturities                                       1,315,000       1,517,500
                                                                                ------------    ------------
TOTAL LIABILITIES                                                                  3,812,081       4,892,243
                                                                                ------------    ------------
COMMITMENTS AND CONTINGENCIES (NOTE 11)

SHAREHOLDERS' EQUITY

   Capital Stock

      Authorized: 100,000,000 shares; 40,000,000 shares designated as common
      stock, no par, and 60,000,000 shares issuable in series or classes; and
      40,000 junior Series A preferred shares. Issued and outstanding:
      13,965,247 (2002: 13,887,612) shares of common stock, no par.               95,666,684      95,490,561
   Additional paid-in capital                                                      2,015,586       2,015,586
   Accumulated deficit                                                           (55,139,874)    (44,082,927)
   Accumulated other comprehensive income                                          1,860,060       2,634,510
                                                                                ------------    ------------
TOTAL SHAREHOLDERS' EQUITY                                                        44,402,456      56,057,730
                                                                                ------------    ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                      $ 48,214,537    $ 60,949,973
                                                                                ============    ============
</TABLE>

 See the accompanying Notes to the Condensed Consolidated Financial Statements.

                                        2

<PAGE>

DUSA PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                      THREE MONTHS ENDED            NINE MONTHS ENDED

                                                                         SEPTEMBER 30,                 SEPTEMBER 30,

                                                                         (UNAUDITED)                    (UNAUDITED)
                                                                 ----------------------------   ----------------------------
                                                                     2003           2002            2003            2002
                                                                 ------------    ------------   ------------    ------------
<S>                                                              <C>             <C>            <C>             <C>
REVENUES

   Product sales and rental income                               $    163,155    $     51,185   $    453,800    $    157,370
   Research grant and milestone revenue                                     -      21,320,830              -      22,312,498
   Research revenue earned under collaborative agreements                   -       1,193,739              -       2,851,362
                                                                 ------------    ------------   ------------    ------------
TOTAL REVENUES                                                        163,155      22,565,754        453,800      25,321,230
                                                                 ------------    ------------   ------------    ------------
OPERATING COSTS

   Cost of product sales and royalties                                887,336       3,240,793      2,464,667       4,696,095
   Research and development                                         1,202,130       2,848,295      4,167,121       9,319,891
   Marketing and sales                                                535,114               -      1,598,604               -
   General and administrative                                       1,627,364       1,411,494      4,782,385       4,104,510
                                                                 ------------    ------------   ------------    ------------
TOTAL OPERATING COSTS                                               4,251,944       7,500,582     13,012,777      18,120,496
                                                                 ------------    ------------   ------------    ------------
INCOME (LOSS) FROM OPERATIONS                                      (4,088,789)     15,065,172    (12,558,977)      7,200,734

OTHER INCOME

   Interest income, net                                               408,931         695,701      1,502,030       2,255,022
                                                                 ------------    ------------   ------------    ------------
NET INCOME (LOSS)                                                $ (3,679,858)   $ 15,760,873   $(11,056,947)   $  9,455,756
                                                                 ============    ============   ============    ============
BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE             $       (.26)   $       1.13   $       (.79)   $       0.68
                                                                 ============    ============   ============    ============
WEIGHTED AVERAGE NUMBER OF
         COMMON SHARES OUTSTANDING                                 13,954,450      13,887,612     13,926,450      13,874,181
                                                                 ============    ============   ============    ============
</TABLE>

 See the accompanying Notes to the Condensed Consolidated Financial Statements.

                                        3

<PAGE>

DUSA PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                       NINE MONTHS ENDED SEPTEMBER 30,

                                                                                            2003            2002

                                                                                         (UNAUDITED)    (UNAUDITED)
                                                                                        ------------    ------------
<S>                                                                                     <C>             <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES

   Net income (loss)                                                                    $(11,056,947)   $  9,455,756
   Adjustments to reconcile net loss to net cash used in operating activities
   Amortization of premiums and accretion of discounts on United States
     government securities available for sale, net                                            72,181          (8,207)
   Depreciation and amortization expense                                                   1,077,083       2,488,764
   Amortization of deferred revenue                                                                -     (22,312,498)
   Issuance of common stock to consultants                                                   110,000          50,000
   Changes in other assets and liabilities impacting cash flows from operations:
     Accrued interest receivable                                                             264,759         212,540
     Accounts receivable                                                                     (58,666)         54,116
     Receivable under co-development program                                                       -         214,534
     Inventory                                                                               235,498       1,734,733
     Prepaids and other current assets                                                       348,748        (163,074)
     Deferred charges                                                                              -        (100,000)
     Accounts payable                                                                        (23,125)       (250,876)
     Accrued payroll and other accrued expenses                                             (865,354)       (294,423)
     Deferred revenue                                                                         47,940        (256,528)
                                                                                        ------------    ------------
NET CASH USED IN OPERATING ACTIVITIES                                                     (9,847,883)     (9,175,163)
                                                                                        ------------    ------------

CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
   Purchases of United States government securities                                       (4,000,000)     (6,131,356)
   Proceeds from maturing United States government securities                             11,000,000      10,983,593
   Purchases of property and equipment                                                      (399,667)     (2,306,726)
                                                                                        ------------    ------------
NET CASH PROVIDED BY INVESTING ACTIVITIES                                                  6,600,333       2,545,511
                                                                                        ------------    ------------

CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
   Proceeds from long-term debt                                                                    -       1,900,000
   Payments of long-term debt                                                               (202,500)        (45,000)
   Proceeds from issuance of options                                                          29,000               -
                                                                                        ------------    ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                                         (173,500)      1,855,000
                                                                                        ------------    ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS                                                 (3,421,050)     (4,774,652)
                                                                                        ------------    ------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                           7,064,596       7,568,500
                                                                                        ------------    ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                                              $  3,643,546    $  2,793,848
                                                                                        ============    ============
</TABLE>

 See the accompanying Notes to the Condensed Consolidated Financial Statements.

                                        4

<PAGE>

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

1)       BASIS OF PRESENTATION

         The Condensed Consolidated Balance Sheet as of September 30, 2003,
Condensed Consolidated Statements of Operations for the three and nine months
ended September 30, 2003 and 2002, and Condensed Consolidated Statements of Cash
Flows for the nine months ended September 30, 2003 and 2002 of DUSA
Pharmaceuticals, Inc. (the "Company" or "DUSA") have been prepared in accordance
with accounting principles generally accepted in the United States of America.
These condensed consolidated financial statements are unaudited but include all
normal recurring adjustments, which management of the Company believes to be
necessary for fair presentation of the periods presented. The results of the
Company's operations for any interim period are not necessarily indicative of
the results of the Company's operations for any other interim period or for a
full year.

