**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**Form 10-K**

| x                                                     | ** ** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15  (d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
|-------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
| **For the fiscal year  ended December 31, 2006** |
| o                                                     | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Forthe transition period from            to                **

**Commission File Number 000-21326**

**Anika Therapeutics, Inc.**

*(Exact Name of Registrant asSpecified in Its Charter)*

| **Massachusetts**                                                   |     | **04-3145961**                          |
|---------------------------------------------------------------------|----------|-----------------------------------------|
| *(State  or Other Jurisdiction of   Incorporation or Organization)* | * * | *(I.R.S.  Employer Identification No.)* |

 

**160 New Boston Street,Woburn, Massachusetts 01801**

*(Address of Principal Executive Offices) (Zip Code)*

**(781) 932-6616**

*(Registrant’s Telephone Number, Including AreaCode)*

**Securities registered pursuant to Section 12 (b) ofthe Act: **Common Stock, par value $.01 per share

**Securitiesregistered pursuant to Section 12 (g) of the Act:**None

Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the SecuritiesAct. Yes o  No x

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes o  No x

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15 (d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past90 days. Yes x  No o

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, andwill not be contained, to the best of registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III ofthis Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinitions of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Securities Exchange Act

| o  Large accelerated filer |   | x  Accelerated filer |   | o  Non-accelerated filer |
|--------------------------------------|--------|--------------------------------|--------|------------------------------------|

Indicateby checkmark whether the registrant is a shell company (as defined in Rule 12b-2of the Act). Yes o  No x

The aggregate market value of voting and non-votingstock held by non-affiliates of the Registrant as of June 30, 2006, thelast day of the Registrant’s most recently completed second fiscal quarter, was$102,855,653 based on the close price per share of Common Stock of $9.68 as ofsuch date as reported on the NASDAQ Global Select Market. Shares of our CommonStock held by each executive officer, director and each person or entity knownto the registrant to be an affiliate have been excluded in that such personsmay be deemed to be affiliates; such exclusion shall not be deemed toconstitute an admission that any such person is an “affiliate” of theregistrant. At March 1, 2007, there were issued and outstanding 10,906,290shares of Common Stock, par value $.01 per share.

**Documents Incorporated By Reference**

Certain informationrequired in response to Items 10, 11, 12, 13 and 14 of Part III is herebyincorporated by reference from the registrant’s Proxy Statement for the AnnualMeeting of Stockholders to be held on June 1, 2007. Such Proxy Statementshall not be deemed to be “filed” as part of this Annual Report on Form 10-Kexcept for the parts therein which have been specifically incorporated byreference herein.

 

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**ANIKATHERAPEUTICS, INC.**TABLE OF CONTENTS

|               | ** ** | ** **                                                                                                         | ** ** | **Page** | ** ** |
|---------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| Part I   |       |                                                                                                               |       |     |       |   |   |
| Item 1.  |       | Business                                                                                                           |       |     | 2          |   |   |
| Item 1A. |       | Risk  Factors                                                                                                      |       |     | 12         |   |   |
| Item 1B. |       | Unresolved Staff Comments                                                                                          |       |     | 23         |   |   |
| Item 2.  |       | Properties                                                                                                         |       |     | 23         |   |   |
| Item 3.  |       | Legal  Proceedings                                                                                                 |       |     | 24         |   |   |
| Item 4.  |       | Submission of Matters to a Vote of Security Holders                                                                |       |     | 24         |   |   |
|          |       |                                                                                                               |       |     |       |   |   |
| Part II  |       |                                                                                                               |       |     |       |   |   |
| Item 5.  |       | Market for Registrant’s Common Equity, Related  Stockholder Matters and Issuer Purchases of Equity Securities |       |     | 25         |   |   |
| Item 6.  |       | Selected  Financial Data                                                                                           |       |     | 26         |   |   |
| Item 7.  |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                        |       |     | 28         |   |   |
| Item 7A. |       | Quantitative and Qualitative Disclosures About Market  Risk                                                        |       |     | 41         |   |   |
| Item 8.  |       | Financial Statements and Supplementary Data                                                                        |       |     | 42         |   |   |
| Item 9.  |       | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure                              |       |     | 66         |   |   |
| Item 9A. |       | Controls and Procedures                                                                                            |       |     | 66         |   |   |
| Item 9B. |       | Other  Information                                                                                                 |       |     | 67         |   |   |
|          |       |                                                                                                               |       |     |       |   |   |
| Part III |       |                                                                                                               |       |     |       |   |   |
| Item 10. |       | Directors, Executive Officers and Corporate Governance                                                             |       |     | 68         |   |   |
| Item 11. |       | Executive Compensation                                                                                             |       |     | 68         |   |   |
| Item 12. |       | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                    |       |     | 68         |   |   |
| Item 13. |       | Certain Relationships and Related Transactions, and  Director Independence                                         |       |     | 68         |   |   |
| Item 14. |       | Principal Accountant Fees and Services                                                                             |       |     | 68         |   |   |
|          |       |                                                                                                               |       |     |       |   |   |
| Part IV  |       |                                                                                                               |       |     |       |   |   |
| Item 15. |       | Exhibits and Financial Statement Schedules                                                                         |       |     | 68         |   |   |
| Signatures    |       |                                                                                                               | 74         |     |       |

 

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**FORM 10-KANIKA THERAPEUTICS, INC.For Fiscal Year Ended December 31, 2006**

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

·                    ourfuture sales and product revenues, including geographic expansions, possibleretroactive price adjustments, and expectations of unit volumes or otheroffsets to price reductions;

·                    ourintention to increase market share for ORTHOVISC® ininternational and domestic markets or otherwise penetrate growing markets forosteoarthritis of the knee and other joints;

·                    ourmanufacturing capacity and efficiency gains and work-in-process manufacturingoperations;

·                    thetiming of, scope of and rate of patient enrollment for clinical trials;

·                    developmentof possible new products;

·                    ourability to achieve or maintain compliance with laws and regulations;

·                    thetiming of and/or receipt of FDA or other regulatory approvals and/orreimbursement approvals of new or potential products;

·                    our intentionto seek patent protection for our products and processes;

·                    negotiationswith potential and existing partners, including our performance under any ofour existing and future distribution or supply agreements or our expectationswith respect to sales and sales threshold milestones pursuant to suchagreements;

·                    thelevel of our revenue or sales in particular geographic areas and/or forparticular products, and the market share for any of our products;

·                    ourcurrent strategy, including our corporate objectives and research anddevelopment and collaboration opportunities,

·                    ourand Bausch & Lomb’s performance under the existing supply agreementfor certain of our ophthalmic viscoelastic products;

·                    ourexpectation for increases in operating expenses;

·                    ourexpectation for increases in capital expenditures;

·                    our ability tomaintain a sufficient supply of HA to meet anticipated demands;

·                    ourability and timing with respect to filling vacancies in management positions;

·                    therate at which we use cash, the amounts used and generated by operations, andour expectation regarding the adequacy of such cash;

·                    possiblenegotiations or re-negotiations with existing or new distribution orcollaboration partners;

·                    ourability and Galderma’s ability to perform under the agreements entered into,and related development and commercialization of our cosmetic tissueaugmentation (“CTA”) products;

·     our expectations regarding Galderma’scommercial launch timing of the CTA product;

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·                    ourexpectations regarding regular order flow for ORTHOVISC; and internationalsales trend of ORTHOVISC;

·                    ourexpectations regarding the result of the reimbursement change in Turkey andrelated ORTHOVISC sales in Turkey;

·                    ourexpectations regarding sales to DePuy Mitek and the positive effects ondomestic ORTHOVISC sales related to DePuy Mitek’s expansion of its productspecialist team, and our expectations of the simplified reimbursement processon ORTHOVISC sales;

·     our expectations regarding HYVISC sales;

·                    ourexpectations regarding the development and commercialization of INCERT, and themarket potential for INCERT;

·                    ourexpectations regarding costs, including financing costs, to buildout and occupythe new Bedford, MA facility;

·     our expectations regarding the terms of anyfuture equity or debt financings; and

·     our expectations regarding the IRS audit.

*Furthermore,additional statements identified by words such as “will,” “likely,” “may,” “believe,”“expect,” “anticipate,” “intend,” “seek,” “designed,” “develop,” “would,” “future,”“can,” “could” and other expressions that are predictions of or indicate futureevents and trends and which do not relate to historical matters, also identifyforward-looking statements.*

*You should not rely on forward-looking statementsbecause they involve known and unknown risks, uncertainties and other factors,some of which are beyond our control, including those factors described in thesection titled “Risk Factors” 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 anticipatedfuture results, performance or achievement, expressed or implied by theforward-looking statements. These forward-looking statements are based upon thecurrent assumptions of our management and are only expectations of futureresults. You should carefully review all of these factors, and you should beaware that there may be other factors that could cause these differences,including those factors discussed in the sections titled “Business” and “Management’sDiscussions and Analysis of Financial Condition and Results of Operations”elsewhere in this Annual Report on Form 10-K. We undertake noobligation to publicly update or revise any forward-looking statement toreflect changes in underlying assumptions or factors, of new information, futureevents or other changes.*

**PART I**

**ITEM 1.**                BUSINESS

**Overview**

Anika Therapeutics, Inc. (“Anika,” the “Company,”“we,” “us,” or “our”) was incorporated in 1992 as a Massachusetts company. Anikadevelops, manufactures and commercializes therapeutic products for tissueprotection, healing and repair. 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 importantrole in a number of physiological functions such as the protection andlubrication of soft tissues and joints, the maintenance of the structuralintegrity of tissues, and the transport of molecules to and within cells. Ourcurrently manufactured and marketed products consist of ORTHOVISC®, which is an HA product usedin the treatment of some forms of osteoarthritis in humans; AMVISC®, AMVISC® Plus, STAARVISCTM-II,and ShellGelÔ, each an injectable ophthalmic viscoelastic HAproduct; HYVISC®,which is an HA product used in the treatment of equine osteoarthritis, 

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and INCERT®,anHA based anti-adhesive for surgical applications. In the U.S., ORTHOVISC ismarketed by DePuy Mitek, a subsidiary of Johnson & Johnson(collectively, “JNJ”), under the terms of a licensing, distribution, supply andmarketing agreement. Outside the U.S., ORTHOVISC has been approved for salesince 1996 and is marketed by distributors in approximately 20 countries.HYVISC is marketed in the U.S. through Boehringer Ingelheim Vetmedica, Inc.Currently, INCERT® isonly marketed in three countries outside the United States. We developed andmanufacture AMVISC® and AMVISC® Plus for Bausch &Lomb Incorporated under a multiyear supply agreement.

Products in development include, ELEVESSTM, an HA based dermal fillerused for cosmetic tissue augmentation applications and next generationosteoarthritis/joint health related products.  See the section captioned “*Research and Development of Potential Products*” hereunderfor additional information.

Our currentstrategy is to:

·                    supportU.S. ORTHOVISC sales growth and to expand ORTHOVISC sales internationally;

·                    obtainU.S. and European regulatory approvals for ELEVESS and through a partnershipwith Galderma Pharma launch ELEVESS in mid-2007;

·                    developand implement a commercialization plan for INCERT®;

·                    initiateadditional human clinical trials to expand claims in the U.S. for ORTHOVISC andfor new joint health products;

·                    focusresearch and development resources on evaluating potential productapplications, including possible collaborations with other parties; and

·                    increasegross margins by upgrading manufacturing processes and efficiencies.

In 2006, revenue from the sale of our productscontributed 89% of our total revenue. Licensing, milestone and contract revenuecontributed 11% of our total revenue in 2006. Revenue from the sale ofophthalmic viscoelastic products was 45% of product revenue. ORTHOVISCcontributed 47% of our product revenue, and HYVISC contributed 8% of ourproduct revenue in 2006.

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

*ORTHOVISC*®

In the U.S., ORTHOVISC is indicated for the treatmentof pain caused by osteoarthritis of the knee in patients who have failed torespond adequately to conservative non-pharmacologic therapy and to simpleanalgesics, such as acetaminophen. ORTHOVISC has been approved for use in alljoints in Europe and certain other international markets. It is a sterile,non-pyrogenic, clear, viscoelastic solution of hyaluronan dissolved inphysiological saline, and dispensed in a single-use syringe. A complex sugar ofthe glycosaminoglycan family, hyaluronan is a high molecular weightpolysaccharide composed of repeating disaccharide units of sodium glucuronateand N-acetylglucosamine. ORTHOVISC is injected into the knee joint in a seriesof 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 ina joint gradually deteriorates due to the effects of mechanical stress, whichcan be caused by a variety of factors including the normal aging process. In anosteoarthritic joint, particular regions of articulating surfaces are exposedto irregular forces, which result in the remodeling of tissue surfaces thatdisrupt the normal equilibrium or mechanical function. As osteoarthritisadvances, the joint gradually loses its ability to regenerate cartilage tissueand the cartilage layer attached to the bone deteriorates to the point whereeventually the bone becomes exposed. Advanced osteoarthritis often requiressurgery and the possible implantation of artificial joints. The currenttreatment options for 

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osteoarthritis beforejoint replacement surgery include viscosupplementation, analgesics,non-steroidal anti-inflammatory drugs and steroid injections.

ORTHOVISC became available for sale in the U.S. on March 1,2004, and is marketed by DePuy Mitek, Inc., a subsidiary of Johnson &Johnson (“Depuy Mitek”), under the terms of a ten-year licensing, distribution,supply and marketing agreement (the “JNJ Agreement”). The JNJ Agreement wasoriginally entered into in December 2003 with Ortho Biotech Products,L.P., also a Johnson & Johnson company, and was assigned to DePuyMitek in mid-2005. Under the JNJ Agreement, DePuy Mitek performs sales,marketing and distribution functions. Additionally, DePuy Mitek has the right,under certain circumstances, to further develop and commercialize ORTHOVISC aswell as other new products for the treatment of pain associated withosteoarthritis based on our viscosupplementation technology. In support of thelicense, the JNJ Agreement provides that DePuy Mitek will fund post-marketingclinical trials for new indications of ORTHOVISC. We received an initialpayment of $2.0 million upon entering into the JNJ Agreement, a milestonepayment of $20.0 million in February 2004, as a result of obtaining FDAapproval of ORTHOVISC and a $5.0 million milestone payment in December 2004for planned upgrades to our manufacturing operations for a total of $27.0million. This amount was initially recorded as deferred revenue, and is beingrecognized as revenue ratably over the agreement’s ten year life. Under the JNJAgreement, we are the exclusive supplier of ORTHOVISC to Depuy Mitek. The JNJAgreement provides for additional sales-based milestone payments to uscontingent upon achieving specified sales targets, in addition to royalty andtransfer fees. The JNJ Agreement is subject to early termination in certaincircumstances and is otherwise renewable by DePuy Mitek for consecutivefive-year terms.

We have a number ofdistribution relationships servicing international markets including Canada,Europe, Turkey, Middle East, and South America. We will continue to seek toestablish long-term distribution relationships in other regions. See thesection captioned *“Management’s Discussionand Analysis of Financial Condition and Results of Operations—ManagementOverview”* and *“Risk Factors.”*

*HYVISC*®

HYVISC is a high molecularweight injectable HA product for the treatment of joint dysfunction in horsesdue to non-infectious synovitis associated with equine osteoarthritis. HYVISChas viscoelastic properties that lubricate and protect the tissues in horsejoints. HYVISC is distributed by Boehringer Ingelheim Vetmedica, Inc. inthe United States.

