UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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FORM 10-K

|ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

For the fiscal year ended December 31, 2004

|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

Commission File Number 000-21326

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Anika Therapeutics, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Massachusetts(State or Other Jurisdiction of
Incorporation or Organization)

04-3145961(I.R.S. Employer
Identification No.)160 New Boston Street, Woburn, Massachusetts(Address of Principal Executive Offices)

01801(Zip Code)


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(Registrant's Telephone Number, Including Area Code)(781) 932-6616

Securities
registered pursuant to Section 12(b) of the Act: None

Securities
registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share

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 months (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 ý    No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. ý

Indicate by check mark whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Securities Exchange Act of 1934). Yes ý    No o

The aggregate market value of voting and non-voting stock held by non-affiliates
of the Registrant as of June 30, 2004, the last day of the Registrant's most recently completed second fiscal quarter, was $172,235,000 based on the average bid and ask price per share of
Common Stock of $17.34 as of such date as reported on the NASDAQ National Market. Shares of our Common Stock held by each executive officer, director and each person or entity known to the registrant
to be an affiliate have been excluded in that such persons may be deemed to be affiliates; such exclusion shall not be deemed to constitute an admission that any such person is an "affiliate" of the
registrant. At March 4, 2005, there were issued and outstanding 10,296,222 shares of Common Stock, par value $.01 per share.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information required in response to Items 10, 11, 12, 13 and 14 of Part III are hereby incorporated by
reference from the registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on June 1, 2005. Such Proxy Statement shall not be deemed to be "filed" as part of this Annual
Report on Form 10-K except for the parts therein which have been specifically incorporated by reference herein.



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FORM 10-K  ANIKA THERAPEUTICS, INC.  For Fiscal Year Ended December 31, 2004

This Annual Report on Form 10-K, including the documents incorporated by reference into this Annual Report on
Form 10-K, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
including, without limitation, statements regarding:



Furthermore, additional statements identified by words such as "will," "likely," "may," "believe," "expect," "anticipate," "intend," "seek," "designed,"
"develop," "would," "future," "can," "could" and other

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expressions that are predictions of or indicate future events and trends and which do not relate to historical matters, also identify forward-looking statements.

You should not rely on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, some of which are beyond our
control, including those factors described in the section titled "Risk Factors and Certain Factors Affecting Future Operating Results," in this Annual Report on Form 10-K. These
risks, uncertainties and other factors may cause our actual results, performance or achievement to be materially different from the anticipated future results, performance or achievement, expressed or
implied by the forward-looking statements. These forward-looking statements are based upon the current assumptions of our management and are only expectations of future results. You should carefully
review all of these factors, and you should be aware that there may be other factors that could cause these differences, including those factors discussed in the sections titled "Business" and
"Management's Discussions and Analysis of Financial Condition and Results of Operations" elsewhere in this Annual Report on Form 10-K. We undertake no obligation to publicly update
or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, future events or other changes.

PART I

ITEM 1.    BUSINESS

Overview

Anika Therapeutics develops, manufactures and commercializes therapeutic products and devices intended to promote the protection and healing of bone, cartilage
and soft tissue. These products are based on hyaluronic acid (HA), a naturally occurring, biocompatible polymer found throughout the body. Due to its unique biophysical and biochemical properties, HA
plays an important role in a number of physiological functions such as the protection and lubrication of soft tissues and joints, the maintenance of the structural integrity of tissues, and the
transport of molecules to and within cells. Our currently marketed products consist of ORTHOVISC®, which is an HA product used in the treatment of some forms of osteoarthritis in humans,
CoEase, STAARVISC-II, and ShellGel, each an injectable ophthalmic viscoelastic HA product, and HYVISC®, which is an HA product used in
the treatment of equine osteoarthritis. In December 2003 we entered into a licensing, distribution, supply and marketing agreement with Ortho Biotech Products, L.P., a member of the
Johnson & Johnson family of companies, for ORTHOVISC covering the U.S. and Mexico, and in February 2004 we received marketing approval from the U.S. Food and Drug Administration (FDA)
for ORTHOVISC. ORTHOVISC became available for sale in the U.S. on March 1, 2004 and has been approved for sale and marketed internationally since 1996. HYVISC is marketed in the U.S. through
Boehringer Ingelheim Vetmedica, Inc. We manufacture AMVISC® and AMVISC® Plus, HA viscoelastic supplement products used in ophthalmic surgery, for Bausch & Lomb
Incorporated. In December 2004, we entered into a multi-year supply agreement with Bausch & Lomb covering viscoelastic products used in ophthalmic surgery, including the
AMVISC and AMVISC Plus family of products.

Our
current strategy is to:



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In
2004, revenue from the sale of our products contributed 84% of our total revenue. Licensing, milestone and contract revenue contributed 16% of our total revenue in 2004. Revenue from
the sale of ophthalmic viscoelastic products was 43% of total revenue in 2004 or 52% of product revenue.
ORTHOVISC contributed 33% of our total revenue in 2004 or 39% of product revenue and HYVISC contributed 8% of our total revenue or 9% of product revenue in 2004.

The
following sections provide more specific information on our products and related activities:

ORTHOVISC®

ORTHOVISC is indicated for the treatment of pain in osteoarthritis of the knee in patients who have failed to respond adequately to conservative
non-pharmacologic therapy and to simple analgesics, such as acetaminophen. It is a sterile, non-pyrogenic, clear, viscoelastic solution of hyaluronan contained in a
single-use syringe. ORTHOVISC consists of high molecular weight, ultra-pure natural hyaluronan dissolved in physiological saline. A natural complex sugar of the
glycosaminoglycan family, hyaluronan is a high molecular weight polysaccharide composed of repeating disaccharide units of sodium glucuronate and N-acetylglucosamine. ORTHOVISC is injected
into the knee joint in a series of three intra-articular injections one week apart.

Osteoarthritis
is a debilitating disease causing pain, inflammation and restricted movement in joints. It occurs when the cartilage in a joint gradually deteriorates due to the effects
of mechanical stress, which can be caused by a variety of factors including the normal aging process. In an osteoarthritic joint, particular regions of articulating surfaces are exposed to irregular
forces, which result in the remodeling of tissue surfaces that disrupt the normal equilibrium or mechanical function. As osteoarthritis advances, the joint gradually loses its ability to regenerate
cartilage tissue and the cartilage layer attached to the bone deteriorates to the point where eventually the bone becomes exposed. Advanced osteoarthritis often requires surgery and the possible
implantation of artificial joints. The current treatment options for osteoarthritis before joint replacement surgery include viscosupplementation, analgesics, non-steroidal
anti-inflammatory drugs and steroid injections.

In
February 2004, we received marketing approval from the FDA for ORTHOVISC based on integrated effectiveness data from two randomized, controlled, double-blind, multi-center,
pivotal U.S. clinical studies encompassing a total of 458 patients suffering from osteoarthritis of the knee. Safety data from a third U.S. trial were also included in the FDA review. The objective of
the studies was to assess the effectiveness of ORTHOVISC for the treatment of joint pain. There were no serious adverse events associated with ORTHOVISC.

In
December 2003 we entered into a ten-year licensing and supply agreement (the OBI Agreement) with Ortho Biotech Products, L.P., a member of the Johnson &
Johnson family of companies, to market ORTHOVISC in the U.S. and Mexico. Under the OBI Agreement, Ortho Biotech will perform sales, marketing and distribution functions. Additionally, Ortho Biotech
licensed the right to further develop and commercialize ORTHOVISC as well as other new products for the treatment of pain associated with osteoarthritis based on our viscosupplementation technology.
In support of the license, the OBI Agreement provides that Ortho Biotech will fund post-marketing clinical trials for new indications of ORTHOVISC. We received an initial payment of
$2.0 million upon entering into the OBI Agreement, a milestone payment of $20.0 million in February 2004, as a result of obtaining FDA approval of ORTHOVISC and a
$5.0 million milestone payment in December 2004 for planned upgrades to our manufacturing operations. Under the OBI Agreement, we are the exclusive supplier of ORTHOVISC to Ortho
Biotech. The OBI Agreement provides for additional sales-based milestone payments to us

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contingent
upon achieving specified sales targets, in addition to royalty and transfer fees. The OBI Agreement is subject to early termination in certain circumstances and is otherwise renewable by
Ortho Biotech for consecutive five-year terms.

We
have a number of distribution relationships servicing international markets including Canada, the U.K., Italy, and other European countries, Turkey, and parts of the Middle East. We
are continuing to seek to establish long-term distribution relationships in other regions, but can make no assurances that we will be successful in doing so. See the section captioned "Management's Discussion and Analysis of
Financial Condition and Results of Operations Overview"and"Risk Factors and Certain
Factors Affecting Future Operating Results."

HYVISC®

HYVISC is a high molecular weight injectable HA product for the treatment of joint dysfunction in horses due to non-infectious synovitis associated
with equine osteoarthritis. HYVISC has viscoelastic properties that lubricate and protect the tissues in horse joints. HYVISC is distributed by Boehringer Ingelheim Vetmedica, Inc. in the
United States.

OPHTHALMIC PRODUCTS

The ophthalmic products we manufacture include the AMVISC and AMVISC Plus product line, CoEase, STAARVISC-II, and ShellGel. Our injectable ophthalmic
viscoelastic products are high molecular weight HA products used as viscoelastic agents in ophthalmic surgical procedures such as cataract extraction and intraocular lens implantation. These products
coat, lubricate and protect
sensitive tissues such as the endothelium and maintain the space between them, thereby facilitating ophthalmic surgical procedures.

Anika
manufactures the AMVISC product line for Bausch & Lomb. In December 2004, we entered into a multi-year supply agreement (the 2004 B&L Agreement) with
Bausch & Lomb for viscoelastic products used in ophthalmic surgery. Under the 2004 B&L Agreement, which extends through December 31, 2010, and superseded the existing supply contract
that was set to expire December 31, 2007, we will continue to be the exclusive global supplier (other than with respect to Japan) for AMVISC and AMVISC Plus to Bausch & Lomb. The 2004
B&L Agreement also provides us with a right to negotiate to manufacture future surgical ophthalmic viscoelastic products developed by Bausch & Lomb, while Bausch & Lomb has been granted
rights to commercialize certain future surgical ophthalmic viscoelastic products developed by us. The 2004 B&L Agreement applies to all products sold by us to Bausch & Lomb from the beginning
of 2004, with a price increase starting in 2005. Under the 2004 B&L Agreement, we are entitled to continue providing surgical viscoelastic products to our existing customers (e.g. Advanced Medical
Optics, STAAR Surgical Company, Cytosol Ophthalmics, Inc.) who currently receive such products from us. See also the section captioned"Risk Factors and Certain Factors
Affecting Future Operating ResultsDependence on Marketing Partners"and"Reliance on a Small Number of
Customers."

Research and Development of Potential Products

As discussed below in the section titled"Risk Factors and Certain Factors Affecting Future Operating Results,"we
have not obtained FDA approval for the sales and marketing in the U.S. of the potential products described below.

Cosmetic Tissue Augmentation

Our products for cosmetic tissue augmentation (CTA) are based on a family of chemically modified, cross-linked forms of HA designed for longer duration in the
body. Cosmetic tissue augmentation is a therapy designed as a soft tissue filler for facial wrinkles, scar remediation and lip augmentation. This new class of tissue filler technology based on HA is
intended to supplant collagen-based products currently on

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the
market. In May 2004, we commenced a pivotal U.S. clinical trial to evaluate CTA's effectiveness for correcting nasolabial folds. The trial is being conducted by dermatologists and plastic
surgeons at 10 centers throughout the U.S. Patient enrollment was completed during the third quarter of 2004 and patients will be monitored for 6 to 12 months following initial treatment.

In
July 2004 we entered into an exclusive worldwide development and commercialization partnership (the OrthoNeutrogena Agreement) for our CTA products with the OrthoNeutrogena
division of Ortho-McNeil Pharmaceuticals, Inc., an affiliate of Johnson & Johnson. Under the terms of the OrthoNeutrogena Agreement, we received an initial payment of
$1.0 million. In addition, OrthoNeutrogena is required, subject to certain limitations, to fund our ongoing pivotal clinical trial of our CTA product initiated in May 2004 and to support
the development of the CTA product, as well as future line extensions. The OrthoNeutrogena Agreement also provides for sales- and development-based milestone payments to be made upon receipt of final
marketing approval from the U.S. Food and Drug Administration (FDA), receipt of a European CE Mark, and upon achievement of other sales and development targets in addition to royalty payments and
transfer payments for the supply of CTA products.

INCERT®

INCERT is a family of chemically modified, cross-linked forms of HA designed to prevent surgical adhesions. Surgical adhesions occur when fibrous bands of tissues
form between adjacent tissue layers during the wound healing process. Although surgeons attempt to minimize the formation of adhesions, they nevertheless occur quite frequently after surgery.
Adhesions in the abdominal and pelvic cavity can cause particularly serious problems such as intestinal blockage following abdominal surgery, and infertility following pelvic surgery. Fibrosis
following spinal surgery can complicate re-operation and may cause pain. We received CE marking for INCERT in the third quarter of 2004.

INCERT-S
is our product designed to reduce post-surgical fibrosis following spinal surgery. We initiated a pilot human clinical trial in Europe in
April 2004 involving patients undergoing spinal surgery. The clinical trial is being conducted at two centers in the U.K. and will involve approximately 45 patients. As of December 31,
2004, patient enrollment was approximately two-thirds complete.

Anika
co-owns issued U.S. patents covering the use of INCERT for adhesion prevention. See the section captioned"Patent and Propriety
Rights".

We
cannot assure you that: (1) we will successfully complete clinical trials of our CTA products or INCERT-S; (2) if completed, regulatory approval for sales in
the U.S. or internationally, in the case of our CTA products, will be obtained; or (3) if regulatory approvals are obtained, meaningful sales of our CTA products or INCERT-S will be
achieved.

Manufacturing of Hyaluronic Acid

We have been manufacturing HA since 1983 in our facility located in Woburn, Massachusetts. This facility is approved by the FDA for the manufacture of medical
devices and drugs. We have developed a proprietary manufacturing process for the extraction and purification of HA from avian combs, a source of high molecular weight HA. We have taken steps to
minimize risks associated with the availability of raw materials by obtaining regulatory approval in 2003 to outsource certain key intermediates for some of our products, which we have expanded to
include all of our current products. We believe that sufficient supplies of these materials are generally available, or maintained in inventory, to meet anticipated demand.

Patent and Proprietary Rights

We have a policy of seeking patent protection for patentable aspects of our proprietary technology. Our issued patents expire between 2009 and 2022. We
co-own certain U.S. patents and a patent application

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with
claims relating to the chemical modification of HA and certain adhesion prevention uses and certain drug delivery uses of HA. We also solely own patents covering composition of matter and certain
manufacturing processes. We also hold a license from Tufts University to use technologies claimed in a U.S. patent for the anti-metastasis applications of HA oligosaccharides. The license
expires upon expiration of the underlying patent. We intend to seek patent protection for products and processes developed in the course of our activities when we believe such protection is in our
best interest and when the cost of seeking such protection is not inordinate relative to the potential benefits. See also the section captioned"Risk Factors and Certain
Factors Affecting Future Operating ResultsWe may be unable to adequately protect our intellectual property."

Other
entities have filed patent applications for or have been issued patents concerning various aspects of HA-related products or processes. In addition, the products or
processes we develop may infringe the patent rights of others in the future. Any such infringement may have a material adverse effect on our business, financial condition, and results of operations.
See also the section captioned"Risk Factors and Certain Factors Affecting Future Operating ResultsWe may be unable to adequately protect our intellectual
property."

We
also rely upon trade secrets and proprietary know-how for certain non-patented aspects of our technology. To protect such information, we require all
employees, consultants and licensees to enter into confidentiality agreements limiting the disclosure and use of such information. These agreements, however, may not provide adequate protection. See
also
the section captioned"Risk Factors and Certain Factors Affecting Future Operating ResultsWe may be unable to adequately protect our intellectual
property."

We
have granted Bausch & Lomb a royalty-free, worldwide, non-exclusive license to our manufacturing inventions which relate to the AMVISC products,
effective upon the earlier of (1) the termination date of the 2004 B&L Agreement or (2) the loss of our rights of exclusivity thereunder.

We
have granted Ortho Biotech an exclusive, non-transferable royalty bearing license to use and sell ORTHOVISC (and other products developed pursuant to the OBI Agreement) in
the U.S. and Mexico, as well as a license to manufacture and have manufactured such products in the event that we are unable to supply Ortho Biotech with products in accordance with the terms of the
OBI Agreement.

We
have granted Ortho Neutrogena a worldwide, exclusive, non-transferable license to use, sell and offer our CTA product currently in development (and other products
developed pursuant to the OrthoNeutrogena Agreement), as well as a non-transferable license to manufacture and have manufactured such products in the event (and during such times) that we
are unable to supply OrthoNeutrogena with CTA products in accordance with the terms of the OrthoNeutrogena Agreement.

Government Regulation

United States Regulation

Our research (including clinical research), development, manufacture, and marketing of products are subject to regulation by numerous governmental authorities in
the U.S. and other countries. In the U.S., medical devices are subject to extensive and rigorous regulation by the FDA and by other federal, state and local authorities. The Federal Food, Drug and
Cosmetic Act (FDC Act) governs the testing, safety, effectiveness, clearance, approval, manufacture, labeling, packaging, distribution, storage, record keeping, reporting, marketing, advertising, and
promotion of our products. Noncompliance with applicable requirements can result in, among other things, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension
of production, failure of the government to grant premarket clearance or approval of products, withdrawal of clearances and approvals, and criminal prosecution.

Medical
products regulated by the FDA are generally classified as drugs, biologics, and/or medical devices. AMVISC, ShellGel, CoEase and STAARVISC are approved as Class III
medical devices in the U.S. for ophthalmic surgical procedures in intraocular use in humans. ORTHOVISC is approved as a

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Class III
medical device in the U.S. for treatment of pain resulting from osteoarthritis of the knee in humans. HYVISC is approved as an animal drug for intra-articular injection in horse
joints to treat degenerative joint disease associated with synovitis. In the past, most HA products for human use have been regulated as medical devices. We believe that the our products for CTA and
INCERT will have to meet the regulatory requirements of Class III devices, including premarket approval (PMA).

Unless
a new device is exempted from premarket notification, its manufacturer must obtain marketing clearance from the FDA through a premarket notification (510(k)) or approval through a
PMA before the device can be introduced into the market. Product development and approval within the FDA regulatory framework takes a number of years and involves the expenditure of substantial
resources. This regulatory framework may change or additional regulation may arise at any stage of our product development process and may affect approval of, or delay an application related to, a
product, or require additional expenditures by us. There is no assurance that the FDA review of marketing applications will result in product approval on a timely basis, or at all.

In
the U.S., medical devices intended for human use are classified into three categories (Class I, II or III), on the basis of the controls deemed reasonably necessary by the FDA
to assure their safety and effectiveness. Class I devices are subject to general controls, for example, labeling and adherence to the FDA's Good Manufacturing Practices/Quality System
Regulation (GMP/QSR). Most Class I devices are exempt from premarket notification. Class II devices are subject to general and special controls (for example, performance standards,
postmarket surveillance, and patient registries). Most Class II devices are subject to premarket notification and may be subject to clinical testing for purposes of premarket notification and
clearance for marketing. Class III is the most stringent regulatory category for medical devices. Most Class III devices require PMA approval from the FDA.

The
PMA approval process is lengthy, expensive, and typically requires, among other things, valid scientific evidence which typically includes extensive data such as
pre-clinical and clinical trial data to demonstrate a reasonable assurance of safety and effectiveness.

Human
clinical trials for significant risk devices must be conducted under an Investigational Device Exemption (IDE), which must be submitted to the FDA and either be approved or be
allowed to become effective before the trials may commence. There can be no assurance that submission of an IDE will result in the ability to commence clinical trials. In addition, the IDE approval
process could result in significant delay. Even if the FDA approves an IDE or allows an IDE for a clinical investigation to become effective, clinical trials may be suspended at any time for a number
of reasons, including, among others, failure to comply with applicable requirements, if there is reason to believe
that the risks to clinical subjects are not outweighed by the anticipated benefits to clinical subjects and the importance of the knowledge to be gained, informed consent is inadequate, the
investigation is scientifically unsound, there is reason to believe that the device, as used, is ineffective. A trial may be terminated if an unanticipated adverse device effect presents an
unreasonable risk to subjects. If clinical studies are suspended or terminated, we may be unable to continue the development of the investigational products affected.

Upon
completion of required clinical trials, for Class III medical devices, results are presented to the FDA in a PMA application. In addition to the results of clinical
investigations, the PMA applicant must submit other information relevant to the safety and effectiveness of the device, including, among other things, the results of non-clinical tests; a
full description of the device and its components; a full description of the methods, facilities and controls used for manufacturing; and proposed labeling. The FDA usually also conducts an
on-site inspection to determine whether an applicant conforms with the FDA's current GMP/QSR. FDA review of the PMA may not result in timely or any PMA approval, and there may be
significant conditions on approval, including limitations on labeling and advertising claims and the imposition of post-market testing, tracking, or surveillance requirements.

Product
changes after approval where such change affects safety and effectiveness as well as the use of a different facility for manufacturing, could necessitate additional FDA review
and approval by the FDA.

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Post
approval changes in labeling, packaging or promotional materials may also necessitate further FDA review and approval by the FDA.

Legally
marketed products are subject to continuing requirements by the FDA relating to manufacturing, quality control and quality assurance, maintenance of records and documentation,
reporting of adverse events, and labeling and promotion. The FDC Act requires device manufacturers to comply with GMP/QSR. The FDA enforces these requirements through periodic inspections of device
manufacturing facilities. In complying with standards set forth in the GMP/QSR regulations, manufacturers must continue to expend time, money and effort in the area of production and quality control
to ensure full technical compliance. Other federal, state, and local agencies may inspect manufacturing establishments as well.

A
set of regulations known as the Medical Device Reporting regulations obligates manufacturers to inform FDA whenever information reasonably suggests that one of their devices may have
caused or contributed to a death or serious injury, or when one of their devices malfunctions and if the malfunction were to recur, the device or a similar device would be likely to cause or
contribute to a death or serious injury.

In
addition to regulations enforced by the FDA, we are subject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control
Act, the Resource Conservation and Recovery Act and other existing and future federal, state and local laws and regulations as well as those of foreign governments. Federal, state and foreign
regulations regarding the manufacture and sale of medical products are subject to change. We cannot predict what impact, if any, such changes might have on our business.

The
process of obtaining approvals from the FDA and foreign regulatory authorities can be costly, time consuming, and subject to unanticipated delays. Approvals of our products,
processes or facilities may not be granted on a timely basis or at all, and we may not have available resources or be able to obtain the financing needed to develop certain of such products. Any
failure or delay in obtaining such approvals could adversely affect our ability to market our products in the U.S. and in other countries.