         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 consolidated financial statements should be read in conjunction with
the Company's December 31, 2002 audited consolidated financial statements and
notes thereto. Certain amounts for 2002 have been reclassified to conform to the
current year presentation. Such reclassifications had no impact on the net loss
or shareholders' equity for any period presented.

2)       2002 COLLABORATION TERMINATION

         On September 1, 2002, DUSA and Schering AG, the Company's former
marketing and development partner for Levulan(R) PDT in the field of
dermatology, terminated the parties' Marketing Development and Supply Agreement,
dated November 22, 1999. As a result of this termination, DUSA reacquired all
rights it granted to Schering AG under the agreement.

         In the quarter ended September 30, 2002, DUSA evaluated certain items
on its Condensed Consolidated Balance Sheet for the timing of revenue
recognition and potential impairment. These items included unamortized deferred
revenue related to non-refundable milestone payments previously received under
the agreement with Schering AG, and assets including the Company's manufacturing
facility, raw material and finished goods inventories, commercial light units,
and deferred charges and royalties. As a result of this analysis, in addition to
normal amortization recorded prior to the termination of the Schering AG
agreement, the Company recorded the following items in its Condensed
Consolidated Statements of Operations during the three months ended September
30, 2002:

                                        5

<PAGE>

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

<TABLE>
<CAPTION>
                                                                                       REVENUE
                                                                                     RECOGNITION/
                                                                                        ASSET
     STATEMENT OF OPERATIONS ITEM                  BALANCE SHEET ITEM                 IMPAIRMENT
-----------------------------------------          ------------------                ------------
<S>                                                <C>                               <C>
Revenues:

      Research grant and milestone revenue         Deferred revenue                  $ 20,990,000
                                                                                     ------------

Operating Costs:

      Cost of product sales                        Deferred charges (1)              $    543,000
                                                   Inventory                            1,705,000

                                                   Commercial light sources
                                                   under lease or rental  (2)             390,000
                                                                                     ------------
         Total cost of product sales                                                 $  2,638,000

      Research and development costs               Deferred royalty  (1)                  639,000
                                                                                     ------------
         Total operating cost impairment                                             $  3,277,000
                                                                                     ------------
</TABLE>

     1)       Deferred charges and deferred royalty were charged to expense in
              2002, and are not currently items in the Condensed Consolidated
              Balance Sheets.

     2)       Commercial light sources under lease or rental are included in
              prepaids and other current assets in the Condensed Consolidated
              Balance Sheets.

3)       UNITED STATES GOVERNMENT SECURITIES AVAILABLE FOR SALE

         The Company's United States government securities available for sale
consist of securities of the United States government and its agencies, with
current yields, as of September 30, 2003, ranging from 3.62% to 7.25% and
maturity dates ranging from November 14, 2003 to September 22, 2008.

         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.

                                        6

<PAGE>

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

4)       INVENTORY

         Inventory consisted of the following:

<TABLE>
<CAPTION>
                                                  SEPTEMBER 30,       DECEMBER 31,
                                                      2003               2002
                                                  (UNAUDITED)
                                                  -----------         -----------
<S>                                               <C>                 <C>
Finished goods                                    $   769,448         $ 1,047,941
Raw materials                                         183,713             140,718
                                                  -----------         -----------
                                                  $   953,161         $ 1,188,659
                                                  ===========         ===========
</TABLE>

5)       OTHER ACCRUED EXPENSES

         Other accrued expenses consisted of the following:

<TABLE>
<CAPTION>
                                        SEPTEMBER 30,   DECEMBER 31,
                                           2003            2002
                                        (UNAUDITED)
                                        ------------    ------------
<S>                                     <C>             <C>
Research and development costs           $  213,131      $  473,543
Marketing and sales costs                   114,353               -
Product related costs                        91,701         463,340
License milestone                                 -         500,000
Legal and other professional fees           417,419         297,966
Employee benefits                           199,565         207,833
Other                                       129,699         127,468
                                         ----------      ----------
                                         $1,165,868      $2,070,150
                                         ==========      ==========
</TABLE>

6)       SHAREHOLDERS' EQUITY

         On June 15, 2003, the Company granted compensation, accrued in the
second quarter of 2003, of $50,000 to Therapeutics, Inc., a clinical research
organization, pursuant to an agreement for services. This compensation was
issued in July 2003 and was comprised of 11,666 shares of common stock valued at
$35,000 and $15,000 of cash. The Company recorded the total value of the
compensation in the second quarter of 2003 as part of research and
development costs in the Condensed Consolidated Statements of Operations.

         On May 2, 2003, the Company granted a total of 32,750 shares of
unregistered common stock, without par value, accrued in the second quarter of
2003, to two outside consultants as compensation for services. These shares were
valued at approximately $75,000 and were recorded in the second quarter of 2003
as part of research and development costs in the Condensed Consolidated
Statements of Operations.

                                        7

<PAGE>

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

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

7)       MARKETING AND SALES

         As a result of the termination of the Company's marketing and
development collaboration with its former marketing partner in September 2002,
the Company commenced certain marketing and sales initiatives in 2003 associated
with having full rights and responsibilities for its product. In addition, the
Company has reassigned resources that were previously functioning in research
and development roles to its marketing and sales function. Prior to the
Company's termination of its marketing and development collaboration, all rights
and activities associated with marketing and sales of its products were solely
the responsibility of its former partner. Activities included in marketing and
sales expense for 2003 consist of trade show expenses, advertising, personnel
and other resources assigned to marketing and sales activities, and other
marketing and promotional activities. All such costs are expensed as incurred.

8)       ACCOUNTING FOR STOCK BASED COMPENSATION

         Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," addresses the financial accounting
and reporting standards for stock or other equity-based compensation
arrangements. The Company has elected to continue to use the intrinsic
value-based method to account for employee stock option awards under the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and to provide disclosures based on the fair value method
in the Notes to the Consolidated Financial Statements as permitted by SFAS No.
123. Stock or other equity-based compensation for non-employees must be
accounted for under the fair value-based method as required by SFAS No. 123 and
Emerging Issues Task Force ("EITF") No. 96-18, "Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services" and other related interpretations.
Under this method, the equity-based instrument is valued at either the fair
value of the consideration received or the equity instrument issued on the date
of grant. The resulting compensation cost is recognized and charged to
operations over the service period, which is generally the vesting period.