*OPHTHALMIC PRODUCTS*

The ophthalmic products wemanufacture include the AMVISC and AMVISC Plus product line,STAARVISC-II, and ShellGel. They are injectable, high molecular weight HAproducts used as viscoelastic agents in ophthalmic surgical procedures such ascataract extraction and intraocular lens implantation. These products coat,lubricate and protect sensitive tissue such as the endothelium, and maintainthe shape of the eye, thereby facilitating ophthalmic surgical procedures.

Anika manufactures theAMVISC product line for Bausch & Lomb under the terms of a supplyagreement through December 31, 2010 (the “2004 B&L Agreement”) forviscoelastic products used in ophthalmic surgery. Under the 2004 B&LAgreement, we will continue to be the exclusive global supplier (other thanwith respect to Japan) for AMVISC and AMVISC Plus to Bausch & Lomb.The 2004 B&L Agreement also provides us with a right to negotiate tomanufacture future surgical ophthalmic viscoelastic products developed byBausch & Lomb, while Bausch & Lomb has been granted rights tocommercialize certain future surgical ophthalmic viscoelastic productsdeveloped by us. Under the 2004 B&L Agreement, we are entitled to continueproviding surgical viscoelastic products to our existing customers (STAARSurgical Company and Cytosol Ophthalmics, Inc.) who currently receive suchproducts from us. Our former distributor for CoEase, Advanced Medical Optics (“AMO”),completed the acquisition of the 

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surgicalophthalmology business of Pfizer, Inc., in September 2004, whichincluded a competing line of viscoelastic products for use in ocular surgery.As a result, our agreement with AMO expired according to its terms in June 2005.See also Item 1A. *“Risk Factors.”*

*INCERT*®

INCERT is a family of chemically modified,cross-linked forms of HA designed to prevent surgical adhesions. Surgicaladhesions occur when fibrous bands of tissues form between adjacent tissuelayers during the wound healing process. Although surgeons attempt to minimizethe formation of adhesions, they nevertheless occur quite frequently aftersurgery. Adhesions in the abdominal and pelvic cavity can cause particularlyserious problems such as intestinal blockage following abdominal surgery, andinfertility following pelvic surgery. Fibrosis following spinal surgery cancomplicate re-operation and may cause pain. We received CE marking for INCERTfor a broad use profile in the third quarter of 2004.

INCERT-S is our product designed to reducepost-surgical fibrosis following spinal surgery. It is currently marketed inthree countries in Europe and the Middle East. The Company is currentlyassessing the market potential for this and other INCERT products in the U.S.as well as other countries. We cannot assure you that meaningful sales ofINCERT-S will be achieved.

Anika co-owns issued U.S.patents covering the use of INCERT for adhesion prevention. See the sectioncaptioned *“Patent and Propriety Rights.”*

**Research andDevelopment of Potential Products**

*Cosmetic TissueAugmentation*

ELEVESS, our product forcosmetic tissue augmentation, is based on a family of chemically modified,cross-linked forms of HA designed for longer duration in the body. ELEVESS is aproduct family designed as a soft tissue filler for facial wrinkles, scarremediation and lip augmentation. This new class of tissue filler technologybased on HA is intended to compete with other HA-based products currently onthe market. The Pre-Market Approval (“PMA”)application for ELEVESS, formerlyknown as REDEFYNE, was approved by the FDA in December 2006. An approvedPMA is required to market and sell our CTA product in the United States.   We also received CE marking approval for ourCTA product in the first quarter of 2006. In June 2006, we entered into alicense and development agreement with Galderma Pharma S.A. and a supplyagreement with Galderma Pharma S.A. and Galderma S.A. for exclusive worldwidedevelopment and commercialization of cosmetic dermatology products. GaldermaPharma S.A. and Galderma S.A. are hereinafter jointly referred to as Galderma.As part of the agreement, the Company is working on implementing some productenhancements that address cosmetic issues and the shelf life of the product. Theseimprovements are expected to increase the competitiveness of the product. Theseproduct and process modifications require supplements to our PMA and CE Mark approvals, which were filedlate in the fourth quarter 2006. Since the modifications do not address safetyor efficacy issues, we do not believe additional clinical trials will berequired. Currently, Galderma is planning a worldwide launch of the enhancedversion of the product in mid-2007. While we have received PMAapproval and CE marking for our initial CTA product, it is the enhanced versionof this product that Galderma intends to commercialize. We cannot assure youthat: (1) we will successfully obtain regulatory approval for sales ofELEVESS in the U.S. or EU; or (2) if regulatory approvals are obtained,meaningful sales of ELEVESS will be achieved.

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*Other Research andDevelopment Activities*

Our research and development efforts primarily consistof the development of new medical applications for our HA-based technology, themanagement of clinical trials for certain product candidates, and the preparationand processing of applications for regulatory approvals at all relevant stagesof development. Our development focus includes chemically modified formulationsof HA designed for longer residence time in the body. These efforts arepresently accomplished primarily through in-house research and developmentpersonnel and resources, as well as through collaboration with other companiesand scientific researchers. As of December 31, 2006, we had six employeesengaged primarily in research and development and engineering, and one employeeand several external contractors were engaged in clinical and regulatorymatters. For the years ended December 31, 2006, 2005 and 2004, theseexpenses were $3.6 million, $4.7 million, and $4.1 million, respectively.We anticipate that we will continue to commit significant resources to researchand development, including clinical trials, in the future.

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

**Manufacturing ofHyaluronic Acid (“HA”)**

We have been manufacturing HA since 1983 in ourfacility located in Woburn, Massachusetts. This facility is approved by the FDAfor the manufacture of medical devices and veterinary drugs. We have developeda proprietary manufacturing process for the extraction and purification of HAfrom avian combs, a source of high molecular weight HA. We have taken steps tominimize risks associated with the availability of raw materials by obtainingregulatory approval to outsource certain key intermediates for our products. Webelieve that sufficient supplies of these materials are generally available, ormaintained in inventory, to meet anticipated demand.

On January 4, 2007,the Company entered into a new lease in Bedford, Massachusetts, consisting ofapproximately 134,000 square feet of general office, research and developmentand manufacturing space. The new facility will provide additional space,including manufacturing capacity necessary to accommodate growth in the Company’sbusiness, as well as to improve efficiency by conducting business in onefacility. We will move our existing manufacturing operations to the newfacility once the buildout and validation of the manufacturing space iscompleted. We currently expect the manufacturing space buildout and validationto be completed by late 2008.

**Patent andProprietary Rights**

We have a policy of seeking patent protection forpatentable aspects of our proprietary technology. Our issued patents expirebetween 2009 and 2022. We co-own certain U.S. patents and a patent applicationwith claims relating to the chemical modification of HA and certain adhesionprevention uses and certain drug delivery uses of HA. We also solely ownpatents covering composition of matter and certain manufacturing processes. Weintend to seek patent protection for products and processes developed in thecourse of our activities when we believe such protection is in our bestinterest and when the cost of seeking such protection is not inordinaterelative to the potential benefits. See also the section captioned *“Risk Factors—We may be unable to adequately protectour intellectual property rights.”*

Other entities have filed patent applications for orhave been issued patents concerning various aspects of HA-related products orprocesses. In addition, the products or processes we develop may infringe thepatent rights of others in the future. Any such infringement may have amaterial adverse effect 

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on our business, financialcondition, and results of operations. See also the section captioned *“Risk Factors—We may be unable to adequately protectour intellectual property rights.”*

We also rely upon trade secrets and proprietaryknow-how for certain non-patented aspects of our technology. To protect suchinformation, we require certain customers and vendors, and all employees,consultants and licensees to enter into confidentiality agreements limiting thedisclosure and use of such information. These agreements, however, may notprovide adequate protection. See also the section captioned *“Risk Factors—We may be unable to adequately protectour intellectual property rights.”*

We have granted Depuy Mitek an exclusive,non-transferable royalty bearing license to use and sell ORTHOVISC (and otherproducts developed pursuant to the JNJ Agreement) in the U.S., as well as alicense to manufacture and have manufactured such products in the event that weare unable to supply them with products in accordance with the terms of the JNJAgreement.

We have also grantedGalderma an exclusive, non-transferable royalty bearing, worldwide license touse and sell ELEVESS (and other products developed pursuant to the GaldermaAgreement), as well as a license to manufacture and have manufactured suchproducts in the event that we are unable to supply them with products inaccordance with the terms of the agreements with Galderma.

**GovernmentRegulation**

*United StatesRegulation*

Our research (including clinical research),development, manufacture, and marketing of products are subject to regulationby numerous governmental authorities in the U.S. and other countries. Medicaldevices are subject to extensive and rigorous regulation by the Food and DrugAdministration (“FDA”) and by other federal, state and local authorities. TheFederal Food, Drug and Cosmetic Act (“FDC Act”) governs the testing, safety,effectiveness, clearance, approval, manufacture, labeling, packaging,distribution, storage, record keeping, reporting, marketing, advertising, andpromotion of our products. Noncompliance with applicable requirements canresult in, among other things, fines, injunctions, civil penalties, recall orseizure of products, total or partial suspension of production, failure of thegovernment to grant premarket clearance or approval of products, withdrawal ofclearances and approvals, and criminal prosecution.

Medical products regulated by the FDA are generallyclassified as drugs, biologics, and/or medical devices. Medical devicesintended for human use are classified into three categories (Class I, IIor III), on the basis of the controls deemed reasonably necessary by the FDA toassure their safety and effectiveness. Class I devices are subject togeneral controls, for example, labeling and adherence to the FDA’s GoodManufacturing Practices/Quality System Regulation (“GMP/QSR”.) Most Class Idevices are exempt from premarket notification. Class II devices aresubject to general and special controls (for example, performance standards,postmarket surveillance, and patient registries). Most Class II devicesare subject to premarket notification and may be subject to clinical testingfor purposes of premarket notification and clearance for marketing. Class IIIis the most stringent regulatory category for medical devices. Most Class IIIdevices require premarket approval (“PMA”) from the FDA. All of our existing productsare subject to the applicable rules related to Class III devices.

AMVISC, AMVISC Plus, ShellGel and STAARVISC areapproved as Class III medical devices in the U.S. for ophthalmic surgicalprocedures in intraocular use in humans. ORTHOVISC is approved as a Class IIImedical device in the U.S. for treatment of pain resulting from osteoarthritisof the knee in humans. Our initial CTA product is approved as a Class IIImedical device in the U.S. for treatment of facial wrinkles and folds,including nasolabial folds. HYVISC is approved as an animal drug forintra-articular injection in horse joints to treat degenerative joint diseaseassociated with synovitis. In the past, most HA products for human use havebeen regulated as medical devices. We believe that our INCERT 

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product, should we decideto seek U.S. approval to market, will have to meet the regulatory requirementsof Class III devices and will require a PMA submission.

Unless a new device is exempted from premarketnotification, its manufacturer must obtain marketing authorization from the FDAthrough premarket clearance (510(k)) or PMA before the device can be introducedinto the market. Product development and approval within the FDA regulatoryframework takes a number of years and involves the expenditure of substantialresources. This regulatory framework may change or additional regulations mayarise at any stage of our product development process and may affect approvalof, or delay an application related to, a product, or require additional expendituresby us. There can be no assurance that the FDA review of marketing applicationswill result in product approval on a timely basis, if at all. The PMA approvalprocess is lengthy, expensive, and typically requires, among other things,valid scientific evidence which generally includes extensive data such aspre-clinical and clinical trial data to demonstrate a reasonable assurance ofsafety and effectiveness.

Human clinical trials in the U.S. for significant riskdevices must be conducted under an Investigational Device Exemption (“IDE”),which must be submitted to the FDA and either be approved or be allowed tobecome effective before the trials may commence. There can be no assurance thatsubmission of an IDE will result in the ability to commence clinical trials. Inaddition, the IDE approval process could result in significant delay. Even ifthe FDA approves an IDE or allows an IDE for a clinical investigation to becomeeffective, clinical trials may be suspended at any time for a number of reasons.Among others, thesereasons may include: a) failure to comply with applicablerequirements; b) inadequacy of informed consent; and c) the datagenerated suggests that: the risks to clinical subjects are not outweighed bythe anticipated benefits to clinical subjects and the importance of theknowledge to be gained, the investigation is scientifically unsound, orthere is reason to believe that the device, as used, is ineffective. Atrial may be terminated if an unanticipated adverse device effect presents anunreasonable risk to subjects. If clinical studies are suspended or terminated,we may be unable to continue the development of the investigational productsaffected.

Upon completion of required clinical trials, for Class IIImedical devices, results are presented to the FDA in a PMA application. Inaddition to the results of clinical investigations, the PMA applicant mustsubmit other information relevant to the safety and effectiveness of thedevice, including, among other things, the results of non-clinical tests; afull description of the device and its components; a full description of themethods, facilities and controls used for manufacturing; and proposed labeling.The FDA usually also conducts an on-site inspection to determine whether an applicantconforms with the FDA’s current Quality System Regulation (“QSR”), formerlyknown as GMP/QSR. FDA review of the PMA may not result in timely or any PMAapproval, and there may be significant conditions on approval, includinglimitations on labeling and advertising claims and the imposition ofpost-market testing, tracking, or surveillance requirements.

Product changes after approval where such changeaffects safety and effectiveness as well as the use of a different facility formanufacturing, could necessitate additional review and approval by the FDA.Post approval changes in labeling, packaging or promotional materials may alsonecessitate further review and approval by the FDA.

Legally marketed products are subject to continuingrequirements by the FDA relating to manufacturing, quality control and qualityassurance, maintenance of records and documentation, reporting of adverseevents, and labeling and promotion. The FDC Act requires device manufacturersto comply with GMP/QSR. The FDA enforces these requirements through periodicinspections of device manufacturing facilities. In complying with standards setforth in the GMP/QSR regulations, manufacturers must continue to expend time,money and effort in the area of production and quality control to ensure fulltechnical compliance. Other federal, state, and local agencies may inspectmanufacturing establishments as well.

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A set of regulations known as the Medical DeviceReporting regulations obligates manufacturers to inform the FDA wheneverinformation reasonably suggests that one of their devices may have caused orcontributed to a death or serious injury, or when one of their devicesmalfunctions and if the malfunction were to recur, the device or a similardevice would be likely to cause or contribute to a death or serious injury.

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

In addition to regulationsenforced by the FDA, we are subject to regulation under the Occupational Safetyand Health Act, the Environmental Protection Act, the Toxic Substances ControlAct, the Resource Conservation and Recovery Act and other existing and futurefederal, state and local laws and regulations as well as those of foreigngovernments. Federal, state and foreign regulations regarding the manufactureand sale of medical products are subject to change. We cannot predict whatimpact, if any, such changes might have on our business.

*Foreign Regulation*

In addition to regulations enforced by the FDA, we andour products are subject to certain foreign regulations. Internationalregulatory bodies often establish regulations governing product standards,packing requirements, labeling requirements, import restrictions, tariffregulations, duties and tax requirements. ORTHOVISC is approved for sale and ismarketed in Canada, Europe, Turkey, and parts of the Middle East. In theEuropean Union (“EU”), ORTHOVISC is sold under *ConformitéEuropéene* (CE mark) authorization, a certification required underEuropean Union medical device regulations. The CE mark, achieved in 1996,allows ORTHOVISC to be marketed without further approvals in most of the EUnations as well as other countries that recognize EU device regulations. In August 2004,we received an EC Design Examination Certificate which entitled us to affix aCE mark to INCERT-S as a barrier to adhesion formation following surgery.AMVISC® and AMVISC® Plus are CEmarked, and in May 2005, we received an EC Design Examination Certificatewhich entitled us to affix a CE mark to ShellGelÔas an ophthalmic viscoelastic surgical device. We may not be able to achieveand/or maintain compliance required for CE marking or other foreign regulatoryapprovals for any or all of our products. The requirements relating to theconduct of clinical trials, product licensing, marketing, pricing, advertising,promotion and reimbursement also vary widely from country to country.

