When you read this section of this report, it is important that you also read the financial statements and related notes included elsewhere in this report. This section contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those we anticipate in these forward-looking statements for many reasons, including the factors described below and in the section entitled "Risk Factors."

We are a vertically integrated dermatology company that is developing and marketing Levulan® photodynamic therapy, or PDT. Our marketed products include the Levulan® Kerastick® 20% Topical Solution with PDT and the BLU-U® brand light source.

We devote most of our resources to advancing the development and marketing of our Levulan ® PDT technology platform. When Levulan® is used and followed with exposure to light to treat a medical condition, it is known as Levulan® PDT. The Kerastick® is our proprietary applicator that delivers Levulan®. The BLU-U® is our patented light device.

The Levulan® Kerastick ® 20% Topical Solution with PDT and the BLU-U® were launched in the United States, or U.S., in September 2000 for the treatment of non-hyperkeratotic actinic keratoses, or AKs, of the face or scalp. AKs are precancerous skin lesions caused by chronic sun exposure that can develop over time into a form of skin cancer called squamous cell carcinoma. In addition, in September 2003 we received clearance from the United States Food and Drug Administration, or FDA, to market the BLU-U® without Levulan® PDT for the treatment of moderate inflammatory acne vulgaris and general dermatological conditions. In addition to our marketed products, our drug, Levulan ® brand of aminolevulinic acid HCl, or ALA, in combination with light, has been studied in a broad range of medical conditions.

We are marketing Levulan® PDT under an exclusive worldwide license of patents and technology from PARTEQ Research and Development Innovations, the licensing arm of Queen's University, Kingston, Ontario, Canada. We also own or license certain other patents relating to our BLU-U® device, our Kerastick®, and methods for using pharmaceutical formulations which contain our drug and related processes and improvements. In the United States, DUSA®, DUSA Pharmaceuticals, Inc. ®, Levulan®, Kerastick®, and BLU-U ® are registered trademarks. Several of these trademarks are also registered in Europe, Australia, Canada, and in other parts of the world. Numerous other trademark applications are pending or have been granted.

We manufacture our Levulan® Kerastick® in our Wilmington, Massachusetts facility. We are responsible for the regulatory, sales, marketing, and customer service and other related activities for our Levulan ® Kerastick® and BLU-U®.

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, 2011. 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. There have been no changes to our critical accounting policies in the nine months ended September 30, 2012.

RESULTS OF OPERATIONS - THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 VERSUS
SEPTEMBER 30, 2011

Revenues - Total revenues for the three and nine-month periods ended
September 30, 2012 were $9,740,000 and $34,887,000, respectively, as compared to
$9,374,000 and $30,027,000 in 2011, and were comprised of the following:



                                         Three months ended                                  Nine months ended
                                            September 30,                                      September 30,
                                                                      Increase/                                           Increase/
                                        2012            2011          (Decrease)           2012             2011          (Decrease)

LEVULAN®KERASTICK® PRODUCT
REVENUES
United States                        $ 9,149,000     $ 7,314,000     $  1,835,000      $ 32,947,000     $ 26,639,000     $  6,308,000

Canada                                   156,000          89,000           67,000           219,000          272,000          (53,000 )

Korea (1)                                     -        1,516,000       (1,516,000 )              -         1,720,000       (1,720,000 )


Subtotal Levulan® Kerastick®
product revenues                       9,305,000       8,919,000          386,000        33,166,000       28,631,000        4,535,000

BLU-U®PRODUCT REVENUES

United States                            435,000         455,000          (20,000 )       1,715,000        1,396,000          319,000
Canada                                        -               -                -              6,000               -             6,000


Subtotal BLU-U® product revenues         435,000         455,000          (20,000 )       1,721,000        1,396,000          325,000


TOTAL PRODUCT REVENUES               $ 9,740,000     $ 9,374,000     $    366,000      $ 34,887,000     $ 30,027,000     $  4,860,000

1) The three-and nine-month periods ended September 30, 2011, include the acceleration of deferred revenues of $1,379,000, comprised of deferred drug shipments of $301,000 and the unamortized balance of milestone payments of $1,078,000, related to the termination of our Asia Pacific distribution agreement with Daewoong Pharmaceutical Co., LTD. and Daewoong Derma & Plastic Surgery Network Company, or Daewoong, in the third quarter of 2011.