                                        8

<PAGE>

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

         Had the Company used the fair value method to measure compensation, the
Company's pro forma net income (loss) and pro forma net income (loss) per common
share for the three and nine months ending September 30, 2003 and 2002 would
have been as follows:

<TABLE>
<CAPTION>
                                                             THREE MONTHS ENDED                NINE MONTHS ENDED
                                                                SEPTEMBER 30,                     SEPTEMBER 30,
                                                                 (UNAUDITED)                       (UNAUDITED)
                                                     -------------------------------    -------------------------------
                                                          2003             2002              2003             2002
                                                     -------------    --------------    --------------    -------------
<S>                                                  <C>              <C>               <C>               <C>
NET INCOME (LOSS)

   As reported                                       $  (3,679,858)   $   15,760,873    $  (11,056,947)   $   9,455,756
   Effect on net loss if fair value method had
      been used                                           (482,455)         (970,058)       (1,613,376)      (2,910,173)
                                                     -------------    --------------    --------------    -------------
   Proforma                                          $  (4,162,313)   $   14,790,815    $  (12,670,323)   $   6,545,583
                                                     =============    ==============    ==============    =============

BASIC AND DILUTED NET INCOME (LOSS) PER COMMON
   SHARE

   As reported                                       $       (0.26)   $         1.13    $        (0.79)   $        0.68
   Effect on net loss per common share if fair
      value method had been used                             (0.04)            (0.06)            (0.12)           (0.21)
                                                     -------------    --------------    --------------    -------------
   Proforma                                          $       (0.30)   $         1.07    $        (0.91)   $        0.47
                                                     =============    ==============    ==============    =============
</TABLE>

9)       BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE

         Basic and diluted net income (loss) per common share are based on the
weighted average number of shares outstanding during each period. Stock options
and warrants are not included in the computation of the weighted average number
of shares outstanding for dilutive net loss per common share during each of the
periods presented in the Condensed Consolidated Statements of Operations, as the
effect would be antidilutive. For the periods ended September 30, 2003 and 2002,
such potentially dilutive securities totaling approximately 2,711,000 and
2,672,000 shares, respectively, have been excluded from the computation of
diluted net income (loss) per common share.

                                        9

<PAGE>

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

10)      COMPREHENSIVE INCOME (LOSS)

         For the three and nine months ended September 30, 2003 and 2002,
comprehensive loss consisted of the following:

<TABLE>
<CAPTION>
                                                THREE MONTHS ENDED             NINE MONTHS ENDED
                                                   SEPTEMBER 30,                 SEPTEMBER 30,
                                                    (UNAUDITED)                   (UNAUDITED)
                                           ----------------------------   ----------------------------
                                               2003            2002           2003            2002
                                           ------------    ------------   ------------    ------------
<S>                                        <C>             <C>            <C>             <C>
NET INCOME (LOSS)                          $ (3,679,858)   $ 15,760,873   $(11,056,947)   $  9,455,756
   Net change in unrealized gains
      (losses) on United States
      securities available for sale            (407,119)        945,511       (774,450)        988,209
                                           ------------    ------------   ------------    ------------
   COMPREHENSIVE INCOME (LOSS)             $ (4,086,977)   $ 16,706,384   $(11,831,397)   $ 10,443,965
                                           ============    ============   ============    ============
</TABLE>

11)      COMMITMENTS AND CONTINGENCIES

         Legal Matters - On April 12, 2002, the Company received notice that one
of the patents licensed to the Company by PARTEQ Research & Development
Innovations, the technology transfer arm of Queen's University at Kingston,
Ontario was challenged by PhotoCure ASA. PhotoCure ASA has filed a lawsuit in
Australia alleging that Australian Patent No. 624985, which is one of the
patents relating to the Company's 5-aminolevulinic acid technology, is invalid.
As a consequence of this action, Queen's University has assigned the Australian
patent to the Company so that DUSA may participate directly in this litigation.
The Company has filed a response setting forth its defenses, in addition to a
related countersuit alleging that certain activities of PhotoCure and its
marketing partner, Galderma S.A., infringe the patent. The case is ongoing and
the Company is unable to predict the outcome at this time. The Company believes
that the final hearing in the Federal Court of Australia will occur in 2004.

         In March 2003, the Company received notice that its Dutch patent was
being formally challenged by an anonymous agent, and DUSA filed a formal
response to the opposition. The Dutch patent office has informed the Company's
that its amended patent claim is valid; however, the opposing party has the
right to appeal the decision.

12)      RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

         In December 2002, the EITF reached conclusion on EITF Issue No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables." This consensus
provides guidance in

                                       10

<PAGE>

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

determining when a revenue arrangement with multiple deliverables should be
divided into separate units of accounting, and, if separation is appropriate,
how the arrangement consideration should be allocated to the identified
accounting units. The provisions of EITF No. 00-21 are effective for revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. The
Company will evaluate any new multiple element arrangements into which it enters
in accordance with this EITF.

13)      MANUFACTURING FACILITY APPROVAL

         In March 2003, DUSA completed the facility qualification, process
validation, and drug product stability testing, and submitted an NDA supplement
to the FDA with respect to its manufacturing facility in Wilmington,
Massachusetts. The FDA completed its inspection of the facility in May 2003 and,
on July 14, 2003, DUSA received approval from the FDA to manufacture the
Levulan(R) Kerastick(R) at our Wilmington facility. Accordingly, the Company
began to depreciate its manufacturing facility and related manufacturing
equipment, with a total cost of $2,204,000 and $461,000, respectively, over
their useful lives.

                                       11

<PAGE>

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

OVERVIEW

         DUSA is a pharmaceutical company engaged primarily in the research,
development, and marketing 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(R).
When Levulan(R) is used and followed with exposure to light to produce a
therapeutic effect, the technology is called photodynamic therapy, or PDT. When
Levulan(R) is used and followed with exposure to light to detect medical
conditions, the technology is called photodetection, or PD. Our first products,
which were launched in September 2000 in the United States, are Levulan(R) 20%
topical solution using our Kerastick(R) brand applicator, and our BLU-U(R) brand
light unit. Levulan(R) is used with the BLU-U(R) to provide PDT for the
treatment of non-hyperkeratotic actinic keratoses, or AKs, of the face or scalp.
In addition, the BLU-U(R) has received market clearance as a stand alone device
for the treatment of moderate inflammatory acne vulgaris.