Turkey Reimbursement: Inthe third quarter of 2006 the government of Turkey eliminated reimbursement forover 100 drugs including ORTHOVISC and its competing products. Internationalsales declined moderately in 2006 compared to 2005 due to the reimbursementchange in Turkey, and we did not ship any product to our distributor thereduring the last five months of 2006. We expect sales to Turkey will resume inthe third quarter of 2007, but at a modest volume compared to 2006.

**Competition**

We compete with many companies, including, amongothers, large pharmaceutical firms and specialized medical products companies.Many of these companies have substantially greater financial resources, largerresearch and development staffs, more extensive marketing and manufacturingorganizations and more experience in the regulatory process than us. We alsocompete with academic institutions, governmental agencies and other researchorganizations, which may be involved in research, development andcommercialization of products. Many of our competitors also compete against usin 

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securing relationshipswith collaborators for their research and development and commercializationprograms.

Competition in ourindustry is based primarily on product efficacy, safety, timing and scope ofregulatory approvals, availability of supply, marketing and sales capability,reimbursement coverage, product pricing and patent protection. Some of theprincipal factors that may affect our ability to compete in our HA developmentand commercialization market include:

·                    thequality and breadth of our technology and technological advances;

·                    ourability to complete successful clinical studies and obtain FDA marketing andforeign regulatory approvals prior to our competitors;

·                    ourability to recruit and retain skilled employees; and

·                    theavailability of substantial capital resources to fund discovery, developmentand commercialization activities or the ability to defray such costs throughsecuring relationships with collaborators for our research and development andcommercialization programs.

We are aware of severalcompanies that are developing and/or marketing products utilizing HA for avariety of human applications. In some cases, competitors have already obtainedproduct approvals, submitted applications for approval or have commenced humanclinical studies, either in the U.S. or in certain foreign countries. All ofthe Company’s products face substantial competition. There exist majorworldwide competing HA based products for the use in ophthalmic surgery,orthopedics, and cosmetic dermal fillers. There is a risk that we will beunable to compete effectively against our current or future competitors.

**Employees**

As of December 31,2006, we had approximately 64 employees. We consider our relations with ouremployees to be good. None of our employees are represented by labor unions.

**Environmental Laws**

We believe that we are incompliance with all federal, state and local environmental regulations withrespect to our manufacturing facilities and that the cost of ongoing compliancewith such regulations does not have a material effect on our operations. Ourleased manufacturing facility is located within the Wells G&H Superfundsite in Woburn, Massachusetts. We have not been named and are not a party toany such legal proceedings regarding the Wells G&H Superfund site.

**Product Liability**

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

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**Recent Developments**

On January 4, 2007, the Company entered into anew lease consisting of approximately 134,000 square feet of general office,research and development and manufacturing space located in Bedford,Massachusetts. Once occupancy is completed, it is anticipated that the newfacility will provide the additional space necessary to accommodate growth inthe Company’s business, as well as to improve efficiency by conducting businessin one facility.

In December 2006, the Company’s ORTHOVISC productwas assigned a separate reimbursement code by the Centers for Medicare andMedicaid Services (“CMS”) for treatment in a doctor’s office setting. This movewill simplify the current reimbursement process, and improve access toORTHOVISC, a treatment for osteoarthritis of the knee. The assignment of a reimbursementcode removes a barrier to physician utilization of the product for Medicare andMedicaid patients. The new code for ORTHOVISC, a Q-code, was effective startingon January 1, 2007. Q-codes have replaced the J-codes forviscosupplementation products. The reimbursement rate will be 106% of ORTHOVISC’saverage selling price calculated from data submitted to CMS.

In December 2006, the Company received FDAapproval for its initial CTA product. CTA is an injectable soft tissue fillerfor facial wrinkles, scar remediation and lip augmentation. The product isbased on Anika’s chemically modified hyaluronic acid (HA) proprietarytechnology and incorporates lidocaine, a local anesthetic. The Company hadpreviously announced in November 2006 that it had received an approvableletter for its product in late 2006. Anika filed amendments with the FDA andEuropean Union regulators to enhance product features prior to the launch ofELEVESS. Commercialization of the enhanced version of the CTA product, ELEVESS,is expected to commence in mid-2007.

In December 2006, theCompany announced Mr. John C. Moran’s appointment to the board ofdirectors as an independent director, and the retirement of Dr. Harvey S.Sadow from the board of directors.

**AvailableInformation**

Our Annual Reports on Form 10-K, includingour consolidated financial statements, Quarterly Reports on Form 10-Q,Current Reports on Form 8-K and other information, includingamendments and exhibits to such reports, filed or furnished pursuant to theSecurities Exchange Act of 1934, are available free of charge in the “SECFilings” section of our website located at http://www.anikatherapeutics.com, assoon as reasonably practicable after the reports are filed with or furnished tothe Securities and Exchange Commission. The information on our website is notpart of this Annual Report on Form 10-K.

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**ITEM 1A.**        RISKFACTORS

Our operating results andfinancial condition have varied in the past and could in the future varysignificantly depending on a number of factors. From time to time, informationprovided by us or statements made by our employees contain “forward-looking”information that involves risks and uncertainties. In particular, statementscontained in this Annual Report on Form 10-K, and in the documentsincorporated by reference into this Annual Report on Form 10-K, thatare not historical facts, including, but not limited to statements concerningnew products, product development and offerings, product and price competition,competition and strategy, customer diversification, product price andinventory, contingent consideration payments, deferred revenues, economic andmarket conditions, potential government regulation, seasonal factors,international expansion, revenue recognition, profits, growth of revenues,composition of revenues, cost of revenues, operating expenses, sales, marketingand support expenses, general and administrative expenses, product grossprofit, interest income, interest expense, anticipated operating and capitalexpenditure requirements, cash inflows, contractual obligations, tax rates,SFAS 123R, leasing and subleasing activities, acquisitions, liquidity,litigation matters, intellectual property matters, distribution channels, stockprice, third party licenses and potential debt or equity financings constituteforward-looking statements and are made under the safe harbor provisions of Section 27of the Securities Act of 1933 as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended. These statements are neitherpromises nor guarantees. Our actual results of operations and financialcondition have varied and could in the future vary significantly from thosestated in any forward-looking statements. The following factors, among others,could cause actual results to differ materially from those contained inforward-looking statements made in this Form 10-K, in the documentsincorporated by reference into this Form 10-K or presented elsewhereby our management from time to time. Such factors, among others, could have amaterial adverse effect upon our business, results of operations and financialcondition.

***Our business is subject to comprehensive and variedgovernment regulation and, as a result, failure to obtain FDA or othergovernmental approvals for our products may materially adversely affect ourbusiness, results of operations and financial condition.***

Product development and approval within the FDAframework takes a number of years and involves the expenditure of substantialresources. There can be no assurance that the FDA will grant approval for ournew products on a timely basis if at all, or that FDA review will not involvedelays that will adversely affect our ability to commercialize additionalproducts or expand permitted uses of existing products, or that the regulatoryframework will not change, or that additional regulation will not arise at anystage of our product development process which may adversely affect approval ofor delay an application or require additional expenditures by us. In the eventour future products are regulated as human drugs or biologics, the FDA’s reviewprocess of such products typically would be substantially longer and moreexpensive than the review process to which they are currently subject asdevices.

Our HA products under development, include a secondgeneration osteoarthritis product and an enhanced version of CTA product. Weobtained U.S. regulatory approval in December 2006 for commercialmarketing and sale of the initial CTA product. We received *Conformité Européenne* marking (CEmarking), a foreign regulatory approval for commercial marketing and sale, forCTA in the first quarter of 2006.

We cannot assureyou that:

·                    wewill begin or successfully complete U.S. clinical trials for these products;

·                    theclinical data will support the efficacy of these products;

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·                    wewill be able to successfully complete the FDA or foreign regulatory approvalprocess, where required; or

·                    additionalclinical trials will support a PMA application and/or FDA approval or otherforeign regulatory approvals, where required, in a timely manner or at all.

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

·                    theapproval may include significant limitations on the indications and otherclaims sought for use for which the products may be marketed;

·                    theapproval may include other significant conditions of approval such aspost-market testing, tracking, or surveillance requirements; and

·                    meaningfulsales may never be achieved.

Once obtained, marketing approval can be withdrawn bythe FDA for a number of reasons, including, among others, the failure to complywith regulatory standards, or the occurrence of unforeseen problems followinginitial approval. We may be required to make further filings with the FDA undercertain circumstances. The FDA’s regulations require a PMA supplement forcertain changes if they affect the safety and effectiveness of an approveddevice, including, but not limited to, new indications for use, labelingchanges, the use of a different facility to manufacture, process or package thedevice, and changes in performance or design specifications. Changes inmanufacturing procedures or methods of manufacturing that may affect safety andeffectiveness may be deemed approved after a 30-day notice unless the FDArequests a 135-day supplement. Our failure to receive approval of a PMAsupplement regarding the use of a different manufacturing facility or any otherchange affecting the safety or effectiveness of an approved device on a timelybasis, or at all, may have a material adverse effect on our business, financialcondition, and results of operations. The FDA could also limit or prevent themanufacture or distribution of our products and has the power to require therecall of such products. Significant delay or cost in obtaining, or failure toobtain FDA approval to market products, any FDA limitations on the use of ourproducts, or any withdrawal or suspension of approval or rescission of approvalby the FDA could have a material adverse effect on our business, financialcondition, and results of operations.

In addition, all FDA approved or cleared productsmanufactured by us must be manufactured in compliance with the FDA’s GoodManufacturing Practices (“GMP”) regulations and, for medical devices, the FDA’sQuality System Regulations (“QSR”). Ongoing compliance with QSR and otherapplicable regulatory requirements is enforced through periodic inspection bystate and federal agencies, including the FDA. The FDA may inspect us and ourfacilities from time to time to determine whether we are in compliance withregulations relating to medical device and manufacturing companies, includingregulations concerning manufacturing, testing, quality control and productlabeling practices. We cannot assure you that we will be able to comply withcurrent or future FDA requirements applicable to the manufacture of ourproducts.

FDA regulations depend heavily on administrativeinterpretation and we cannot assure you that the future interpretations made bythe FDA or other regulatory bodies, with possible retroactive effect, will notadversely affect us. In addition, changes in the existing regulations oradoption of new governmental regulations or policies could prevent or delayregulatory approval of our products.

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

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

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

***Substantial competition could materially affect ourfinancial performance.***

We compete with manycompanies, including, among others, large pharmaceutical companies, specializedmedical products companies and healthcare companies. Many of these companieshave substantially greater financial resources, larger research and developmentstaffs, more extensive marketing and manufacturing organizations and more experiencein the regulatory process than us. We also compete with academic institutions,governmental agencies and other research organizations that may be involved inresearch, development and commercialization of products. Because a number ofcompanies are developing or have developed HA products for similar applicationsand have received FDA approval, the successful commercialization of aparticular product will depend in part upon our ability to complete clinicalstudies and obtain FDA marketing and foreign regulatory approvals prior to ourcompetitors, or, if regulatory approval is not obtained prior to competitors,to identify markets for our products that may be sufficient to permitmeaningful sales of our products. For example, we are aware of several companiesthat are developing and/or marketing products utilizing HA for a variety ofhuman applications. In some cases, competitors have already obtained productapprovals, submitted applications for approval or have commenced human clinicalstudies, either in the U.S. or in certain foreign countries. There exist majorcompeting products for the use of HA in ophthalmic surgery. In addition,certain HA products made by our competitors for the treatment of osteoarthritisin the knee have received FDA approval before ours and have been marketed inthe U.S. since 1997, as well as select markets in Canada, Europe and othercountries. To date the FDA approved three HA products for the treatment offacial wrinkles which have been marketed internationally for a number of years.There can be no assurance that we will be able to compete against current orfuture competitors or that competition will not have a material adverse effecton our business, financial condition and results of operations.

***We are uncertain regarding the success of our clinicaltrials.***

Several of our productswill require clinical trials to determine their safety and efficacy for U.S.and international marketing approval by regulatory bodies, including the FDA.There can be no assurance that we will be able to successfully complete theU.S. regulatory approval process for products in development. In addition,there can be no assurance that we will not encounter additional problems thatwill cause us to delay, suspend or terminate our clinical trials. In addition,we cannot make any assurance that clinical trials, if completed, willultimately demonstrate these products to be safe and efficacious.

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***We are dependent upon marketing and distributionpartners and the failure to maintain strategic alliances on acceptable termswill have a material adverse effect on our business, financial condition andresults of operations.***

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

We cannot assure you that such marketing partners willnot 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 ophthalmicviscoelastic products. The 2004 B&L Agreement expires December 31,2010. This contract also provides us with a right to negotiate to manufacturefuture surgical ophthalmic viscoelastic products developed by Bausch &Lomb, while Bausch & Lomb has been granted rights to commercializecertain future surgical ophthalmic viscoelastic products developed by us. Inaddition, under certain circumstances, Bausch & Lomb has the right toterminate the agreement, and/or the agreement may revert to a non-exclusivebasis; in each case, we cannot make any assurances that such circumstances willnot occur. For the years ended December 31, 2006 and 2005, sales of AMVISCproducts to Bausch & Lomb accounted for 36% and 31% of total revenues,respectively.

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

In December 2003, we entered into a ten-yearlicensing and supply agreement (“JNJ Agreement”) with Ortho Biotech Products,L.P., a member of the Johnson & Johnson family of companies, to marketORTHOVISC in the U.S. and Mexico. This agreement was assigned to DePuy Mitek, Inc.in mid-2005. Under this Agreement, DePuy Mitek performs sales, marketingand distribution functions. Additionally, DePuy Mitek has the right undercertain circumstances, to further develop and commercialize ORTHOVISC as wellas other new products for the treatment of pain associated with osteoarthritisbased on our viscosupplementation technology. We cannot assure you that DepuyMitek will be able to market ORTHOVISC effectively or to establish sales levelsto the extent that Anika and Depuy Mitek believe are possible in the timeframesexpected, or at all, nor can we assure you that we will be able to achieve theperformance- and sales- based milestones provided in the JNJ Agreement. For theyears ended December 31, 2006 and 2005, sales of ORTHOVISC to Depuy Mitekand royalties tied to end-user sales accounted for 20% and 6% of total revenue,respectively. Furthermore, we cannot predict whether the license granted toDepuy Mitek in the JNJ Agreement to further develop and commercialize ORTHOVISCproducts for the treatment of pain associated with osteoarthritis based on ourviscosupplementation technology will result in any new products or indicationsfor use.