For the three and nine-month periods ended September 30, 2012, total products revenues, comprised of revenues from our Kerastick® and BLU-U ® products, were $9,740,000 and $34,887,000, respectively. This represents an increase of $366,000 or 4%, and $4,860,000, or 16%, over the comparable 2011 totals of $9,374,000 and $30,027,000, respectively. The increase in revenues was driven by increased Kerastick® revenues in the United States, offset in part by the acceleration of deferred revenues related to the termination of our Asia Pacific distribution agreement in 2011.

For the three and nine-month periods ended September 30, 2012, Kerastick ® revenues were $9,305,000, and $33,166,000, respectively, representing a $386,000, or 4%, and $4,535,000, or 16%, increase over the comparable 2011 totals of $8,919,000, and $28,631,000, respectively. Kerastick® unit sales to end-users were 62,352 and 220,422 for the three and nine-month periods ended September 30, 2012, respectively, including on a year-to-date basis 218,322 sold in the United States and 2,100 sold in Canada. This represents an increase from 54,258 and 195,177 Kerastick® units sold in the three and nine-month periods ended September 30, 2011, respectively, including on a year-to-date basis 188,754 sold in the United States, 2,838 sold in Canada, and 3,585 sold in Korea. Our distributor arrangement for Korea was terminated during the third quarter of 2011. Our overall average net selling price for the Kerastick® increased to $150.40 per unit for the first nine months of 2012 from $138.82 per unit for the first nine months of 2011. The increase in 2012 Kerastick® revenues was driven mainly by an increase in sales volumes in the United States as well as an increase in our overall average unit selling price, offset in part by the acceleration of deferred revenues of $1,379,000 related to the termination of our Asia Pacific distribution agreement in 2011. For the three and nine-month periods ended September 30, 2012, domestic Kerastick® revenues were $9,149,000, and $32,947,000, respectively, representing a $1,835,000, or 25%, and $6,308,000, or 24%, increase over the comparable 2011 totals of $7,314,000, and $26,639,000, respectively.

For the three and nine-month periods ended September 30, 2012, BLU-U ® revenues were $435,000 and $1,721,000, respectively, representing a ($20,000), or (4%), and $325,000, or 23%, (decrease)/increase over the comparable 2011 totals of $455,000 and $1,396,000, respectively. On a year-to-date basis, the increase in BLU-U® revenues was due to an increase in our sales volumes, partially offset by a decrease in our overall average selling price. In the three and nine-month periods ended September 30, 2012, there were 61 and 241 units sold, respectively, versus 61 and 181 units sold, respectively, in the comparable 2011 periods. In 2012, on a year-to-date basis, our average net selling price for the BLU-U ® decreased to $7,060 from $7,526 in 2011. The decrease in our average selling price from the prior year is a result of incentive discounting.

Our BLU-U® evaluation program allows customers to take delivery for a limited number of BLU-U® units for a period of up to four months for private practitioners and up to one year for hospital clinics, before we require a purchase decision. At September 30, 2012, there were approximately 31 units in the field pursuant to this evaluation program, compared to 48 units in the field at December 31, 2011. The units are classified as inventory in the financial statements and are being amortized during the evaluation period to cost of goods sold using an estimated life for the equipment of three years. In addition, the Company offers active customers who own an out-of-warranty, non-current version of the BLU-U ®, the opportunity to purchase our latest model at a discounted price with the return of the older unit.

The increase in our total product revenues for the nine-month period ended September 30, 2012, compared to the comparable 2011 period, results primarily from increased Kerastick® and BLU-U ® revenues in the United States, offset in part by the acceleration of deferred revenues related to the termination of our Asia Pacific distribution agreement in 2011. We have to continue to demonstrate the clinical value of our unique therapy, and the related product benefits as compared to other well-established conventional therapies, in order for the medical community to accept our products on a large scale. We are aware that physicians are using Levulan® PDT with short incubation times, and 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, we believe that these activities are positively affecting the sales of our products. Additionally, our two Phase 2 clinical trials to study broad area, short incubation methods, one of which has been successfully completed, could encourage us to conduct further studies which, following additional larger Phase 3 clinical studies, could lead to enhancements to our current product label and allow us to market our therapy under a treatment method being adopted by the medical community.