         We have primarily devoted our resources to funding research and
development in order to advance the Levulan(R) PDT/PD technology platform and,
as a result, we have experienced significant operating losses. As of September
30, 2003, we had an accumulated deficit of approximately $55,140,000. Achieving
our goal of becoming a profitable operating company is dependent upon the market
penetration of our products, acceptance of our therapy by the medical and
consumer constituencies, and our ability to develop and/or acquire new products.
We expect that with the addition of our new sales force, doctors will become
more familiar with the benefits of Levulan(R) PDT for actinic keratoses. (See
section entitled "Results of Operations - Marketing and Sales Costs") We
continue to support efforts to improve reimbursement levels to physicians, and
are working to educate the major private insurance carriers to reimburse our
therapy so they will approve our therapy for coverage. In addition, these
efforts include working with the Centers for Medicare and Medicaid Services
(CMS) to reverse the bundling of the drug cost from the procedure fee which
occurred, effective March 1, 2003. In November 2003, CMS agreed to reinstate the
code for physicians to bill the drug cost separate from the procedure fee,
effective January 1, 2004. We believe that due to these efforts, more widespread
adoption of our therapy should occur over time. In addition, we are aware that
some physicians have been using Levulan(R) with light devices manufactured by
other companies and for uses other than our FDA-approved use. While we are not
permitted to market our products for so-called "off-label" uses, these
activities could also positively affect adoption of our products and increase
sales.

         We expect to continue to incur operating losses until our first
products successfully penetrate the market. However, as a result of the 2002
termination of our former dermatology collaboration arrangement, we reported
positive operating income in the 2002 period, which included the one-time
recognition of certain items resulting in an increase to operating income of
approximately $17,713,000. Also as a result of this collaboration termination,
we reevaluated our expenses in 2003 and increased the level of marketing and
sales activities due to reacquiring our marketing and product rights, while
minimizing expenditures that are not directly related to our core objectives for

                                       12

<PAGE>
2003. At this time, we are focusing primarily on increasing the sales of our
approved products, on implementing our development program, and on seeking a
partner to help develop and market Levulan(R) PDT for the treatment of dysplasia
in patients with Barrett's esophagus. As of September 30, 2003, we had a staff
of 41 full-time employees, as compared to 43 at the end of 2002, who support all
of our activities, including marketing and sales, production, maintenance,
customer support, and financial operations for our products, as well as the
research and development programs for dermatology and internal indications. In
October, 2003 we increased our staff by hiring an initial regional sales force
as we focus on increasing sales, marketing, and customer support activities
associated with our AK products. With success, DUSA plans to further expand the
sales force in 2004. (See section entitled "Results of Operations - Marketing
and Sales Costs") While our financial position is strong, we cannot predict when
product sales may offset the cost of these efforts.

         2002 COLLABORATION TERMINATION - On September 1, 2002, DUSA and
Schering AG, the Company's former marketing and development partner for
Levulan(R) PDT in the field of dermatology, terminated the parties' Marketing
Development and Supply Agreement, dated November 22, 1999. As a result of this
termination, DUSA reacquired all rights it granted to Schering AG under the
agreement.

         In the quarter ended September 30, 2002, DUSA evaluated certain items
on its Condensed Consolidated Balance Sheet for the timing of revenue
recognition and potential impairment. These items included unamortized deferred
revenue related to non-refundable milestone payments previously received under
the agreement with Schering AG, and assets including the Company's manufacturing
facility, raw material and finished goods inventories, commercial light units,
and deferred charges and royalties. As a result of this analysis, in addition to
normal amortization recorded prior to the termination of the Schering AG
agreement, the Company recorded the following items in its Condensed
Consolidated Statements of Operations during the three months ended September
30, 2002:

<TABLE>
<CAPTION>
                                                                                        REVENUE
                                                                                      RECOGNITION/
                                                                                         ASSET
       STATEMENT OF OPERATIONS ITEM                BALANCE SHEET ITEM                  IMPAIRMENT
------------------------------------------         ------------------                 ------------
<S>                                                <C>                                <C>
Revenues:
      Research grant and milestone revenue         Deferred revenue                   $20,990,000

Operating Costs:
      Cost of product sales                        Deferred charges (1)               $   543,000
                                                   Inventory                            1,705,000
                                                   Commercial light sources
                                                   under lease or rental (2)              390,000
                                                                                      -----------
         Total cost of product sales                                                  $ 2,638,000

      Research and development costs               Deferred royalty (1)                   639,000
                                                                                      -----------
         Total operating cost impairment                                              $ 3,277,000
                                                                                      -----------
</TABLE>

                                       13

<PAGE>
     1)       Deferred charges and deferred royalty were charged to expense in
              2002, and are not currently items in the Condensed Consolidated
              Balance Sheets.

     2)       Commercial light sources under lease or rental are included in
              prepaids and other current assets in the Condensed Consolidated
              Balance Sheets.

         MANUFACTURING FACILITY APPROVAL - On July 14, 2003, DUSA received
approval from the FDA to manufacture the Levulan(R) Kerastick(R) at our
Wilmington facility. We expect to manufacture Kerastick(R) units at our approved
facility in 2004 assuming market demand for our products increases
significantly. As of September 30, 2003, we had 39,756 Kerastick(R) units in
inventory. This inventory, which includes physician samples, was produced in
2002 by our former third-party manufacturer to meet product demand during the
execution of our project to complete and gain FDA approval of our new
manufacturing facility. In 2004, manufacturing levels will be dependent on sales
levels. We plan to maintain a reasonable level of Kerastick(R) inventory based
on sales projections. The facility will also be utilized in 2004 to produce
clinical supplies for our planned DUSA-sponsored studies in addition to
investigator studies which DUSA plans to support.

         510(K) FDA FILING - On September 9, 2003, DUSA received market
clearance from the FDA to market the BLU-U(R) as a stand alone device for the
treatment of moderate inflammatory acne vulgaris. We plan to initiate marketing
of the BLU-U(R) for this indication in the fourth quarter of 2003. The impact
that selling the BLU-U(R) as a stand alone device for the treatment of acne will
have on product sales is uncertain at this time.