On June 30, 2006, we entered into a License andDevelopment Agreement and a Supply Agreement with Galderma, for the exclusiveworldwide development and commercialization of hyaluronic acid based cosmeticdermatology products. Under the agreements, we will be responsible for thedevelopment and manufacturing of the CTA products, and Galderma will beresponsible for the commercialization, including distribution and marketing, ofthe CTA products worldwide. As part of the agreement, we are working onimplementing some product enhancements that address cosmetic issues and theshelf life of ELEVESS. These enhancements are expected to increase thecompetitiveness of the product both in the European and the North Americanmarkets. These product and process modifications require supplements to our PMAand CE Mark approvals. We received FDA approval in December 2006 for the 

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PMA that was filed in September 2005.CE marking regulatory approval for CTA was received in the first quarter of2006. In late 2006, we filed supplements to our FDA and CE mark approvalsrelated to the product improvements. There can be no assurance that we willsuccessfully complete the FDA and European approvals for the enhanced versionof the CTA product, ELEVESS, for commercialization. If we are able tosuccessfully complete the FDA and CE marking approval processes for ELEVESS, wecannot assure you that we will be able to successfully commercialize our CTAproduct effectively, or at all. Furthermore, we cannot assure you that Galdermawill be able to market ELEVESS effectively or to establish sales levels to theextent that Anika and Galderma believe are possible in the timeframes expected,or at all, nor can we assure you that we will be able to achieve theperformance-based and sales threshold payments provided in the agreement.

We may need to obtain theassistance of additional marketing partners to bring new and existing productsto market and to replace certain marketing partners. The failure to establishstrategic partnerships for the marketing and distribution of our products onacceptable terms will have a material adverse effect on our business, financialcondition, and results of operations.

***Our future success depends upon market acceptance ofour existing and future products.***

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

***We may be unable to adequately protect ourintellectual property rights.***

Our success willdepend, in part, on our ability to obtain and enforce patents, protect tradesecrets, obtain licenses to technology owned by third parties when necessary,and conduct our business without infringing on the proprietary rights ofothers. The patent positions of pharmaceutical, medical products andbiotechnology firms, including ours, can be uncertain and involve complex legaland factual questions. There can be no assurance that any patent applicationswill result in the issuance of patents or, if any patents are issued, whetherthey will provide significant proprietary protection or commercial advantage,or will not be circumvented by others. In the event a third party has alsofiled one or more patent applications for any of its inventions, we may have toparticipate in interference proceedings declared by the United States Patentand Trademark Office (“PTO”) to determine priority of invention, which couldresult in failure to obtain, or the loss of, patent protection for theinventions and the loss of any right to use the inventions. Even if theeventual outcome is favorable to us, such interference proceedings could resultin substantial cost to us, and diversion of management’s attention away fromour operations. Filing and prosecution of patent applications, litigation toestablish the validity and scope of patents, assertion of patent infringementclaims against others and the defense of patent infringement claims by otherscan be expensive and time consuming. There can be no assurance that in theevent that any claims with respect to any of our patents, if issued, arechallenged by one or more third parties, that any court or patent authorityruling on such challenge will determine that such patent claims are valid andenforceable. An adverse outcome in such litigation could cause us to loseexclusivity covered by the disputed rights. If a third party is found to haverights covering products or processes used by us, we could be forced to ceaseusing the technologies or marketing the products covered by such rights, couldbe subject to significant liabilities to such third party, and could berequired to license technologies from such third party. Furthermore, even if 

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our patents are determined to be valid, enforceable,and broad in scope, there can be no assurance that competitors will not be ableto design around such patents and compete with us using the resultingalternative technology. We have a policy of seeking patent protection forpatentable aspects of our proprietary technology. We intend to seek patentprotection with respect to products and processes developed in the course ofour activities when we believe such protection is in our best interest and whenthe cost of seeking such protection is not inordinate. However, no assurancecan be given that any patent application will be filed, that any filedapplications will result in issued patents or that any issued patents willprovide us with a competitive advantage or will not be successfully challengedby third parties. The protections afforded by patents will depend upon theirscope and validity, and others may be able to design around our patents.

Other entities have filed patent applications for orhave been issued patents concerning various aspects of HA-related products orprocesses. There can be no assurance that the products or processes developedby us will not infringe on the patent rights of others in the future. Any suchinfringement may have a material adverse effect on our business, financialcondition, and results of operations. In particular, we received notice fromthe PTO in 1995 that a third party was attempting to provoke a patent interferencewith respect to one of our co-owned patents covering the use of INCERT forpost-surgical adhesion prevention. It is unclear whether an interference willbe declared. If an interference is declared it is not possible at this time todetermine the merits of the interference or the effect, if any, theinterference will have on our marketing of INCERT for this use. No assurancecan be given that we would be successful in any such interference proceeding.If the third-party interference were to be decided adversely to us, involvedclaims of our patent would be cancelled, our marketing of the INCERT productmay be materially and adversely affected and the third party may enforce patentrights against us which could prohibit the sale and use of INCERT products, whichcould have a material adverse effect on our future operating results.

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

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

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***Our manufacturing processes involve inherent risks anddisruption could materially adversely affect our business, financial conditionand results of operations.***

Our results of operations are dependent upon thecontinued operation of our manufacturing facility in Woburn, Massachusetts. Theoperation of biomedical manufacturing plants involves many risks, including therisks of breakdown, failure or substandard performance of equipment, theoccurrence of natural and other disasters, and the need to comply with therequirements of directives of government agencies, including the FDA. Inaddition, we rely on a single supplier for HA powder, syringes and a smallnumber of suppliers for a number of other materials required for themanufacturing and delivery of our HA products. Although we believe thatalternative sources for many of these and other components and raw materialsthat we use in our manufacturing processes are available, any supplyinterruption could harm our ability to manufacture our products until a newsource of supply is identified and qualified. We may not be able to find asufficient alternative supplier in a reasonable time period, or on commerciallyreasonable terms, if at all, and our ability to produce and supply our productscould be impaired.

Furthermore, our manufacturing processes and researchand development efforts involve animals and products derived from animals. Weprocure our animal-derived raw materials from qualified vendors, control forcontamination and have processes that effectively inactivate infectious agents;however, we cannot assure you that we can completely eliminate the risk oftransmission of infectious agents. Furthermore, regulatory authorities could inthe future impose restrictions on the use of animal-derived raw materials thatcould impact our business.

The utilization of animalsin research and development and product commercialization is subject toincreasing focus by animal rights activists. The activities of animal rightsgroups and other organizations that have protested animal based research anddevelopment programs or boycotted the products resulting from such programscould cause an interruption in our manufacturing processes and research anddevelopment efforts. The occurrence of material operational problems, includingbut not limited to the events described above, could have a material adverseeffect on our business, financial condition, and results of operations duringthe period of such operational difficulties.

***Our new facility construction and validation processescould materially adversely affect our operations.***

We entered into a newlease on January 4, 2007, for a new headquarters facility consisting ofapproximately 134,000 square feet of general office, research and developmentand manufacturing space located in Bedford, Massachusetts. The leases coveringour current corporate and research and development facility, and itsmanufacturing facility both located in Woburn, Massachusetts are set to expirein December 2007 and February 2009, respectively. The new lease hasan initial term of ten and a half years, and is expected to commence onapproximately May 1, 2007 once certain agreed upon landlord improvementsare completed. We will commence buildout of the new facility during the secondquarter of 2007. We currently expect our administrative and research anddevelopment personnel to begin occupying the Bedford facility by the end of2007, and for the buildout and validation for the new manufacturing space to becompleted by late 2008. We provide no assurance that the buildout andvalidation processes will be completed on time. Furthermore, we cannot assureyou that the transition from the existing facilities to the new facility willbe seamless and successful. In the event the construction is delayed or themove transition is unsuccessful, it may result in business interruptions. Wemay also incur additional expenditures in the event that we have to maintainthree facilities for a prolonged period.

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***Our financial performance depends on the continuedgrowth and demand for our products and we may not be able to successfullymanage the expansion of our operations.***

Our future successdepends on substantial growth in product sales. There can be no assurance thatsuch growth can be achieved or, if achieved, can be sustained. There can be noassurance that even if substantial growth in product sales and the demand forour products is achieved, we will be able to:

·       developthe necessary manufacturing capabilities;

·       obtainthe assistance of additional marketing partners;

·       attract,retain and integrate the required key personnel; and

·       implementthe financial, accounting and management systems needed to manage growingdemand for our products.

Our failure tosuccessfully manage future growth could have a material adverse effect on ourbusiness, financial condition, and results of operations.

***If we engage in any acquisition as a part our growthstrategy, we will incur a variety of costs, and may never realize theanticipated benefits of the acquisition.***

Our business strategy mayinclude the future acquisition of businesses, technologies, services orproducts that we believe are a strategic fit with our business. If we undertakeany acquisition, the process of integrating an acquired business, technology,service or product may result in unforeseen operating difficulties andexpenditures and may absorb significant management attention that wouldotherwise be available for ongoing development of our business. Moreover, wemay fail to realize the anticipated benefits of any acquisition as rapidly asexpected or at all. Future acquisitions could reduce stockholders’ ownership,cause us to incur debt, expose us to future liabilities and result inamortization expenses related to intangible assets with definite lives. Inaddition, acquisitions involve other risks, including diversion of managementresources otherwise available for ongoing development of our business and risksassociated with entering new markets with which we have limited experience orwhere experienced distribution alliances are not available. Our futureprofitability may depend in part upon our ability to develop further ourresources to adapt to these new products or business areas and to identify andenter into satisfactory distribution networks. We may not be able to identifysuitable acquisition candidates in the future or consummate futureacquisitions.

***Sales of our products are largely dependent upon thirdparty reimbursement and our performance may be harmed by health care costcontainment initiatives.***

In the U.S. and othermarkets, health care providers, such as hospitals and physicians, that purchasehealth care products, such as our products, generally rely on third partypayers, including Medicare, Medicaid and other health insurance and managed careplans, to reimburse all or part of the cost of the health care product. Wedepend upon the distributors for our products to secure reimbursement andreimbursement approvals. Reimbursement by third party payers may depend on anumber of factors, including the payer’s determination that the use of ourproducts is clinically useful and cost-effective, medically necessary and notexperimental or investigational. Since reimbursement approval is required fromeach payer individually, seeking such approvals can be a time consuming andcostly process which, in the future, could require us or our marketing partnersto provide supporting scientific, clinical and cost-effectiveness data for theuse of our products to each payer separately. Significant uncertainty exists asto the reimbursement status of newly approved health care products, and anyfailure or delay in obtaining reimbursement approvals can negatively impactsales of our new products. In addition, third party payers are increasinglyattempting to contain the costs of health care products and services bylimiting both coverage and the level of reimbursement for new therapeuticproducts and by refusing in some cases to 

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providecoverage for uses of approved products for disease indications for which theFDA has not granted marketing approval. Also, Congress and certain statelegislatures have considered reforms that may affect current reimbursementpractices, including controls on health care spending through limitations onthe growth of Medicare and Medicaid spending. There can be no assurance thatthird party reimbursement coverage will be available or adequate for anyproducts or services developed by us. Outside the U.S., the success of ourproducts is also dependent in part upon the availability of reimbursement andhealth care payment systems. Domestic and international reimbursement laws andregulations may change from time to time. Lack of adequate coverage andreimbursement provided by governments and other third party payers for ourproducts and services, including change of classification by CMS of ORTHOVISCunder an unique Q-code for Medicare/Medicaid reimbursement, could have amaterial adverse effect on our business, financial condition, and results ofoperations.

***We may seek financing in the future, which could bedifficult to obtain and which could dilute your ownership interest or the valueof your shares.***

We had cash andcash equivalents of approximately $47.2 million at December 31, 2006. Ourfuture capital requirements and the adequacy of available funds will depend,however, on numerous factors, including:

·       marketacceptance of our existing and future products;

·       thesuccess and sales of our products under various distributor agreements;

·       thesuccessful commercialization of products in development;

·       progressin our product development efforts;

·       themagnitude and scope of such product development efforts;

·       progresswith preclinical studies, clinical trials and product clearances by the FDA andother agencies;

·       thecost and timing of our efforts to manage our manufacturing capabilities andrelated costs;

·       thecost and timing of construction and validation processes for our newheadquarters;

·       thecost of filing, prosecuting, defending and enforcing patent claims and otherintellectual property rights;

·       competingtechnological and market developments;

·       thedevelopment of strategic alliances for the marketing of certain of ourproducts;

·       theterms of such strategic alliances, including provisions (and our ability tosatisfy such provisions) that provide upfront and/or milestone payments to us;and

·       thecost of maintaining adequate inventory levels to meet current and futureproduct demands.

To the extent that funds generated from ouroperations, together with our existing capital resources are insufficient tomeet future requirements, we will be required to obtain additional fundsthrough equity or debt financings, strategic alliances with corporate partnersand others, or through other sources. The terms of any future equity financingsmay be dilutive to you and the terms of any debt financings may containrestrictive covenants, which limit our ability to pursue certain courses ofaction. Our ability to obtain financing is dependent on the status of ourfuture business prospects as well as conditions prevailing in the relevantcapital markets. No assurance can be given that any additional financing willbe made available to us or will be available on acceptable terms should such aneed arise.

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We intend to spendapproximately $25 million to build out this new facility that will serve as ourcorporate headquarters and manufacturing facility for the foreseeable future. Weplan to use a combination of cash on hand and debt to finance the build outwith approximately 60% provided by long term debt. There can be no assurancethat we will find available financing or financing on terms favorable to theCompany.

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

The testing, marketing andsale of human health care products entail an inherent risk of allegations ofproduct liability, and there can be no assurance that substantial productliability claims will not be asserted against us. Although we have not receivedany 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 claimsshould they arise, there can be no assurance that material claims will notarise in the future or that our insurance will be adequate to cover allsituations. Moreover, there can be no assurance that such insurance, oradditional insurance, if required, will be available in the future or, ifavailable, will be available on commercially reasonable terms. Any productliability claim, if successful, could have a material adverse effect on ourbusiness, financial condition and results of operations.

***Our business is dependent upon hiring and retainingqualified management and scientific personnel.***

We are highly dependent onthe members of our management and scientific staff, the loss of one or more ofwhom could have a material adverse effect on us. We experienced a number ofmanagement changes in recent years. There can be no assurances that suchmanagement changes will not adversely affect our business. We believe that ourfuture success will depend in large part upon our ability to attract and retainhighly skilled, scientific, managerial and manufacturing personnel. We facesignificant competition for such personnel from other companies, research andacademic institutions, government entities and other organizations. There canbe no assurance that we will be successful in hiring or retaining the personnelwe require. The failure to hire and retain such personnel could have a materialadverse effect on our business, financial condition and results of operations.

***We are subject to environmental regulation and anyfailure to comply with applicable laws could subject us to significant liabilitiesand harm our business.***

We are subject to avariety of local, state and federal government regulations relating to thestorage, discharge, handling, emission, generation, manufacture and disposal oftoxic, or other hazardous substances used in the manufacture of our products.Any failure by us to control the use, disposal, removal or storage of hazardouschemicals 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 byeconomic, political and other risks relating to international sales.***

During the years ended December 31,2006 and 2005, approximately, 37% and 43%, respectively, of our product saleswere to international distributors. Our representatives, agents anddistributors who sell products in international markets are subject to the lawsand regulations of the foreign jurisdictions in which they operate and in whichour products are sold. A number of risks are inherent in international salesand operations. For example, the volume of international sales may be limitedby 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 andfluctuations in foreign currency exchange rates. Such changes in the volume ofsales may have a material adverse effect on our business, financial condition,and results of operations.