Foreign Regulation

In addition to regulations enforced by the FDA, we and our products are subject to certain foreign regulations. International regulatory bodies often establish
regulations governing product standards, packing requirements, labeling requirements, import restrictions, tariff regulations, duties and tax requirements. ORTHOVISC is approved for sale and is
marketed in Canada, Europe, Turkey, and parts of the Middle East. In Europe, ORTHOVISC is sold underConformité Européene(CE mark) authorization, a certification required under European Union (EU) medical device regulations. The CE mark allows ORTHOVISC to be marketed without further approvals in most of the EU nations
as well as other countries that recognize EU device regulations. In October 1996, we received an EC Design Examination and an EC Quality System Certificate from a European Notified Body, which
entitled us to affix the CE mark to ORTHOVISC as a viscoelastic supplement or a replacement for synovial fluid in human joints. In August 2004, we received an EC Design Examination Certificate
which entitled us to affix a CE mark to INCERT-S as a barrier to adhesion formation following surgery. We may not be able to achieve and/or maintain compliance required for CE marking or
other foreign regulatory approvals for any or all of our products. The requirements relating to the conduct of clinical trials, product licensing, marketing, pricing, advertising, promotion and
reimbursement also vary widely from country to country.

Competition

We compete with many companies, including, among others, large pharmaceutical firms and specialized medical products companies. Many of these companies have
substantially greater financial and other resources, larger research and development staffs, more extensive marketing and manufacturing

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organizations
and more experience in the regulatory process than us. We also compete with academic institutions, governmental agencies and other research organizations, which may be involved in
research, development and commercialization of products. Many of our competitors also compete against us in securing relationships with collaborators for their research and development and
commercialization programs.

General
competition in our industry is based primarily on product efficacy, safety, timing and scope of regulatory approvals, availability of supply, marketing and sales capability,
reimbursement coverage, product pricing and patent protection. Some of the principal factors that may affect our ability to compete in our HA development and commercialization market include:



We
are aware of several companies that are developing and/or marketing products utilizing HA for a variety of human applications. In some cases, competitors have already obtained product
approvals,
submitted applications for approval or have commenced human clinical studies, either in the U.S. or in certain foreign countries. There exists major competing products for the use of HA in ophthalmic
surgery. In addition, certain HA products for the treatment of osteoarthritis in the knee have received FDA approval and have been marketed in the U.S. since 1997, as well as select markets in Canada,
Europe and other countries. In December 2003, the FDA approved an HA product for the treatment of facial wrinkles which has been marketed internationally since 1996. There is a risk that we
will be unable to compete effectively against our current or future competitors.

Research and Development

Our research and development efforts primarily consist of the development of new medical applications for our HA-based technology and the management
of clinical trials for certain product candidates and the preparation and processing of applications for regulatory approvals at all relevant stages of development. Our development of new products is
presently accomplished primarily through in-house research and development personnel and resources as well as through collaboration with other companies and scientific researchers. As of
December 31, 2004, we had nine employees engaged primarily in research and development and engineering and two employees engaged in regulatory matters. For the years ended December 31,
2004, 2003, and 2002, research and development expenses were $4.1 million, $2.6 million, and $3.9 million, respectively. We anticipate that we will continue to commit significant
resources to research and development, including clinical trials, in the future.

Under
the OBI Agreement, Ortho Biotech has the right (1) to file for regulatory approval to market ORTHOVISC in Mexico at its sole cost and expense and (2) to further
develop ORTHOVISC by carrying out clinical trials. Under the OBI Agreement, Ortho Biotech has agreed to begin a clinical trial for a new indication for ORTHOVISC or a Phase IV clinical trial within
twelve months of the FDA approval of ORTHOVISC.

In
April of 2004 we initiated a pilot human clinical trial in Europe for INCERT-S, our product designed to reduce post-surgical fibrosis following spinal surgery.
In May we commenced a pivotal clinical trial in the U.S. for our product for CTA. We cannot assure you that: (1) we will successfully complete clinical trials of our INCERT-S or CTA
products; (2) if completed, regulatory approval for sales in the U.S.

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or
internationally, in the case of our CTA product, will be obtained; or (3) if regulatory approvals are obtained, meaningful sales of our products will be achieved

Under
the OrthoNeutrogena Agreement, OrthoNeutrogena is required, subject to certain limitations, to fund the May 2004 pivotal Phase III CTA clinical trial and to support us in
our development of this CTA product, as well as possible future line extensions.

There
is a risk that our efforts will not be successful in (1) developing our existing product candidates, (2) expanding the therapeutic applications of our existing
products, or (3) resulting in new applications for our HA technology. There is also a risk that we may choose not to pursue development of potential product candidates. We may not be able to
obtain regulatory approval for any new applications we develop. Furthermore, even if all regulatory approvals are obtained, there can be no assurances that we will achieve meaningful sales of such
products or applications.

Employees

As of December 31, 2004, we had approximately 61 full-time employees. We consider our relations with our employees to be good. None of our
employees are represented by labor unions.

Environmental Laws

We believe that we are in compliance with all federal, state and local environmental regulations with respect to our manufacturing facilities and that the cost of
ongoing compliance with such regulations does not have a material effect on our operations. Our leased manufacturing facility is located within the Wells G&H Superfund site in Woburn, MA. We have not
been named and are not a party to any such legal proceedings regarding the Wells G&H Superfund site.

Product Liability

The testing, marketing and sale of human health care products entail an inherent risk of allegations of product liability, and we cannot assure you that
substantial product liability claims will not be asserted against us. Although we have not received any material product liability claims to date and have coverage under our insurance policy of
$5,000,000 per occurrence and $5,000,000 in the aggregate, we cannot assure you that if material claims arise in the future, our insurance will be adequate to cover all situations. Moreover, we cannot
assure you that such insurance, or additional insurance, if required, will be available in the future or, if available, will be available on commercially reasonable terms. Any product liability claim,
if successful, could have a material adverse effect on our business, financial condition, and results of operation.

Recent Developments

On December 20, 2004, we announced the signing of a multi-year supply agreement, effective December 15, 2004, with Bausch & Lomb
for viscoelastic products used in ophthalmic surgery.

Available Information

Our Annual Reports on Form 10-K, including our consolidated financial statements, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K and other information, including amendments and exhibits to such reports, filed or furnished pursuant to the Securities Exchange Act of 1934, are available free
of charge in the "SEC Filings" section of our website located at http://www.anikatherapeutics.com, as soon as reasonably practicable after the reports are filed with or furnished to the Securities and
Exchange Commission.

11

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ITEM 2.    PROPERTIES

Our corporate headquarters is located in Woburn, Massachusetts, where we lease approximately 10,000 square feet of administrative and research and development
space. We extended our lease for this facility in 2004 for a term ending in December 2006. We also lease approximately 37,000 square feet of space at a separate location in Woburn,
Massachusetts, for our manufacturing facility and warehouse. This facility has received all FDA and state regulatory approvals to operate as a sterile device and drug manufacturer. We extended our
lease for this facility in 2003 for an additional five-year term ending in February 2009. For the year ended December 31, 2004, we had aggregate lease costs of approximately
$700,000.

ITEM 3.    LEGAL PROCEEDINGS

Securities and Exchange Commission Investigation.In May 2000, the Securities and Exchange Commission (SEC) issued a
formal order of investigation in connection with certain revenue recognition matters. On January 13, 2003 we announced that we had entered into a settlement with the SEC concluding and
resolving this investigation, which pertained to the company's historical accounting for and disclosures concerning sales of ORTHOVISC under a long-term supply and distribution agreement
with Zimmer, Inc. To conclude this matter, we consented to the entry of an order to comply with sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and
rules 12b-20, 13a-1 and 13a-13 promulgated thereunder. The settlement did not impose any monetary sanctions against us, and it is not expected to affect our
results of operations or financial condition. We neither admitted nor denied the findings in the SEC's administrative cease and desist order resolving the matter.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted to a vote of the security holders during the fourth quarter of the fiscal year covered by this report.

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PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

COMMON STOCK INFORMATION

Our common stock has traded on the Nasdaq National Market since November 25, 1997, under the symbol "ANIK." The following table sets forth, for the periods
indicated, the high and low sales prices of our common stock on the Nasdaq National Market. These prices represent prices between dealers and do not include retail mark-ups, markdowns, or
commissions and may not necessarily represent actual transactions.

Year Ended December 31, 2004

High

LowFirst Quarter

$
11.87

$
6.48Second Quarter


17.87


8.18Third Quarter


17.45


10.01Fourth Quarter


15.75


7.89


Year Ended December 31, 2003

High

LowFirst Quarter

$
1.82

$
0.97Second Quarter


4.17


1.45Third Quarter


6.75


2.64Fourth Quarter


11.65


5.67


At
December 31, 2004, the closing price per share of our common stock was $9.15 as reported on the Nasdaq National Market and there were approximately 275 holders
of record.

We
have never declared or paid any cash dividends on our common stock. We currently intend to retain earnings, if any, for use in our business and do not anticipate paying cash dividends
on our common stock in the foreseeable future. Payment of future dividends, if any, on our common stock will be at the discretion of our Board of Directors after taking into account various factors,
including our financial condition, operating results, anticipated cash needs, and plans for expansion.

EQUITY COMPENSATION PLAN INFORMATION

The following table sets forth information concerning the Company's equity compensation plan as of December 31, 2004.

|                                                           |       | Equity Compensation Plan Information
|---------------------------------------------------------- | ----- | ------------------------------------
|
|
|Equity compensation plans approved by security holders     |       | 1,702,305                           
|Equity compensation plans not approved by security holders |       |                                    
|                                                           |       |                                     
|                                                           | Total |                                     
|                                                           |       |                                     

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ITEM 6.    SELECTED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements and the Notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Annual Report. The Balance Sheet Data at December 31, 2004 and 2003 and the Statement of
Operations Data for each of the three years ended December 31, 2004 have been derived from the audited Consolidated Financial Statements for such years, included elsewhere in this Annual
Report. The Balance Sheet Data at December 31, 2002, 2001 and 2000, and the Statement of Operations Data for each of the two years in the period ended December 31, 2001 have been derived
from the audited Consolidated Financial Statements for such years, not included in this Annual Report.

The
Consolidated Financial Statements for fiscal years 2000 and 2001 were audited by Arthur Andersen LLP (Andersen) who has ceased operations.

Statement of Operations Data
(In thousands, except per share data)

|                                           |               | Years ended December 31,
|------------------------------------------ | ------------- | ------------------------
|
|Product revenue                            |               | $                       
|Licensing, milestone and contract revenue  |               |                         
|                                           |               |                         
|                                           | Total revenue |                         
|Cost of product revenue                    |               |                         
|                                           |               |                         
|Gross profit                               |               |                         
|Total operating expenses                   |               |                         
|Net income (loss)                          |               | $                       
|Diluted net income (loss) per common share |               | $                       
|Diluted common shares outstanding          |               |                         

Balance Sheet Data
(In thousands)

|                          |  | December 31, |       
|------------------------- |  | ------------ | ------
|
|Cash and cash equivalents |  | $            | 39,339
|Marketable securities     |  |              |      
|Working capital           |  |              | 42,135
|Total assets              |  |              | 59,538
|Accumulated deficit       |  |              | (2,379
|Treasury stock            |  |              |      
|Stockholders' equity      |  |              | 30,363

In
the first quarter of 2004, based on our expectations regarding future profitability, we released the previously established valuation allowance against our deferred
tax assets and recorded a one-time income tax benefit of $7.0 million.

We
received an initial payment of $2.0 million in December 2003 upon entering into the OBI Agreement. In February 2004 we received a milestone payment of
$20.0 million as a result of obtaining FDA approval for ORTHOVISC and in December 2004 we received a milestone payment of $5.0 million upon completion of certain manufacturing
upgrades. We are recognizing these non-refundable payments ratably over the expected term of the OBI Agreement, which is currently 10 years, and as of December 31, 2004, we
had recorded deferred revenue of $24.3 million.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following section of this Annual Report on Form 10-K titled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contains statements that are not statements of historical fact and are forward-looking statements within the meaning of the federal securities laws. These
statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievement to differ materially from anticipated results, performance,
or achievement, expressed or implied in such forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and
uncertainties. We discuss many of these risks and uncertainties at the beginning of this Annual Report on Form 10-K and under the heading "Business"and "Risk Factors and Certain Factors Affecting
Future Operating Results." The following discussion should also be read in conjunction with the Consolidated Financial Statements of
Anika Therapeutics, Inc. and the Notes thereto appearing elsewhere in this report.

Management Overview

Anika Therapeutics develops, manufactures and commercializes therapeutic products and devices intended to promote the protection and healing of bone, cartilage
and soft tissue. These products are based on hyaluronic acid (HA), a naturally occurring, biocompatible polymer found throughout the body. Due to its unique biophysical and biochemical properties, HA
plays an important role in a number of physiological functions such as the protection and lubrication of soft tissues and joints, the maintenance of the structural integrity of tissues, and the
transport of molecules to and within cells. Our marketed products include therapies for the treatment of joint diseases such as osteoarthritis and viscoelastic products used in eye surgery. Products
in development include chemically modified, cross-linked forms of HA to prevent surgical adhesions and for cosmetic tissue augmentation (CTA).

Our
currently marketed products include ORTHOVISC®, an HA product used in the treatment of some forms of osteoarthritis in humans, and HYVISC®, an HA product used
in the treatment of equine osteoarthritis. In the U.S., ORTHOVISC became available for sale on March 1, 2004 and is marketed by Ortho Biotech Products, L.P., under an exclusive license and
supply agreement. Internationally, ORTHOVISC has been approved for sale and marketed since 1996 under various distribution and marketing agreements. HYVISC is marketed in the U.S. through an exclusive
agreement with Boehringer Ingelheim Vetmedica, Inc. Our ophthalmic products include CoEase, STAARVISC-II, and ShellGel,
each an injectable ophthalmic viscoelastic HA product, distributed by Advanced Medical Optics, Inc., STAAR Surgical Company, and Cytosol Ophthalmics, Inc., respectively. We also
manufacture AMVISC® and AMVISC® Plus, HA viscoelastic supplement products used in ophthalmic surgery, for Bausch & Lomb Incorporated.

In
December 2004, we entered into a multi-year supply agreement (the 2004 B&L Agreement) with Bausch & Lomb for viscoelastic products used in ophthalmic surgery,
including the AMVISC and AMVISC Plus family of products. Under the new agreement, which extends through December 31, 2010, and superseded the existing supply contract that was set to expire
December 31, 2007, we will continue to be the exclusive global supplier (other than with respect to Japan) for AMVISC and AMVISC Plus to Bausch & Lomb. The 2004 B&L Agreement also
provides us with a right to negotiate to manufacture future surgical ophthalmic viscoelastic products developed by Bausch & Lomb, while Bausch & Lomb has been granted rights to
commercialize certain future surgical ophthalmic viscoelastic products developed by us. The 2004 B&L Agreement applies to all products sold by us to Bausch & Lomb from the beginning of 2004,
with a price increase starting in 2005. Under the 2004 B&L Agreement, we are entitled to continue providing surgical viscoelastic products to our existing customers (e.g. Advanced Medical Optics,
STAAR Surgical Company, Cytosol Ophthalmics, Inc.) who currently receive such products from us.

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On
July 26, 2004, we announced the signing of an exclusive worldwide development and commercialization partnership for our CTA products with the OrthoNeutrogena division of Ortho-
McNeil Pharmaceuticals, Inc., an affiliate of Johnson & Johnson. Under the terms of the OrthoNeutrogena Agreement, we received an initial payment of $1.0 million. In addition,
OrthoNeutrogena is required, subject to certain limitations, to fund our ongoing pivotal clinical trial of our CTA product initiated in May 2004 and to support the development of the CTA product, as
well as future line extensions. The OrthoNeutrogena Agreement also provides for sales- and development-based milestone payments in addition to royalty payments and transfer payments for the supply of
CTA products.

Osteoarthritis Business

We have marketed ORTHOVISC, our product for the treatment of osteoarthritis of the knee, internationally since 1996 through various distribution agreements.
International sales of ORTHOVISC contributed 18% of product revenue for the year ended December 31, 2004 and increased 31% compared to 2003. The increase was primarily due to increased market
penetration in Canada and Greece, as well as significant sales increase in Turkey. We expect international sales to grow in 2005 compared to 2004 reflecting further increased market penetration in
certain of our existing markets as well as anticipated expansion into new international markets. For these new opportunities we have assessed the world market and we are actively pursuing commercial
partners.

In
December 2003 we entered into the OBI Agreement with Ortho Biotech for the sales, marketing and distribution of ORTHOVISC in the U.S. and we received marketing approval from the U.S.
FDA in February 2004 for ORTHOVISC. Sales of ORTHOVISC were initiated in March 2004 by Ortho Biotech with the U.S. launch of ORTHOVISC at the annual meeting of the American Academy of Orthopedic
Surgeons. Sales of ORTHOVISC in the U.S. contributed 21% of our product revenue for the year ended December 31, 2004.

Our
sales of ORTHOVISC in the U.S. during 2004 represented primarily product for the initial product launch and inventory building. Sales of ORTHOVISC to end-users grew
slower than anticipated in 2004 as a result of a number of factors. We believe that a primary contributing factor to this slower growth has been reimbursement and lack of receiving assignment of a
specific reimbursement code. The Healthcare Common Procedure Coding System (HCPCS) is a comprehensive and standardized coding system that describes classifications of like products that are medical in
nature by category for the purpose of efficient claims processing. HCPCS codes are assigned by the Centers for Medicare and Medicaid Services (CMS). As is typical for a newly-introduced medical
device, initial sales of ORTHOVISC were made without a unique reimbursement code and reimbursement submissions were made using a miscellaneous code with no specified reimbursement dollar value. We
believe that using the miscellaneous reimbursement code without a specified reimbursement dollar value negatively impacted end-user sales of ORTHOVISC in 2004. Ortho Biotech, with our
help, submitted an application to secure a unique reimbursement code for ORTHOVISC in March 2004. In November 2004, Ortho Biotech received a decision on the application which assigned a unique
reimbursement code to be used by hospitals in an outpatient setting (the C code) which specifies a reimbursement dollar value. Use of the C code was effective January 2005. The CMS
decision, however, did not assign a unique reimbursement code to be used in the physician office setting (the J code) because the application filed in March 2004 did not reflect the required
six months of sales history. Instead of a unique J code, submission for reimbursement of ORTHOVISC is to continue using a miscellaneous J code. However, under the decision, the dollar
value to be reimbursed under the miscellaneous J code is defined. An application for a unique J code was re-submitted in January 2005 which, if assigned, will be effective in
January 2006. There can be no assurance that ORTHOVISC will receive a unique J code.

As
a result of the CMS decision which did not assign a unique J code for ORTHOSVISC to be effective January 2005 we are not entitled to a contractual milestone under the OBI
Agreement that would have been triggered had a unique J code been assigned by a specific date. The decision by the CMS to not

16

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assign
a unique J code for ORTHOVISC may further adversely impact our ORTHOVISC revenues. The required use of a miscellaneous J code may result in physician reluctance to utilize
ORTHOVISC as compared to if a unique J code had been assigned. These negative trends are further effected by changes in the categories of revenues we are entitled to under the OBI agreement. In
addition to milestone payments, the OBI Agreement provides for Ortho Biotech to pay us transfer fees, which are related to sales to Ortho Biotech, and royalty fees, which are tied to
end-user sales. As a result of Ortho Biotech's inventory buildup during 2004, we presently expect to experience a reduction in transfer fees, which may be offset by royalties as, and if,
ORTHOVISC achieves desired market penetration. As a result of these factors, we did not ship any ORTHOVISC to Ortho Biotech in the fourth quarter of 2004. We expect unit sales of ORTHOVISC to Ortho
Biotech in 2005 will be below 2004 levels. We expect the negative impact on our revenues will be partially offset by expected increased royalties we receive on end-user sales.

Sales
of HYVISC, our product for the treatment of equine osteoarthritis, contributed 9% to product revenue for the year ended December 31, 2004 and increased 18% compared to 2003.
We expect sales of HYVISC to decrease modestly in 2005 compared to 2004 primarily due to distributor inventory replenishment patterns. We continue to look at other veterinary applications and
opportunities to expand geographic territories.

Ophthalmic Business

Our ophthalmic business includes HA viscoelastic products used in ophthalmic surgery. For the year ended December 31, 2004, sales of ophthalmic products
contributed 52% of our product revenue reflecting an increase in sales of ophthalmic products of 10% compared to 2003. Sales to Bausch & Lomb accounted for 74% of ophthalmic sales for 2004 and
contributed 38% of product revenue for the period.

In
December 2004, we entered into a multi-year supply agreement (the 2004 B&L Agreement) with Bausch & Lomb for viscoelastic products used in ophthalmic surgery. Under
the new agreement, which extends through December 31, 2010, and superseded the existing supply contract that was set to expire December 31, 2007, we will continue to be the exclusive
global supplier (other than with respect to Japan) for AMVISC and AMVISC Plus to Bausch & Lomb. The 2004 B&L Agreement also provides us with a right to negotiate to manufacture future surgical
ophthalmic viscoelastic products developed by Bausch & Lomb, while Bausch & Lomb has been granted rights to commercialize certain future surgical ophthalmic viscoelastic products
developed by us. The 2004 B&L Agreement applies to all products sold by us to Bausch & Lomb from the beginning of 2004, with a price increase starting in 2005. Under the 2004 B&L Agreement, we
are entitled to continue providing surgical
viscoelastic products to our existing customers (e.g. Advanced Medical Optics, STAAR Surgical Company, Cytosol Ophthalmics, Inc.) who currently receive such products from us.

Prior
to entering into the 2004 B&L Agreement sales to Bausch & Lomb were made under the 2000 B&L Agreement. Under the terms of the 2000 B&L Agreement the price applicable for all
units sold to Bausch & Lomb in a calendar year was dependent on the total unit volume of sales of certain ophthalmic products during the year. In accordance with our revenue recognition policy,
revenue is not recognized if the sale price is not fixed or determinable, and any amounts received in excess of revenue recognized are recorded as deferred revenue. During the fourth quarter the
actual annual unit volume became known and we recorded revenue equal to the amounts earned or we provided a rebate to our customer. In each of the previous three fiscal years (i.e. 2003, 2002, 2001),
the annual unit volume was below levels fixed under our agreement with Bausch & Lomb and, accordingly, in the fourth quarter of each of these years we recognized as revenue the amounts deferred
during the first three quarters. For the nine months ended September 30, 2004, we deferred $1.0 million related to sales to Bausch & Lomb which was subject to possible retroactive
price adjustments. As a result of entering into the 2004 B&L Agreement, which retroactively applies to sales from the beginning of 2004, we applied the unit pricing terms under the 2004 B&L Agreement
to our 2004 Bausch & Lomb sales activity. These terms essentially provide for fixed unit pricing with reduced unit pricing applicable for units purchased in excess of a specified amount during
the

17

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fiscal
year. As a result of applying this new pricing to 2004 transactions, we earned $761,000 of revenue which was previously deferred during the first nine months of 2004 and rebated $252,000 to
Bausch & Lomb.