         CRITICAL ACCOUNTING POLICIES

         Our accounting policies are disclosed in Note 2 to the Notes to the
Consolidated Financial Statements in our Annual Report on Form 10-K for the year
ended December 31, 2002. Since not all of these accounting policies require
management to make difficult, subjective or complex judgments or estimates, they
are not all considered critical accounting policies. We have discussed these
policies and the underlying estimates used in applying these accounting policies
with our Audit Committee. We consider the following policies and estimates to be
critical to our financial statements.

         REVENUE RECOGNITION - Revenues on product sales of the Kerastick(R) are
recognized when persuasive evidence of an arrangement exists, the price is fixed
and final, delivery has occurred, and there is reasonableness of collection.
Research revenue previously earned under our collaborative agreement consisted
of non-refundable research and development funding from our former dermatology
collaboration partner. Research revenue generally compensated us for a portion
of our agreed-upon research and development expenses and was recognized as
revenue at the time the research and development activities were performed under
the terms of the related agreements and when no future performance obligations
existed. Milestone or other up-front payments are typically recorded as deferred
revenue upon receipt and recognized as earned, generally on a straight-line
basis over the term of an agreement. Although we make every effort to assure the
reasonableness of our estimates, significant unanticipated changes in our
estimates due to business, economic, or industry events could have a material
impact on our results of operations.

                                       14

<PAGE>

         INVENTORY - Inventories are stated at the lower of cost or market
value. Cost is determined using the first-in, first-out method. Inventories are
continually reviewed for slow moving, obsolete and excess items. Inventory items
identified as slow-moving are evaluated to determine if an adjustment is
required. Additionally, our industry is characterized by regular technological
developments that could result in obsolete inventory. Although we make every
effort to assure the reasonableness of our estimates, any significant
unanticipated changes in demand, technological development, or significant
changes to our business model could have a significant impact on the value of
our inventory and our results of operations. We use sales projections to
estimate the appropriate level of inventory that should remain on the
Consolidated Balance Sheet. Management believes that the recorded inventory
value is reasonable in light of our current sales forecasts. Should we be unable
to achieve the forecasted sales, additional adjustments may be recorded to cost
of goods sold.

         VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS - We review long-lived
assets, comprised of property, plant and equipment for impairment whenever
events or changes in business circumstances indicate that the carrying amount of
assets may not be fully recoverable or that the useful lives of these assets are
no longer appropriate. Factors considered important which could trigger an
impairment review include significant changes relative to: (i) projected future
operating results; (ii) the use of the assets or the strategy for the overall
business; (iii) business collaborations; and (iv) industry, business, or
economic trends and developments. Each impairment test is based on a comparison
of the undiscounted cash flow to the recorded value of the asset. If it is
determined that the carrying value of long-lived or intangible assets may not be
recoverable based upon the existence of one or more of the above indicators of
impairment, the asset is written down to its estimated fair value on a
discounted cash flow basis. In 2002 and again in 2003, we concluded that the
termination of our former dermatology collaboration arrangement in September
2002 and current business events have not caused any impairment to our
manufacturing facility. At September 30, 2003, total property, plant and
equipment had a carrying value of $4,552,000, including our manufacturing
facility which received FDA approval on July 14, 2003. We had no intangible
assets recorded as of September 30, 2003 or December 31, 2002.

         STOCK-BASED COMPENSATION - We have elected to continue to use the
intrinsic value-based method to account for employee stock option awards under
the provisions of Accounting Principles Board Opinion No. 25, and to provide
disclosures based on the fair value method in the Notes to the Consolidated
Financial Statements as permitted by Statement of Financial Accounting Standards
("SFAS") No. 123. Stock or other equity-based compensation for non-employees is
accounted for under the fair value-based method as required by SFAS No. 123 and
Emerging Issues Task Force ("EITF") No. 96-18, "Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services" and other related interpretations.
Under this method, the equity-based instrument is valued at either the fair
value of the consideration received or the equity instrument issued on the date
of grant. The resulting compensation cost is recognized and charged to
operations over the service period, which, in the case of stock options, is
generally the vesting period. As we utilize stock and stock options as one means
of compensating employees, consultants, and others, a change in accounting for
stock-based compensation would,

                                       15

<PAGE>

under certain circumstances, result in an adverse material effect on our results
of operations, but would not affect cash flows.

         RESULTS OF OPERATIONS

         REVENUES - Total revenues for the three and nine months ended September
30, 2003 were $163,000 and $454,000, as compared to $22,566,000 and $25,321,000
during the comparable 2002 periods. Revenues for 2003 were comprised entirely of
direct Kerastick(R) product sales to physicians as compared to $51,000 and
$157,000 of product sales and rental income in the three and nine months ended
September 30, 2002. The increase in 2003 product sales revenue is due in part to
DUSA's receipt of 100% of revenues on Kerastick(R) units sold to end-users
primarily through our distributor, Moore Medical Corporation, as compared to
approximately 30% of the net sales that we received as a royalty under our
former collaboration agreement during 2002. Total revenues for the three and
nine month periods in 2002 also included research grant and milestone revenues
of $21,321,000 and $22,312,000, and research and development reimbursement of
$1,194,000 and $2,851,000 that we earned under our collaboration agreement with
our former marketing and development partner. As discussed above, research grant
and milestone revenue for the three and nine-month periods ended September 30,
2002 includes $20,990,000 as a result of the termination of the Schering AG
collaboration.

         As of September 30, 2003, 360 BLU-U(R) units were in place in
physicians offices, up from 323 units at June 30, 2003 and 329 units at December
31, 2002. Kerastick(R) sales to end-users were 1,938 and 5,694 for the three and
nine months ended September 30, 2003, as compared to 1,392 and 5,394 for the
comparable 2002 periods. Although the level of Kerastick(R) sales to end-users
for the current periods are higher than those in the prior year periods,
Kerastick(R) sales continue to be at insignificant levels as we continue to
develop an infrastructure to support marketing and sales activities and
implement our own marketing strategy. See "Marketing and Sales Costs."