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***Our stock price has been and may remain highlyvolatile, and we cannot assure you that market making in our common stock willcontinue.***

The market price of shares of our common stock may behighly volatile. Factors such as announcements of new commercial products ortechnological innovations by us or our competitors, disclosure of results ofclinical testing or regulatory proceedings, governmental regulation andapprovals, developments in patent or other proprietary rights, public concernas to the safety of products developed by us and general market conditions mayhave a significant effect on the market price of our common stock. The tradingprice of our common stock could be subject to wide fluctuations in response toquarter-to-quarter variations in our operating results, material announcementsby us or our competitors, governmental regulatory action, conditions in thehealth care industry generally or in the medical products industryspecifically, or other events or factors, many of which are beyond our control.In addition, the stock market has experienced extreme price and volumefluctuations which have particularly affected the market prices of many medicalproducts companies and which often have been unrelated to the operatingperformance of such companies. Our operating results in future quarters may bebelow the expectations of equity research analysts and investors. In suchevent, the price of our common stock would likely decline, perhapssubstantially.

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

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

Certain provisions of ourRestated Articles of Organization and Amended and Restated By-laws could havethe effect of discouraging a third party from pursuing a non-negotiatedtakeover of us and preventing certain changes in control. These provisionsinclude a classified Board of Directors, advance notice to the Board ofDirectors of stockholder proposals, limitations on the ability of stockholdersto remove directors and to call stockholder meetings, the provision thatvacancies on the Board of Directors be filled by vote of a majority of the remainingdirectors. In addition, the Board of Directors adopted a Shareholders RightsPlan in April 1998. We are also subject to Chapter 110F of theMassachusetts General Laws which, subject to certain exceptions, prohibits aMassachusetts corporation from engaging in any of a broad range of businesscombinations with any “interested stockholder” for a period of three yearsfollowing the date that such stockholder became an interested stockholder.These provisions could discourage a third party from pursuing a takeover of usat a price considered attractive by many stockholders, since such provisionscould have the effect of preventing or delaying a potential acquirer fromacquiring control of us and our Board of Directors.

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

We have historicallyderived the majority of our revenues from a small number of customers, most ofwhom resell our products to end-users and most of whom are significantly largercompanies than us. For the year ended December 31, 2006, three customersaccounted for 79% of product revenue. While it is expected that our ability tomarket 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 smallnumber of large customers for the majority of our revenues. Our failure togenerate as much revenue as expected from these customers or the failure ofthese customers to purchase our products would seriously harm our business. Inaddition, if present and future customers terminate their purchasingarrangements with us, significantly reduce or delay their orders, or seek torenegotiate their agreements on terms less favorable to us, our business,financial condition, and results of operations will be adversely affected. Ifwe accept terms 

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lessfavorable than the terms of the current agreement, such renegotiations may havea material adverse effect on our business, financial condition, and/or resultsof operations. Furthermore, in any future negotiations we may be subject to theperceived or actual leverage that these customers may have given their relativesize and importance to us. Any termination, change, reduction or delay inorders could seriously harm our business, financial condition, and results ofoperations. Accordingly, unless and until we diversify and expand our customerbase, our future success will significantly depend upon the timing and size offuture purchases by our largest customers and the financial and operationalsuccess of these customers. The loss of any one of our major customers or thedelay of significant orders from such customers, even if only temporary, couldreduce or delay our recognition of revenues, harm our reputation in theindustry, and reduce our ability to accurately predict cash flow, and, as aconsequence, could seriously harm our business, financial condition, andresults of operations.

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

We may have difficulty inobtaining adequate directors’ and officers’ insurance to protect us and ourdirectors and officers from claims made against them. Additionally, even ifadequate coverage is available, the costs for such coverage may besignificantly greater than current costs. This additional cost may have asignificant effect on our profits and as a consequence our results ofoperations may be adversely affected.

**ITEM 1B.**       UNRESOLVEDSTAFF COMMENTS

We have received nowritten comments regarding our periodic or current reports from the staff ofthe Securities and Exchange Commission that were issued 180 days or morepreceding the end of our 2006 fiscal year and that remain unresolved.

**ITEM 2.**                PROPERTIES

Our corporate headquarters is located in Woburn,Massachusetts, where we lease approximately 10,000 square feet ofadministrative and research and development space. We extended our lease forthis facility in 2006 for a term ending in December 2007. We also leaseapproximately 37,000 square feet of space at a separate location in Woburn,Massachusetts, for our manufacturing facility and warehouse. This facility hasreceived all FDA and state regulatory approvals to operate as a sterile deviceand drug manufacturer. We extended our lease for this facility in 2003 for anadditional five-year term ending in February 2009. For the year ended December 31,2006, we had aggregate lease costs of approximately $791,000.

On January 4, 2007, we entered into a new lease,pursuant to which we will lease a new headquarters facility (the “Lease”),consisting of approximately 134,000 square feet of general office, research anddevelopment and manufacturing space located in Bedford, Massachusetts. TheLease has an initial term of ten and a half years, and is expected to commenceon approximately May 1, 2007 once certain agreed upon landlordimprovements are completed. We have an option under the Lease to extend its termsfor up to four periods beyond the original expiration date subject to thecondition that we notify the landlord that we are exercising each option atleast one year prior to the expiration of the original or current term thereof.The first three renewal options each extend the term an additional five yearswith the final renewal option extending the term six years. We currently expectour administrative, research and development personnel to begin occupying theBedford facility by the end of 2007, and that the buildout and validation forthe new manufacturing space will be completed by late 2008. Assuming a leasecommencement date of May 1, 2007, the new facility is expected to addapproximately $1 million to general and administration expense for 2007.

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We intend to spendapproximately $25 million to build out this new facility that will serve as ourcorporate headquarters and manufacturing facility for the foreseeable future. Weplan to use a combination of cash on hand and debt to finance the build outwith approximately 60% provided by long term debt. There can be no assurancethat we will find available financing or financing on terms favorable to theCompany. Construction is expected to commence in the spring of 2007 andcontinue into 2008. There can also be no assurance that we will be successfulin re-qualifying the new facility under the FDA and European Union regulations.

**ITEM 3.**                LEGALPROCEEDINGS

None.

**ITEM 4.**                SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

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

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**PART II**

**ITEM 5.**                MARKETFOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES

**COMMON STOCKINFORMATION**

Ourcommon stock has traded on the NASDAQ Global Select Market since November 25,1997, under the symbol “ANIK.” The following table sets forth, for the periodsindicated, the high and low sales prices of our common stock on the NASDAQGlobal Select Market. These prices represent prices between dealers and do notinclude retail mark-ups, markdowns, or commissions and may not necessarilyrepresent actual transactions.

| **Year Ended December 31, 2006** | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** |
|------------------------------------------------------|------------|------------|------------|----------|------------|---------|------------|
| First Quarter                                        |       | $          | 14.50      |     | $          | 10.07   |       |
| Second Quarter                                       |       | 12.26      |       | 9.58     |       |
| Third Quarter                                        |       | 13.90      |       | 9.50     |       |
| Fourth Quarter                                       |       | 14.74      |       | 11.17    |       |
|                                                      |            |            |            |          |            |         |            |  |  |

 

| **Year Ended December 31, 2005** | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** |
|------------------------------------------------------|------------|------------|------------|----------|------------|---------|------------|
| First Quarter                                        |       | $          | 13.49      |     | $          | 8.05    |       |
| Second Quarter                                       |       | 17.21      |       | 11.06    |       |
| Third Quarter                                        |       | 14.49      |       | 10.13    |       |
| Fourth Quarter                                       |       | 13.45      |       | 10.15    |       |
|                                                      |            |            |            |          |            |         |            |  |  |

 

At December 31, 2006, the closing price per shareof our common stock was $13.27 as reported on the NASDAQ Global Select Marketand there were approximately 239 holders of record.

We have never declared orpaid any cash dividends on our common stock. We currently intend to retainearnings, if any, for use in our business and do not anticipate paying cashdividends on our common stock in the foreseeable future. Payment of futuredividends, if any, on our common stock will be at the discretion of our Boardof Directors after taking into account various factors, including our financialcondition, operating results, anticipated cash needs, and plans for expansion.

**EQUITY COMPENSATIONPLAN INFORMATION**

Thefollowing table sets forth information concerning the Company’s equitycompensation plan as of December 31, 2006.

| ** **                                                  | ** ** | **Equity Compensation Plan Information** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **Plan category**                                      | ** ** | ** **                                              | ** ** | **Number of securities  to be issued upon  exercise of outstanding  options, warrants and rights** | ** ** | **Weighted Average  exercise price  of outstanding  options, warrants and rights** | ** ** | **Number of securities  remaining available  for future issuance  under equity  compensation plans  (excluding securities  reflected in  column (a))** | ** ** |
| ** **                                                  | ** ** | **(a)**                                                 | ** ** | **(b)** | ** ** | **(c)** | ** ** |
| Equity  compensation plans approved by security holders     |       |                                                    | 1,571,312  |   |   |   | $ | 6.47 |   |   |   | 572,365 |   |   |
| Equity  compensation plans not approved by security holders |       |                                                    | —     |   |   |   | — |   |   |   | — |   |   |
| Total                                                       |       |                                                    | 1,571,312  |   |   |   | $ | 6.47 |   |   |   | 572,365 |   |   |
|                                                             |            |                                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**ITEM 6.**                SELECTEDFINANCIAL DATA

The following selected consolidated financial datashould be read in conjunction with the Consolidated Financial Statements andthe Notes thereto and Management’s Discussion and Analysis of FinancialCondition and Results of Operations included elsewhere in this Annual Report onForm 10-K. The Balance Sheet Data at December 31, 2006 and 2005and the Statement of Operations Data for each of the three years ended December 31,2006 have been derived from the audited Consolidated Financial Statements forsuch years, included elsewhere in this Annual Report on Form 10-K.The Balance Sheet Data at December 31, 2004, 2003 and 2002, and theStatement of Operations Data for each of the two years in the period ended December 31,2003 have been derived from the audited Consolidated Financial Statements forsuch years, not included in this Annual Report on Form 10-K.

TheConsolidated Financial Statements for fiscal year 2002 were audited by ArthurAndersen LLP (Andersen) who has ceased operations.

**Statementof Operations Data(In thousands, except per share data)**

| ** **                                  | ** ** | **Years ended December 31,** | ** ** |
|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                  | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Product revenue                             |       | $                                           | 23,953     |   | $ | 20,534 |   | $ | 22,286 |   | $ | 15,330 |   | $ | 13,129 |   |
| Licensing,  milestone and contract revenue  |       | 2,887                                       |       | 9,301 |   | 4,180 |   | 74 |   | 58 |   |
| Total revenue                               |       | 26,840                                      |       | 29,835 |   | 26,466 |   | 15,404 |   | 13,187 |   |
| Cost of product  revenue                    |       | 11,118                                      |       | 11,144 |   | 9,949 |   | 8,005 |   | 8,109 |   |
| Product gross  profit                       |       | 12,835                                      |       | 9,390 |   | 12,337 |   | 7,325 |   | 5,020 |   |
| Product gross  margin                       |       | 54                                          | %          | 46 | % | 55 | % | 48 | % | 38 | % |
| Total operating  expenses                   |       | 21,413                                      |       | 21,284 |   | 20,078 |   | 14,809 |   | 16,462 |   |
| Net income (loss)                           |       | $                                           | 4,604      |   | $ | 5,893 |   | $ | 11,190 |   | $ | 827 |   | $ | (3,040 | ) |
| Diluted net  income (loss) per common share |       | $                                           | 0.41       |   | $ | 0.52 |   | $ | 0.98 |   | $ | 0.08 |   | $ | (0.31 | ) |
| Diluted common shares  outstanding          |       | 11,155                                      |       | 11,428 |   | 11,384 |   | 10,850 |   | 9,934 |   |

 

**BalanceSheet Data(In thousands)**

| ** **                               | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Cash and cash  equivalents               |       | $                     | 47,167     |   | $ | 44,747 |   | $ | 39,339 |   | $ | 14,592 |   | $ | 11,002 |   |
| Working capital                          |       | 52,145                |       | 46,584 |   | 42,135 |   | 18,450 |   | 14,921 |   |
| Total assets                             |       | 68,114                |       | 62,618 |   | 59,538 |   | 21,873 |   | 20,087 |   |
| Retained earnings  (accumulated deficit) |       | 8,118                 |       | 3,514 |   | (2,379 | ) | (13,569 | ) | (14,396 | ) |
| Stockholders’ equity                |       | 45,488                |       | 37,892 |   | 30,363 |   | 17,984 |   | 17,064 |   |
|                                          |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

On September 1, 2005, the Company announced thatit had mutually agreed with OrthoNeutrogena to terminate its development andcommercialization agreement. Under the terms of the termination agreement, wereceived a final payment of $3.1 million from OrthoNeutrogena including $0.8million for all outstanding clinical study costs incurred and committed to bythe Company at the termination date, plus a mutually agreed upon terminationfee of $2.1 million. Given that there were no continuing performance obligationswith respect to the development and commercialization agreement or the relatedtermination agreement, all amounts were recognized as contract revenue duringthe third quarter of 2005, including $0.3 million of previously deferredrevenue under the performance-based model.

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In the first quarter of 2004, based on ourexpectations regarding future profitability, we released the previouslyestablished valuation allowance against our deferred tax assets and recorded aone-time income tax benefit of $7.0 million.

We received an initial payment of $2.0 million in December 2003upon entering into the JNJ Agreement. In February 2004 we received amilestone payment of $20.0 million as a result of obtaining FDA approval forORTHOVISC, and in December 2004 we received a milestone payment of $5.0million upon completion of certain manufacturing upgrades. We are recognizingthese non-refundable payments as license revenue ratably over the expected termof the JNJ Agreement, which is currently ten years, and as of December 31,2006, we had recorded deferred revenue of $18.9 million related to theJNJ Agreement.

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**ITEM 7.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

*The following section of this Annual Report on Form 10-Ktitled “Management’s Discussion and Analysis of Financial Condition and Resultsof Operations” contains statements that are not statements of historical factand are forward-looking statements within the meaning of the federal securitieslaws. These statements involve known and unknown risks, uncertainties, andother factors that may cause our actual results, performance, or achievement todiffer materially from anticipated results, performance, or achievement,expressed or implied in such forward-looking statements. These statementsreflect our current views with respect to future events and are based on assumptionsand subject to risks and uncertainties. We discuss many of these risks anduncertainties at the beginning of this Annual Report on Form 10-Kand under Item 1 “Business” and Item 1A”Risk Factors.” The following discussionshould also be read in conjunction with the Consolidated Financial Statementsof Anika Therapeutics, Inc. and the Notes thereto appearing elsewhere inthis report.*

**Management Overview**

Anika Therapeutics, Inc. (“Anika,” the “Company,”“we,” “us” or “our”) develops, manufactures and commercializes therapeuticproducts for tissueprotection, healing and repair. These products are based on hyaluronicacid (“HA”), a naturally occurring, biocompatible polymer found throughout thebody. Due to its unique biophysical and biochemical properties, HA plays animportant role in a number of physiological functions such as the protectionand lubrication of soft tissues and joints, the maintenance of the structuralintegrity of tissues, and the transport of molecules to and within cells. Ourcurrently manufactured and marketed products consist of ORTHOVISC® , which is an HA product used in thetreatment of some forms of osteoarthritis in humans; AMVISC®, AMVISC® Plus, STAARVISCTM-II, and ShellGelTM, each an injectable ophthalmic viscoelastic HA product; andHYVISC® , which is an HA product used in the treatmentof equine osteoarthritis, and INCERT® is an HA based anti-adhesive for surgicalapplications currently marketed in three countries outside of the U.S. In theU.S. ORTHOVISC® is marketed by DePuy Mitek, Inc., asubsidiary of Johnson & Johnson, under the terms of a licensing,distribution, supply and marketing agreement. Outside the U.S., ORTHOVISC® has been approved for sale since 1996 and ismarketed by distributors in approximately 20 countries. HYVISC® ismarketed in the U.S. through Boehringer Ingelheim Vetmedica, Inc. Wedeveloped and manufacture AMVISC® and AMVISC® Plus for Bausch &Lomb Incorporated under a multiyear supply agreement.