Our
distributor for CoEase, Advanced Medical Optics, completed the acquisition of the surgical ophthalmology business of Pfizer, Inc., in June 2004, which includes a competing
line of viscoelastic products for use in ocular surgery. As a result, our agreement with Advanced Medical Optics has not been renewed and we expect will terminate in July 2005 upon its expiration. We
expect sales to Advanced Medical Optics will decline to minimum required levels in accordance with the agreement and to discontinue during the first quarter of 2005. As a result, in the future we may
not be able to sustain current product revenue levels in our ophthalmic business. Sales to Advanced Medical Optics contributed 19% of ophthalmic product revenue and 10% of total product revenue for
the year ended December 31, 2004.

Research and Development

Our current research and development efforts are focused on our chemically modified formulations of HA designed for longer residence time in the body. We
initiated a U.S. pivotal clinical trial for our product for cosmetic tissue augmentation (CTA), a therapy for correcting dermal defects, including facial wrinkles, scar remediation and lip
augmentation, in May 2004. The trial is designed to evaluate the effectiveness of CTA for correcting nasolabial folds and is being conducted by dermatologists and
plastic surgeons at 10 centers throughout the U.S. Patient enrollment was completed during the third quarter of 2004 and patients will be monitored for 6 to 12 months following initial
treatment. As discussed above, we are being reimbursed for the clinical trial expenses, subject to certain limitations, in connection with the OrthoNeutrogena Agreement which is included in contract
revenue.

In
April 2004 we initiated a pilot human clinical trial for INCERT®-S, a chemically modified form of HA designed to act as a barrier to prevent internal tissue
adhesion and scarring following spinal surgery. The clinical trial is being conducted at two centers in the U.K. and will involve approximately 45 patients. As of December 31, 2004,
patient enrollment was approximately two-thirds complete.

Financial Overview

For the year ended December 31, 2004 net income increased to $11,190,000 or $.98 per diluted share from $827,000, or $.08 per diluted share for the same
period last year. Net income from operations for 2004 was $6,388,000 compared to $595,000 for 2003.

RevenueWe increased sales in each of our product groups for the year ended December 31, 2004 compared to the same
period last year. Sales of our ophthalmic products increased 10%, HYVISC sales increased 18% and ORTHOVISC sales increased 183% in 2004 compared to 2003. The increases in product sales were primarily
due to increased sales volume with existing customers and also included the launch of ORTHOVISC in the U.S. License, milestone and contract revenue comprised 16% of total revenue in 2004 and consists
of the ratable recognition of the upfront and milestone payments received under the OBI Agreement and contract revenue received under the Ortho Neutrogena Agreement.

Cost of product revenueOur cost of product revenue includes material, labor and manufacturing overhead costs, obsolescence
charges, packaging and shipping costs. Our costs of product revenue may vary over time based on the mix of products sold. Over the past three years we have experienced a decrease in the cost of
product revenue as a percentage of product revenue primarily due to increased manufacturing efficiencies and product volume combined with cost cutting efforts. Gross margin on product revenue for the
year ended December 31, 2004 increased to 55% compared to 48% for the year ended December 31, 2003. We expect gross margin on product sales to be relatively consistent in 2005 compared
to 2004 reflecting product mix and comparable manufacturing volume.

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Research and developmentOur research and development costs consists primarily of salaries and related expenses for personnel
and fees paid to outside consultants and outside service providers. Our research and development costs increased 57% for the year ended December 31, 2004 compared to the same period last year
primarily due to costs associated with the clinical trials for CTA and INCERT. We expect to incur additional costs associated with the human clinical trials for our product candidates and to increase
personnel-related expenses as we expand our research and development efforts. As a result, we expect research and development costs will increase in 2005 compared to 2004.

Selling, general and administrativeSelling, general and administrative costs consists primarily of salaries and related
expenses for personnel in executive, finance and accounting, human resources, information technology, and sales and marketing functions. Other costs include professional fees for legal and accounting,
fees for consulting and outside services, and insurance costs. Selling, general and administrative expenses for the year ended December 31, 2004 increased 44% compared to the prior year. The
increase in selling, general and administrative expenses during 2004 is primarily due to an increase in professional and outside services fees, including costs for implementation and compliance of
Section 404 of the Sarbanes-Oxley Act of 2002, combined with an increase in personnel related costs. We expect selling, general and administrative expenses to increase in 2005 compared to 2004
as a result of increased personnel related costs as well as expanded marketing efforts for ORTHOVISC and partially offset by lower audit and tax fees and consulting fees for ongoing Sarbanes-Oxley
compliance.

Income taxes.We recorded a provision for income taxes for the year ended December 31, 2004 reflecting an effective
tax rate of approximately 39%. As a result of the receipt of the upfront and milestone payments from Ortho Biotech, we have determined that we will utilize all of our net operating loss and credit
carry-forwards. In addition, based on our current expectations regarding future profitability, we released the previously established valuation allowance against our deferred tax assets and recorded a
one-time income tax benefit of $7.0 million in the first quarter of 2004.

Summary of Critical Accounting Policies; Significant Judgments and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We monitor our estimates on an on-going basis for changes in facts and
circumstances, and material changes in these estimates could occur in the future. Changes in estimates are recorded in the period in which they become known. We base our estimates on historical
experience and other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from our estimates if past experience or other assumptions do not turn out to be
substantially accurate.

We
have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these
policies on our business operations is discussed throughout Management's Discussion and Analysis of Financial Condition and
Results of Operations where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see Note 2 in
the Notes to the Consolidated Financial Statements of this Annual Report on Form 10-K for the year ended December 31, 2004.

Revenue Recognition.

Our
revenue recognition policies are in accordance with the Securities and Exchange Commission's (SEC) Staff Accounting Bulletin No. 101,Revenue
Recognition in Financial Statements, as amended by SEC

19

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Staff
Accounting Bulletin No. 104,Revenue Recognition,and Emerging Issues Task Force Issue No. 00-21, Revenue Arrangements with Multiple Deliverables.

We
recognize revenue from the sales of products we manufacture upon confirmation of regulatory compliance and shipment to the customer as long as there is (1) persuasive evidence
of an arrangement, (2) delivery has occurred and risk of loss has passed, (3) the sales price is fixed or determinable and (4) collection of the related receivable is probable.
Amounts billed or collected prior to recognition of revenue are classified as deferred revenue. When determining whether risk of loss has transferred to customers on product sales or if the sales
price is fixed or determinable we evaluate both the contractual terms and conditions of our distribution and supply agreements as well as our business practices. ORTHOVISC has been sold through
several distribution arrangements as well as outsource order-processing arrangements (logistic agents). Sales of product through third party logistics agents in certain markets are recognized as
revenue upon shipment by the logistics agent to the customer.

Under
the 2000 B&L Agreement, the price for units sold in a calendar year was dependent on total unit volume of sales to Bausch & Lomb and other customers of certain ophthalmic
products during the year. Prices fluctuated based on sales levels, and interim quarters were subject to possible retroactive price adjustments when the actual annual unit volume for the year became
known. Given the pricing in this arrangement was not fixed and was determined based on qualifying sales to multiple customers, we determined that we could not reliably estimate the rebate, and
accordingly, we deferred the maximum rebate that could be due until the annual sales volume was known in the fourth quarter. Under the 2004 B&L Agreement, the pricing is based solely on ophthalmic
products sold to Bausch & Lomb. While the unit prices will be discounted for those units in excess of cumulative minimum sales levels, no amounts will be rebated. The applicable discount will
be measured quarterly, subject to adjustment based on cumulative annual thresholds. Since quarterly revenue may be adjusted higher or lower depending on the relationship of our quarterly activity
relative to our annual goals, we will need to estimate annual unit volume to determine the amount of revenue recognition in each quarter, thereby spreading the discount, if any, across all units
purchased in a given annual period. Factors we will consider in developing our estimate include: (1) the discount will be based solely on sales activity with Bausch &Lomb who has been a
long standing customer of our ophthalmic products; (2) the
homogeneous nature of the products purchased under this arrangement; (3) our expected future activity with Bausch & Lomb based on historical experience and product forecasts provided by
them; and (4) overall market demand for our ophthalmic products. In 2004, retroactive application of the 2004 Bausch & Lomb agreement resulted in recognition of $761,000 of revenue which
was previously deferred during the first nine months of 2004 and we rebated $252,000 to Bausch & Lomb.

In
July 2004 the Company entered into an exclusive worldwide development and commercialization agreement (the OrthoNeutrogena Agreement) for our CTA products with the
OrthoNeutrogena, a division of Ortho-McNeil Pharmaceuticals, Inc., an affiliate of Johnson & Johnson. This arrangement included up front payments, funding of ongoing development
activities, milestones upon achievement of predefined goals, in addition, we will receive payments for supply of CTA products and royalties on sales. We believe this is a multiple element arrangement
that falls under the scope of EITF 00-21. Under the EITF 00-21 framework, in order to account for an element as a separate unit of accounting, the element must have stand-alone
value and there must be objective and reliable evidence of fair value of the undelivered elements. While this arrangement includes several elements, we believe that two separate units of accounting
exist (a combined license and development unit and a manufacturing unit) under the EITF 00-21 model.

We
are accounting for the combined license and development unit using the performance based model, which recognizes revenue as the efforts are expended limited to the amount of
non-refundable cash received. Under this arrangement, we received non-refundable upfront fees of $1 million and reimbursement for approximately $1.3 million of
costs which were incurred prior to our entering into this arrangement. We have treated both these amounts as upfront fees that will be recognized over the

20

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expected
term of the license and development unit. In addition to the upfront fees, we are receiving reimbursement of pre-approved development costs incurred. For the year ended
December 31, 2004 we recognized $1,392,000 as contract revenue for this arrangement under the performance-based method.

In
December 2003 the Company entered into a ten-year licensing and supply agreement (the OBI Agreement) with Ortho Biotech Products, L.P., a member of the
Johnson & Johnson family of companies, to market ORTHOVISC in the U.S. and Mexico. Under the OBI Agreement, Ortho Biotech will perform sales, marketing and distribution functions and licensed
the right to further develop and commercialize ORTHOVISC as well as other new products for the treatment of pain associated with osteoarthritis based on the Company's viscosupplementation technology.
In support of the license, the OBI Agreement provides that Ortho Biotech will fund post-marketing clinical trials for new indications of ORTHOVISC. The Company received an initial payment
of $2.0 million upon entering into the OBI Agreement, a milestone payment of $20.0 million in February 2004, as a result of obtaining FDA approval of ORTHOVISC and a milestone
payment of $5.0 million in December 2004 for planned upgrades to our manufacturing operations. We evaluated the terms of the OBI Agreement and determined that the upfront fee and
milestone payments did not meet the conditions to be recognized separately from the supply agreement, therefore, we have
deferred non refundable payments received of $27.0 million which we are recognizing ratably over the expected term of the OBI Agreement, which is currently 10 years.

Reserve for Obsolete/Excess Inventory.Inventories are stated at the lower of cost or market. We regularly review our
inventories and record a provision for excess and obsolete inventory based on certain factors that may impact the realizable value of our inventory including, but not limited to, technological
changes, market demand, inventory cycle time, regulatory requirements and significant changes in our cost structure. If ultimate usage varies significantly from expected usage or other factors arise
that are significantly different than those anticipated by management, additional inventory write-down or increases in obsolescence reserves may be required.

We
generally produce finished goods based upon specific orders or in anticipation of specific orders. As a result, we generally do not establish reserves against finished goods. Under
certain circumstances we may purchase raw materials or manufacture work-in-process or finished goods inventory in anticipation of receiving regulatory approval for the use of
the raw materials in our manufacturing process or sale of the finished goods inventory. We evaluate the value of inventory on a quarterly basis and may, based on future changes in facts and
circumstances, determine that a write-down of inventory is required in future periods.

Deferred tax assets.We record a deferred tax asset or liability based on the difference between the financial statement and
tax basis of assets and liabilities, as measured by the enacted tax rates assumed to be in effect when these differences reverse.

In
2004, we achieved milestones under the OBI Agreement and received payments totaling $25.0 million which we recognized as taxable income in 2004. As a result, we have determined
that we will be able to utilize all of our net operating loss and credit carry-forwards in 2004 to offset part of our taxable income. In accordance with our revenue recognition policy, for financial
statement purposes, the milestone payments totaling $25.0 million were deferred and are being recognized ratably over the expected ten-year term of the OBI Agreement. We recorded a
deferred tax asset of $9.1 million representing the approximate income tax effect of the timing difference of revenue recognition for financial statement purposes and for tax purposes related
to these milestone payments as of December 31, 2004. Based on management's current expectations regarding future profitability, we released the valuation allowance previously established
against our deferred tax assets and recorded a one-time income tax benefit of $7.0 million.

21

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Results of Operations

Year ended December 31, 2004 compared to year ended December 31, 2003

Statement of Operations Detail

Year Ended December 31,2004

2003Product revenue

$
22,286,000

$
15,330,000Licensing, milestone and contract revenue


4,180,000


74,000Total revenue


26,466,000


15,404,000Cost of product revenue


9,949,000


8,005,000Gross profit


16,517,000


7,399,000Operating Expenses:Research and development


4,087,000


2,595,000Selling, general and administrative


6,042,000


4,209,000Total operating expenses


10,129,000


6,804,000Income from operations


6,388,000


595,000Interest income


389,000


144,000Income before income taxes


6,777,000


739,000Provision for income taxes


2,626,000


(88,000
)Benefit from release of valuation allowance


(7,039,000
)

Net income

$
11,190,000

$
827,000


Product revenue.Product revenue for the year ended December 31, 2004 was $22,286,000, an increase of $6,956,000, or
45%, compared with $15,330,000 for the year ended December 31, 2003.

Year Ended December 31,2004

2003Ophthalmic Products

$
11,533,000

$
10,512,000ORTHOVISC


8,699,000


3,073,000HYVISC


2,054,000


1,745,000$
22,286,000

$
15,330,000


Ophthalmic
products sales increased $1,021,000, or 10%, to $11,533,000 compared with sales of $10,512,000 in 2003. The increase is primarily attributable to increased sales to
Bausch & Lomb and, to a lesser extent, to increased sales to each of our other ophthalmic customers. In December 2004, the company entered into the 2004 B&L Agreement which, among other
things, established reduced unit pricing to Bausch & Lomb for units purchased in 2004 in excess of a specified volume. Under the terms of the 2000 B&L Agreement, which was replaced by the 2004
B&L Agreement in December 2004, the price for all units sold for a calendar year was dependent on the total unit volume of sales of certain ophthalmic products during the year. Accordingly,
unit prices for sales occurring in the nine months ended September 30, 2004 and 2003 were subject to possible retroactive price adjustments when the actual annual unit volume became known. In
accordance with our revenue recognition policy, the amount of revenue reasonably subject to the price adjustment was recorded as deferred revenue until the annual unit volume became known and the
sales price becomes fixed. In the fourth quarter 2004, as a result of entering into the 2004 B&L Agreement, we applied the terms of the 2004 B&L Agreement retroactively to the beginning of 2004 and
included in product revenue $761,000 of revenue related to sales of AMVISC to Bausch & Lomb which had been previously deferred during the first three quarters of 2004 and rebated $252,000 to
Bausch & Lomb. Under the 2000 B&L Agreement, during the fourth quarter of 2003 the

22

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actual
annual unit volume, and therefore the final sales price, became known and determinable and product revenue included the recognition of $846,000 of revenue related to sales of AMVISC to
Bausch & Lomb previously deferred during the first three quarters of 2003. Our agreement with Advanced Medical Optics has not been renewed as a result of their acquisition of a competing line
of viscoelastic products for ophthalmic surgery and is expected terminate in July 2005 upon its expiration. We expect sales to Advanced Medical Optics to decline to minimum required levels in
accordance with the agreement and to discontinue during the first quarter of 2005. Sales to Advanced Medical Optics contributed 19% of ophthalmic product revenue and 10% of total product revenue for
the year ended December 31, 2004. As a result, we expect ophthalmic sales will decrease in 2005 compared to 2004.

Our
sales of ORTHOVISC increased $5,626,000, or 183%, to $8,699,000 in 2004 as compared with $3,073,000 in 2003. The increase was primarily due to sales to our U.S. distributor, Ortho
Biotech, and royalty fees tied to end-user sales. U. S. sales of ORTHOVISC were 21% of product sales for 2004. We expect sales of ORTHOVISC to our U.S. distributor for 2005 to be below
2004 levels primarily because of inventory buildup by Ortho Biotech in 2004, partially offset by increased
royalty fees tied to end-user sales. International sales of ORTHOVISC increased 31% for 2004 to $4,030,000 from $3,073,000 for 2003. The increase is primarily due to increased sales to our
Turkey distributor combined with increased sales in Canada and Greece. We expect international sales to increase in 2005 compared to 2004 reflecting increased market penetration in certain of our
existing markets as well as expansion into new international markets.

Sales
of HYVISC increased $309,000, or 18%, to $2,054,000 for 2004 as compared with $1,745,000 for 2003. Sales of HYVISC are made to a single customer under an exclusive agreement which
expires in May 2006. Sales of HYVISC in 2003 included distributor inventory replenishment for certain units shipped without regulatory approval in the third quarter of 2002.

Licensing, milestone and contract revenue.Licensing, milestone and contract revenue for the year ended December 31,
2004 was $4,180,000, compared to $74,000 for 2003. Licensing and milestone revenue includes the ratable recognition of the $2.0 million up-front payment and $25.0 million in
milestone payments from Ortho Biotech. These amounts are being recognized in income ratably over the ten-year expected life of the agreement, or $675,000 per quarter. Contract revenue was
$1,392,000 for the year ended December 31, 2004. Contract revenue consists of reimbursement of clinical and development costs from OrthoNeutrogena as well as development-related fees and
milestones under the OrthoNeutrogena agreement recorded utilizing a performance-based method for revenue recognition.

Gross profit.Gross profit for the year ended December 31, 2004 was $16,517,000, or 62% of revenue, compared with
$7,399,000, or 48% of revenue, for the year ended December 31, 2003. Gross margin on product revenue was 55% for 2004 compared to 48% for 2003. The increase in gross margin on product revenue
is mainly due to a higher margin product mix combined with efficiency gains in our manufacturing process. We introduced outsourced intermediates in our manufacturing process for certain of our
products in 2004 which we expect to expand to all product lines in 2005. We expect gross margin on product sales to be relatively consistent in 2005 compared to 2004 reflecting product mix and
comparable manufacturing volume.

Research and development.Research and development expenses for the year ended December 31, 2004 increased by
$1,492,000, or 57%, to $4,087,000 from $2,595,000 for the prior year. Research and development expenses include those costs associated with our in-house research and development efforts
for the development of new medical applications for our HA-based technology, the management and cost of clinical trials, and the preparation and processing of applications for regulatory
approvals at all relevant stages of development. The increase in research and development expenses during 2004 is primarily attributable to expenditures associated with the pilot study for
INCERT-S initiated in April 2004 and the pivotal clinical trial for our product for cosmetic tissue augmentation initiated in May 2004, including costs associated with the
start-up of the clinical trials incurred in the first quarter of 2004. The comparative

23

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increase
in 2004 was partially offset by the elimination of costs primarily incurred in the first half of 2003 associated with the completion of our pivotal clinical trial for ORTHOVISC.

Our
current in-house research and development efforts primarily relate to INCERT, a product designed to prevent surgical adhesions and our products for the CTA market. Our
research and development efforts will include seeking new applications for the HA molecule as well as our proprietary chemically modified HA and other therapeutics applications of our ORTHOVISC
formulation that target osteoarthritis-related ailments. As a result of these ongoing efforts, as well as the ongoing clinical trials, we expect research and development expenses will increase in 2005
compared to 2004.

Selling, general and administrative.Selling, general and administrative expenses for the year ended December 31, 2004
increased by $1,833,000 or 44%, to $6,042,000 from $4,209,000 in the prior year. The increase in selling, general and administrative expenses during 2004 is primarily due to an increase in
professional and outside services fees of $1,393,000 combined with an increase in personnel related costs of $403,000 compared with 2003. The increase in professional and outside services fees
included an increase in audit and tax fees and consulting fees of $773,000 primarily relating to costs for the implementation and compliance with Section 404 of the Sarbanes-Oxley Act of 2002.
We expect selling, general and administrative expenses to increase in 2005 compared to 2004 as a result of increased personnel related costs as well as expanded marketing efforts for ORTHOVISC
partially offset by lower audit and tax fees and consulting fees for ongoing Sarbanes-Oxley compliance.

Interest income.Interest income increased $245,000, or 170%, to $389,000 for the year ended December 31, 2004, from
$144,000 in 2003. The increase is primarily attributable to a higher average cash and investment balances during 2004. Interest income in 2005 is expected to increase as a result of higher average
cash and investment balances.

Income taxes.A net tax benefit of $4,413,000 was recorded for the year ended December 31, 2004, comprising a provision for income
taxes of $2,626,000 offset by a $7,039,000 benefit resulting from the release of the valuation allowance. As a result of the receipt of the $20.0 million milestone payment in
February 2004 and the $5.0 million milestone payment received in December 2004 from Ortho Biotech,
our recent operating results and forecasted future income support an assertion that ultimate realization of our deferred tax assets is more likely than not at December 31, 2004. Accordingly,
the Company fully released the valuation allowance during 2004 and correspondingly recorded a one-time tax benefit of $7,039,000.

We
recorded a provision for income taxes of $66,000 and an income tax benefit of $154,000 for year ended December 31, 2003. In 2002 federal tax law changed to allow for a five
year carryback period and a suspension of certain limitations on the use of alternative minimum tax losses. We filed an income tax carryback claim to carry our 2001 tax loss back to prior tax years.
As a result of the carryback claim, in the first quarter of 2003, we received a refund of approximately $154,000 of taxes paid in prior years.

24

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Year ended December 31, 2003 compared to year ended December 31, 2002

Statement of Operations Detail

Year Ended December 31,2003

2002Product revenue

$
15,330,000

$
13,129,000Licensing revenue


74,000


58,000Total revenue


15,404,000


13,187,000Cost of product revenue


8,005,000


8,109,000Gross profit


7,399,000


5,078,000Operating Expenses:Research and development


2,595,000


3,928,000Selling, general and administrative


4,209,000


4,425,000Total operating expenses


6,804,000


8,353,000Income (loss) from operations


595,000


(3,275,000
)Interest income, net


144,000


240,000Income (loss) before income taxes


739,000


(3,035,000
)Income taxes


(88,000
)

5,000Net income (loss)

$
827,000

$
(3,040,000
)


Product revenue.Product revenue for the year ended December 31, 2003 was $15,330,000, an increase of $2,201,000, or
17%, compared with $13,129,000 for the year ended December 31, 2002.