During 2012, our revenues in the United States grew as a result of increased demand for our Kerastick ® and our BLU-U®. With respect to Kerastick®prices, we announced a price increase in the fourth quarter of 2011, which became effective January 1, 2012. We intend to announce a price increase each year in the fourth quarter, which will become effective on January 1 of the following year. This strategy is likely to have a positive impact on sales volumes in the fourth quarter of each year. Although we expect continued growth in revenues, we are susceptible to the uncertain economic conditions, particularly with our Canadian customer base where our product lacks reimbursement, and to increased competition, particularly from Medicis Pharmaceutical Corporation (or Medicis), who in December 2011 acquired Aldara®, a topical AK product, and Zyclara®, used to treat precancerous skin growths related to sun overexposure, and Leo Pharma, who in January 2012 received FDA approval for Picato® Gel, a topical product, to treat AKs on the face and scalp and on the extremities. In September 2012, Medicis agreed to be acquired by Valeant Pharmaceuticals International. Also, Galderma, S.A., a large dermatology company, holds a non-exclusive license from us to Metvixia ®, which was transferred to Galderma by PhotoCure ASA, our original licensee. This product received FDA approval for treatment of AKs in July 2004 and it is directly competitive with our Levulan® Kerastick ® product. Metvixia® is commercially available in the U.S.; however, to our knowledge, product revenues have not been significant to date.

We recently decided to participate in voluntary government programs which will require us to pay specified rebates for products reimbursed by Medicaid and to provide discounts for Kerastick® units purchased by certain "covered entities" under section 340B of the Public Health Service Act (such as "disproportionate share" hospitals meeting certain criteria). The mandated Medicaid rebate is 23.1%, plus an additional amount for price changes relative to cost of living adjustments since the product's launch. Our participation in these programs could lead to some incremental revenues since we are not presently serving these coverage groups; however, our revenues will be negatively impacted by our actual rebate and discount experience. To date, we have had nominal inquiries pertaining to these programs and we do not expect that these rebates and discounts will have a material effect on our revenues.

Our ability to maintain profitability on a quarterly basis may be affected by fluctuations in the demand for our products caused by both seasonal changes, such as when patient visits slow during summer months, and the timing of pricing changes, which may impact the purchasing patterns of our customers.

Cost of Product Revenues - Cost of product revenues for the three and nine-month periods ended September 30, 2012 were $1,509,000 and $5,357,000 as compared to $1,412,000 and $4,514,000 in the comparable periods in 2011. A summary of the components of cost of product revenues and royalties is provided below:

                                                        Three months ended September 30,
                                                                                     Increase/
                                                     2012             2011          (Decrease)
Levulan®Kerastick® Cost of Product Revenues
and Royalties
Direct and indirect Levulan® Kerastick®
Product Costs                                     $   632,000      $   642,000      $   (10,000 )
Royalties (1)                                         367,000          307,000           60,000

Subtotal Levulan® Kerastick® Cost of Product
Revenues and Royalties                            $   999,000      $   949,000      $    50,000

BLU-U®Cost of Product Revenues

Direct BLU-U® Product Costs                       $   256,000      $   245,000      $    11,000
Other BLU-U® Product Costs including internal
costs assigned to support products; as well
as, costs incurred to ship, install and
service the BLU-U® in physicians' offices             254,000          218,000           36,000

Subtotal BLU-U ® Cost of Product Revenues         $   510,000      $   463,000      $    47,000

TOTAL COST OF PRODUCT REVENUES AND ROYALTIES      $ 1,509,000      $ 1,412,000      $    97,000

                                                         Nine months ended September 30,
                                                                                     Increase/
                                                     2012             2011           (Decrease)
Levulan®Kerastick® Cost of Product Revenues
and Royalties
Direct and indirect Levulan® Kerastick®
Product Costs                                     $ 2,299,000      $ 2,108,000      $    191,000
Royalties (1)                                       1,311,000        1,081,000           230,000

Subtotal Levulan® Kerastick® Cost of Product
Revenues and Royalties                            $ 3,610,000      $ 3,189,000      $    421,000

BLU-U®Cost of Product Revenues

Direct BLU-U® Product Costs                       $ 1,012,000      $   727,000      $    285,000
Other BLU-U® Product Costs including internal
costs assigned to support products; as well
as, costs incurred to ship, install and
service the BLU-U® in physicians' offices         $   735,000          598,000           137,000


Subtotal BLU-U® Cost of Product Revenues          $ 1,747,000      $ 1,325,000      $    422,000


TOTAL COST OF PRODUCT REVENUES AND ROYALTIES      $ 5,357,000      $ 4,514,000      $    843,000

1) Royalties reflect amounts paid to our licensor, PARTEQ.