                                       16

<PAGE>

COST OF PRODUCT SALES AND ROYALTIES - Cost of product sales and royalties for
the three and nine months ended September 30, 2003 were $887,000 and $2,465,000,
respectively, as compared to $3,241,000 and $4,696,000 in 2002. A summary of the
components of cost of product sales and royalties is provided below:

<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,                                 NINE MONTHS ENDED SEPTEMBER 30,
        (UNAUDITED)                                                        (UNAUDITED)
     (DOLLARS IN 000's)                                                 (DOLLARS IN 000's)

                 INCREASE                                                               INCREASE
2003     2002   (DECREASE)                                          2003      2002      (DECREASE)
-----   ------  ----------                                        -------    ------     ----------
<S>     <C>     <C>             <C>                               <C>        <C>        <C>
                                Product costs including
                                internal costs (e.g.
                                customer service, quality
                                assurance, purchasing, and
                                other product support
                                operations) assigned to
$ 722   $  357   $   365        support products (1)              $ 1,905    $   992     $    913

   96       66        30        Depreciation on BLU-U(R) units        337        266           71

                                Costs incurred to ship,
                                install and service the
                                BLU-U(R) in physicians
   51       53        (2)       offices                               169        345         (176)

   18       16         2        Royalty and supply fees (2)            54         48            6

    -       84       (84)       Net underutilization costs (3)          -        267         (267)

    -       27       (27)       Deferred charges amortization (4)       -        140         (140)

                                Inventory and deferred charge
                                adjustments resulting from
    -    2,638    (2,638)       collaboration termination               -      2,638       (2,638)
-----   ------   -------                                          -------    -------     --------
                                Total cost of product sales
$ 887   $3,241   $(2,354)       and royalties                     $ 2,465    $ 4,696     $ (2,231)
=====   ======   =======                                          =======    =======     ========

</TABLE>

1)       2003 includes costs to support DUSA's manufacturing facility including
         submission of the FDA supplement and depreciation.

2)       Royalty and supply fees are paid to our licensor, PARTEQ Research and
         Development Innovations, the licensing arm of Queen's University,
         Kingston, Ontario.

3)       Underutilization costs commenced in 2001 and were fully amortized as of
         December 31, 2002 based on agreements with our third-party
         manufacturers due to orders falling below certain previously
         anticipated levels.

4)       Deferred charges amortization reflects consideration paid by us in 2000
         to amend our Supply Agreement with Sochinaz SA, the manufacturer of the
         bulk drug ingredient used in Levulan(R). Such deferred charges were
         fully amortized in 2002.

         As discussed above, cost of product sales and royalties for the three
and nine months ended September 30, 2002 included $2,638,000 as a result of the
termination of the Schering AG collaboration.

                                       17

<PAGE>

         RESEARCH AND DEVELOPMENT COSTS - Research and development costs for the
three and nine month periods ended September 30, 2003 were $1,202,000 and
$4,167,000, as compared to $2,848,000 and $9,320,000 in the comparable 2002
periods. The research and development costs for 2002 include the write-off of
$639,000 of previously deferred royalty costs as a result of the termination of
the Schering AG collaboration. The overall lower level of research and
development costs in 2003 is also attributable to the absence of costs for
co-sponsored projects that were developed in collaboration in 2002 and
previously reimbursed to us by our former marketing partner. Co-sponsored
projects included Phase I/II studies using Levulan(R) PDT in the treatment of
persistent plantar warts and onychomycosis (nail fungus). These projects have
been delayed as we concentrate on increasing sales, and implementing a new
dermatology development program focused on indications that use our approved
Kerastick(R). Based on market research that was completed earlier in 2003, we
decided to move forward with Phase II studies for use of Levulan(R) PDT in
photo-damaged skin and acne rather than pursuing a broad area actinic keratoses
(BAAK) treatment, as we do not believe this indication would have a major impact
on sales. We have also received market clearance from the FDA on a Section
510(k) premarket notification application for use of the BLU-U(R) without
Levulan(R) PDT, to treat moderate inflammatory acne. The development program
also includes completing an FDA-mandated Phase IV long-term AK tracking study,
which should be completed by the end of 2003, and funding of various
investigator studies involving the Kerastick(R).

         We have also been conducting Phase I/II studies in the treatment of
high-grade and low-grade dysplasia associated with Barrett's esophagus. Results
of the high-grade dysplasia (HGD) study as of January 2003, with twelve months
of follow-up data in four patients, and six months in one patient, showed a
continued complete ablation of high-grade dysplasia. The treatment has been well
tolerated, with no occurrence of strictures (circumferential scarring), and no
signs of mucosal overgrowth. In addition, in preparation for a Phase II clinical
trial, we are planning to carry out a small single-center pilot Phase II
clinical trial using DUSA's new proprietary light delivery device for the
treatment of high grade dysplasia. However, currently, we do not plan to fund
other Phase II or III clinical trials for this indication. While our original
goal had been to complete a partnership agreement during 2003, it does not
appear that we will have a signed partnership in place by the end of 2003. There
can be no assurance that we will be able to consummate any collaboration, or
whether we will be able to obtain terms acceptable to us.

         MARKETING AND SALES COSTS - Marketing and sales costs for the three and
nine month periods ended September 30, 2003 were $535,000 and $1,599,000,
respectively. In the prior year, there were no marketing and sales expenses
incurred directly by us as all rights and activities associated with marketing
and sales of our products were the sole responsibility of our former partner. In
late 2002, following the termination of our collaboration with our former
marketing partner, we commenced marketing initiatives associated with having
full rights and responsibilities for our products. In addition, as of January 1,
2003, we reassigned resources that were functioning in research and development
roles to our marketing and sales function. In August 2003, DUSA hired an
Associate Vice President of Sales, and in October 2003 we hired, trained, and
deployed a regional sales force designed to focus on most of our key geographic
markets in the United States. This sales organization is initially comprised of
six direct representatives, five independent representatives, and

                                       18

<PAGE>

an independent sales distributor with seven representatives. With success, DUSA
plans to further expand these sales channels in 2004.

         GENERAL AND ADMINISTRATIVE COSTS - General and administrative costs for
the three and nine month periods ended September 30, 2003 were $1,627,000 and
$4,782,000, respectively, as compared to $1,411,000 and $4,105,000 in comparable
2002 periods. These increases are attributable to higher legal expenses
amounting to $814,000 and $2,400,000 during the current three and nine month
periods, as compared to $596,000 and $1,346,000 in the comparable 2002 periods,
due primarily to patent defense costs. Such patent defense issues are discussed
below. It is expected that legal expenses will remain at elevated levels as long
as these patent disputes continue. These increased legal expenses were offset,
slightly, by lower staffing costs in 2003, due primarily to employee separations
during 2002.