Year Ended December 31,2003

2002Ophthalmic Products

$
10,512,000

$
9,907,000ORTHOVISC


3,073,000


2,307,000HYVISC


1,745,000


915,000$
15,330,000

$
13,129,000


Ophthalmic
products sales increased $605,000, or 6%, to $10,512,000 compared with sales of $9,907,000 in 2002. The increase is primarily attributable to one new distributor added in the
second quarter of 2002 which reflected a full year of sales in 2003. Sales of AMVISC to Bausch and Lomb for 2003 were relatively level with sales for 2002. Under the terms of the 2000 B&L Agreement,
the price for units sold in a calendar year is dependent on the total unit volume of sales of certain ophthalmic products during the year. Accordingly, unit prices for sales occurring in the nine
months ended September 30, 2003 and 2002 were subject to possible retroactive price adjustments when the actual annual unit volume became known. In accordance with the Company's revenue
recognition policy, the amount of revenue reasonably subject to the price adjustment is recorded as deferred revenue until the annual unit volume becomes known and the sales price becomes fixed.
During the fourth quarter of each year the actual annual unit volume, and therefore the final sales price, became known and determinable. In the fourth quarter of 2003 and 2002, product revenue
included the recognition of $846,000 and $839,000, respectively, of revenue related to sales of AMVISC to Bausch & Lomb, which had been previously deferred during the first three quarters of
the respective years. Our sales of ORTHOVISC increased $766,000, or 33%, to $3,073,000 in 2003 as compared with $2,307,000 in 2002. The increase was primarily due to increased sales to our Turkey
distributor partially offset by a net decrease in sales among our European distributors. Sales of HYVISC increased $830,000, or 91%, to $1,745,000 for 2003 as compared with $915,000 for 2002. Sales of
HYVISC are made to a single customer under an exclusive agreement which expires in May 2006. The increase in

25

---



sales
of HYVISC included distributor inventory replenishment for certain units shipped without regulatory approval in the third quarter of 2002.

Licensing revenue.Licensing revenue for the year ended December 31, 2003 increased $16,000, or 28%, to $74,000 from
$58,000 in the prior year. Licensing revenue includes up-front and maintenance payments on certain supply agreements with purchasers of our ophthalmic products which are recognized ratably
over the remaining term of the related agreement. The increase relates to a full year impact from a new distribution agreement effective in 2002. In addition, the OBI Agreement provides for additional
payments to us contingent on achieving certain performance milestones which, if met, the related payment is expected to be recognized in income ratably over the remaining term, beginning in the period
in which the milestones are met.

Gross profit.Gross profit for the year ended December 31, 2003 was $7,399,000, or 48% of revenue, compared with
$5,078,000, or 39% of revenue, for the year ended December 31, 2002.    The increase in gross profit is mainly due to a higher margin product mix combined with efficiency gains in
our manufacturing process.

Research and development.Research and development expenses for the year ended December 31, 2003 decreased by
$1,333,000, or 34%, to $2,595,000 from $3,928,000 for the prior year. Research and development expenses include those costs associated with our in-house research and development efforts
for the development of new medical applications for our HA-based technology, the management and cost of clinical trials, and the preparation and processing of applications for regulatory
approvals at all relevant stages of development. The decrease in research and development expenses during 2003 is primarily attributable to a decrease in costs associated with the pivotal clinical
trial for ORTHOVISC which was substantially complete in the first quarter of 2003. During 2003 expenditures associated with our pivotal clinical trial for ORTHOVISC decreased approximately $1,500,000
compared to 2002 expenditures. In late May 2003 we completed compilation of the clinical data and submitted a PMA application to the FDA as a requirement for seeking U.S. market approval.

Our
in-house research and development efforts relate to INCERT, a product designed to prevent surgical adhesions and products for the CTA market. Our ongoing focus will
include second-generation versions of our existing ophthalmic and osteoarthritis products, as well as other therapeutics applications of HA.

Selling, general and administrative.Selling, general and administrative expenses for the year ended December 31, 2003
decreased by $216,000 or 5%, to $4,209,000 from $4,425,000 in the prior year. The decrease in selling, general and administrative expenses during 2003 is primarily due to a decrease in outside
services fees of $121,000 combined with a decrease in professional service fees of $112,000 compared with 2002. These decreases reflect lower consulting and selling expenses in addition to lower legal
expenses partially offset by an increase in accounting fees.

Interest income, net.Interest income, net, decreased $96,000, or 40%, to $144,000 for the year ended December 31,
2003, from $240,000 in 2002. The decrease is attributable to lower average cash and investment balances and lower interest rates during 2003.

Income taxes.We recorded an income tax benefit of $88,000 for the year ended December 31, 2003 compared to income tax
expense of $5,000 for the year ended December 31, 2002. In 2002 federal tax law changed to allow for a five year carryback period and a suspension of certain limitations on the use of
alternative minimum tax losses. We filed an income tax carryback claim to carry our 2001 tax loss back to prior tax years. As a result of the carryback claim, in the first quarter of 2003, we received
a refund of approximately $154,000 of taxes paid in prior years. The tax benefit was partially offset by a provision for income taxes in the amount of $64,000 recorded for 2003 federal alternative
minimum tax and $2,000 for state taxes paid on investment income. For federal and state income tax purposes, net operating loss

26

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carryforwards
offset the taxable income which included the $2.0 million received in December 2003. As of December 31, 2003, we have federal and state net operating loss
carryforwards of approximately $9,686,000, and $9,462,000, respectively, which may be available to offset future taxable income. As provided in Section 382 of the Internal Revenue Code (IRC)
the amount of net operating loss and credit carryforwards that we may utilize in any one year may be restricted in the event of certain changes in ownership.

Liquidity And Capital Resources

We require cash to fund our operating expenses and to make capital expenditures. We expect that our requirements for cash to fund these uses will increase as the
scope of our operations expand. Historically we have funded our cash requirements from available cash and investments on hand. At December 31, 2004, cash and cash equivalents totaled
$39.3 million compared to cash, cash equivalents and marketable securities of $14.6 million at December 31, 2003 and $13.5 million at December 31, 2002.

We
received an initial payment of $2.0 million in December 2003 upon entering into the OBI Agreement. In February 2004, we received a milestone payment of
$20.0 million as a result of obtaining FDA approval for ORTHOVISC and in December 2004 we received a milestone payment of $5.0 million upon completion of certain manufacturing
upgrades. On an on-going and long-term basis, the OBI Agreement also provides for us to receive royalty and transfer fees.

In
July 2004 we received an initial payment of $1.0 million upon entering into the OrthoNeutrogena Agreement. The OrthoNeutrogena Agreement provides for additional performance-
and sales-based milestone payments to the Company contingent upon final marketing approval from the FDA, receipt of a European CE Mark, and upon achievement of other sales and development targets, in
addition to royalty and transfer fees. In addition, OrthoNeutrogena is required, subject to certain limitations, to fund the ongoing pivotal clinical trial of our CTA product initiated in
May 2004 and to support the development of the CTA product, as well as future line extensions. Reimbursable development and
clinical expenses incurred through the December 31, 2004 totaled approximately $2.2 million of which payment for approximately $1.4 million had been received.

Cash
provided by operating activities was $23,825,000 for the year ended December 31, 2004 compared with cash provided by operating activities of $2,012,000 and $332,000 for the
years ended December 31, 2003 and 2002, respectively. Cash provided by operating activities in 2004 resulted primarily from net income of $11,190,000 which includes a one-time
non-cash income tax benefit of $7,039,000 from the release of the previously established valuation allowance against our deferred tax assets and an increase in deferred revenue of
$24,166,000. The increase in cash provided by operating activities was partially offset by an increase in the deferred tax asset of $11,181,000 and a net increase in other current assets and
liabilities of $1,663,000. The increase in other current assets and liabilities includes an increase on accounts receivable of $927,000, an increase in inventory of $600,000 and an increase in prepaid
expenses of $1,257,000 partially offset by an increase in current liabilities of $1,186,000. The increase in deferred revenue was primarily due to the $20.0 million milestone payment received
in February 2004 and the $5.0 million milestone payment received in December 2004 from Ortho Biotech. The increase in prepaid expenses includes $933,000 of prepaid income taxes as
a result of our estimated federal and state income tax payments totaling approximately $7.2 million for the year.

Cash
provided by investing activities was $344,000, $1,485,000, and $1,605,000 for 2004, 2003 and 2002, respectively. Net cash flows from investing activities for 2004 includes the
release of restricted cash of $818,000 which was partially offset by capital expenditures of $474,000, primarily for manufacturing and computer equipment. In connection with the issuance of an
irrevocable letter of credit to one of our vendors we had deposited $818,000 with our bank to collateralize the letter of credit which amount is recorded in restricted cash at December 31,
2003. These funds were restricted from our use during the

27

---



term
of the letter of credit which expired in April 2004. We expect to increase our capital expenditures in 2005 primarily for upgrading and expanding our manufacturing and packaging equipment.

Cash
provided by financing activities of $578,000 and $93,000 for 2004 and 2003, respectively, reflects the proceeds from the exercise of stock options.

Off Balance Sheet Arrangements

We do not use special purpose entities or other off-balance sheet financing techniques except for operating leases as disclosed in the contractual
obligations table below that we believe have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity or capital resources.

Recent Accounting Pronouncements

In November 2004, the FASB issued SFAS 151, "Inventory Costs" which amends the guidance in Accounting Research Bulletin No. 43, Chapter 4,
"Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). In addition, SFAS 151 requires that
allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of SFAS 151 is effective for the first annual
reporting period beginning after June 15, 2005. The adoption of SFAS 151 is not expected to have a material impact on the our Consolidated Financial Statements.

In
December 2004, the FASB, issued a revision to SFAS 123 Share-Based Payment, also known as SFAS 123R, that amends existing accounting pronouncements for share-based
payment transactions in which an enterprise receives employee and certain non-employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities
that are based on the fair value of the enterprise's equity instruments or that may be settled by the issuance of such equity instruments. SFAS 123R eliminates the ability to account for
share-based compensation transactions using APB 25 and generally requires such transactions be accounted for using a fair-value-based method. SFAS 123R's effective date would be
applicable for awards that are granted, modified, become vested, or settled in cash in interim or annual periods beginning after June 15, 2005. SFAS 123R includes three transition
methods: one that provides for prospective application and two that provide for retrospective application. We intend to adopt SFAS 123R prospectively commencing in the third quarter of the
fiscal year ending December 31, 2005; it is expected that the adoption of SFAS 123R will cause us to record, as expense each quarter, a non-cash accounting charge
approximating the fair value of such share based compensation meeting the criteria outlined in the provisions of SFAS 123R; as of December 31, 2004, we had approximately 692,000 stock
options outstanding which had not yet become vested.

Contractual Obligations and Other Commercial Commitments

We have no material commitments for purchases of inventories or property and equipment. We expect to incur additional investments in our operations through
increased inventory levels and balances in accounts receivable for 2005 compared to 2004 in addition to greater capital expenditures in 2005 for manufacturing equipment to meet anticipated higher
volume requirements and computers and software and furniture and fixtures associated with normal operations. To the extent that funds generated from our operations, together with our existing capital
resources are insufficient to meet future requirements, we will be required to obtain additional funds through equity or debt financings, strategic alliances with corporate partners and others, or
through other sources. No assurance can be given that any additional financing will be made available to us or will be available on acceptable terms should such a need arise.

28

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Our
future capital requirements and the adequacy of available funds will depend, on numerous factors, including:



We
cannot assure you that we will record profits in future periods. However, we believe that based on our current strategy, our cash and investments on hand will be sufficient to meet
our cash flows requirements beyond 2005. See the section captioned"Risk Factors and Certain Other Factors Affecting Future Operating ResultsHistory of Losses;
Uncertainty of Future Profitability."

The
terms of any future equity financings may be dilutive to our stockholders and the terms of any debt financings may contain restrictive covenants, which could limit our ability to
pursue certain courses of action. Our ability to obtain financing is dependent on the status of our future business prospects as well as conditions prevailing in the relevant capital markets. No
assurance can be given that any additional financing may be made available to us or may be available on acceptable terms should such a need arise.

The
table below summarizes our contractual obligations of non-cancelable operating leases at December 31, 2004:

Amount2005


707,0002006


710,0002007


618,0002008


617,0002009


103,000Thereafter


Total

$
2,755,000


29

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RISK FACTORS AND CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS

Our business is subject to comprehensive and varied government regulation and, as a result, failure to obtain FDA or other governmental approvals for
our products may materially adversely affect our business, results of operations and financial condition.

Product development and approval within the FDA framework takes a number of years and involves the expenditure of substantial resources. There can be no assurance
that the FDA will grant approval for our new products on a timely basis if at all, or that FDA review will not involve delays that will adversely affect our ability to commercialize additional
products or expand permitted uses of existing products, or that the regulatory framework will not change, or that additional regulation will not arise at any stage of our product development process
which may adversely affect approval of or delay an application or require additional expenditures by us. In the event our future products are regulated as human drugs or biologics, the FDA's review
process of such products typically would be substantially longer and more expensive than the review process to which they are currently subject as devices.

Our
HA products under development, including a product for the cosmetic tissue augmentation market (CTA), and INCERT®, a product designed to prevent surgical adhesions, have
not obtained U.S. regulatory approval for commercial marketing and sale. We receivedConformité Européennemarking (CE
marking), a foreign regulatory approval for commercial marketing and sale, for INCERT in the third quarter of 2004. CTA has not received foreign regulatory approval for marketing and sale. We believe
that these products will be regulated as Class III medical devices in the U.S. and will require a PMA prior to marketing. We cannot assure you that:



We
also cannot assure you that any delay in receiving FDA approvals will not adversely affect our competitive position. Furthermore, even if we do receive FDA approval:



Once
obtained, marketing approval can be withdrawn by the FDA for a number of reasons, including, among others, the failure to comply with regulatory standards, or the occurrence of
unforeseen problems following initial approval. We may be required to make further filings with the FDA under certain circumstances. The FDA's regulations require a PMA supplement for certain changes
if they affect the safety and effectiveness of an approved device, including, but not limited to, new indications for use, labeling changes, the use of a different facility to manufacture, process or
package the device, and changes in performance or design specifications. Changes in manufacturing procedures or methods of manufacturing that may affect safety and effectiveness may be deemed approved
after a 30-day notice unless the FDA requests a 135-day supplement. Our failure to receive approval of a PMA supplement regarding the use of a different manufacturing facility
or any other change affecting the safety or effectiveness of an approved device on a timely basis, or at all, may have a material adverse effect on our

30

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business,
financial condition, and results of operations. The FDA could also limit or prevent the manufacture or distribution of our products and has the power to require the recall of such products.
Significant delay or cost in obtaining, or failure to obtain FDA approval to market products, any FDA limitations on the use of our products, or any withdrawal or suspension of approval or rescission
of approval by the FDA could have a material adverse effect on our business, financial condition, and results of operations.

In
addition, all FDA approved or cleared products manufactured by us must be manufactured in compliance with the FDA's Good Manufacturing Practices (GMP) regulations and, for medical
devices, the FDA's Quality System Regulations (QSR). Ongoing compliance with QSR and other applicable regulatory requirements is enforced through periodic inspection by state and federal agencies,
including the FDA. The FDA may inspect us and our facilities from time to time to determine whether we are in compliance with regulations relating to medical device and manufacturing companies,
including regulations concerning manufacturing, testing, quality control and product labeling practices. We cannot assure you that we will be able to comply with current or future FDA requirements
applicable to the manufacture of products.

FDA
regulations depend heavily on administrative interpretation and we cannot assure you that the future interpretations made by the FDA or other regulatory bodies, with possible
retroactive effect, will not adversely affect us. In addition, changes in the existing regulations or adoption of new governmental regulations or policies could prevent or delay regulatory approval of
our products.

Failure
to comply with applicable regulatory requirements could result in, among other things, warning letters, fines, injunctions, civil penalties, recall or seizure of products, total
or partial suspension of production, refusal of the FDA to grant pre-market clearance or pre-market approval for devices, withdrawal of approvals and criminal prosecution.

In
addition to regulations enforced by the FDA, we are subject to other existing and future federal, state, local and foreign regulations. International regulatory bodies often establish
regulations governing product standards, packing requirements, labeling requirements, import restrictions, tariff regulations, duties and tax requirements. We cannot assure you that we will be able to
achieve and/or maintain compliance required for CE marking or other foreign regulatory approvals for any or all of our products or that we will be able to produce our products in a timely and
profitable manner while complying with applicable requirements. Federal, state, local and foreign regulations regarding the manufacture and sale of medical products are subject to change. We cannot
predict what impact, if any, such changes might have on our business.

The
process of obtaining approvals from the FDA and other regulatory authorities can be costly, time consuming, and subject to unanticipated delays. We cannot assure you that approvals
or clearances of our products will be granted or that we will have the necessary funds to develop certain of our products. Any failure to obtain, or delay in obtaining such approvals or clearances,
could adversely affect our ability to market our products.

We have historically incurred operating losses and we cannot make any assurances about our future profitability.

From our inception through December 31, 1996 and 1999 through 2002 we have incurred annual operating losses. For the years ended December 31, 2004
and 2003, we recorded net income of $11.2 million and $827,000, respectively, and as of December 31, 2004, we had an accumulated deficit of approximately $2.4 million. Our ability
to maintain profitability is uncertain. The continued development of our products will require the commitment of substantial resources to conduct research and preclinical and clinical development
programs, and the establishment of sales and marketing capabilities or distribution arrangements either by us or our partners. We cannot assure you that we will be able to develop these products or
new medical applications of our existing products or technology, or that if developed, the necessary regulatory approvals will be obtained, or if obtained, that sales, marketing and

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distribution
capabilities and arrangements will be established in order to permit us to maintain profitability.

Substantial competition could materially affect our financial performance.

We compete with many companies, including, among others, large pharmaceutical companies and specialized medical products companies. Many of these companies have
substantially greater financial and other resources, larger research and development staffs, more extensive marketing and
manufacturing organizations and more experience in the regulatory process than us. We also compete with academic institutions, governmental agencies and other research organizations that may be
involved in research, development and commercialization of products. Because a number of companies are developing or have developed HA products for similar applications and have received FDA approval,
the successful commercialization of a particular product will depend in part upon our ability to complete clinical studies and obtain FDA marketing and foreign regulatory approvals prior to our
competitors, or, if regulatory approval is not obtained prior to competitors, to identify markets for our products that may be sufficient to permit meaningful sales of our products. For example, we
are aware of several companies that are developing and/or marketing products utilizing HA for a variety of human applications. In some cases, competitors have already obtained product approvals,
submitted applications for approval or have commenced human clinical studies, either in the U.S. or in certain foreign countries. There exists major competing products for the use of HA in ophthalmic
surgery. In addition, certain HA products for the treatment of osteoarthritis in the knee have received FDA approval before us and have been marketed in the U.S. since 1997, as well as select markets
in Canada, Europe and other countries. In December 2003, the FDA approved an HA product for the treatment of facial wrinkles which has been marketed internationally since 1996. There can be no
assurance that we will be able to compete against current or future competitors or that competition will not have a material adverse effect on our business, financial condition and results of
operations.

We are uncertain regarding the success of our clinical trials.

Several of our products will require clinical trials to determine their safety and efficacy for U.S. and international marketing approval by regulatory bodies,
including the FDA. We began a pilot human clinical trial in Europe for INCERT-S in April 2004 and initiated a pivotal clinical trial for our product for CTA in May 2004.
There can be no assurance that we will successfully complete clinical trials of INCERTS or our CTA product or that we will be able to successfully complete the regulatory approval process
for either INCERTS or our CTA product. In addition, there can be no assurance that we will not encounter additional problems that will cause us to delay, suspend or terminate the clinical
trials. In addition, we cannot make any assurance that such clinical trials, if completed, will ultimately demonstrate these products to be safe and efficacious.

We are dependent upon marketing and distribution partners and the failure to maintain strategic alliances on acceptable terms will have a material
adverse effect on our business, financial condition and results of operations.

Our success will be dependent, in part, upon the efforts of our marketing partners and the terms and conditions of our relationships with such marketing partners.

We
cannot assure you that such marketing partners will not seek to renegotiate their current agreements on terms less favorable to us. Under the terms of the 2004 B&L Agreement,
effective December 15, 2004, we will continue to be Bausch & Lomb's exclusive global supplier (other than with respect to Japan) of AMVISC and AMVISC Plus ophthalmic viscoelastic
products. The B&L Agreement expires December 31, 2010, and superseded an existing supply contract with Bausch & Lomb that was set to expire December 31, 2007. The new contract
also provides us with a right to negotiate to manufacture future surgical ophthalmic viscoelastic products developed by Bausch & Lomb, while Bausch & Lomb has

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been
granted rights to commercialize certain future surgical ophthalmic viscoelastic products developed by us. In addition, under certain circumstances, Bausch & Lomb has the right to terminate
the agreement, and/or the agreement may revert to a non-exclusive basis; in each case, we cannot make any assurances that such circumstances will not occur. For the years ended
December 31, 2004 and 2003, sales of AMVISC products to Bausch & Lomb accounted for 32% and 51% of total revenues, respectively. Although we intend to continue to seek new ophthalmic
product customers, there can be no assurances that we will be successful in obtaining new customers or to achieve meaningful sales to such new customers.

Our
distributor for CoEase, Advanced Medical Optics, completed its previously announced acquisition of the surgical ophthalmology business of Pfizer, Inc. in June 2004,
which includes a competing line of viscoelastic products for use in ocular surgery. As a result, our agreement with Advanced Medical Optics has not been renewed and we expect will terminate in
July 2005 upon its expiration. We expect that sales to Advanced Medical Optics will decline to minimum required levels in accordance with the agreement and to discontinue during the first
quarter of 2005. As a result, in the future we may not be able to sustain current product revenue levels in our ophthalmic business.

We
have entered into various agreements for the distribution of ORTHOVISC internationally which are subject to termination under certain circumstances. We are continuing to seek to
establish long-term distribution relationships in regions not covered by existing agreements, but can make no assurances that we will be successful in doing so. There can be no assurance
that we will be able to identify or engage appropriate distribution or collaboration partners or effectively transition to any such partners. There can be no assurance that we will obtain European or
other reimbursement approvals or, if such approvals are obtained, they will be obtained on a timely basis or at a satisfactory level of reimbursement.