Margins - Total product margins for the three and nine-month periods ended September 30, 2012 were $8,231,000 and $29,530,000, respectively, as compared to $7,962,000 and $25,513,000 for the comparable 2011 periods, as shown below:

                                                             Three months ended September 30,
                                                                                                     Increase/
                                               2012                         2011                    (Decrease)
Levulan®Kerastick® gross margin            $  8,306,000        89 %     $  7,970,000       89 %     $   336,000
BLU-U®gross margin                              (75,000 )     (17 )%          (8,000 )     (2 )%        (67,000 )


Total gross margin                         $  8,231,000        85 %     $  7,962,000       85 %     $   269,000

                                                            Nine months ended September 30,
                                                                                                   Increase/
                                               2012                        2011                   (Decrease)
Levulan®Kerastick® gross margin            $ 29,556,000       89 %     $ 25,442,000       89 %    $ 4,114,000
BLU-U®gross margin                              (26,000 )     (1 )%          71,000        5 %        (97,000 )


Total gross margin                         $ 29,530,000       85 %     $ 25,513,000       85 %    $ 4,017,000

Kerastick® gross margins for the three and nine-month periods ended September 30, 2012 and 2011 were 89% for all periods.

Our long-term goal is to achieve higher gross margins on Kerastick® sales. Our gross margin percentages could be negatively impacted by our recent decision to participate in voluntary government programs such as Medicaid and to provide discounts to certain "covered entities" under section 340B of the Public Health Service Act (such as "disproportionate share" hospitals meeting certain criteria). To date, we have had nominal inquiries pertaining to these programs and we do not expect that these rebates and discounts will have a material effect on our gross margins.

BLU-U® margins for the three and nine-month periods ended September 30, 2012 were (17)% and (1)%, respectively, as compared to (2%) and 5% in the comparable 2011 periods. The decrease in gross margin percentage is a result of a decrease in our average selling price, partially offset by an increase in sales volumes on year-to-date basis. It is important for us to sell BLU-U® units in an effort to increase Kerastick® sales volumes, and accordingly, we often sell BLU-U ® units at low profit margins.

Research and Development Costs - Research and development costs for the three and nine-month periods ended September 30, 2012 were $1,698,000 and $5,955,000 as compared to $1,307,000 and $3,739,000 in the comparable 2011 periods. The increase in 2012 compared to 2011 was due primarily to increased spending related to 2 clinical trials, which were initiated in late 2011, as further described in the following paragraph. In addition, we are exploring potential new formulations for Levulan® as part of our product life cycle management activities.

A DUSA-sponsored Phase 2 clinical trial designed to study the broad area application and short drug incubation, or BASDI, method of using the Levulan® Kerastick® was initiated during the fourth quarter of 2011, and is being carried out at 13 clinical trial sites. Two hundred thirty-five (235) study subjects are enrolled in this trial, which has been closed to further accrual. The protocol objectives are to compare the

effect of various incubation times (1, 2 or 3 hours) of broad area application, versus a 2 hour spot incubation on the safety and efficacy of Levulan ® plus BLU-U® PDT versus vehicle plus BLU-U® for the treatment of multiple actinic keratoses of the face or scalp and to investigate the potential for reduction in AK occurrence in the treatment areas during a follow-up period of up to 6 months. We expect that preliminary results of this trial will be available by the end of 2012.

In addition to this BASDI clinical trial, another DUSA-sponsored clinical trial designed to study a BASDI method of using the Levulan® Kerastick® for the treatment of AKs on upper extremities was initiated during the fourth quarter of 2011. Seventy (70) subjects were enrolled in this study at 3 trial sites. The objective of the study was to compare the safety and efficacy of Levulan® Kerastick ® plus BLU-U® PDT versus vehicle plus BLU-U® PDT on AKs of the upper extremities, and to evaluate the effect of occlusive dressing versus no occlusive dressing during incubation. We announced the results of this study on September 13, 2012. The results showed that at 12 weeks following PDT, the subjects that were treated with Levulan® plus occlusion demonstrated an 89% (p<0.0001) AK lesion clearance rate as compared to a 70% (p<0.0001) clearance rate for those treated without occlusion after up to two PDT treatments; subjects receiving vehicle plus occlusion and vehicle alone demonstrated 17% and 6% lesion clearance rates, respectively. The results of the study suggest that blue light-Levulan ® PDT following a 3-hour incubation appears efficacious for AK lesion clearance of the upper extremities, and that incubation using an occlusive dressing significantly increases the efficacy of the procedure.