Products in developmentinclude ELEVESS, an HA based dermal filler used for cosmetic tissueaugmentation (“CTA”) applications. We received FDA and CE marking approvals forthe initial CTA product in December 2006 and first quarter of 2006, respectively.We filed supplements with the FDA and EU for an enhanced version of the CTAproduct during the fourth quarter of 2006.

*OsteoarthritisBusiness*

Our osteoarthritis business contributed 47% to ourproduct revenue reflecting an increase in sales of 43% compared to 2005. Wehave marketed ORTHOVISC®,our product for the treatment of osteoarthritis of the knee, internationallysince 1996 through various distribution agreements. International sales ofORTHOVISC® contributed 26% of product revenue for theyear ended December 31, 2006 and decreased 3% compared to 2005. Thedecrease was primarily due to reduced international sales resulting from achange in the Turkish government’s reimbursement policy for more than 100drugs, including ORTHOVISC® and its competing products. Our Turkishpartner is working to resolve this issue, and we cannot predict if or whensales in that market will resume. We expect international sales to decline in2007 compared to 2006 reflecting the impact of losing ORTHOVISC® salesin Turkey.

ORTHOVISC® became available for sale in the U.S. on March 1,2004, and is marketed by DePuy Mitek, Inc., a subsidiary of Johnson &Johnson, under the terms of a ten-year licensing, distribution, supply 

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and marketing agreement(the “JNJ Agreement”). The JNJ Agreement was originally entered into with OrthoBiotech Products, L.P. (“OBP”), also a Johnson & Johnson company, andwas assigned to DePuy Mitek in mid-2005. Sales of ORTHOVISC® in the U.S. contributed 22% of our productrevenue for the year ended December 31, 2006, or increased by 219%compared to 2005. The considerable increase was due to initial overstocking ofproduct by OBP in 2004 such that no units were purchased by OBP/DePuy Mitekduring the last nine months of 2005, as well as increases in DePuy Mitek’s  underlying sales to end-users in 2006compared to 2005. For the year ended December 31, 2006, DePuy Mitek’ssales to end-users were 94% higher than in the same period in 2005.

Sales of ORTHOVISC® toend-users has grown slower than anticipated since 2004 as a result of a numberof factors. We believe that a primary contributing factor to this slower growthhas been reimbursement and the lack of receiving assignment of a specificreimbursement code. The Healthcare Common Procedure Coding System (“HCPCS”) isa comprehensive and standardized coding system that describes classificationsof like products that are medical in nature by category for the purpose ofefficient claims processing. HCPCS codes are assigned by the Centers for Medicareand Medicaid Services (“CMS”) for treatment in a doctor’s office setting. As istypical for a newly-introduced medical device, initial sales of ORTHOVISC® were made without an unique reimbursementcode. We did not receive a unique reimbursement code for ORTHOVISC® until 2006. We believe that using themiscellaneous reimbursement code from 2004 through 2006 negatively impactedend-user sales of ORTHOVISC®.Depuy Mitek took significant steps to assist in the reimbursement process inphysicians’ offices, including increasing its specialty sales force in thefield to support the sales representatives and provide hands-on assistance tothe physicians’ offices. In December 2006, the CMS assigned a uniquereimbursement code to our ORTHOVISC® product. The new code for ORTHOVISC®, a Q-code, was effectivestarting on January 1, 2007. This move will simplify the currentreimbursement process, and improve access to ORTHOVISC®. The assignment of a reimbursement coderemoves a barrier to physician utilization of the product for Medicare andMedicaid patients. We expect this change will have a significant positiveimpact on our U.S. ORTHOVISC® salesin 2007.

Sales of HYVISC, ourproduct for the treatment of equine osteoarthritis, contributed 8% to productrevenue for the year ended December 31, 2006 and decreased 12% from 2005.We expect Hyvisc sales to stay flat in 2007. We continue to look at otherveterinary applications and opportunities to expand geographic territories.

*Ophthalmic Business*

Our ophthalmic business includes HA viscoelasticproducts used in ophthalmic surgery. For the year ended December 31, 2006,sales of ophthalmic products contributed 45% of our product revenue reflectingan increase in sales of ophthalmic products of 2% compared to 2005. Sales toBausch & Lomb accounted for 91% of ophthalmic sales for 2006 andcontributed 41% of product revenue for the period.

Our former distributor forCoEase, Advanced Medical Optics (“AMO”), completed the acquisition of thesurgical ophthalmology business of Pfizer, Inc., in September 2004,which included a competing line of viscoelastic products for use in ocularsurgery. As a result, our agreement with AMO expired according to its terms in June 2005.There have been no sales to AMO since the second quarter of 2005.

*Anti-adhesionBusiness*

INCERT® is an HA based anti-adhesive for surgicalapplications. CE marking approval for commercial marketing and sale wasreceived in the third quarter of 2004. We commenced INCERT sales during thesecond quarter of 2006.

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*Research andDevelopment*

ELEVESS, our cosmetic dermatology product, is a dermalfiller based on a family of chemically modified, cross-linked forms of HAdesigned for longer duration in the body. ELEVESS is a therapy designed as asoft tissue filler for facial wrinkles, scar remediation and lip augmentationand is intended to supplant collagen-based products and to compete with otherHA-based products currently on the market. In October 2005, we completed apivotal U.S. clinical trial to evaluate CTA’s effectiveness for correctingnasolabial folds. The trial was conducted by dermatologists and plasticsurgeons at 10 centers throughout the U.S. The six month primary endpointresults of this trial were submitted to the U.S. Food and Drug Administration (“FDA”)in a Pre-Market Approval (“PMA”) application in September 2005. Wereceived FDA approval for the PMA in December 2006. In the first quarterof 2006, we received CE mark approval to market ELEVESS in the European Union.

On June 30, 2006, theCompany entered into a License and Development Agreement and a Supply Agreementwith Galderma, for the exclusive worldwide development and commercialization ofhyaluronic acid based cosmetic dermatology products. Under the agreements, weare responsible for the development and manufacturing of the CTA products, andGalderma is responsible for the commercialization, including distribution andmarketing, of the CTA products worldwide. As part of the agreement, the Companyis working on implementing some product enhancements that address cosmeticissues and the shelf life of the product. These enhancements are expected toincrease the competitiveness of the product both in the European and the NorthAmerican markets. These product and process modifications require supplementsto our PMA and CE Mark approvals. Since the modifications do not address safetyor efficacy issues, we do not believe additional clinical trials will berequired. In late 2006, we filed amendments with the FDA and the European Unionregulators to seek approval for the enhanced version of ELEVESS. In January 2007,we received regulatory approval for the enhanced product, ELEVESS, in Canada. Currently,Galderma is planning on launching the enhanced version of the product in mid-2007.

**Summary of CriticalAccounting Policies; Significant Judgments and Estimates**

Our discussion and analysis of our financial conditionand results of operations are based upon our financial statements, which havebeen prepared in accordance with accounting principles generally accepted inthe United States of America. The preparation of these financial statementsrequires us to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses, and related disclosure ofcontingent assets and liabilities. We monitor our estimates on an on-goingbasis for changes in facts and circumstances, and material changes in theseestimates could occur in the future. Changes in estimates are recorded in theperiod in which they become known. We base our estimates on historicalexperience and other assumptions that we believe to be reasonable under thecircumstances. Actual results may differ from our estimates if past experienceor other assumptions do not turn out to be substantially accurate.

We have identified the policiesbelow as critical to our business operations and the understanding of ourresults of operations. The impact and any associated risks related to thesepolicies on our business operations is discussed throughout “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” wheresuch policies affect our reported and expected financial results. For adetailed discussion on the application of these and other accounting policies,see Note 2 in the Notes to the Consolidated Financial Statements of this AnnualReport on Form 10-K for the year ended December 31, 2006.

*Revenue Recognition.*

Our revenue recognition policies are in accordancewith the Securities and Exchange Commission’s (“SEC”) Staff Accounting BulletinNo. 101,*Revenue Recognition inFinancial Statements*, as amended by 

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SEC Staff AccountingBulletin 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 wemanufacture upon confirmation of regulatory compliance and shipment to thecustomer as long as there is (1) persuasive evidence of an arrangement, (2) deliveryhas occurred and risk of loss has passed, (3) the sales price is fixed ordeterminable and (4) collection of the related receivable is reasonablyassured. Amounts billed or collected prior to recognition of revenue areclassified as deferred revenue. When determining whether risk of loss hastransferred to customers on product sales or if the sales price is fixed ordeterminable we evaluate both the contractual terms and conditions of ourdistribution and supply agreements as well as our business practices. Productrevenue also includes royalties. Royalty revenue is based on our distributor’ssales and recognized in the same period our distributor records their sale ofthe product.

On June 30, 2006, the Company entered into aLicense and Development Agreement and a Supply Agreement with Galderma for theexclusive worldwide development and commercialization of hyaluronic acid basedcosmetic dermatology products. Under the agreements, the Company is responsiblefor the development and manufacturing of the CTA products, and Galderma isresponsible for the commercialization, including distribution and marketing, ofthe CTA products worldwide. The agreementsinclude an upfront payment, milestones upon achievement of predefinedregulatory goals, funding of certain ongoing development activities, paymentsfor supply of CTA products, royalties on sales and sales thresholdachievement payments for meeting certain netsales targets. The Company accounts for the agreements in accordancewith the Emerging Issues Task Force Issue No. 00-21, “RevenueArrangements with Multiple Deliverables” (EITF 00-21). Under EITF 00-21,in order to account for an element as a separate unit of accounting, theelement must have stand-alone value and there must be objective and reliableevidence of fair value of the undelivered elements. Based on the review of theagreements, the Company believes that two separate units of accounting exist: acombined license and development unit and a manufacturing and supply unit.Milestone payments related to achieving regulatory goals under the license anddevelopment unit are subject to certain refund clauses, which are expected toexpire by June 2007. Pursuant to this model, the Company will recognizepayments received under the license and development unit upon expiration of refundcontingencies, over the period in which the Company performs its obligations,which approximates the contractual term of ten years. Using thecontingency-adjusted performance model, the intial and subsequent milestonepayments, once earned, are recognized as contract and license fee revenue. Paymentsfrom the manufacturing and supply unit will be recognized postcommercialization as product is delivered.

The Company entered into an exclusive worldwidedevelopment and commercialization agreement (the OrthoNeutrogena Agreement) in July 2004for our CTA products with OrthoNeutrogena, a division of Ortho-McNeilPharmaceuticals, Inc., an affiliate of Johnson & Johnson. On September 1, 2005, the Companyannounced that it had mutually agreed with OrthoNeutrogena to terminate itsdevelopment and commercialization agreement. The Company received a payment of$3,115,000 from OrthoNeutrogena including a $2,300,000 contract terminationfee. Given that there were no continuing performance obligations with respect tothe development and commercialization agreement or the related terminationagreement, all amounts were recognized during the third quarter of 2005,including approximately $251,000 of previously deferred revenue under theperformance-based model. Total contract revenue recognized during 2005 relatedto the agreements with OrthoNeutrogena was $6,537,094.

In December 2003, the Company entered into aten-year licensing and supply agreement (the “JNJ Agreement”) with OrthoBiotech Products, L.P., a member of the Johnson & Johnson family ofcompanies, to market ORTHOVISC in the U.S. In mid-2005, the agreement wasassigned to DePuy Mitek, Inc., a subsidiary of Johnson & Johnson(“Depuy Mitek”). Under the JNJ Agreement, DePuy Mitek performs sales, marketingand distribution functions and licensed the right to further develop andcommercialize ORTHOVISC as well as other new products for the treatment of painassociated with 

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osteoarthritis based onthe Company’s viscosupplementation technology. In support of the license, theJNJ Agreement provides that DePuy Mitek will fund post-marketing clinicaltrials for new indications of ORTHOVISC. The Company received an initialpayment of $2,000,000 upon entering into the JNJ Agreement, a milestonepayment of $20,000,000 in February 2004, as a result of obtainingFDA approval of ORTHOVISC and a milestone payment of $5,000,000 in December 2004for planned upgrades to our manufacturing operations. We evaluated the terms ofthe JNJ Agreement and determined that the upfront fee and milestone paymentsdid not meet the conditions to be recognized separately from the supplyagreement, therefore, we have deferred non refundable payments received of$27,000,000 which we are recognizing ratably over the expected ten year term ofthe JNJ Agreement. Under the JNJ Agreement, we are the exclusive supplierof ORTHOVISC to Depuy Mitek, Inc. The JNJ Agreement provides foradditional sales-based milestone payments to us contingent upon achievingspecified sales targets, in addition to royalty and transfer fees. The JNJAgreement is subject to early termination in certain circumstances and isotherwise renewable by DePuy Mitek for consecutive five-year terms.

*Reservefor Obsolete/Excess Inventory.  *Inventories arestated at the lower of cost or market. We regularly review our inventories andrecord a provision for excess and obsolete inventory based on certain factorsthat may impact the realizable value of our inventory including, but notlimited to, technological changes, market demand, inventory cycle time,regulatory requirements and significant changes in our cost structure. Ifultimate usage varies significantly from expected usage or other factors arisethat are significantly different than those anticipated by management,additional inventory write-down or increases in obsolescence reserves may berequired.

We generally produce finished goods based uponspecific orders or in anticipation of specific orders. As a result, wegenerally do not establish reserves against finished goods. We evaluate thevalue of inventory on a quarterly basis and may, based on future changes infacts and circumstances, determine that a write-down of inventory is requiredin future periods.

*Stock-basedCompensation.  *Effective January 1, 2006,the Company adopted the provisions of Statement of Financial AccountingStandards No. 123R, (“SFAS 123R”) “Share-Based Payment,” whichestablishes accounting for equity instruments exchanged for employee services.Under the provisions of SFAS 123R, share-based compensation cost ismeasured at the grant date, based on the calculated fair value of the award,and is recognized as an expense over the employee’s requisite service period(generally the vesting period of the equity grant). Prior to January 1,2006, the Company accounted for share-based compensation to employees inaccordance with Accounting Principles Board Opinion No. 25, (“APB 25”) “Accountingfor Stock Issued to Employees,” and related interpretations. The Company alsofollowed the disclosure requirements of SFAS No. 123, “Accounting forStock-Based Compensation,” as amended by SFAS 148, “Accounting for Stock-BasedCompensation - Transition and Disclosure.” The Company elected to adopt themodified prospective transition method as provided by SFAS 123R and,accordingly, financial statement amounts for the prior periods presented inthis Annual Report on Form 10-K have not been restated to reflectthe fair value method of expensing share-based compensation.

The Company estimates the fair value of stock optionsand stock appreciation rights using the Black-Scholes valuation model. Keyinput assumptions used to estimate the fair value of stock options include theexercise price of the award, the expected option term, the expected volatilityof the Company’s stock over the option’s expected term, the risk-free interestrate over the option’s expected term, and the Company’s expected annualdividend yield. The Company uses historical data on exercise of stock optionsand other factors to estimate the expected term of share-based awards. Theexpected volatility assumption is based on the unadjusted historical volatilityof the Company’s common stock. The risk-free interest rate assumption is basedon U.S. Treasury interest rates at the time of grants. Estimates of fair valueare not intended to predict actual future events or the value ultimatelyrealized by persons who receive equity awards.