In
December 2003 we entered into a ten-year licensing and supply agreement with Ortho Biotech Products, L.P., a member of the Johnson & Johnson family of
companies, to market ORTHOVISC in the U.S. and Mexico. Under the OBI Agreement Ortho Biotech will perform sales, marketing and distribution functions. Additionally, Ortho Biotech licensed the right to
further develop and commercialize ORTHOVISC products for the treatment of pain associated with osteoarthritis. We cannot assure you that Ortho Biotech will be able to market ORTHOVISC effectively or
to establish sales levels to the extent that Anika and Ortho Biotech believe are possible in the timeframes expected, or at all, nor can we assure you that we will be able to achieve the performance-
and sales- based milestones provided in the OBI Agreement. For the year ended December 31, 2004, sales of
ORTHOVISC to Ortho Biotech and royalties tied to end-user sales accounted for 18% of total revenue. Furthermore, we cannot predict whether the license granted to Ortho Biotech in the OBI
Agreement to further develop and commercialize ORTHOVISC products for the treatment of pain associated with osteoarthritis based on our viscosupplementation technology will result in any new products
or indications for use.

On
July 26, 2004, we announced the signing of an exclusive worldwide development and commercialization partnership with OrthoNeutrogena a division of Ortho-McNeil
Pharmaceuticals, Inc., an affiliate of Johnson & Johnson, for our CTA therapy products. Under the terms of the agreement, OrthoNeutrogena will, subject to certain limitations, reimburse
us for costs incurred for the ongoing pivotal clinical trial with our CTA product initiated in May 2004 and support the development of the CTA product, as well as future line extensions. There
can be no assurance that we will successfully complete the clinical trial for our CTA product or that we will be able to successfully complete the FDA approval process. If we are able to successfully
complete the FDA approval process for our CTA product, we cannot assure you that OrthoNeutrogena will be able to commercialize our CTA product effectively, or at all, nor can we assure you that we
will be able to achieve the sales- and performance-based milestones provided in the agreement.

We
may need to obtain the assistance of additional marketing partners to bring new and existing products to market and to replace certain marketing partners. The failure to establish
strategic

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partnerships
for the marketing and distribution of our products on acceptable terms will have a material adverse effect on our business, financial condition, and results of operations.

Our future success depends upon market acceptance of our existing and future products.

Our success will depend in part upon the acceptance of our existing and future products by the medical community, hospitals and physicians and other health care
providers, and third-party payers. Such acceptance may depend upon the extent to which the medical community perceives our products as safer, more effective or cost-competitive than other
similar products. Ultimately, for our new products to gain general market acceptance, it may also be necessary for us to develop marketing partners for the distribution of our products. There can be
no assurance that our new products will achieve significant market acceptance on a timely basis, or at all. Failure of some or all of our future products to achieve significant market acceptance could
have a material adverse effect on our business, financial condition, and results of operations.

We may be unable to adequately protect our intellectual property rights.

Our success will depend, in part, on our ability to obtain and enforce patents, protect trade secrets, obtain licenses to technology owned by third parties when
necessary, and conduct our business without infringing on the proprietary rights of others. The patent positions of pharmaceutical, medical products and biotechnology firms, including ours, can be
uncertain and involve complex legal and factual questions. There can be no assurance that any patent applications will result in the issuance of patents or, if any patents are issued, whether they
will provide significant proprietary protection or commercial advantage, or will not be circumvented by others. In the event a third party has also filed one or more patent applications for any of its
inventions, we may have to participate in interference proceedings declared by the United States Patent and Trademark Office (PTO) to determine priority of invention, which could result in failure to
obtain, or the loss of, patent protection for the inventions and the loss of any right to use the inventions. Even if the eventual outcome is favorable to us, such interference proceedings could
result in substantial cost to us, and diversion of management's attention away from our operations. Filing and prosecution of patent applications, litigation to establish the validity and scope of
patents, assertion of patent infringement claims against others and the defense of patent infringement claims by others can be expensive and time consuming. There can be no assurance that in the event
that any claims with respect to any of our patents, if issued, are challenged by one or more third parties, that any court or patent authority ruling on such challenge will determine that such patent
claims are valid and enforceable. An adverse outcome in such litigation could cause us to lose exclusivity covered by the disputed rights. If a third party is found to have rights covering products or
processes used by us, we could be forced to cease using the technologies or marketing the products covered by such rights, could be subject to significant liabilities to such third party, and could be
required to license technologies from such third party. Furthermore, even if our patents are determined to be valid, enforceable, and broad in scope, there can be no assurance that competitors will
not be able to design around such patents and compete with us using the resulting alternative technology.

We
have a policy of seeking patent protection for patentable aspects of our proprietary technology. We intend to seek patent protection with respect to products and processes developed
in the course of our activities when we believe such protection is in our best interest and when the cost of seeking such protection is not inordinate. However, no assurance can be given that any
patent application will be filed, that any filed applications will result in issued patents or that any issued patents will provide us with a competitive advantage or will not be successfully
challenged by third parties. The protections afforded by patents will depend upon their scope and validity, and others may be able to design around our patents.

Other
entities have filed patent applications for or have been issued patents concerning various aspects of HA-related products or processes. There can be no assurance that
the products or processes developed by us will not infringe on the patent rights of others in the future. Any such infringement may

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have
a material adverse effect on our business, financial condition, and results of operations. In particular, we received notice from the PTO in 1995 that a third party was attempting to provoke a
patent interference with respect to one of our co-owned patents covering the use of INCERT for post-surgical adhesion prevention. It is unclear whether an interference will be
declared. If an interference is declared it is not possible at this time to determine the merits of the interference or the effect, if any, the interference will have on our marketing of INCERT for
this use. No assurance can be given that we would be successful in any such interference proceeding. If the third-party interference were to be decided adversely to us, involved claims of our patent
would be cancelled, our marketing of the INCERT product may be materially and adversely affected and the third party may enforce patent rights against us which could prohibit the sale and use of
INCERT products, which could have a material adverse effect on our future operating results.

We
also rely upon trade secrets and proprietary know-how for certain non-patented aspects of our technology. To protect such information, we require all
employees, consultants and licensees to enter into confidentiality agreements limiting the disclosure and use of such information. There can be no assurance that these agreements provide meaningful
protection or that they will not be breached, that we would have adequate remedies for any such breach, or that our trade secrets, proprietary know-how, and our technological advances will
not otherwise become known to others. In addition, there can be no assurance that, despite precautions taken by us, others have not and will not obtain access to our proprietary technology. Further,
there can be no assurance that third parties will not independently develop substantially equivalent or better technology.

Pursuant
to the 2004 B&L Agreement, we have agreed to transfer to Bausch & Lomb, upon expiration of the term of the 2004 B&L agreement on December 31, 2010, or in
connection with earlier termination in certain circumstances, our manufacturing process, know-how and technical information, which relate to only AMVISC products. Upon expiration of the
2004 B&L Agreement, there can be no assurance that Bausch & Lomb will continue to use us to manufacture AMVISC and AMVISC Plus. If Bausch & Lomb discontinues the use of us as a
manufacturer after such time, our business, financial condition, and results of operations would likely be materially and adversely affected.

Our manufacturing processes involve inherent risks and disruption could materially adversely affect our business, financial condition and results of
operations.

Our results of operations are dependent upon the continued operation of our manufacturing facility in Woburn, Massachusetts. The operation of biomedical
manufacturing plants involves many risks, including the risks of breakdown, failure or substandard performance of equipment, the occurrence of natural and other disasters, and the need to comply with
the requirements of directives of government agencies, including the FDA. In addition, we rely on a single supplier for syringes and a small number of suppliers for a number of other materials
required for the manufacturing and delivery of our HA products. Although we believe that alternative sources for many of these and other components and raw materials that we use in our manufacturing
processes are available, any supply interruption could harm our ability to manufacture our products until a new source of supply is identified and qualified. We may not be able to find a sufficient
alternative supplier in a reasonable time period, or on commercially reasonable terms, if at all, and our ability to produce and supply our products could be impaired.

Furthermore,
our manufacturing processes and research and development efforts involve animals and products derived from animals. We procure our animal-derived raw materials from
qualified vendors, control for contamination and have processes that effectively inactivate infectious agents; however, we cannot assure you that we can completely eliminate the risk of transmission
of infectious agents and in the future regulatory authorities could impose restrictions on the use of animal-derived raw materials that could impact our business.

The
utilization of animals in research and development and product commercialization is subject to increasing focus by animal rights activists. The activities of animal rights groups and
other organizations

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that
have protested animal based research and development programs or boycotted the products resulting from such programs could cause an interruption in our manufacturing processes and research and
development efforts. The occurrence of material operational problems, including but not limited to the events described above, could have a material adverse effect on our business, financial
condition, and results of operations during the period of such operational difficulties.

Our financial performance depends on the continued growth and demand for our products and we may not be able to successfully manage the expansion of our
operations

Our future success depends on substantial growth in product sales. There can be no assurance that such growth can be achieved or, if achieved, can be sustained.
There can be no assurance that even if substantial growth in product sales and the demand for our products is achieved, we will be able to:



Our
failure to successfully manage future growth could have a material adverse effect on our business, financial condition, and results of operations.

If we engage in any acquisition as a part our growth strategy, we will incur a variety of costs, and may never realize the anticipated benefits of the
acquisition.

Our business strategy may include the future acquisition of businesses, technologies, services or products that we believe are a strategic fit with our business.
    If we undertake any acquisition, the process of integrating an acquired business, technology, service or product may result in unforeseen operating difficulties and expenditures and may
absorb significant management attention that would otherwise be available for ongoing development of our business. Moreover, we may fail to realize the anticipated benefits of any acquisition as
rapidly as expected or at all. Future acquisitions could reduce stockholders' ownership, cause us to incur debt, expose us to future liabilities and result in amortization expenses related to
intangible assets with definite lives. In addition, acquisitions involve other risks, including diversion of management resources otherwise available for ongoing development of our
business and risks associated with entering new markets with which we have limited experience or where experienced distribution alliances are not available. Our future profitability may depend in part
upon our ability to develop further our resources to adapt to these new products or business areas and to identify and enter into satisfactory distribution networks. We may not be able to identify
suitable acquisition candidates in the future or consummate future acquisitions.

Sales of our products are largely dependent upon third party reimbursement and our performance may be harmed by health care cost containment
initiatives.

In the U.S. and other markets, health care providers, such as hospitals and physicians, that purchase health care products, such as our products, generally rely
on third party payers, including Medicare, Medicaid and other health insurance and managed care plans, to reimburse all or part of the cost of the health care product. We depend upon the distributors
for our products to secure reimbursement and reimbursement approvals. Reimbursement by third party payers may depend on a number of factors, including the payer's determination that the use of our
products is clinically useful and cost-effective, medically necessary and not experimental or investigational. Since reimbursement approval is required from each payer individually,
seeking such approvals can be a time consuming and costly process which, in the future, could require us or our marketing partners to provide supporting scientific, clinical and

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cost-effectiveness
data for the use of our products to each payer separately. Significant uncertainty exists as to the reimbursement status of newly approved health care products, and any
failure or delay in obtaining reimbursement approvals can negatively impact sales or our new products. In addition, third party payers are increasingly attempting to contain the costs of health care
products and services by limiting both coverage and the level of reimbursement for new therapeutic products and by refusing in some cases to provide coverage for uses of approved products for disease
indications for which the FDA has not granted marketing approval. Also, Congress and certain state legislatures have considered reforms that may affect current reimbursement practices, including
controls on health care spending through limitations on the growth of Medicare and Medicaid spending. There can be no assurance that third party reimbursement coverage will be available or adequate
for any products or services developed by us. Outside the U.S., the success of our products is also dependent in part upon the availability of reimbursement and health care payment systems. Lack of
adequate coverage and reimbursement provided by governments and other third party payers for our products and services could have a material adverse effect on our business, financial condition, and
results of operations.

We may seek financing in the future, which could be difficult to obtain and which could dilute your ownership interest or the value of your shares.

We had cash and cash equivalents of approximately $39.3 million at December 31, 2004. Our future capital requirements and the adequacy of available
funds will depend, however, on numerous factors, including:



To
the extent that funds generated from our operations, together with our existing capital resources are insufficient to meet future requirements, we will be required to obtain
additional funds through equity or debt financings, strategic alliances with corporate partners and others, or through other sources. The terms of any future equity financings may be dilutive to you
and the terms of any debt financings may contain restrictive covenants, which limit our ability to pursue certain courses of action. Our ability to obtain financing is dependent on the status of our
future business prospects as well as conditions prevailing in the relevant capital markets. No assurance can be given that any additional financing will be made available to us or will be available on
acceptable terms should such a need arise.

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We could become subject to product liability claims, which, if successful, could materially adversely affect our business, financial condition and
results of operations.

The testing, marketing and sale of human health care products entail an inherent risk of allegations of product liability, and there can be no assurance that
substantial product liability claims will not be asserted against us. Although we have not received any material product liability claims to date and have an insurance policy of $5,000,000 per
occurrence and $5,000,000 in the aggregate to cover such claims should they arise, there can be no assurance that material claims will not arise in the future or that our insurance will be adequate to
cover all situations. Moreover, there can be no assurance that such insurance, or additional insurance, if required, will be available in the future or, if available, will be available on commercially
reasonable terms. Any product liability claim, if successful, could have a material adverse effect on our business, financial condition and results of operations.

Our business is dependent upon hiring and retaining qualified management and scientific personnel.

We are highly dependent on the members of our management and scientific staff, the loss of one or more of whom could have a material adverse effect on us. We
experienced a number of management changes in 2004. There can be no assurances that such management changes will not adversely affect our business. We believe that our future success will depend in
large part upon our ability to attract and retain highly skilled, scientific, managerial and manufacturing personnel. We face significant competition for such personnel from other companies, research
and academic institutions, government entities and other organizations. We have been operating without a Chief Financial Officer since October 2004 and continue to search for a permanent
replacement. There can be no assurance that we will be successful in hiring or retaining the personnel we require, including a permanent Chief Financial Officer. The failure to hire and retain such
personnel could have a material adverse effect on our business, financial condition and results of operations.

We are subject to environmental regulation and any failure to comply with applicable laws could subject us to significant liabilities and harm our
business.

We are subject to a variety of local, state and federal government regulations relating to the storage, discharge, handling, emission, generation, manufacture and
disposal of toxic, or other hazardous substances used in the manufacture of our products. Any failure by us to control the use, disposal, removal or storage of hazardous chemicals or toxic substances
could subject us to significant liabilities, which could have a material adverse effect on our business, financial condition, and results of operations.

Our future operating results may be harmed by economic, political and other risks relating to international sales.

During the years ended December 31, 2004 and 2003, approximately, 18% and 20%, respectively, of our product sales were to international distributors. Our
representatives, agents and distributors who sell products in international markets are subject to the laws and regulations of the foreign jurisdictions in which they operate and in which our products
are sold. A number of risks are inherent in international sales and operations. For example, the volume of international sales may be limited by the imposition of government controls, export license
requirements, political and/or economic instability, trade restrictions, changes in tariffs, difficulties in managing international operations, import restrictions and fluctuations in foreign currency
exchange rates. Such changes in the volume of sales may have a material adverse effect on our business, financial condition, and results of operations.

Our stock price has been and may remain highly volatile, and we cannot assure you that market making in our common stock will continue.

The market price of shares of our common stock may be highly volatile. Factors such as announcements of new commercial products or technological innovations by us
or our competitors,

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disclosure
of results of clinical testing or regulatory proceedings, governmental regulation and approvals, developments in patent or other proprietary rights, public concern as to the safety of
products developed by us and general market conditions may have a significant effect on the market price of our common stock. The trading price of our common stock could be subject to wide
fluctuations in response to quarter-to-quarter variations in our operating results, material announcements by us or our competitors, governmental regulatory action, conditions
in the health care industry generally or in the medical products industry specifically, or other events or factors, many of which are beyond our control. In addition, the stock market has experienced
extreme price and volume fluctuations which have particularly affected the market prices of many medical products companies and which often have been unrelated to the operating performance of such
companies. Our operating results in future quarters may be below the expectations of equity research analysts and investors. In such event, the price of our common stock would likely decline, perhaps
substantially.

No
person is under any obligation to make a market in the common stock or to publish research reports on us, and any person making a market in the common stock or publishing research
reports on us may discontinue market making or publishing such reports at any time without notice. There can be no assurance that an active public market in our common stock will be sustained.

Our charter documents contain anti-takeover provisions that may prevent or delay an acquisition of us.

Certain provisions of our Restated Articles of Organization and Amended and Restated By-laws could have the effect of discouraging a third party from
pursuing a non-negotiated takeover of us and preventing certain changes in control. These provisions include a classified Board of Directors, advance notice to the Board of Directors of
stockholder proposals, limitations on the ability of stockholders to remove directors and to call stockholder meetings, the provision that vacancies on the Board of Directors be filled by a majority
of the remaining directors. In addition, the Board of Directors adopted a Shareholders Rights Plan in April 1998. We are also subject to Chapter 110F of the Massachusetts General Laws which,
subject to certain exceptions, prohibits a Massachusetts corporation from engaging in any of a broad range of business combinations with any "interested stockholder" for a period of three years
following the date that such stockholder became an interested stockholder. These provisions could discourage a third party from pursuing a takeover of us at a price considered attractive by many
stockholders, since such
provisions could have the effect of preventing or delaying a potential acquirer from acquiring control of us and our Board of Directors.

Our revenues are derived from a small number of customers, the loss of which could materially adversely affect our business, financial condition and
results of operations.

We have historically derived the majority of our revenues from a small number of customers, most of whom resell our products to end users and most of whom are
significantly larger companies than us. For the year ended December 31, 2004, three customers accounted for 73% of product revenue. While it is expected that our ability to market ORTHOVISC in
the U.S. will reduce our dependence on revenues from Bausch & Lomb, historically our largest customer, we will still be dependent on a small number of large customers for the majority of our
revenues. Our failure to generate as much revenue as expected from these customers or the failure of these customers to purchase our products would seriously harm our business. In addition, if present
and future customers terminate their purchasing arrangements with us, significantly reduce or delay their orders, or seek to renegotiate their agreements on terms less favorable to us, our business,
financial condition, and results of operations will be adversely affected. If we accept terms less favorable than the terms of the current agreement, such renegotiations may have a material adverse
effect on our business, financial condition, and/or results of operations. Furthermore, we may be subject to the perceived or actual leverage the customers may have given their relative size and
importance to us in any future negotiations. Any termination, change, reduction or delay in orders could seriously harm our business, financial condition, and results of operations. Accordingly,
unless and until we diversify and expand our customer base, our future success will significantly depend upon the timing and size of future

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purchases
by our largest customers and the financial and operational success of these customers. The loss of any one of our major customers or the delay of significant orders from such customers, even
if only temporary, could reduce or delay our recognition of revenues, harm our reputation in the industry, and reduce our ability to accurately predict cash flow, and, as a consequence, could
seriously harm our business, financial condition, and results of operations.

Additional costs for complying with recent and proposed future changes in Securities and Exchange Commission, Nasdaq Stock Market and accounting rules
could adversely affect our profits.

Recent future changes in the Securities and Exchange Commission and Nasdaq rules, as well as changes in accounting rules, will cause us to incur additional costs
including professional fees, as well as additional personnel costs, in order to keep informed of the changes and operate in a compliant manner. In addition, we have and continue to expect to incur
general and administrative expense as we maintain compliance with Section 404 of the Sarbanes-Oxley Act of 2002, which requires management to report on, and our independent registered public
accounting firm to attest to, our internal controls. These costs may be significant enough to cause our financial position and results of operation to be
negatively impacted. In addition, compliance with these new rules could also result in continued diversion of management's time and attention, which could prove to be disruptive to our normal business
operations. Failure to comply with any of the new laws and regulations could adversely impact market perception of our company, which could make it difficult to access the capital markets or otherwise
finance our operations in the future.

With new rules, including the Sarbanes-Oxley Act of 2002, we may have difficulty in retaining or attracting directors for the board and various
sub-committees thereof or officers.

The recent changes in SEC and Nasdaq rules, including those resulting from the Sarbanes-Oxley Act of 2002, may result in our being unable to attract and retain
the necessary board directors and members of sub-committees thereof or officers, to effectively provide for our management. The perceived increased personal risk associated with these
recent changes may deter qualified individuals from wanting to participate in these roles.

We may have difficulty obtaining adequate directors and officers insurance and the cost for coverage may significantly increase.

We may have difficulty in obtaining adequate directors' and officers' insurance to protect us and our directors and officers from claims made against them.
Additionally, even if adequate coverage is available, the costs for such coverage may be significantly greater than current costs. This additional cost may have a significant effect on our profits and
as a consequence our results of operations may be adversely affected.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of December 31, 2004, we did not utilize any derivative financial instruments, market risk sensitive instruments or other financial and commodity
instruments for which fair value disclosure would be required under SFAS No. 107. All of our investments consist of money market funds, commercial paper and municipal bonds that are carried on
our books at amortized cost, which approximates fair market value.

Primary Market Risk Exposures

Our primary market risk exposures are in the areas of interest rate risk. Our investment portfolio of cash equivalent is subject to interest rate fluctuations,
but we believe this risk is immaterial due to the short-term nature of these investments. We currently do not hedge interest rate exposure.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ANIKA THERAPEUTICS, INC. AND SUBSIDIARIES  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|Managements Report on Internal Control Over Financial Reporting                                      |  | 42
|---------------------------------------------------------------------------------------------------- |  | --
|Report of Independent Registered Public Accounting Firm                                              |  | 43
|Consolidated Balance Sheets as of December 31, 2004 and 2003                                         |  | 45
|Consolidated Statements of Operations for the Years Ended December 31, 2004, 2003 and 2002           |  | 46
|Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2004, 2003 and 2002 |  | 47
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002           |  | 48
|Notes to Consolidated Financial Statements                                                           |  | 49

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Management's Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f)
and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Because
of its inherent limitations, internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.

Our
management assessed the effectiveness of our internal control over financial reporting as of December 31, 2004. In making this assessment, management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.

Based
on our assessment and those criteria, our management believes that the company maintained effective internal control over financial reporting as of December 31, 2004.

Our
management's assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004 has been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm, as stated in their report which is included herein.

42

---



Report of Independent Registered Public Accounting Firm

To
the Board of Directors and Stockholders of
Anika Therapeutics, Inc.:

We
have completed an integrated audit of Anika Therapeutics, Inc.'s 2004 consolidated financial statements and of its internal control over financial reporting as of
December 31, 2004 and audits of its 2003 and 2002 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our
opinions, based on our audits, are presented below.