We expect that the total cost of these trials will be approximately $3.2 million once completed. Due to these studies, we expect research and development costs for 2012 to be increased from 2011 levels.

Marketing and Sales Costs - Marketing and sales costs for the three and nine-month periods ended September 30, 2012 were $3,354,000 and $11,988,000, respectively, as compared to $3,353,000 and $10,614,000 for the comparable 2011 periods. These costs consisted primarily of expenses such as salaries and benefits for the marketing and sales staff, commissions, and related support expenses totaling $2,711,000 and $8,904,000 for the three and nine-month periods ended September 30, 2012, compared to $2,701,000 and $7,812,000 in the comparable 2011 periods. The increased spending on a year-to-date basis for 2012 in this category is due to increased headcount. The remaining expenses consisted of tradeshows, miscellaneous marketing and outside consultants totaling $643,000 and $3,084,000 for the three and nine-month periods ended September 30, 2012, compared to $652,000 and $2,802,000 for the comparable 2011 periods. The increase in this category on a year-to-date basis is due primarily to an increase in expenditures related to promotional activities. We expect marketing and sales costs for the full year 2012 to increase over 2011 levels, but to decrease as a percentage of revenues.

General and Administrative Costs - General and administrative costs for the three and nine-month periods ended September 30, 2012 were $2,907,000 and $8,864,000, respectively, as compared to $2,319,000 and $7,322,000 for the comparable 2011 periods. The increase in 2012 is mainly attributable to compensation related charges and legal expenses. General and administrative expenses are highly dependent on our legal and other professional fees, which can vary significantly from period to period. For the full year 2012, we expect general and administrative costs to increase compared with 2011, and also to increase as a percentage of revenues.

(Loss) Gain on Change in Fair Value of Warrants - The warrants issued to investors in connection with the October 29, 2007 private placement were recorded initially at fair value and are marked to market each reporting period. The increase in the liability during the three and nine-month periods ended September 30, 2012 was $1,703,000 and $2,309,000, respectively, which resulted in non-cash losses in the respective periods. The change in fair value of the warrants is primarily due to changes in our stock price and a decreasing term to expiration. The exercise price of the warrants is $2.85 per share and the warrants expire in April 2013.

Other Income, Net - Other income for the three and nine-month periods ended September 30, 2012, decreased to $8,000 and $13,000, respectively, from $9,000 and $45,000, during the comparable 2011 periods. The decrease reflects a general decrease in interest rates over that timeframe.

(Loss) Income from Discontinued Operations - (Loss) Income from discontinued operations was $0 for the three and nine-month periods ended September 30, 2012, as compared to ($55,000) and $625,000 during the three and nine-month periods ended September 30, 2011, respectively. Discontinued operations reflect the results of our historically designated Non-PDT segment. See Note 8 in the Notes to the Consolidated Financial Statements for further discussion.

Net (Loss) Income - For the three and nine-month periods ended September 30, 2012, our net (loss) income was ($1,421,000), or ($0.06) per share, and $426,000, or $0.02 per diluted share, respectively, as compared to $3,507,000, or $0.13 per diluted share, and $4,013,000, or $0.15 per diluted share for the comparable 2011 periods. The increase in our net loss, or decrease in our net income, is attributable to the reasons discussed above.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2012, we had approximately $32,306,000 of total liquid assets, comprised of $28,736,000 of cash and cash equivalents and marketable securities available-for-sale totaling $3,570,000. We believe that our liquidity will be sufficient to meet our cash requirements for at least the next 12 months. As of September 30, 2012, our marketable securities had a weighted average yield to maturity of 1.06% and maturity dates ranging from October 2012 to January 2013. Our net cash generated from continuing operations for the nine-month period ended September 30, 2012 was $5,391,000 versus $3,698,000 for the comparable period in 2011. The year-over-year increase in cash generated from continuing operations is primarily attributable to the change in our (loss) income from continuing operations, adjusted for certain non-cash items such as the our
(loss)/gain on the change in the fair value of our warrants and the recognition of $1.7 million of deferred revenues in 2011. The increase in our investment in inventory for the 9 month period ended September 30, 2012 is to support our historically

higher sales volumes in the fourth quarter of each year. Our net cash (used in) provided by operating activities from discontinued operations was ($651,000) for the nine-month period ended September 30, 2012 versus $343,000 for the . . .