         In April 2002, we received a copy of a notice issued by PhotoCure ASA
to Queen's University at Kingston, Ontario, alleging that Australian Patent No.
624985, which is one of the patents licensed by PARTEQ to us, relating to
5-aminolevulinic acid technology, is invalid. As a consequence of this action,
Queen's University has assigned the Australian patent to us so that we may
participate directly in this litigation. We have filed an answer setting forth
our defenses and a related countersuit alleging that certain activities of
PhotoCure and its marketing partner, Galderma S.A, infringe the patent. The case
is ongoing and we are unable to predict the outcome at this time. DUSA believes
that the final hearing in the Federal Court of Australia will occur in 2004.

         In March 2003, we received notice that our Dutch patent is being
formally challenged by an anonymous agent, and we filed a formal response to the
opposition. The Dutch patent office has informed us that our amended patent
claim is valid; however, the opposing party has the right to appeal the
decision.

         INTEREST INCOME, NET - Interest income, net for the three and nine
month periods ended September 30, 2003 was $409,000 and $1,502,000,
respectively, as compared to $696,000 and $2,255,000 in the comparable 2002
periods. These decreases were attributable to lower investable cash balances as
we used cash to support our operating activities, and lower yields. Interest
income will continue to decline as our investable cash balances are used to
support our operating activities. During the three and nine month periods ended
September 30, 2003, interest expense associated with the construction of our
Kerastick(R) manufacturing facility of $1,000 and $36,000 was capitalized in
property, plant and equipment in the Condensed Consolidated Balance Sheet. We
capitalized interest expense of $29,000 in the three and nine-month periods
ended September 30, 2002.

         NET INCOME (LOSS) - For the three and nine months ended September 30,
2003, the Company incurred net losses of ($3,680,000), or ($0.26) per share, and
($11,057,000), or ($0.79) per share, respectively, as compared to net income of
$15,761,000, or $1.13 per share, and $9,456,000, or $0.68 per share,
respectively, for the comparable three and nine-month periods ended September
30, 2002. As a result of the termination of the Schering AG agreement, net
income for both prior periods included $17,713,000 of income from operations
that was based on the one-time recognition of certain items on its Consolidated
Condensed Balance Sheets. (See section entitled "Overview -

                                       19

<PAGE>

2002 Collaboration Termination".) This one-time recognition resulted in an
increase to earnings per share of $1.28 for both prior year three and nine-month
periods. Net losses are expected to be incurred until the successful market
penetration of our first products occurs. Such losses may increase until
end-user sales offset the cost of launching our sales force and other marketing
initiatives.

LIQUIDITY AND CAPITAL RESOURCES

         We are in a strong cash position to continue to increase Levulan(R) PDT
marketing expenses, and to fund our current research and development activities
for our Levulan(R) PDT/PD platform. Our primary sources of working capital have
been public and private equity financings, as well as research milestone and
grant payments from our former marketing and development partner. At September
30, 2003, we had $41,612,000 of available cash resources comprised of $3,644,000
of cash and cash equivalents, and United States government securities of
$37,968,000. All of our United States government securities are classified as
available for sale.

         As of September 30, 2003, our working capital (total current assets
minus total current liabilities) was $41,165,000 as compared to $52,346,000 as
of December 31, 2002. Total current assets decreased $12,058,000 as of September
30, 2003 compared to December 31, 2002 due primarily to a decline in cash, cash
equivalents, and United States government securities of $11,268,000 as we use
cash to support our operating activities. Total current liabilities decreased
$878,000 as of September 30, 2003 compared to December 31, 2002 due primarily to
a decline in other accrued expenses of $904,000 as higher 2002 accruals for
research and development costs, product related costs and license milestone were
paid in 2003.

         For the nine months ended September 30, 2003, we used $9,848,000 of
cash for operating activities, purchased $400,000 of property and equipment, and
received $7,000,000 of net proceeds from maturations and purchases of United
States government securities. During the current period, we also made payments
on long-term debt of $203,000, while receiving $29,000 in stock options
proceeds. During the comparable 2002 nine-month period, we used $9,175,000 of
cash for operating activities, purchased $2,307,000 of property and equipment
primarily attributed to the construction of our manufacturing facility, and
received net proceeds of $4,852,000 from maturations and purchases of United
States government securities. During June 2002, we also received a secured term
loan promissory note ("Note") with Citizens Bank of Massachusetts to fund the
construction of our manufacturing facility. We made payments on this loan of
$45,000 in the 2002 period. As of September 30, 2003, the total outstanding loan
balance was $1,585,000, of which $270,000 is current. Approximately $3,000,000
of the Company's United States government securities are pledged as collateral
to secure the loan. Prior to expiration of the 360-day LIBOR-based rate for each
year of the loan, we can either continue to choose a LIBOR-based rate at that
time, execute a one-time conversion to a fixed rate loan, or repay the loan
balance. The current interest rate on the Note is 2.755% based on the annual
renewal on June 30, 2003. As this rate was lower than the yield being generated
by each of our United States government securities at that time, we decided not
to repay the loan.

                                       20

<PAGE>

         We believe that we have sufficient capital resources to proceed with
our current programs for Levulan(R) PDT, and to fund operations and capital
expenditures for 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.

         As a result of the termination of our former dermatology collaboration
arrangement, we have reevaluated our operations and are minimizing research and
development and related general and administrative expenditures that are not
directly related to our core objectives for 2003. We are also implementing a
development program focused on dermatology indications that use our approved
Kerastick(R). See "Research and Development Costs."

         We anticipate that the level of marketing and sales expense will
increase following the hiring of a senior sales executive in August 2003, and
the initial small sales force in October 2003. We may also seek to expand or
enhance our business by using resources to acquire by license, purchase or other
arrangements, businesses, new technologies, or products, especially in
PDT-related areas. However, for the balance of the year, we are focusing
primarily on increasing the sales of the Levulan(R) Kerastick(R) and the
BLU-U(R), planning and/or initiating Phase II studies for use of Levulan(R) PDT
in photo-damaged skin and acne, and on seeking a partner to help develop and
market Levulan(R) PDT for the treatment of dysplasia in patients with Barrett's
esophagus.

         We cannot accurately predict the level of revenues from sales of our
products. In order to maintain and expand continuing research and development
programs, we may need to raise additional funds through future corporate
alliances, financings, or other sources, depending upon the amount of sales we
receive.

CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS

         There have been no material changes to our contractual obligations and
other commercial commitments from those presented in our Annual Report on Form
10-K for the year ended December 31, 2002.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

         In December 2002, the EITF reached conclusion on EITF Issue No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables." This consensus
provides guidance in determining when a revenue arrangement with multiple
deliverables should be divided into separate units of accounting, and, if
separation is appropriate, how the arrangement consideration should be allocated
to the identified accounting units. The provisions of EITF No. 00-21 are
effective for revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. The Company will evaluate any new arrangements into which
it enters in accordance with this EITF.

INFLATION

                                       21

<PAGE>

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

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         We hold fixed income Unites States 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
long-term instruments with maturities, 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.

         We currently have exposure to interest rate risk under a secured term
loan promissory note which we issued to fund the construction of our
manufacturing facility. This loan currently bears interest at a LIBOR-based
rate, and calls for an annual renewal on June 30th of each year through June 30,
2009 to either the applicable LIBOR-based rate or a one-time conversion to a
fixed rate loan. On June 30, 2003, the loan rate was reduced to the then current
360-day LIBOR-based rate of 2.755%. Our exposure to interest rate risk due to
changes in LIBOR is not expected to be material.

ITEM 4.  CONTROLS AND PROCEDURES

         Our management is responsible for the preparation, integrity and
objectivity of the financial statements and other information presented in this
report. Such financial statements have been prepared in accordance with
generally accepted accounting principals and reflect certain estimates and
adjustments by management. Our management maintains a system of internal
accounting and disclosure controls, and procedures which management believes
provide reasonable assurance that the transactions are properly recorded and our
assets are protected from loss or unauthorized use.

         The integrity of the accounting and disclosure systems are based on
written policies and procedures, the careful selection and training of qualified
financial personnel, a program of internal controls and direct management
review. Our disclosure control systems and procedures are designed to ensure
timely collection and evaluation of information subject to disclosure, to ensure
the selection of appropriate accounting policies and to ensure compliance with
our accounting policies and procedures. The Audit Committee is composed solely
of independent directors and meets periodically with the independent auditors
and management to discuss accounting, financial reporting, auditing and internal
auditing matters. The independent auditors have direct and private access to the
Audit Committee.

                                       22

<PAGE>

         As of September 30, 2003, an evaluation was performed under the
supervision and with the participation of our management, including the Chief
Executive Officer/Chief Financial Officer, regarding the effectiveness of the
design and operation of our disclosure controls and procedures. Based on this
evaluation, our management, including the Chief Executive Officer/Chief
Financial Officer, believes that our disclosure controls and procedures are
adequately designed to ensure that the information that we are required to
disclose in this report has been accumulated and communicated to our management,
including our Chief Executive Officer/Chief Financial Officer, as appropriate,
to allow timely decisions regarding such required disclosure. There have been no
significant changes in our internal controls or in other factors that could
significantly affect internal controls subsequent to September 30, 2003.

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
management's goal of becoming profitable, beliefs regarding adoption of our
therapy, improving reimbursement levels, expectations for continuing operating
losses, expectations of increasing staff and our sales force, timing of Phase II
photo-damaged skin and acne studies, effects of unanticipated changes in
estimates, technology and forecasts, belief concerning reasonableness of
inventory values, factors which could trigger impairment review, effect of an
accounting change for stock-based compensation, expectations for the use of our
facility to manufacture Kerasticks(R) and other clinical supplies, beliefs
concerning the decrease in revenues and decision not to pursue the BAAK
indication, plans to initiate marketing of the BLU-U(R) for moderate
inflammatory acne vulgaris, plans to conduct additional clinical trials for
high-grade dysplasia and consummation of any partnerships for high-grade
dysplasia, expectations for increased marketing and sales costs and elevated
levels of legal fees, beliefs regarding The Netherlands and Australian patent
litigation, expectations regarding levels of interest income and net losses,
requirements of cash resources, and potential impact on conversion of government
securities, need for additional funds for development, evaluation of
transactions under new accounting pronouncements, inflation, market risks and
controls and procedures. 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 FDA approval
and market acceptance of our products, the maintenance of our patent portfolio
and ability to obtain competitive levels of reimbursement by additional
third-party payors, and other risks noted in our SEC filings from time to time,
including our Form 10-K for the period ending December 31, 2002, none of which
can be assured.

                                       23

<PAGE>

                           PART II- OTHER INFORMATION

Items 1, 3-5.
                  None.

Item 2.  Changes in Securities and Use of Proceeds.

         i)       On June 15, 2003, DUSA granted 11,666 shares of unregistered
                  common stock, without par value, to an outside consultant for
                  compensation of services in reliance on Section 4(2) of the
                  Securities Act of 1933, as amended. Such shares were issued in
                  July 2003.

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

         i)       Exhibits

                  a)       Exhibit 31.1 - Sarbanes-Oxley Section 302(a)
                           Certification.

                  b)       Exhibit 32.1 - Certification Pursuant to 18 U.S.C.
                           Section 1350 as Adopted Pursuant to Section 906 of
                           the Sarbanes-Oxley Act of 2002.

                  c)       Exhibit 99.1 - Press Release dated November 13, 2003.

         ii)      Form 8-K

                  a)       Form 8-K dated and filed September 11, 2003 noting
                           receipt of 510(k) marketing clearance from the United
                           States Food and Drug Administration for the BLU-U(R)
                           to treat dermatological indications and specifically,
                           moderate inflammatory acne vulgaris.

                                       24

<PAGE>

                                   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.

                                   DUSA Pharmaceuticals, Inc.

                                   By: /s/ D. Geoffrey Shulman
                                      ------------------------
                                      D. Geoffrey Shulman
                                      President, Chief Executive Officer
                                      (Principal Executive Officer), and Chief
                                      Financial Officer (Principal Financial
                                      Officer)

Date: November 13, 2003            By: /s/ Peter M. Chakoutis
                                       ----------------------
                                       Peter M. Chakoutis
                                       Controller (Principal Accounting Officer)

<PAGE>
                                 EXHIBIT INDEX


31.1    Sarbanes-Oxley Section 302(a) Certification.

32.1    Certification Pursuant to 18 U.S.C. Section 1350 as Adopted to Section
        906 of the Sarbanes-Oxley Act of 2002.

99.1    Press Release dated November 13, 2003.