Consolidated financial statements

In our opinion, the accompanying consolidated balance sheets and related consolidated statements of operations, of stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of Anika Therapeutics, Inc. and its subsidiaries at December 31, 2004 and 2003, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these
statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

Internal control over financial reporting

Also, in our opinion, management's assessment, included in Management's Report on Internal Control Over Financial Reporting appearing under this Item 8, that the
Company maintained effective internal
control over financial reporting as of December 31, 2004 based on criteria established inInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established inInternal
ControlIntegrated Frameworkissued by the COSO. The Company's management is responsible for maintaining effective internal control over financial reporting and for
its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management's assessment and on the effectiveness of the Company's
internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management's
assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance

43

---



of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use,
or disposition of the company's assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

| |  | /s/PRICEWATERHOUSECOOPERS LLP
| |  | -----------------------------

Boston, Massachusetts
March 16, 2005

44

---





Anika Therapeutics, Inc. and Subsidiaries  Consolidated Balance Sheets

|                                           |                                                                                                                                                                                                          | December 31,               |           
|------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ----------
|
|ASSETS                                     |                                                                                                                                                                                                         
|Current assets:                            |                                                                                                                                                                                                          |                            |           
|                                           | Cash and cash equivalents                                                                                                                                                                                |                            | $         
|                                           | Restricted cash                                                                                                                                                                                          |                            |           
|                                           | Accounts receivable, net of reserves of $23,000 and $29,000 at December 31, 2004 and 2003, respectively                                                                                                  |                            |           
|                                           | Inventories                                                                                                                                                                                              |                            |           
|                                           | Current portion deferred income taxes                                                                                                                                                                    |                            |           
|                                           | Prepaid expenses and other receivables                                                                                                                                                                   |                            |           
|                                           |                                                                                                                                                                                                          |                            |           
|                                           |                                                                                                                                                                                                          | Total current assets       |           
|Property and equipment, at cost            |                                                                                                                                                                                                          |                            | 10,349,000
|Less: accumulated depreciation             |                                                                                                                                                                                                          |                            | (9,394,000
|                                           |                                                                                                                                                                                                          |                            |           
|                                           |                                                                                                                                                                                                          |                            | 955,000   
|Long-term deposits                         |                                                                                                                                                                                                          |                            | 143,000   
|Deferred income taxes                      |                                                                                                                                                                                                          |                            | 9,357,000 
|                                           |                                                                                                                                                                                                          |                            |           
|Total Assets                               |                                                                                                                                                                                                          | $                          | 59,538,000
|                                           |                                                                                                                                                                                                          |                            |           
|LIABILITIES AND STOCKHOLDERS' EQUITY       |                                                                                                                                                                                                         
|Current liabilities:                       |                                                                                                                                                                                                          |                            |           
|                                           | Accounts payable                                                                                                                                                                                         |                            | $         
|                                           | Income taxes payable                                                                                                                                                                                     |                            |           
|                                           | Accrued expenses                                                                                                                                                                                         |                            |           
|                                           | Deferred revenue                                                                                                                                                                                         |                            |           
|                                           |                                                                                                                                                                                                          |                            |           
|                                           |                                                                                                                                                                                                          | Total current liabilities  |           
|Long-term deferred revenue                 |                                                                                                                                                                                                          |                            | 22,227,000
|Commitments and contingencies (Note 9)     |                                                                                                                                                                                                          |                            |           
|Stockholders' equity                       |                                                                                                                                                                                                          |                            |           
|                                           | Preferred stock, $.01 par value; 1,250,000 shares authorized, no shares issued and outstanding at December 31, 2004 and 2003                                                                             |                            |           
|                                           | Common stock, $.01 par value: 30,000,000 shares authorized, 10,257,472 shares issued and outstanding at December 31, 2004, 9,991,943 shares issued and 9,986,405 shares outstanding at December 31, 2003 |                            |           
|                                           | Additional paid-in-capital                                                                                                                                                                               |                            |           
|                                           | Treasury stock, at cost, 0 and 5,538 shares at December 31, 2004 and 2003, respectively                                                                                                                  |                            |           
|                                           | Accumulated deficit                                                                                                                                                                                      |                            |           
|                                           |                                                                                                                                                                                                          |                            |           
|                                           |                                                                                                                                                                                                          | Total stockholders' equity |           
|                                           |                                                                                                                                                                                                          |                            |           
|Total Liabilities and Stockholders' Equity |                                                                                                                                                                                                          | $                          | 59,538,000
|                                           |                                                                                                                                                                                                          |                            |           

The
accompanying notes are an integral part of these consolidated financial statements.

45

---





Anika Therapeutics, Inc. and Subsidiaries  Consolidated Statements of Operations

|                                          |                                                    | For the Years Ended December 31, |           
|----------------------------------------- | -------------------------------------------------- | -------------------------------- | ----------
|
|Product revenue                           |                                                    | $                                | 22,286,000
|Licensing, milestone and contract revenue |                                                    |                                  | 4,180,000 
|                                          |                                                    |                                  |           
|                                          | Total revenue                                      |                                  |           
|Cost of product revenue                   |                                                    |                                  | 9,949,000 
|                                          |                                                    |                                  |           
|                                          | Gross profit                                       |                                  |           
|Operating expenses:                       |                                                    |                                  |           
|                                          | Research & development                             |                                  |           
|                                          | Selling, general & administrative                  |                                  |           
|                                          |                                                    |                                  |           
|Total operating expenses                  |                                                    |                                  | 10,129,000
|                                          |                                                    |                                  |           
|Income (loss) from operations             |                                                    |                                  | 6,388,000 
|                                          | Interest income                                    |                                  |           
|                                          |                                                    |                                  |           
|Income (loss) before income taxes         |                                                    |                                  | 6,777,000 
|Income tax expense (benefit)              |                                                    |                                  |           
|                                          | Provision (benefit) for income taxes               |                                  |           
|                                          | Benefit from release of valuation allowance        |                                  |           
|                                          |                                                    |                                  |           
|                                          | Net income (loss)                                  |                                  | $         
|                                          |                                                    |                                  |           
|Basic net income (loss) per share:        |                                                    |                                  |           
|                                          | Net income (loss)                                  |                                  | $         
|                                          |                                                    |                                  |           
|                                          | Basic weighted average common shares outstanding   |                                  |           
|                                          |                                                    |                                  |           
|Diluted net income (loss) per share:      |                                                    |                                  |           
|                                          | Net income (loss)                                  |                                  | $         
|                                          |                                                    |                                  |           
|                                          | Diluted weighted average common shares outstanding |                                  |           
|                                          |                                                    |                                  |           

The
accompanying notes are an integral part of these consolidated financial statements.

46

---





Anika Therapeutics, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity

|                                     |  | Common Stock |  |   |         | Treasury Stock |   |            |   |         |  
|------------------------------------ |  | ------------ |  | - | ------- | -------------- | - | ---------- | - | ------- | -
|
|Balance, December 31, 2001           |  | 9,991,943    |  | $ | 100,000 |                | $ | 31,640,000 |   | 57,663  |  
|Net loss                             |  |             |  |   |        |                |   |           |   |        |  
|                                     |  |              |  |   |         |                |   |            |   |         |  
|Balance, December 31, 2002           |  | 9,991,943    |  |   | 100,000 |                |   | 31,640,000 |   | 57,663  |  
|Exercise of common stock options     |  |             |  |   |        |                |   | (160,000   | ) | (52,125 | )
|Net income                           |  |             |  |   |        |                |   |           |   |        |  
|                                     |  |              |  |   |         |                |   |            |   |         |  
|Balance, December 31, 2003           |  | 9,991,943    |  |   | 100,000 |                |   | 31,480,000 |   | 5,538   |  
|Exercise of common stock options     |  | 265,529      |  |   | 3,000   |                |   | 549,000    |   | (5,538  | )
|Tax benefit related to stock options |  |             |  |   |        |                |   | 610,000    |   |        |  
|Net income                           |  |             |  |   |        |                |   |           |   |        |  
|                                     |  |              |  |   |         |                |   |            |   |         |  
|Balance, December 31, 2004           |  | 10,257,472   |  | $ | 103,000 |                | $ | 32,639,000 |   |        |  
|                                     |  |              |  |   |         |                |   |            |   |         |  

The
accompanying notes are an integral part of these consolidated financial statements.

47

---





Anika Therapeutics, Inc. and Subsidiaries  Consolidated Statements of Cash Flows

|                                                                                         |                                                           | For the Years Ended December 31, |           
|---------------------------------------------------------------------------------------- | --------------------------------------------------------- | -------------------------------- | ----------
|
|Cash flows from operating activities:                                                    |                                                           |                                  |           
|Net income (loss)                                                                        |                                                           | $                                | 11,190,000
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |                                                           |                                  |           
|                                                                                         | Depreciation                                              |                                  |           
|                                                                                         | Deferred income taxes                                     |                                  |           
|                                                                                         | Provision for doubtful accounts                           |                                  |           
|                                                                                         | Provision for inventory                                   |                                  |           
|                                                                                         | Tax benefit related to stock options                      |                                  |           
|                                                                                         | Changes in operating assets and liabilities:              |                                  |           
|                                                                                         |                                                           | Accounts receivable              |           
|                                                                                         |                                                           | Inventories                      |           
|                                                                                         |                                                           | Prepaid expenses                 |           
|                                                                                         |                                                           | Accounts payable                 |           
|                                                                                         |                                                           | Customer deposit                 |           
|                                                                                         |                                                           | Accrued expenses                 |           
|                                                                                         |                                                           | Deferred revenue                 |           
|                                                                                         |                                                           | Income taxes payable             |           
|                                                                                         |                                                           |                                  |           
|Net cash provided by operating activities                                                |                                                           |                                  | 23,824,000
|                                                                                         |                                                           |                                  |           
|Cash flows from investing activities:                                                    |                                                           |                                  |           
|                                                                                         | Proceeds from the redemption of marketable securities     |                                  |           
|                                                                                         | Purchase of marketable securities                         |                                  |           
|                                                                                         | Restricted cash                                           |                                  |           
|                                                                                         | Purchase of property and equipment                        |                                  |           
|                                                                                         | Proceeds from repayment of notes receivable from officers |                                  |           
|                                                                                         | Long-term deposits                                        |                                  |           
|                                                                                         |                                                           |                                  |           
|Net cash provided by investing activities                                                |                                                           |                                  | 344,000   
|                                                                                         |                                                           |                                  |           
|Cash flows from financing activities:                                                    |                                                           |                                  |           
|                                                                                         | Proceeds from exercise of stock options                   |                                  |           
|                                                                                         |                                                           |                                  |           
|Net cash provided by financing activities                                                |                                                           |                                  | 579,000   
|                                                                                         |                                                           |                                  |           
|Increase in cash and cash equivalents                                                    |                                                           |                                  | 24,747,000
|Cash and cash equivalents at beginning of year                                           |                                                           |                                  | 14,592,000
|                                                                                         |                                                           |                                  |           
|Cash and cash equivalents at end of year                                                 |                                                           | $                                | 39,339,000
|                                                                                         |                                                           |                                  |           
|Supplemental disclosure of cash flow information:                                        |                                                           |                                  |           
|                                                                                         | Cash paid for income taxes                                |                                  | $         
|                                                                                         |                                                           |                                  |           

The
accompanying notes are an integral part of these consolidated financial statements.

48

---





ANIKA THERAPEUTICS, INC.        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF BUSINESS

Anika Therapeutics, Inc. ("Anika" or the "Company") develops, manufactures and commercializes therapeutic products and devices intended to promote the
protection and healing of bone, cartilage and soft tissue. These products are based on hyaluronic acid (HA), a naturally occurring, biocompatible polymer found throughout the body. Due to its unique
biophysical and biochemical properties, HA plays an important role in a number of physiological functions such as the protection and lubrication of soft tissues and joints, the maintenance of the
structural integrity of tissues, and the transport of molecules to and within cells. The Company's currently marketed products consist of ORTHOVISC®, which is an HA product used in the
treatment of some forms of osteoarthritis in humans, CoEase, STAARVISC-II, and ShellGel, each an injectable ophthalmic viscoelastic HA product, and
HYVISC®, which is an HA product used in the treatment of equine osteoarthritis. In February 2004, the Company received marketing approval from the U.S. Food and Drug Administration
(FDA) for ORTHOVISC. ORTHOVISC became available for sale in the U.S. on March 1, 2004 and has been approved for sale and marketed internationally since 1996. HYVISC is marketed in the U.S.
through Boehringer Ingelheim Vetmedica, Inc. The Company manufactures AMVISC® and AMVISC® Plus, HA viscoelastic supplement products used in ophthalmic surgery, for
Bausch & Lomb Incorporated.

The
Company is subject to risks common to companies in the biotechnology and medical device industries including, but not limited to, development by the Company or its competitors of new
technological innovations, dependence on key personnel, protection of proprietary technology, commercialization of existing and new products, and compliance with FDA government regulations and
approval requirements as well as the ability to grow the Company's business.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Anika Therapeutics, Inc. and its wholly owned subsidiaries, Anika
Securities, Inc. (a Massachusetts Securities Corporation) and Anika Therapeutics UK, Ltd. All intercompany balances and transactions have been eliminated in consolidation. There was no
activity by the UK subsidiary during the years ended December 31, 2003 and 2002. As of March 2003 the UK subsidiary was dissolved.

Cash and Cash Equivalents

Cash and cash equivalents consists of cash and highly liquid investments with original maturities of 90 days or less.

49

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Financial Instruments

SFAS No. 107, "Disclosures About Fair Value of Financial Instruments", requires disclosure about fair value of financial instruments. Financial instruments
consist of cash equivalents, marketable securities, accounts receivable, notes receivable from officers and accounts payable. The estimated fair value of the Company's financial instruments
approximate their carrying values.

Revenue Recognition

The Company's revenue recognition policies are in accordance with the Securities and Exchange Commission's (SEC) Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements, as amended by SEC Staff Accounting Bulletin No. 104,Revenue
Recognition,and Emerging Issues Task Force Issue No. 00-21,Revenue Arrangements with Multiple Deliverables.

The
Company recognizes revenue from the sales of products it manufactures upon confirmation of regulatory compliance and shipment to the customer as long as there is
(1) persuasive evidence of an arrangement, (2) delivery has occurred and risk of loss has passed, (3) the sales price is fixed or determinable and (4) collection of the
related receivable is probable. Amounts billed or collected prior to recognition of revenue are classified as deferred revenue. When determining whether risk of loss has transferred to customers on
product sales or if the sales price is fixed or determinable the Company evaluates both the contractual terms and conditions of its distribution and supply agreements as well as its business
practices. ORTHOVISC has been sold through several distribution arrangements as well as outsource order-processing arrangements (logistic agents). Sales of product through third party logistics agents
in certain markets are recognized as revenue upon shipment by the logistics agent to the customer.

In
December 2004, the Company entered into a multi-year supply agreement (the 2004 B&L Agreement) with Bausch & Lomb for viscoelastic products used in
ophthalmic surgery. Under the new agreement, which extends through December 31, 2010, and superseded the existing supply contract, the Company will continue to be the exclusive global supplier
(other than with respect to Japan) for AMVISC and AMVISC Plus to Bausch & Lomb. Prior to entering into the 2004 B&L Agreement sales to Bausch & Lomb were made under the 2000 B&L
Agreement. Under the terms of the 2000 B&L Agreement the price applicable for all units sold to Bausch & Lomb in a calendar year was dependent on the total unit volume of sales of certain
ophthalmic products during the year. Since the price was not fixed and determinable, the Company deferred the portion of revenue that is subject to retroactive price adjustment, until the ultimate
amount it will earn is known. Under the 2000 B&L Agreement, during the nine months ended September 30, 2004, the Company deferred $1.0 million related to sales to Bausch & Lomb
which was subject to possible retroactive price adjustments under the 2000 B&L Agreement when actual unit volume for the year would have become known. As a result of entering into the 2004 B&L
Agreement, which retroactively applies to sales from the beginning of 2004, the Company applied the unit pricing terms under the 2004 B&L Agreement to its 2004 Bausch & Lomb sales activity.
These terms essentially provide for fixed unit pricing with reduced unit pricing applicable
for units purchased in excess of a specified amount during the fiscal year and in the fourth quarter. As a result of applying this new pricing to 2004 transactions, we earned $761,000 of revenue which
was previously deferred during the first nine months which relates to those units under the reduced pricing threshold of 2004 and rebated $252,000 to Bausch & Lomb.

In
July 2004 the Company entered into an exclusive worldwide development and commercialization agreement (the OrthoNeutrogena Agreement) for our CTA products with the
OrthoNeutrogena, a

50

---



division
of Ortho-McNeil Pharmaceuticals, Inc., an affiliate of Johnson & Johnson. This arrangement included up front payments, funding of ongoing development activities, milestones upon
achievement of predefined goals, in addition, the Company will receive payments for supply of CTA products and royalties on sales. The Company believes this is a multiple element arrangement that
falls under the scope of EITF 00-21. Under the EITF 00-21 framework, in order to account for an element as a separate unit of accounting, the element must have stand-alone
value and there must be objective and reliable evidence of fair value of the undelivered elements. While this arrangement includes several elements, the Company believes that two separate units of
accounting exist (a combined license and development unit and a manufacturing unit) under the EITF 00-21 model.

The
Company is accounting for the combined license and development unit using the performance based model, which recognizes revenue as the efforts are expended limited to the amount of
non-refundable cash received. Under this arrangement, the Company received non-refundable upfront fees of $1 million and reimbursement for approximately
$1.3 million of costs which were incurred prior to our entering into this arrangement. The Company has treated both these amounts as upfront fees that will be recognized over the expected term
of the license and development unit. In addition to the upfront fees, the Company is receiving reimbursement of pre-approved development costs incurred. For the year ended
December 31, 2004 the Company recognized $1,392,000 as contract revenue for this arrangement under the performance-based method.

In
December 2003 the Company entered into a ten-year licensing and supply agreement (the OBI Agreement) with Ortho Biotech Products, L.P., a member of the
Johnson & Johnson family of companies, to market ORTHOVISC in the U.S. and Mexico. Under the OBI Agreement, Ortho Biotech will perform sales, marketing and distribution functions and licensed
the right to further develop and commercialize ORTHOVISC as well as other new products for the treatment of pain associated with osteoarthritis based on the Company's viscosupplementation technology.
In support of the license, the OBI Agreement provides that Ortho Biotech will fund post-marketing clinical trials for new indications of ORTHOVISC. The Company received an initial payment
of $2.0 million upon entering into the OBI Agreement, a milestone payment of $20.0 million in February 2004, as a result of obtaining FDA approval of ORTHOVISC and a milestone
payment of $5.0 million in December 2004 for planned upgrades to its manufacturing operations. The Company evaluated the terms of the OBI Agreement and determined that the upfront fee
and milestone payments did not meet the conditions to be recognized separately from the supply agreement,
therefore, it has deferred non refundable payments received of $27.0 million which it is recognizing ratably over the expected term of the OBI Agreement, which is currently 10 years.

Accounts Receivable and Allowance for Doubtful Accounts:

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company's best estimate of the
amount of probable credit losses in its existing accounts receivable. The Company determines the allowance based on historical write-off experience by industry and regional economic data.
The Company reviews its allowance for doubtful accounts monthly. Past due balances over 90 days and over a specified amount are reviewed individually for collectibility. Account balances are
charged off against the allowance when the Company feels it is probable the receivable will not be recovered. The Company does not have any off-balance-sheet credit exposure related to its
customers.

51

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Property and Equipment

Property and equipment are carried at cost less accumulated depreciation. Costs of major additions and betterments are capitalized; maintenance and repairs that
do not improve or extend the life of the respective assets are charged to operations. On disposal, the related accumulated depreciation or amortization is removed from the accounts and any resulting
gain or loss is included in results of operations. Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows:

Machinery and equipment

3-7 yearsFurniture and fixtures

3-5 yearsLeasehold improvements

Shorter of lease term or
estimated useful life


The
Company accounts for impairment of long-lived assets in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
SFAS No. 144 establishes a uniform accounting model for long-lived assets to be disposed of. This Statement also requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by comparing the
carrying amount of an asset to estimated undiscounted future net cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated future cash flows, an
impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. As of December 31, 2004 and 2003, long-lived assets
consisted of property and equipment.

During
the years ended December 31, 2004, 2003, and 2002 the Company did not record losses on impairment.

Research and Development

Research and development costs consists primarily of salaries and related expenses for personnel and fees paid to outside consultants and outside service
providers. Research and development costs are expensed as incurred.

Income Taxes

The Company provides for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes". SFAS No. 109 requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities.

Stock-Based Compensation

Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148, requires that companies
either recognize compensation expense for grants of stock options and other equity instruments based on fair value, or provide pro forma disclosure of net income (loss) and net income (loss) per share
in the notes to the financial statements". At December 31, 2004, the Company has stock options outstanding under three stock-based compensation plans, which are

52

---



described
more fully in Note 10. The Company accounts for those plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. Accordingly, no compensation cost has been recognized under SFAS 123 for the Company's employee stock option plans. Had compensation
cost for the awards under those plans been determined based on the grant date fair values, consistent with the method required under SFAS 123, the Company's net income (loss) and net income
(loss) per share would have been reduced to the pro forma amounts indicated below:

|                                    |                                                                                                  | December 31, |  
|----------------------------------- | ------------------------------------------------------------------------------------------------ | ------------ | -
|
|Net income (loss)                   |                                                                                                  |              |  
|                                    | As reported                                                                                      |              | $
|                                    | Add: Stock-based employee compensation expense included in reported net income (loss)            |              |  
|                                    | Deduct: Total stock-based employee compensation under the fair-value-based method for all awards |              |  
|                                    |                                                                                                  |              |  
|                                    | Pro forma net income (loss)                                                                      |              | $
|                                    |                                                                                                  |              |  
|Basic net income (loss) per share   |                                                                                                  |              |  
|                                    | As reported                                                                                      |              | $
|                                    | Proforma                                                                                         |              | $
|Diluted net income (loss) per share |                                                                                                  |              |  
|                                    | As reported                                                                                      |              | $
|                                    | Proforma                                                                                         |              | $

The
fair value of each stock option granted is estimated on the grant date using the fair value method with the following weighted average assumptions:

December 31,2004

2003

2002Risk-free interest rate

3.27
%
2.69
%
5.14
%Expected dividend yield

0.00
%
0.00
%
0.00
%Expected lives

4

4

4Expected volatility

77.68
%
101.66
%
86.52
%


Concentration of Credit Risk and Significant Customers

SFAS No. 105, "Disclosure of Information About Financial Instruments with Off-Balance-Sheet-Risk and Financial Instruments with
Concentrations of Credit Risk", requires disclosure of any significant off-balance-sheet-risk, or concentrations of credit risk. The Company has no significant
off-balance sheet or concentrations of credit risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements. The Company, by policy, limits the amount of
credit exposure to any one financial institution, and routinely assesses the financial strength of its customers. As a result, the Company believes that its accounts receivable credit risk exposure is
limited and has not experienced significant write-downs in its accounts receivable balances. As of December 31, 2004, Bausch & Lomb, Ortho Biotech, OrthoNeutrogena, and Boehringer
Ingelheim Vetmedica, combined, represented 90% of the Company's

53

---



accounts
receivable balance. As of December 31, 2003, Bausch & Lomb and Advanced Medical Optics, combined, represented 85% of the Company's accounts receivable balance.