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*Deferred tax assets.  *Werecord a deferred tax asset or liability based on the difference between thefinancial statement and tax basis of assets and liabilities, as measured by theenacted tax rates assumed to be in effect when these differences reverse. As ofDecember 31, 2006, management determined that it is more likely than notthat the deferred tax assets will be realized and, therefore, a valuationallowance has not been recorded.

**Results ofOperations**

***Year ended December 31, 2006 compared to yearended December 31, 2005***

*Statement of Operations Detail*

| ** **                                 | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                 | ** ** | **2006**                                   | ** ** | **2005** | ** ** |
| Product revenue                            |       | $                                          | 23,953,285 |   | $ | 20,533,889 |   |
| Licensing,  milestone and contract revenue |       | 2,887,329                                  |       | 9,300,723 |   |
| Total revenue                              |       | 26,840,614                                 |       | 29,834,612 |   |
| Operating  Expenses:                       |       |                                       |       |   |   |
| Cost of product revenue                    |       | 11,117,861                                 |       | 11,144,090 |   |
| Research and development                   |       | 3,616,435                                  |       | 4,730,664 |   |
| Selling, general and administrative        |       | 6,678,845                                  |       | 5,409,329 |   |
| Total operating expenses                   |       | 21,413,141                                 |       | 21,284,083 |   |
| Income from  operations                    |       | 5,427,473                                  |       | 8,550,529 |   |
| Interest income,  net                      |       | 2,100,749                                  |       | 1,241,113 |   |
| Income before  income taxes                |       | 7,528,222                                  |       | 9,791,642 |   |
| Provision for  income taxes                |       | 2,924,006                                  |       | 3,899,104 |   |
| Net income                                 |       | $                                          | 4,604,216  |   | $ | 5,892,538 |   |
| Product gross profit                       |       | $                                          | 12,835,424 |   | $ | 9,389,799 |   |
| Product gross margin                       |       | 54%                                        |       | 46% |   |

 

*Netand operating income.**  *Forthe year ended December 31, 2006 income from operations was $5,427,473compared to $8,550,529 for 2005. Net income for 2006 was $4,604,216 or $.41 perdiluted share compared to $5,892,538 or $.52 per diluted share for the sameperiod last year. The primary drivers for the decrease in net and operatingincome was $6,537,094 of contract revenue and termination fee recorded throughthe third quarter of 2005, an increase in SFAS123R compensation expense of$1,267,205 as a result of adoption of SFAS 123R on January 1, 2006,partially offset by increases in product margin and interest income compared to2005.

*TotalRevenue.**  *Totalrevenue for the year ended December 31, 2006 decreased by $2,993,998 to$26,840,614 compared to $29,834,612 for 2005 primarily due to decrease incontract revenue in connection with the termination of the OrthoNeutrogenaagreement partially offset by an increase in product revenue. Product revenuefor 2006 increased by $3,419,396 to $23,953,285 primarily due to increasedORTHOVISC revenue from Depuy Mitek from both our sales to Depuy Mitek andincreased royalties from Depuy Mitek’s sales. The increase in U.S. ORTHOVISCsales was partially offset by a decrease in international ORTHOVISC sales andHYVISC sales. See below for further details.

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*Product revenue by productline.**  *Product revenue forthe year ended December 31, 2006 was $23,953,285, an increase of$3,419,396, or 17%, compared with $20,533,889 for the year ended December 31,2005.

| ** **          | ** ** | **Year Ended December 31,** | ** ** |
|---------------------|------------|--------------------------------------------|------------|
| ** **          | ** ** | **2006**                                   | ** ** | **2005** | ** ** |
| Ophthalmic Products |       | $                                          | 10,748,765 |   | $ | 10,521,914 |   |
| ORTHOVISC           |       | 11,340,433                                 |       | 7,938,333 |   |
| HYVISC              |       | 1,820,617                                  |       | 2,073,642 |   |
| INCERT              |       | 43,470                                     |       | — |   |
|                |       | $                                          | 23,953,285 |   | $ | 20,533,889 |   |

 

Ophthalmic products sales increased $226,851, or 2%,to $10,748,765. The increase was primarily attributable to growth of sales toBausch & Lomb in 2006 compared to 2005, partially offset by the lossof business from Advanced Medical Optics, which contract was terminated in June 2005.

Our sales of ORTHOVISC increased $3,402,100, or 43%,to $11,340,433 in 2006 as compared with $7,938,333 in 2005. The increase inORTHOVISC sales for 2006 was primarily due to an increase in U.S. ORTHOVISCsales. Domestically, sales by DePuy Mitek showed good progress with their unitsales more than doubling in 2006 compared to 2005. This resulted in asignificant increase in royalty revenue for Anika. In addition, we resumedshipping ORTHOVISC to DePuy Mitek in January 2006 as they had broughttheir inventory levels back to their target levels. We did not ship any units tothem during the last nine months of 2005 due to the inventory overstocking thatarose in 2004. Total U.S. sales of ORTHOVISC were $5,232,589, or 22% of productsales, in 2006 compared to $1,642,627, or 8% of product sales, in 2005.International sales of ORTHOVISC decreased to $6,107,844 from $6,295,706, or 3%in 2006 compared to the same period last year. The decrease in internationalsales was due to a reimbursement change in Turkey. In the third quarter of 2006the government of Turkey eliminated reimbursementfor over 100 drugs including ORTHOVISC and its competing products. No shipmentwas made to our Turkish distributor during the last five months of the 2006. Salesto Turkey represented 17% and 23% of product sales in 2006 and 2005,respectively. We expect U.S. ORTHOVISC sales to increase in 2007compared to 2006, and international ORTHOVISC sales to decrease in 2007compared to 2006.

Sales of HYVISC decreased slightly in 2006 as comparedto 2005 and represented 8% and 10%, respectively, of product sales. Sales ofHYVISC are made to a single customer under an exclusive agreement which wasextended in April 2006 to December 31, 2010. We expect HYVISC salesto be essentially flat in 2007 from 2006.

*Licensing,milestone and contract revenue.**  *Licensing,milestone and contract revenue for the year ended December 31, 2006 was$2,887,329, compared to $9,300,723 for 2005. Licensing and milestone revenueincludes the ratable recognition of the $27,000,000 in up-front and milestonepayments from Ortho Biotech. These amounts are being recognized in incomeratably over the ten-year expected life of the agreement, or $675,000 perquarter. Contract revenue was $105,145 for 2006, compared to $6,537,094 in2005. Contract revenue in 2005 represented reimbursement of clinical anddevelopment costs due under the OrthoNeutrogena contract, and a $2,300,000termination fee to exit the contract which was terminated in the third quarterof 2005. All amounts due and contractual obligations by both parties have beensatisfied.

*Productgross profit.**  *Productgross profit for the year ended December 31, 2006 was $12,835,424, or 54%of product revenue, compared with $9,389,799, or 46% of product revenue, forthe year ended December 31, 2005. The improvement in product gross profitwas due to increased royalties, favorable raw material prices, and lower thannormal margins in 2005. Product margin in 2005 was adversely affected by costsincurred from the voluntary ophthalmic product recall. We expect product grossmargin to improve 

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slightly in 2007 comparedto 2006 reflecting higher royalties, higher manufacturing volume, andimplementation of cost and process improvements changes.

*Researchand development.**  *Researchand development expenses for the year ended December 31, 2006 decreased by$1,114,229, or 24%, to $3,616,435 from $4,730,664 for the prior year. Researchand development expenses include those costs associated with our in-house andexternal research and development efforts for the development of CTA product enhancements, next generation osteoarthritis products,the costs of clinical trials,manufacturing process improvements, and the preparation and processingof applications for regulatory approvals at all relevant stages of development.The decrease in research and development expenses during 2006 was primarilyattributable to reduced clinical trial expenses in 2006 compared to 2005. In2006, our clinical trial spending was for a modest CTA study to refinetechnique of ELEVESS. In 2005, research and development spending included alarge U.S. pivotal CTA trial in support of our September 2005 PMAapplication. The decrease in size and effort of CTA clinical trials was theprimary driver for the reduction in research and development expenses in 2006from 2005. We expect research and development expenses will increase in thefuture related to next generation ORTHOVISC products, and other research anddevelopment programs in the pipeline.

*Selling,general and administrative.**  *Selling,general and administrative expenses for the year ended December 31, 2006increased by $1,269,516 or 23%, to $6,678,845 from $5,409,329 in the prioryear. The increase was primarily due to recording of $1,267,205 of stock-basedcompensation expense. The Company expects that selling, general andadministrative expenses will increase in the future related to headcountincreases, and infrastructure expansion. With the signing of a lease in January 2007for our new facility in Bedford, Massachusetts, general and administrativeexpenses will increase by more than $1,000,000 in 2007 assuming a May 1,2007 rent commencement date. Operating expense related to the new facility willbe mostly recorded in general and administrative expenses until manufacturingoperations occupies the building in late 2008.

*Interestincome, net.**  *Net interest income increased $859,636,or 69%, to $2,100,749 for the year ended December 31, 2006, from$1,241,113 in 2005. The increase was primarily attributable to higher averageavailable cash and invested balances during 2006 as well as increasing interestrates. Interest income in 2007 is expected to decrease as a result of lowerexpected available cash due to capital investments in the Company’s newfacility project.

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*Income taxes.**  *Income tax provision was $2,924,006 and $3,899,104for 2006 and 2005, respectively. The slightly lower effective tax rate in 2006of 38.8% was primarily a result of the impact of research and other credits andunfavorable state deferred tax assets rate change in 2005. Our effective taxrate varied from the U.S. federal statutory rate due, principally, to theimpact of research and development and other credits, and non-deductiblecompensation expenses related to SFAS 123R. A reconciliation of theU.S. federal statutory tax rate to the effective tax rate for the periodsending December 31 is as follows:

| ** **                                                     | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                     | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Computed expected  tax expense                                 |       | 34.0                                        | %          | 34.0 | % | 34.0 | % |
| State tax expense  (net of federal benefit)                    |       | 3.8                                         | %          | 4.3 | % | 2.8 | % |
| State deferred  tax assets rate change                         |       | —                                      |       | 4.5 | % | — |   |
| Permanent items,  including nondeductible expenses             |       | 1.8                                         | %          | -0.9 | % | 0.9 | % |
| Federal and state  research and development, and other credits |       | -1.6                                        | %          | -1.4 | % | -1.8 | % |
| Other                                                          |       | 0.8                                         | %          | -0.7 | % | — |   |
| Federal rate  difference                                       |       | —                                      |       | — |   | 2.9 | % |
| Change in  valuation allowance related to income tax benefit   |       | —                                      |       | — |   | -103.9 | % |
| Tax (benefit)  expense                                         |       | 38.8                                        | %          | 39.8 | % | -65.1 | % |

 

We have a pending IRSaudit related to our 2004 tax return. We are currently in the process of finalizingthe audit results with the IRS. We expect that the outcome of the IRS auditwill not be material to our financial statements.

***Year ended December 31, 2005 compared to yearended December 31, 2004***

*Statement of Operations Detail*

| ** **                                   | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                   | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| Product revenue                              |       | $                                          | 20,533,889 |   | $ | 22,285,985 |   |
| Licensing,  milestone and contract revenue   |       | 9,300,723                                  |       | 4,179,060 |   |
| Total revenue                                |       | 29,834,612                                 |       | 26,465,045 |   |
| Operating Expenses:                          |       |                                       |       |   |   |
| Cost of product revenue                      |       | 11,144,090                                 |       | 9,948,593 |   |
| Research and development                     |       | 4,730,664                                  |       | 4,087,272 |   |
| Selling, general and administrative          |       | 5,409,329                                  |       | 6,041,417 |   |
| Total operating expenses                     |       | 21,284,083                                 |       | 20,077,282 |   |
| Income from  operations                      |       | 8,550,529                                  |       | 6,387,763 |   |
| Interest income,  net                        |       | 1,241,113                                  |       | 388,945 |   |
| Income before  income taxes                  |       | 9,791,642                                  |       | 6,776,708 |   |
| Provision for  income taxes                  |       | 3,899,104                                  |       | 2,625,631 |   |
| Benefit from  release of valuation allowance |       | —                                     |       | (7,038,792 | ) |
| Net income                                   |       | $                                          | 5,892,538  |   | $ | 11,189,869 |   |
| Product gross profit                         |       | $                                          | 9,389,799  |   | $ | 12,337,392 |   |
| Product gross margin                         |       | 46%                                        |       | 55% |   |

 

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*Product revenue.**  *Product revenue for the year ended December 31,2005 was $20,533,889, a decrease of $1,752,096, or 8%, compared with$22,285,985 for the year ended December 31, 2004.

| ** **           | ** ** | **Year Ended December 31,** | ** ** |
|----------------------|------------|--------------------------------------------|------------|
| ** **           | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| Ophthalmic  Products |       | $                                          | 10,521,914 |   | $ | 11,532,671 |   |
| ORTHOVISC            |       | 7,938,333                                  |       | 8,698,826 |   |
| HYVISC               |       | 2,073,642                                  |       | 2,054,488 |   |
|                 |       | $                                          | 20,533,889 |   | $ | 22,285,985 |   |

 

Ophthalmic products sales decreased $1,010,757, or 9%,to $10,521,914. The decrease was primarily attributable to the loss of businessfrom Advanced Medical Optics. Sales to Advanced Medical Optics decreased to$248,855 from $2,195,388, or 89%, in 2005 compared to 2004, and contributedonly 2% of ophthalmic product revenue for 2005 versus 19% in 2004. The decreasein sales to Advanced Medical Optics was attributable to Advanced Medical Optics’acquisition of a competing line of viscoelastic products for use in ocularsurgery. Our agreement with Advanced Medical Optics expired according to itsterms in June 2005. This decrease was partially offset by increased salesto Bausch & Lomb and, to a lesser extent, to increased sales to eachof our other ophthalmic customers.

Our sales of ORTHOVISC decreased $760,493, or 9%, to$7,938,333 in 2005 as compared with $8,698,826 in 2004. The decrease inORTHOVISC sales for 2005 was primarily due to overstocking of inventory by JNJin 2004. This resulted in substantially lower purchases of ORTHOVISC by JNJfrom the Company in 2005. This domestic decrease was partially offset bycontinued robust international ORTHOVISC sales. U.S. sales of ORTHOVISC were$1,642,627, or 8% of product sales, in 2005 compared to $4,669,134, or 21% ofproduct sales, in 2004. The impact of the decrease in unit sales was partiallyoffset by a 32% increase in royalty fees tied to end-user sales, and increasedinternational sales. International sales of ORTHOVISC increased to $6,295,706from $4,029,692, or 56% in 2005 compared to the same periods last year. Theincrease in international sales was primarily attributable to increased marketpenetration by our distributors in Turkey, Canada, Western Europe and MiddleEast countries.

Sales of HYVISC were essentially flat in 2005 ascompared to 2004 and represented 10% and 9%, respectively, of product sales.Sales of HYVISC are made to a single customer under an exclusive agreementwhich was extended in April 2006 to December 31, 2010.

*Licensing,milestone and contract revenue.**  *Licensing,milestone and contract revenue for the year ended December 31, 2005 was$9,300,723, compared to $4,179,060 for 2004. Licensing and milestone revenueincludes the ratable recognition of the $27,000,000 in up-front and milestonepayments from Ortho Biotech. These amounts are being recognized in incomeratably over the ten-year expected life of the agreement, or $675,000 perquarter. Contract revenue was $6,537,094 for 2005, compared to $1,295,759 in2004. Revenue in 2005 consisted of $4,237,094 for reimbursement of clinical anddevelopment costs due under the OrthoNeutrogena contract, and a $2,300,000termination fee to exit the contract, which was terminated in the quarter of2005. All amounts due and contractual obligations by both parties have beensatisfied.