The
Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to pay amounts due. If the financial condition of the
Company's customers were to deteriorate, resulting in an impairment in their ability to make payments, additional allowances may be required which could affect future earnings.

Reporting Comprehensive Income

SFAS No. 130, "Reporting Comprehensive Income" establishes standards for reporting and display of comprehensive income and its components in the financial
statements. Comprehensive income is the total of net income and all other non-owner changes in equity including such items as unrealized holding gains/losses on securities, foreign
currency translation adjustments and minimum pension liability adjustments. The Company had no such items for the years ended December 31, 2004, 2003, and 2002 and as a result, comprehensive
income (loss) is the same as reported net income (loss) for all periods presented.

Disclosures About Segments of an Enterprise and Related Information

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief
operating decision maker, or decision-making group, in making decisions regarding how to allocate resources and assess performance. The Company's chief decision-making group consists of its four
officers. Based on the criteria established by SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," the Company has one reportable operating segment, the results
of which are disclosed in the accompanying consolidated financial statements. Substantially all of the operations and assets of the Company have been derived from and are located in the United States.

New Accounting Pronouncements

In November 2004, the FASB issued SFAS 151, "Inventory Costs" which amends the guidance in Accounting Research Bulletin No. 43, Chapter 4,
"Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). In addition, SFAS 151 requires that
allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of SFAS 151 is effective for the first annual
reporting period beginning after June 15, 2005. The adoption of SFAS 151 is not expected to have a material impact on the Company's Consolidated Financial Statements.

In
December 2004, the FASB, issued a revision to SFAS 123 "Share-Based Payment", also known as SFAS 123R, that amends existing accounting pronouncements for
share-based payment transactions in which an enterprise receives employee and certain non-employee services in exchange for (a) equity instruments of the enterprise or
(b) liabilities that are based on the fair value of the enterprise's equity instruments or that may be settled by the issuance of such equity instruments. SFAS 123R eliminates the
ability to account for share-based compensation transactions using APB 25 and generally requires such transactions be accounted for using a fair-value-based method. SFAS 123R's
effective date would be applicable for awards that are granted, modified, become vested, or settled in cash in interim or annual periods beginning after June 15, 2005. SFAS 123R includes
three transition methods: one that provides for prospective application and two that provide for retrospective application. The Company intends to adopt

54

---



SFAS 123R
prospectively commencing in the third quarter of the fiscal year ending December 31, 2005; it is expected that the adoption of SFAS 123R will cause the Company to
record, as expense each quarter, a non-cash accounting charge approximating the fair value of such share-based compensation meeting the criteria outlined in the provisions of
SFAS 123R; as of December 31, 2004, the Company has approximately 692,000 stock options outstanding which had not yet become vested.

3. NET INCOME (LOSS) PER COMMON SHARE

The Company reports earnings per share in accordance with SFAS No. 128, "Earnings per Share," which establishes standards for computing and presenting
earnings (loss) per share. Basic earnings per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings per share
is computed by dividing net income (loss) by the weighted average number of common shares outstanding and the number of dilutive potential common share equivalents during the period. Under the
treasury stock method, unexercised "in-the-money" stock options are assumed to be exercised at the beginning of the period or at issuance, if later. The assumed proceeds are
then used to purchase common shares at the average market price during the period. For periods where the Company has incurred a loss, dilutive net loss per share is equal to basic net loss per share.

Shares
used in calculating basic and diluted earnings per share for each of the years ended December 31, 2004, 2003 and 2002, are as follows:

2004

2003

2002Net income (loss)

$
11,190,000

$
827,000

$
(3,040,000
)Basic weighted average common shares outstanding


10,103,835


9,953,733


9,934,280Dilutive effect of assumed exercise of stock options and warrants


1,280,320


895,877


Diluted weighted average common and potential common shares outstanding


11,384,155


10,849,610


9,934,280


Outstanding
stock options to purchase approximately 233,000 shares at December 31, 2002 are excluded from the calculation of diluted weighted average shares outstanding for 2002
because the Company incurred a loss for each of these years and to include them would have been anitdilutive. Options to purchase approximately 14,000, 728,000 and 1,115,000 shares were outstanding at
December 31, 2004, 2003, and 2002, respectively, but not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market
price during the period.

4. RESTRICTED CASH

At December 19, 2003, in connection with the issuance of an irrevocable letter of credit to one of the Company's vendors, the Company had deposited
$818,000 with its bank to collateralize the letter of credit. These funds were restricted from the Company's use during the term of the letter of credit although the Company was entitled to all
interest earned on the funds. The letter of credit was drawn upon by the Company's vendor and in April 2004 the restricted funds were released to the Company. There was no restricted cash at
December 31, 2004.

55

---



5. ALLOWANCE FOR DOUBTFUL ACCOUNTS

A summary of the allowance for doubtful account activity is as follows:

December 31,2004

2003

2002Balance, beginning of the year

$
29,000

$
35,000

$
25,000Amounts provided








10,000Amounts written off


(6,000
)

(6,000
)

Balance, end of the year

$
23,000

$
29,000

$
35,000


6. INVENTORIES

Inventories consists of the following:

December 31,2004

2003Raw Materials

$
1,842,000

$
1,537,000Work-in-Process


1,589,000


1,445,000Finished Goods


796,000


645,000Total

$
4,227,000

$
3,627,000


Inventories
are stated at the lower of cost or market, with cost being determined using the first-in, first-out (FIFO) method.
Work-in-process and finished goods inventories include materials, labor, and manufacturing overhead.

7. PROPERTY & EQUIPMENT

Property and equipment is stated at cost and consists of the following:

December 31,2004

2003Machinery and equipment

$
6,237,000

$
5,802,000Furniture and fixtures


725,000


699,000Leasehold improvements


3,387,000


3,374,00010,349,000


9,875,000Less accumulated depreciation


(9,394,000
)

(8,684,000
)Total

$
955,000

$
1,191,000


Depreciation
expense was $710,000, $1,006,000 and $1,095,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

56

---





8. ACCRUED EXPENSES

Accrued expenses consists of the following:

December 31,2004

2003Payroll and benefits

$
933,000

$
939,000Professional fees


637,000


218,000Clinical trial


265,000


Other


206,000


140,000Total

$
2,041,000

$
1,297,000


9. COMMITMENTS AND CONTINGENCIES

Operating Leases.The Company's corporate headquarters is located in Woburn, Massachusetts, where it leases approximately
10,000 square feet of administrative and research and development space. The lease on this facility terminates in December 2006. The Company also leases approximately 37,000 square feet of
space at a separate location in Woburn, Massachusetts, for its manufacturing facility and warehouse. The lease for this facility terminates in February 2009. Rental expense in connection with
the leases, totaled $700,000, $685,000, and $657,000, for the years ended December 31, 2004, 2003, and 2002, respectively.

Future
minimum lease payments under noncancelable operating leases at December 31, 2004 are as follows:

Amount2005


707,0002006


710,0002007


618,0002008


617,0002009


103,000Thereafter


Total

$
2,755,000


Guarantor Arrangements.In certain of its contracts, the Company warrants to its customers that the products it manufactures
conform to the product specifications as in effect at the time of delivery of the product. The Company may also warrant that the products it manufactures do not infringe, violate or breach any U.S.
patent or intellectual property rights, trade secret or other proprietary information of any third party. On occasion, the Company contractually indemnifies its customers against any and all losses
arising out of or in any way connected with any claim or claims of breach of its warranties or any actual or alleged defect in any product caused by the negligence or acts or omissions of the Company.
The Company maintains a products liability insurance policy that limits its exposure. Based on the Company's historical activity in combination with its insurance policy coverage, the Company believes
the estimated fair value of these indemnification agreements is minimal. The Company has no accrued warranties and has no history of claims.

57

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10. STOCK OPTION PLAN

The Company had reserved 3,485,000 shares of common stock for the grant of stock options to employees, directors, consultants and advisors under the Anika
Therapeutics, Inc. 1993 Stock Option Plan, as amended (the "1993 Plan"). In addition, the Company also established the Directors' Stock Option Plan (the "Directors' Plan") and reserved 40,000
shares of the Company's common stock for issuance to the Board of Directors. On March 3, 2003, the 1993 Plan expired in accordance with its terms and approximately 662,000 shares reserved under
the plan were released. On April 4, 2003 the Board of Directors approved the 2003 Anika Therapeutics, Inc. Stock Option and Incentive Plan (the "2003 Plan"). The Company has reserved
1,500,000 shares of common stock for grant of stock options to employees, directors, consultants and advisors under the 2003 Plan, which was approved by stockholders on June 4, 2003.

Combined
stock option activity under the three plans is summarized as follows:

|                                                             |           | 2004      |          | 2003 |      | 2002 
|------------------------------------------------------------ | --------- | --------- | -------- | ---- | ---- | -----
|
|Outstanding at beginning of year                             |           | 2,067,297 |          | $    | 3.51 |      
|                                                             | Granted   |           | 207,000  |      |      | 12.60
|                                                             | Canceled  |           | (275,925 | )    |      | 7.73 
|                                                             | Expired   |           | (25,000  | )    |      | 2.63 
|                                                             | Exercised |           | (271,067 | )    |      | 2.13 
|                                                             |           |           |          |      |      |      
|Outstanding at end of year                                   |           | 1,702,305 |          | $    | 4.16 |      
|                                                             |           |           |          |      |      |      
|Options exercisable at end of year                           |           | 1,010,055 |          | $    | 3.31 |      
|Weighted average fair value of options granted at fair value |           |           |          | $    | 7.45 |      

Generally,
options vest in equal, annual installments up to four years after the date of grant and have an expiration date no later than ten years after the date of grant. There are
999,850 options available for future grant at December 31, 2004.

58

---



The
following table summarizes significant ranges of outstanding options under the three plans at December 31, 2004:

Options OutstandingOptions ExercisableWeighted
Average
Remaining
Contractual
LifeRange of Exercise Prices

Number
Outstanding

Weighted
Average
Exercise
Price

Number
Exercisable

Weighted
Average
Exercise
Price$0.90$1.05

431,676

7.52

$
1.02

242,701

$
0.991.061.17

291,125

6.09


1.17

212,875


1.171.234.75

289,667

5.33


2.22

215,767


2.354.949.21

257,833

4.22


6.17

244,833


6.02$9.22$15.45

432,004

9.01


9.41

93,879


9.261,702,305

6.80

$
4.16

1,010,055

$
3.31


11. SHAREHOLDER RIGHTS PLAN

On April 6, 1998, the Board of Directors adopted a shareholder rights agreement (the "Rights Plan") which was subsequently amended as of November 5,
2002. In connection with the adoption of the Rights Plan, the Board of Directors declared a dividend distribution of one preferred stock purchase right (a "Right") for each outstanding share of common
stock to stockholders of record as of the close of business on April 23, 1998. Currently, these Rights are not exercisable and trade with the shares of the Company's Common Stock.

Under
the Rights Plan, the Rights generally become exercisable if: (1) a person becomes an "Acquiring Person" by acquiring 15% or more of the Company's Common Stock, (2) a
person commences a tender offer that would result in that person owning 15% or more of the Company's Common Stock, or (3) the Board of Directors deems a person to be an "Adverse Person," as
defined under the Rights Plan. In the event that a person becomes an "Acquiring Person," or an "Adverse Person," each holder of a Right (other than the Acquiring Person or Adverse Person) would be
entitled to acquire such number of units of preferred stock (which are equivalent to shares of the Company's Common Stock) having a value of twice the exercise price of the Right. If, after any such
event, the Company enters into a merger or other business combination transaction with another entity, each holder of a Right would then be entitled to purchase, at the then-current
exercise price, shares of the acquiring company's common stock having a value of twice the exercise price of the Right. The current exercise price per Right is $45.00.

The
Rights will expire at the close of business on April 6, 2008 (the "Expiration Date"), unless previously redeemed or exchanged by the Company as described below. The Rights may
be redeemed in whole, but not in part, at a price of $0.01 per Right (payable in cash, shares of the Company's Common Stock or other consideration deemed appropriate by the Board of Directors) by the
Board of Directors only until the earlier of (1) the time at which any person becomes an "Acquiring Person" or an "Adverse Person", or (2) the Expiration Date. At any time after any
person becomes an "Acquiring Person" or an "Adverse Person", the Board of Directors may, at its option, exchange all or any part of the then outstanding and exercisable Rights for shares of the
Company's Common Stock at an exchange ratio specified in the Rights Plan. Notwithstanding the foregoing, the Board of Directors generally will not be

59

---



empowered
to affect such exchange at any time after any person becomes the beneficial owner of 50% or more of the Company's Common Stock.

Until
a Right is exercised, the holder will have no rights as a stockholder of the Company (beyond those as an existing stockholder), including the right to vote or to receive dividends.

In
connection with the establishment of the Rights Plan, the Board of Directors approved the creation of Preferred Stock of the Company designated as Series B Junior Participating
Cumulative Preferred Stock with a par value of $0.01 per share. The Board also reserved 150,000 shares of preferred stock for issuance upon exercise of the Rights.

12. STOCK REPURCHASE PLAN

In October 1998, the Board of Directors approved a stock repurchase plan under which the Company is authorized to purchase up to $4,000,000 of the
Company's Common Stock, with the total number of shares repurchased not to exceed 9.9% of the total number of shares issued and outstanding. Under the plan, shares may be repurchased from time to time
and in such amounts as market conditions warrant, subject to regulatory considerations. As of December 31, 2004, the Company had repurchased a total of 762,100 shares at a net cost of
approximately $3,873,000 and has reissued all shares upon exercise of employee stock options. No shares were purchased in 2004 or 2003.

13. EMPLOYEE BENEFIT PLAN

Employees are eligible to participate in the Company's 401(k) savings plan. Employees may elect to contribute a percentage of their compensation to the plan, and
the Company will make matching contributions up to a limit of 5% of an employee's compensation. In addition, the Company may make annual discretionary contributions. For the years ended
December 31, 2004, 2003, and 2002, the Company made matching contributions of $177,000, $157,000, and $150,000 respectively.

14. LICENSING AND DISTRIBUTION AGREEMENTS

In December 2004, the Company entered into a new multi-year supply agreement (the "2004 B&L Agreement") with Bausch & Lomb for
viscoelastic products used in ophthalmic surgery. Under the 2004 B&L Agreement, which extends through December 31, 2010, and superseded the existing supply contract (the "2000 B&L Agreement")
that was set to expire December 31, 2007, the Company will continue to be the exclusive global supplier (other than with respect to Japan) for AMVISC and AMVISC Plus to Bausch & Lomb.
The 2004 B&L Agreement also provides the Company with a right to negotiate to manufacture future surgical ophthalmic viscoelastic products developed by Bausch & Lomb, while Bausch & Lomb
has been granted rights to commercialize certain future surgical ophthalmic viscoelastic products developed by the Company. The 2004 B&L Agreement applies to
products sold by the Company to Bausch & Lomb from the beginning of 2004, with a price increase starting in 2005. Under the 2004 B&L Agreement, the Company is entitled to continue providing
surgical viscoelastic products to its existing customers who receive such products currently.

Prior
to entering into the 2004 B&L Agreement sales to Bausch & Lomb were made under the 2000 B&L Agreement. Under the terms of the 2000 B&L Agreement the price applicable for all
units sold to Bausch & Lomb in a calendar year were dependent on the total unit volume of sales of certain ophthalmic products during the year. In accordance with the Company's revenue
recognition policy, revenue is not

60

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recognized
if the sale price is not fixed or determinable, and any amounts received in excess of revenue recognized are recorded as deferred revenue. During the fourth quarter the actual annual unit
volume became known and we recorded revenue equal to the amounts earned or we provided a rebate to our customer. In each of the last three fiscal years (i.e. 2003, 2001, 2002), the annual unit volume
was below levels fixed under our agreement with Bausch & Lomb and, accordingly, in the fourth quarter of each of the years we recognized as revenue the amounts deferred during the first three
quarters. For the nine months ended September 30, 2004, the Company deferred $1.0 million related to sales to Bausch & Lomb which was subject to possible retroactive price
adjustments. As a result of entering into the 2004 B&L Agreement which retroactively applies to sales from the beginning of 2004, the Company applied the unit pricing terms under the 2004 B&L
Agreement to its 2004 Bausch & Lomb sales activity. These terms essentially provide for fixed unit pricing with reduced unit pricing applicable for unit purchased in excess of a specified
amount during the fiscal year. As a result of applying this new pricing to 2004 transaction, the Company earned $761,000 of revenue which was previously deferred during the first nine months of 2004
and rebated $252,000 to Bausch & Lomb. In the fourth quarters of 2003 and 2002, product revenue included the recognition of $846,000 and $839,000, respectively, of revenue related to sales of
AMVISC and AMVISC Plus to Bausch & Lomb, which had been previously deferred during the first three quarters of the respective years until the actual annual unit volume became fixed or
determinable. During the years ended December 31, 2004, 2003, and 2002, the Company recognized revenues of $8,527,000, $7,801,000, and $7,811,000, respectively, under the Bausch & Lomb
agreements. Additionally, during the years ended December 31, 2004, 2003 and 2002, the Company incurred royalty payments of $17,000, $52,000 and $109,000, respectively, to Bausch & Lomb
under the 2000 B&L Agreement.

In
July 2004 the Company entered into a exclusive worldwide development and commercialization partnership (the OrthoNeutrogena Agreement) for its CTA products with the
OrthoNeutrogena division of Ortho-McNeil Pharmaceuticals, Inc., an affiliate of Johnson & Johnson. Under the terms of the OrthoNeutrogena Agreement, the Company received an initial
payment of $1.0 million. In addition, OrthoNeutrogena will, subject to certain limitations, fund the Company's ongoing pivotal clinical trial of its CTA product initiated in May 2004 and
support the development of the CTA product, as well as future line extensions. The OrthoNeutrogena Agreement also provides for sales- and development-based milestone payments to be made upon receipt
of final marketing approval from the U.S. Food and Drug Administration (FDA), receipt of a European CE Mark, and upon achievement of other sales and development targets in addition to royalty payments
and transfer payments for the supply of CTA products. For the year ended December 31, 2004 we recognized $1,392,000 as contract revenue under the performance-based method.

In
December 2003 the Company entered into a ten-year licensing and supply agreement (the OBI Agreement) with Ortho Biotech Products, L.P., a member of the
Johnson & Johnson family of companies, to market ORTHOVISC in the U.S. and Mexico. Under the OBI Agreement, Ortho Biotech will perform sales, marketing and distribution functions and licensed
the right to further develop and commercialize ORTHOVISC as well as other new products for the treatment of pain associated with osteoarthritis based on the Company's viscosupplementation technology.
In support of the license, the OBI Agreement provides that Ortho Biotech will fund post-marketing clinical trials for new indications of ORTHOVISC. The Company received an initial payment
of $2.0 million upon entering into the OBI Agreement, a milestone payment of $20.0 million in February 2004, as a result of obtaining FDA approval of ORTHOVISC and a milestone
payment of $5.0 million in December 2004 for planned upgrades to our manufacturing operations. Under the OBI Agreement, the Company will be the exclusive supplier of

61

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ORTHOVISC
to Ortho Biotech. The OBI Agreement provides for additional sales-based milestone payments to the Company contingent upon achieving specified sales targets, in addition to royalty and
transfer fees. The OBI Agreement is subject to early termination in certain circumstances and is otherwise renewable by Ortho Biotech for consecutive five-year terms.

15. REVENUE BY PRODUCT GROUP, BY SIGNIFICANT CUSTOMER AND BY GEOGRAPHIC REGION

Product revenue by product group is as follows:

Years Ended December 31,2004

2003

2002Ophthalmic Products

$
11,533,000

$
10,512,000

$
9,907,000ORTHOVISC


8,699,000


3,073,000


2,307,000HYVISC


2,054,000


1,745,000


915,000$
22,286,000

$
15,330,000

$
13,129,000


Product
revenue by significant customers as a percent of product revenues is as follows:

Percent of Product Revenue
Years Ended December 31,2004

2003

2002Bausch & Lomb Incorporated

38.3
%
50.6
%
59.2
%Ortho Biotech

21.0
%


Pharmaren AG/Biomeks

13.6
%
14.3
%
10.0
%Advanced Medical Optics

9.9
%
13.4
%
8.8
%Boehringer Ingelheim Vetmedica

9.2
%
11.3
%
6.9
%92.0
%
89.6
%
84.9
%


As
of December 31, 2004, four customers represented 90% of the Company's accounts receivable balance and as of December 31, 2003, two customers represented 85% of the
Company's accounts receivable balance.

Revenues
by geographic location in total and as a percentage of total revenues are as follows:

|                     |  | Years Ended December 31, |           
|-------------------- |  | ------------------------ | ----------
|
|
|Geographic location: |  |                          |           
|United States        |  | $                        | 22,425,000
|Turkey               |  |                          | 3,024,000 
|Other                |  |                          | 1,017,000 
|                     |  |                          |           
|Total                |  | $                        | 26,466,000
|                     |  |                          |           

62

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16. INCOME TAXES

Income tax expense (benefit) was ($4,413,000), ($88,000), and $5,000 for the years ended December 31, 2004, 2003, and 2002, respectively.

The
components of the provision for income taxes and benefit from release of valuation allowance are as follows:

Years Ended December 31,2004

2003

2002Current:Federal

$
5,846,000

$
(90,000
)
$
State


922,000


2,000


5,0006,768,000


(88,000
)

5,000Deferred:Federal


(3,680,000
)




State


(462,000
)




(4,142,000
)




Provision for income taxes


2,626,000


(88,000
)

5,000Benefit from release of valuation allowance:Federal


(5,760,000
)




State


(1,279,000
)




(7,039,000
)




Tax expense (benefit)

$
(4,413,000
)
$
(88,000
)
$
5,000


The
Company receives a tax deduction upon the exercise of nonqualified stock options and disqualifying distributions by employees for the difference between the exercise price and the
market price of the underlying common stock on the date of exercise. The benefit of the tax deduction in the amount of $610,000 is not recorded through the tax provision, rather it is credited
directly to additional paid in capital in 2004.

In
2004, the Company achieved milestones under the OBI Agreement and received payments totaling $27.0 million which the Company recognized as taxable income in 2004. As a result,
the Company has determined that it will be able to utilize all of its net operating loss and credit carry-forwards in 2004 to offset part of its taxable income. In accordance with the Company's
revenue recognition policy, for financial statement purposes, the milestone payments totaling $27.0 million were deferred and are being recognized ratably over the expected ten-year
term of the OBI Agreement. The Company recorded a deferred tax asset of $9.8 million representing the approximate income tax effect of the timing difference of revenue recognition for financial
statement purposes and for tax purposes related to these milestone payments as of December 31, 2004. Based on management's current expectations regarding future profitability, the Company
released the valuation allowance previously established against its deferred tax assets and recorded a one-time income tax benefit of $7.0 million.

63

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The
income tax expense (benefit) differs from the amounts computed by applying the U.S. Federal income tax rate to pretax income as a result of the following:

Years ended December 31,2004

2003

2002Computed expected tax (benefit) expense

$
2,304,000

$
251,000

$
(1,032,000
)State tax expense (net of federal benefit)


190,000


48,000


2,000Nondeductible expenses


58,000


4,000


3,000Federal and state research and development credits


(121,000
)




(224,000
)Alternative minimum tax benefit from carryback





(154,000
)

Alternative minimum tax liability





64,000


Alternative minimum tax credit





(64,000
)

Other





(34,000
)

2,000Federal rate difference


195,000





Change in valuation allowance related to income tax (benefit) expense


(7,039,000
)

(203,000
)

1,254,000Tax (benefit) expense

$
(4,413,000
)
$
(88,000
)
$
5,000


The
Company records a deferred tax asset or liability based on the difference between the financial statement and tax bases of assets and liabilities, as measured by the enacted tax
rates assumed to be in effect when these differences reverse. The approximate income tax effect of each type of temporary difference and carryforward is as follows:

Years ended December 31,2004

2003Deferred tax assets:Depreciation

$
525,000

$
584,000Accrued expenses and other


366,000


292,000Inventory reserves


68,000


66,000Net operating loss carryforwards





3,878,000Deferred revenue


10,222,000


832,000Credit carryforwards





1,387,000Gross deferred tax assets


11,181,000


7,039,000Less: valuation allowance





(7,039,000
)Net deferred tax asset

$
11,181,000

$



As
of December 31, 2004, management determined that it is more likely than not that the deferred tax assets will be realized and, therefore, a valuation allowance has not been
recorded.

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17. QUARTERLY FINANCIAL DATA (Unaudited)

|Year 2004                    |                                   | Quarter
ended
December 31, |           | Quarter
ended
September 30, |   | Quarter
ended
June 30, |            | Quarter
ended
March 31,
|---------------------------- | --------------------------------- | -------------------------- | --------- | --------------------------- | - | ---------------------- | ---------- | -----------------------
|Total revenue                |                                   | $                          | 7,656,000 |                             | $ | 6,407,000              |            | $                      
|Cost of product revenue      |                                   |                            | 2,335,000 |                             |   | 2,451,000              |            |                        
|Gross profit                 |                                   |                            | 5,321,000 |                             |   | 3,956,000              |            |                        
|Net income                   |                                   | $                          | 1,755,000 |                             | $ | 884,000                |            | $                      
|Per common share information |                                   |                            |           |                             |   |                        |            |                        
|                             | Basic net income per share        |                            | $         | 0.17                        |   | $                      | 0.09       |                        
|                             | Basic common shares outstanding   |                            |           | 10,224,407                  |   |                        | 10,140,925 |                        
|                             | Diluted net income per share      |                            | $         | 0.15                        |   | $                      | 0.08       |                        
|                             | Diluted common shares outstanding |                            |           | 11,329,592                  |   |                        | 11,506,999 |                        

|Year 2003                    |                                     | Quarter
ended
December 31, |           | Quarter
ended
September 30, |   | Quarter
ended
June 30, |            | Quarter
ended
March 31, |          
|---------------------------- | ----------------------------------- | -------------------------- | --------- | --------------------------- | - | ---------------------- | ---------- | ----------------------- | ---------
|Total revenue                |                                     | $                          | 5,014,000 |                             | $ | 3,688,000              |            | $                       | 3,318,000
|Cost of product revenue      |                                     |                            | 2,260,000 |                             |   | 1,930,000              |            |                         | 1,846,000
|Gross profit                 |                                     |                            | 2,754,000 |                             |   | 1,758,000              |            |                         | 1,472,000
|Net income (loss)            |                                     | $                          | 801,000   |                             | $ | 420,000                |            | $                       | (81,000  
|Per common share information |                                     |                            |           |                             |   |                        |            |                         |          
|                             | Basic net income (loss) per share   |                            | $         | 0.08                        |   | $                      | 0.04       |                         | $        
|                             | Basic common shares outstanding     |                            |           | 9,979,068                   |   |                        | 9,959,904  |                         |          
|                             | Diluted net income (loss) per share |                            | $         | 0.07                        |   | $                      | 0.04       |                         | $        
|                             | Diluted common shares outstanding   |                            |           | 11,188,042                  |   |                        | 10,422,066 |                         |          

In
the first quarter of 2004, based on its expectations regarding future profitability, the Company released the previously established valuation allowance against its deferred tax
assets and recorded a one-time income tax benefit of $7,039,000. See Note 16.

In
the fourth quarters of 2004 and 2003 product revenue included the recognition of $761,000 and $846,000, respectively, of revenue related to sales of AMVISC® and
AMVISC® Plus to Bausch & Lomb, which had been previously deferred during the first three quarters of the respective years until the actual annual unit volume became fixed or
determinable. See Note 14.

65

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ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.    CONTROLS AND PROCEDURES

As
required by Rule 13a-15 under the Securities Exchange Act of 1934 (Exchange Act), we carried out an evaluation under the supervision and with the participation of
the our management, including our chief executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of
the period covered by this report. Based upon that evaluation, the chief executive officer and principal financial officer have concluded that our disclosure controls and procedures are reasonably
effective to ensure that material information relating to us required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and forms. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and
procedures, no matter how well designed and operated, can provide only reasonable assurances of achieving the desired control objectives, and management necessarily was required to apply its judgment
in designing and evaluating the controls and procedures. We currently are in the process of further reviewing and documenting our disclosure controls and procedures, and our internal control over
financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.

There
were no changes in our internal control over financial reporting during the fourth quarter of fiscal year 2004 that have materially affected, or that are reasonably likely to
materially affect, our internal controls over financial reporting.

ITEM 9B.    OTHER INFORMATION

None

PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by Item 10 is hereby incorporated by reference to the Registrant's Proxy Statement (the Proxy Statement) for the Annual Meeting of
Stockholders to be held on June 1, 2005 under the heading "Election of Directors."

ITEM 11.    EXECUTIVE COMPENSATION

The information required by Item 11 is hereby incorporated by reference to the Proxy Statement under the heading "Executive Compensation."

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by Item 12 is hereby incorporated by reference to the Proxy Statement under the heading "Beneficial Ownership of Common Stock" and from
Item 5 of this Annual Report on Form 10-K under the heading "Equity Compensation Plan Information."

66

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ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 13 is hereby incorporated by reference to the Proxy Statement under the headings "Agreements with Named Executive Officers" and
"Certain Relationships and Related Transactions."

ITEM 14.    PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by Item 14 is hereby incorporated by reference to the Proxy Statement under the headings "Principal Accounting Fees and Services."

PART IV

ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Managements Report on Internal Control Over Financial Reporting

42Report of Independent Registered Public Accounting Firm

43Consolidated Balance Sheets

45Consolidated Statements of Operations

46Consolidated Statements of Stockholder's Equity

47Consolidated Statements of Cash Flows

48Notes to Consolidated Financial Statements

49-65








|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                         
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3)         |  | Articles of Incorporation and Bylaws:                                                                                                                                                                                                                                                                               
|3.1         |  | The Amended and Restated Articles of Organization of the Company, incorporated herein by reference to Exhibit 3.1 to the Company's Registration Statement on Form 10 (File no. 000-21326), filed with the Securities and
Exchange Commission on March 5, 1993.                                                      
|3.2         |  | Certificate of Vote of Directors Establishing a Series of Convertible Preferred Stock, incorporated herein by reference to Exhibits to the Company's Registration Statement on Form 10 (File no. 000-21326), filed with the
Securities and Exchange Commission on March 5, 1993.                                    
|3.3         |  | Amendment to the Amended and Restated Articles of Organization of the Company, incorporated herein by reference to Exhibit 3.1 to the Company's quarterly report on Form 10-QSB for the period ended November 30, 1996, (File
no. 000-21326), filed with the Securities and Exchange Commission on January 14, 1997.
|            |  |                                                                                                                                                                                                                                                                                                                     

67

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|3.4  |  | Certificate of Vote of Directors Establishing a Series of a Class of Stock, incorporated herein by reference to Exhibit 3.1 of the Company's Registration Statement on Form 8-AB12 (File no. 001-14027), filed
with the Securities and Exchange Commission on April 7, 1998.                                                                                                                                                  
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.5  |  | Intentionally Omitted.                                                                                                                                                                                                                                                                                                                                                                                                        
|3.6  |  | Intentionally Omitted.                                                                                                                                                                                                                                                                                                                                                                                                        
|3.7  |  | Amendment to the Amended and Restated Articles of Organization of the Company, incorporated herein by reference to Exhibit 3.3 of the Company's quarterly report on Form 10-Q for the quarterly period ending June 30, 2002
(File no. 000-21326), filed with the Securities and Exchange Commission on August 14, 2002.                                                                                                       
|3.8  |  | The Amended and Restated Bylaws of the Company, incorporated herein by reference to Exhibit 3.6 to the Company's quarterly report on Form 10-Q for the quarterly period ended June 30, 2002 (File no. 000-21326), filed with
the Securities and Exchange Commission on August 14, 2002.                                                                                                                                       
|(4)  |  | Instruments Defining the Rights of Security Holders                                                                                                                                                                                                                                                                                                                                                                           
|4.1  |  | Shareholder Rights Agreement dated as of April 6, 1998 between the Company and Firstar Trust Company, incorporated herein by reference to Exhibit 4.1 to the Company's Registration Statement on Form 8-A12B (File no.
001-14027), filed with the Securities and Exchange Commission on April 7, 1998.                                                                                                                        
|4.2  |  | Amendment to Shareholder Rights Agreement dated as of November 5, 2002 between the Company and American Stock Transfer and Trust Company, as successor to Firstar Trust Company incorporated herein by reference to Exhibit
4.2 to the Company's quarterly report on Form 10-Q for the quarterly period ended September 30, 2002 (File no. 000-21326), filed with the Securities and Exchange Commission on November 13, 2002.
|(10) |  | Material Contracts                                                                                                                                                                                                                                                                                                                                                                                                            
|10.1 |  | Supply Agreement dated as of July 25, 2000 by and between the Company and Bausch & Lomb, Inc., incorporated herein by reference to Exhibit 10.1 to the Company's quarterly report on Form 10-Q
for the quarterly period ended September 30, 2000 (File no. 001-14027), filed with the Securities and Exchange Commission on November 14, 2000. Confidential treatment was granted to certain portions of this Exhibit.        
|10.4 |  | 1993 Stock Option Plan, as amended, incorporated herein by reference to Annex A of the Company's Proxy Statement (File no. 001-14027), filed with the Securities and Exchange Commission on April 28, 2000.                                                                                                                                                                                                                   
|10.5 |  | License Agreement dated as of July 22, 1992 between the Company and Tufts University, incorporated herein by reference to Exhibit 10.4 to the Company's Registration Statement on Form 10 (File no. 000-21326), filed with
the Securities and Exchange Commission on March 5, 1993.                                                                                                                                           
|10.6 |  | Lease dated March 10, 1995 between the Company and Cummings Properties, incorporated herein by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (File no.
001-14027), filed with the Securities Exchange Commission on April 2, 2001.                                                                                                                        
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                               

68

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|10.7  |  | First Amendment to Lease dated December 11, 1997 between the Company and Cummings Properties, incorporated herein by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000 (File no. 001-14027), filed with the Securities Exchange Commission on April 2, 2001.                                    
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.8  |  | Extension of Lease dated November 23, 1999 between the Company and Cummings Properties, incorporated herein by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2000 (File no. 001-14027), filed with the Securities Exchange Commission on April 2, 2001.                                         
|10.9  |  | Second Amendment to Lease dated November 23, 1998 between the Company and Cummings Properties, incorporated herein by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2000 (File no. 001-14027), filed with the Securities Exchange Commission on April 2, 2001.                                  
|10.10 |  | Lease dated September 23, 1999 between the Company and Cummings Properties, incorporated herein by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (File
no. 001-14027), filed with the Securities Exchange Commission on April 2, 2001.                                                     
|10.15 |  | Letter Agreement dated April 15, 1998 between the Company and Charles H. Sherwood, incorporated herein by reference to Exhibit 10.3 to the Company's quarterly report on Form 10-Q for the quarterly period ended June 30,
2000 (File no. 001-14027), filed with the Securities and Exchange Commission on August 14, 2000.                                     
|10.17 |  | Non-Disclosure and Non-Competition Agreement dated May 5, 1998 between the Company and Charles H. Sherwood, incorporated herein by reference to Exhibit 10.26 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000 (File no. 001-14027), filed with the Securities Exchange Commission on April 2, 2001.                     
|10.18 |  | Promissory Note for $59,000 dated May 26, 2000 between the Company and Charles H. Sherwood, incorporated herein by reference to Exhibit 10.27 to the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 2000 (File no. 001-14027), filed with the Securities Exchange Commission on April 2, 2001.                                     
|10.19 |  | Letter Agreement dated March 30, 2000 by and between the Company and Douglas R. Potter, incorporated herein by reference to Exhibit 10.5 to the Company's quarterly report on Form 10-Q for the quarterly period ended June
30, 2000 (File no. 001-14027), filed with the Securities and Exchange Commission on August 14, 2000.                                
|10.20 |  | Non-Disclosure and Non-Competition Agreement dated April 3, 2000 by and between the Company and Douglas R. Potter, incorporated herein by reference to Exhibit 10.6 to the Company's quarterly report on Form 10-Q for the
quarterly period ended June 30, 2000 (File no. 001-14027), filed with the Securities and Exchange Commission on August 14, 2000.     
|10.21 |  | Change in Control, Bonus and Severance Agreement dated April 26, 2000 by and between the Company and Douglas R. Potter, incorporated herein by reference to Exhibit 10.7 to the Company's quarterly report on
Form 10-Q for the quarterly period ended June 30, 2000 (File no. 001-14027), filed with the Securities and Exchange Commission on August 14, 2000.
|      |  |                                                                                                                                                                                                                                                                                                                                                                 

69

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|10.22 |  | Non-Disclosure and Non-Competition Agreement dated December 2, 1996 by and between the Company and Edward Ross, Jr., incorporated herein by reference to Exhibit 10.31 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000 (File no. 001-14027), filed with the Securities Exchange Commission on April 2, 2001.                                                
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.23 |  | Change in Control, Bonus and Severance Agreement dated April 26, 2000 by and between the Company and Edward Ross, Jr., incorporated herein by reference to Exhibit 10.8 to the Company's quarterly report on
Form 10-Q for the quarterly period ended June 30, 2000 (File no. 001-14027), filed with the Securities and Exchange Commission on August 14, 2000.                                     
|10.25 |  | Stipulation and Agreement of Compromise, Settlement and Release dated May 25, 2001 in connection with In Re Anika Therapeutics, Inc. Securities Litigation, incorporated herein by reference to Exhibit 10.2 to the Company's
quarterly report on Form 10-Q for the quarterly period ended June 30, 2001 (File no. 001-14027), filed with the Securities and Exchange Commission on August 14, 2001.
|10.26 |  | Amendment to Lease #3 dated November 1, 2001 by and between the Company and Cummings Properties, incorporated herein by reference to Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarterly period
ended September 30, 2001 (File no. 001-14027), filed with the Securities and Exchange Commission on November 14, 2001.                                                    
|10.28 |  | Sublease effective as of November 2001, between MedChem Products, Inc. and the Company, incorporated herein by reference to Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarterly period ended March
31, 2002 (File no. 000-21326), filed with the Securities and Exchange Commission on May 14, 2002.                                                                      
|10.29 |  | Separation Agreement dated April 2, 2002 by and between the Company and Edward Ross, Jr., incorporated herein by reference to Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarterly period ended June
30, 2002 (File no. 000-21326), filed with the Securities and Exchange Commission on August 14, 2002.                                                                  
|10.30 |  | Letter Agreement dated June 25, 2002 by and between the Company and William J. Knight incorporated herein by reference to Exhibit 10.2 to the Company's quarterly report on Form 10-Q for the quarterly period ended June 30,
2002 (File no. 000-21326), filed with the Securities and Exchange Commission on August 14, 2002.                                                                      
|10.31 |  | Change in Control, Bonus and Severance Agreement dated July 8, 2002 by and between the Company and William J. Knight incorporated herein by reference to Exhibit 10.3 to the Company's quarterly report on
Form 10-Q for the quarterly period ended June 30, 2002 (File no. 000-21326), filed with the Securities and Exchange Commission on August 14, 2002.                                       
|10.32 |  | Amended and Restated Change in Control, Bonus and Severance Agreement dated July 8, 2002 by and between the Company and Charles H. Sherwood incorporated herein by reference to Exhibit 10.4 to the Company's
quarterly report on Form 10-Q for the quarterly period ended June 30, 2002 (File no. 000-21326), filed with the Securities and Exchange Commission on August 14, 2002.                
|10.33 |  | Letter Agreement dated February 21, 2003 by and between the Company and Roger C. Stikeleather, incorporated herein by reference to Exhibit 10.33 to the Company's quarterly report on Form 10-Q for the
quarterly period ended March 31, 2003 (File no. 000-21326), filed with the Securities and Exchange Commission on May 15, 2003.                                                              
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                     

70

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|10.34   |  | Change in Control, Bonus and Severance Agreement dated March 17, 2003 by and between the Company and Roger C. Stikeleather, incorporated herein by reference to Exhibit 10.34 to the Company's quarterly report on Form 10-Q
for the quarterly period ended March 31, 2003 (File no. 000-21326), filed with the Securities and Exchange Commission on May 15, 2003.                                                                                                          
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.35   |  | Change in Control, Bonus and Severance Agreement dated June 9, 2003 by and between the Company and Francesco J. Luppino, incorporated herein by reference to Exhibit 10.35 to the Company's quarterly report
on Form 10-Q for the quarterly period ended June 30, 2003 (File no. 000-21326), filed with the Securities and Exchange Commission on August 14, 2003.                                                                                                           
|10.36   |  | Lease Extension dated October 8, 2003 by and between the Company and Cummings Properties, LLC, incorporated herein by reference to Exhibit 10.36 to the Company's quarterly report on Form 10-Q for the quarterly period
ended September 30, 2003 (File no. 000-21326), filed with the Securities and Exchange Commission on November 14, 2003.                                                                                                                              
|10.37   |  | Lease Amendment dated October 8, 2003 by and between the Company and MedChem Products, Inc., incorporated herein by reference to Exhibit 10.36 to the Company's quarterly report on Form 10-Q for the quarterly period ended
September 30, 2003 (File no. 000-21326), filed with the Securities and Exchange Commission on November 14, 2003.                                                                                                                                
|10.38   |  | License Agreement dated as of December 20, 2003 by and between the Company and Ortho Biotech Products, L.P., incorporated herein by reference to Exhibit 10.38 to the Company's annual report on Form 10-K for
the year ended December 31, 2003 (File no. 000-21326), filed with the Securities and Exchange Commission on March 29, 2004.                                                                                                                                   
|10.39   |  | Separation Agreement dated January 19, 2004 by and between the Company and Roger C. Stikeleather, incorporated herein by reference to Exhibit 10.39 to the Company's annual report on Form 10-K for the
year ended December 31, 2003 (File no. 000-21326), filed with the Securities and Exchange Commission on March 29, 2004.                                                                                                                                              
|10.40   |  | License Agreement dated as of July 23, 2004 by and between the Company and Ortho-McNeil Pharmaceutical, Inc., acting through its OrthoNeutrogena Division., incorporated herein by reference to Exhibit 10.39 to the
Company's quarterly report on Form 10-Q for the quarterly period ended June 30, 2004 (File no. 000-21326), filed with the Securities and Exchange Commission on August 16, 2004. Confidential treatment was granted to certain portions of this
Exhibit.
|10.41   |  | Letter Agreement dated October 6, 2004 by and between the Company and Carol A. Toth, Ph.D., incorporated herein by reference to the Company's current report on Form 8-K (File no. 000-21326), filed with
the Securities and Exchange Commission on November 19, 2004.                                                                                                                                                                                                       
|10.42   |  | Change of Control, Bonus and Severance Agreement dated October 6, 2004 by and between the Company and Carol A. Toth, Ph.D., incorporated herein by reference to the Company's current report on Form 8-K (File no. 000-21326),
 filed with the Securities and Exchange Commission on November 19, 2004.                                                                                                                                                                      
|**10.43 |  | Supply Agreement dated as of December 15, 2004 by and between the Company and Bausch & Lomb, Incorporated.                                                                                                                                                                                                                                                                                                                                                                   
|*10.44  |  | Lease Amendment dated October 13, 2004 by and between the Company and MedChem Products, Inc.                                                                                                                                                                                                                                                                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

71

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|(11)    |  | Statement Regarding the Computation of Per Share Earnings                                                                                                                  
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|11.1    |  | See Note 2 to the Financial Statements included herewith.                                                                                                                  
|(21)    |  | Subsidiaries of the Registrant                                                                                                                                             
|*21.1   |  | List of Subsidiaries of the Registrant.                                                                                                                                    
|(23)    |  | Consent of Experts                                                                                                                                                         
|*23.1   |  | Consent of PricewaterhouseCoopers LLP.                                                                                                                                     
|*31.1   |  | Certification of Charles H. Sherwood, Ph.D. pursuant to Rules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.               
|*31.2   |  | Certification of James E. O'Neill pursuant to Rules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                         
|***32.1 |  | Certification of Charles H. Sherwood, Ph.D. and James E. O'Neill, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|(99)    |  | Additional Exhibits                                                                                                                                                        
|None    |  |                                                                                                                                                                            

---

72

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized in Woburn, Massachusetts on March 16, 2005.

|                     |  | ANIKA THERAPEUTICS, INC.
|-------------------- |  | ------------------------
|Date: March 16, 2005 |  | By:                     

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.

|Signature                                               |  | Title                                                              |  | Date          
|------------------------------------------------------- |  | ------------------------------------------------------------------ |  | --------------
|                                                        |  |                                                                    |  |               
|/s/CHARLES H. SHERWOOD, PH.D.Charles H. Sherwood, Ph.D. |  | Chief Executive Officer and Director (Principal Executive Officer) |  | March 16, 2005
|/s/JAMES E. O'NEILLJames E. O'Neill                     |  | Treasurer (Principal Accounting Officer)                           |  | March 16, 2005
|/s/JOSEPH L. BOWERJoseph L. Bower                       |  | Director                                                           |  | March 16, 2005
|/s/EUGENE A. DAVIDSON, PH.D.Eugene A. Davidson, Ph.D.   |  | Director                                                           |  | March 16, 2005
|/s/SAMUEL F. MCKAYSamuel F. McKay                       |  | Director                                                           |  | March 16, 2005
|/s/HARVEY S. SADOW, PH.D.Harvey S. Sadow, Ph.D.         |  | Director                                                           |  | March 16, 2005
|/s/STEVEN E. WHEELERSteven E. Wheeler                   |  | Director                                                           |  | March 16, 2005

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