*ProductGross profit.**  *Productgross profit for the year ended December 31, 2005 was $9,389,799, or 46%of product revenue, compared with $12,337,392, or 55% of product revenue, forthe year ended December 31, 2004. The decrease in product gross margin wasmainly due to three factors:  the costimpact of a mid-year product recall totaling approximately $370,000, a lowermargin product mix, and volume based inefficiencies in our manufacturingprocess.

*Researchand development.**  *Researchand development expenses for the year ended December 31, 2005 increased by$643,392, or 16%, to $4,730,664 from $4,087,272 for the prior year. Researchand development expenses include those costs associated with our in-houseresearch and development efforts 

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for the development of newmedical applications for our HA-based technology, the management and cost ofclinical trials, and the preparation and processing of applications forregulatory approvals at all relevant stages of development. The increase inresearch and development expenses during 2005 was primarily attributable toexpenditures associated with the pivotal clinical trial for our CTA productinitiated in 2004 and completed in late 2005, as well as engineering andscale-up activities in preparation for the manufacture of our CTA product. TheCompany filed a PMA application with the FDA based on the results of thisclinical trial.

*Selling,general and administrative.**  *Selling,general and administrative expenses for the year ended December 31, 2005decreased by $632,088 or 10%, to $5,409,329 from $6,041,417 in the prior year.The decrease was primarily due to lower business development expenses andprofessional fees related to the Sarbanes Oxley Act, which were partiallyoffset by higher fees related to recruiting.

*Interestincome.**  *Interest income increased $852,168,or 219%, to $1,241,113 for the year ended December 31, 2005, from $388,945in 2004. The increase was primarily attributable to higher average availablecash and invested balances during 2005 as well as increasing interest rates.

*Income taxes.**  *Income taxprovision for 2005 is $3,899,104 versusa net tax benefit of $4,413,161 recorded for 2004. The 2004 net benefitwas comprised of a provision for income taxes of $2,625,631 offset by a$7,038,792 benefit resulting from the release of the valuation allowance. As aresult of the receipt of the $25,000,000 in milestone payments in 2004 fromOrtho Biotech, our recent operating results, and forecasted future income,together supported an assertion that ultimate realization of our deferred taxassets was more likely than not at December 31, 2004. Accordingly, theCompany fully released the valuation allowance during 2004 and correspondinglyrecorded a one-time tax benefit of $7,038,792 or $.62 per fully diluted share.

**Liquidity andCapital Resources**

We require cash to fund our operating expenses and tomake capital expenditures. We expect that our requirements for cash to fundthese uses will increase as the scope of our operations expands. Historicallywe have funded our cash requirements from available cash and investments onhand. We expect that our existing capital resources, together with cash fromoperations and interest income, will be sufficient to fund our operations forthe foreseeable future. At December 31, 2006, cash and cash equivalentstotaled $47,167,432 compared to $44,746,656 at December 31, 2005, and$39,339,359 at December 31, 2004.

Cash provided by operating activities was $2,001,172,$6,451,927 and $23,824,796 for 2006, 2005, and 2004 respectively. Cash providedby operating activities decreased by $4,440,755 in 2006 from 2005. This decrease in operating cash was primarilydue to the following major factors: a decrease in net income of $1,288,322;build-up of inventory of $2,214,918 primarily related to the reimbursementpolicy change in Turkey; and an increase in accounts receivables of $1,443,268due to sales growth; which were partially offset by a net increase in currentassets and liabilities of $885,072.

Cash used in investing activities was $1,305,801 and$1,600,821 in 2006 and 2005 respectively. Cash provided by investing activitieswas $344,296 in 2004. Cash used for investing activities in 2006 and 2005 wasprimarily the result of deposits for manufacturing equipment and constructioncosts to build a new manufacturing suite in connection with our new CTA productcurrently in development. Net cash flows from investing activities for 2004includes the release of restricted cash of $817,960 which was partially offsetby capital expenditures of $473,664, primarily for manufacturing and computerequipment. We expect to increase our capital expenditures in 2007 primarilyrelated to the buildout of our new facility. We expect the new facility capital project tocost approximately $25 million (including interior construction, equipment,furniture and fixtures), of which approximately $20 million will be spent orcommitted during 2007. This new facility will serve as our corporateheadquarters and manufacturing facility for the foreseeable future. We plan touse a combination of cash on hand and debt to finance the build out with up 

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to approximately 60%provided by long term debt. There can be no assurance that we will findavailable financing or financing on terms favorable to the company. Constructionis expected to commence in the Spring of 2007 and continue into 2008. There canalso be no assurance that we will be successful in re-qualifying the newfacility under the FDA and European Union regulations.

Cash provided by financingactivities of $1,725,405, $556,191 and $578,159 for 2006, 2005 and 2004,respectively, reflects the proceeds from the exercise of stock options,including any associated tax benefits.

*Off Balance SheetArrangements*

We do not use specialpurpose entities or other off-balance sheet financing techniques except foroperating leases as disclosed in the contractual obligations table below thatwe believe have or are reasonably likely to have a current or future materialeffect on our financial condition, changes in financial condition, revenues orexpenses, results of operations, liquidity or capital resources.

*Recent AccountingPronouncements*

On July 13, 2006, FASB Interpretation (FIN) No. 48,*Accounting for Uncertainty in Income Taxes—AnInterpretation of FASB Statement No. 109*, was issued.FIN 48 clarifies the accounting for uncertainty in income taxes recognizedin an enterprise’s financial statements in accordance with FASB Statement No. 109,*Accounting for Income Taxes.*FIN 48 also prescribes a recognition threshold and measurement attributefor the financial statement recognition and measurement of a tax position takenor expected to be taken in a tax return. The new FASB standard also provides guidanceon derecognition, classification, interest and penalties, accounting in interimperiods, disclosure, and transition and is effective for fiscal years beginningafter December 15, 2006. We are currently evaluating the impact ofadopting FIN 48 on our financial statements.

On September 15, 2006, the FASB issued SFAS No. 157,“Fair Value Measurements” (SFAS 157). This Statement defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles (GAAP), and expands disclosures about fair valuemeasurements. This Statement applies under other accounting pronouncements thatrequire or permit fair value measurements, the Board having previouslyconcluded in those accounting pronouncements that fair value is the relevantmeasurement attribute. Accordingly, this Statement does not require any newfair value measurements. SFAS 157 is effective for the Company as of January 1,2008. The Company is currently evaluating the potential impact of adoptingSFAS 157.

On September 13, 2006, the Securities andExchange Commission issued Staff Accounting Bulletin No. 108, *Considering the Effects of Prior Year MisstatementsWhen Quantifying Misstatements in Current Year Financial Statements*,or SAB 108. SAB 108 provides guidance on how prior year misstatementsshould be taken into consideration when quantifying misstatements in currentyear financial statements for the purposes of determining whether the currentyear’s financial statements are materially misstated. SAB 108 becomeseffective for accounting years ending after November 15, 2006. Theadoption of this SAB did not have any impact on our financial statements.

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*ContractualObligations and Other Commercial Commitments*

We have no material commitments for purchases ofinventories. We expect to incur significant capital investments related to thebuildout of our new facility in Bedford, Massachusetts. We plan to use acombination of cash on hand and debt to finance the build out with up toapproximately 60% provided by long term debt. There can be no assurance that wewill find available financing or financing on terms favorable to the Company. Tothe extent that funds generated from our operations, together with our existingcapital resources are insufficient to meet future requirements, we will berequired to obtain additional funds through equity or debt financings,strategic alliances with corporate partners and others, or through othersources. No assurance can be given that any additional financing will be madeavailable to us or will be available on acceptable terms should such a needarise.

Our future capitalrequirements and the adequacy of available funds will depend, on numerousfactors, including:

·       marketacceptance of our existing and future products;

·       thesuccess and sales of ORTHOVISC under the JNJ Agreement;

·       thesuccessful commercialization of products in development;

·       progressin our product development efforts;

·       themagnitude and scope of such efforts;

·       progresswith pre-clinical studies, clinical trials and product clearances by the FDAand other agencies;

·       thecost of maintaining adequate manufacturing capabilities;

·       thecost of filing, prosecuting, defending and enforcing patent claims and otherintellectual property rights;

·       competingtechnological and market developments;

·       thedevelopment of strategic alliances for the marketing of certain of ourproducts;

·       theterms of such strategic alliances, including provisions (and our ability tosatisfy such provisions) that provide upfront and/or milestone payments to us;and

·       thecost of maintaining adequate inventory levels to meet current and futureproduct demands.

We cannot assure you that we will record profits infuture periods. However, we believe that based on our current strategy, ourcash and investments on hand will be sufficient to meet our cash flowsrequirements beyond 2007. See Item 1A. *“Risk Factors.”*

The terms of any future equity financings may bedilutive to our stockholders and the terms of any debt financings may containrestrictive covenants, which could limit our ability to pursue certain coursesof action. Our ability to obtain financing is dependent on the status of our futurebusiness prospects as well as conditions prevailing in the relevant capitalmarkets. No assurance can be given that any additional financing may be madeavailable to us or may be available on acceptable terms should such a needarise.

Thetable below summarizes our contractual obligations of non-cancelable operatingleases at December 31, 2006:

| ** **       | ** ** | **Payments due by period** | ** ** |
|------------------|------------|-------------------------------------------|------------|
| ** **       | ** ** | **Total**                                 | ** ** | **Less than 1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than 5 years** | ** ** |
| Operating leases |       | $                                         | 1,656,484  |   |   | $ | 801,948 |   |   | $ | 814,956 |   | $ | 39,580 |   |   | $ | — |   |   |
|                  |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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On January 4, 2007, we entered into a new lease,pursuant to which we will lease a new headquarters facility (the “Lease”),consisting of approximately 134,000 square feet of general office, research anddevelopment and manufacturing space located in Bedford, Massachusetts. TheLease has an initial term of ten and a half years, and is expected to commenceon approximately May 1, 2007 once certain agreed upon landlordimprovements are completed. We have an option under the Lease to extend itsterms for up to four periods beyond the original expiration date subjectto the condition that we notify the landlord that we are exercising each optionat least one year prior to the expiration of the original or current termthereof. The first three renewal options each extend the term an additionalfive years with the final renewal option extending the term six years. Theleases covering the Company’s current corporate and research and developmentfacility, and its manufacturing facility both located in Woburn, Massachusettsare set to expire in December 2007 and February 2009, respectively. Wecurrently expect our administrative, research and development personnel tobegin occupying the Bedford facility by the end of 2007, and for the buildoutand validation for the new manufacturing space to be completed by late 2008.

Thefollowing table shows the expected future contractual obligation assumingcommencement of the Lease on approximately May 1, 2007.

| ** **          | ** ** | **Payments due by period** | ** ** |
|---------------------|------------|-------------------------------------------|------------|
| ** **          | ** ** | **Total**                                 | ** ** | **Less than 1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
| New facility  lease |       | $                                         | 8,063,167  |   |   | $ | 208,334 |   |   | $ | 1,041,667 |   | $ | 1,514,583 |   | $ | 5,298,583 |   |
|                     |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**ITEM 7A.**        QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of December 31,2006, we did not utilize any derivative financial instruments, market risksensitive instruments or other financial and commodity instruments for whichfair value disclosure would be required under SFAS No. 107. All of ourinvestments consist of money market funds, commercial paper and municipal bondsthat are carried on our books at amortized cost, which approximates fair marketvalue.

*Primary Market RiskExposures*

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

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**ITEM8.**                FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

**ANIKA THERAPEUTICS, INC. AND SUBSIDIARIES**

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

| Report of Independent  Registered Public Accounting Firm                                                             |   | 43 |   |
|----------------------------------------------------------------------------------------------------------------------|--------|----|--------|
| Consolidated  Balance Sheets as of December 31, 2006 and 2005                                                   |   | 45 |   |
| Consolidated Statements of Operations for the Years  Ended December 31, 2006, 2005 and 2004                     |   | 46 |   |
| Consolidated Statements of Stockholders’ Equity for  the Years Ended December 31, 2006, 2005 and 2004 |   | 47 |   |
| Consolidated Statements of Cash Flows for the Years  Ended December 31, 2006, 2005 and 2004                     |   | 48 |   |
| Notes to Consolidated Financial Statements                                                                           |   | 49 |   |

 

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**Report ofIndependent Registered Public Accounting Firm**

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

We have completedintegrated audits of Anika Therapeutics, Inc.’s consolidated financialstatements and of its internal control over financial reporting as of December 31,2006, in accordance with the standards of the Public Company AccountingOversight Board (United States). Our opinions, based on our audits, arepresented below.

*Consolidated financial statements*

In our opinion, theconsolidated financial statements in the accompanying index presentfairly, in all material respects, the financial position of Anika Therapeutics, Inc.and its subsidiaries****at December 31,2006 and 2005, and the results of their operations and their cash flows foreach of the three years in the period ended December 31, 2006 inconformity with accounting principles generally accepted in the United Statesof America. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits. We conducted our audits of these statements inaccordance with the standards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit of financial statements includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinion.

As discussed in Note 9 tothe consolidated financial statements, the Company changed the manner in whichit accounts for share-based compensation as of January 1, 2006.

*Internal controlover financial reporting*

Also, in our opinion, management’s assessment, includedin Management’s Report on Internal Control Over Financial Reporting appearingunder this Item 8, that the Company maintained effective internal control overfinancial reporting as of December 31, 2006 based on criteria establishedin *Internal Control—Integrated Framework*issued 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 31,2006, based on criteria established in *Internal Control—IntegratedFramework* issued by the COSO. The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express opinions on management’s assessmentand on the effectiveness of the Company’s internal control over financialreporting based on our audit. We conducted our audit of internal control overfinancial reporting in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. An audit of internal control over financial reportingincludes obtaining an understanding of internal control over financialreporting, evaluating management’s assessment, testing and evaluating thedesign and operating effectiveness of internal control, and performing suchother procedures as we consider necessary in the circumstances. We believe thatour audit provides a reasonable basis for our opinions.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal 

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control over financialreporting includes those policies and procedures that (i) pertain to themaintenance of records that, in reasonable detail, accurately and fairly reflectthe transactions and dispositions of the assets of the company; (ii) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (iii) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the company’s assets that could have a material effect on the financialstatements.

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

| /s/ PricewaterhouseCoopers LLP |
|--------------------------------|
| Boston,  Massachusetts         |   |
| March 13,  2007           |   |

 

 

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**AnikaTherapeutics, Inc. and Subsidiary**

**ConsolidatedBalance Sheets**

| ** **                                                                                                                                                                                           | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                           | ** ** | **2006**              | ** ** | **2005** | ** ** |
| **ASSETS**                                                                                                                                                                                           | ** ** | ** **            | ** ** | ** ** | ** ** |
| Current assets:                                                                                                                                                                                      |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                                                                                            |       | $                     | 47,167,432 |   | $ | 44,746,656 |   |
| Accounts receivable, net of reserves of $49,724 and  $22,558 at December 31, 2006 and 2005, respectively                                                                                        |       | 3,509,508             |       | 2,066,240 |   |
| Inventories                                                                                                                                                                                          |       | 5,395,596             |       | 3,270,678 |   |
| Current portion deferred income taxes                                                                                                                                                                |       | 1,312,901             |       | 1,301,085 |   |
| Prepaid expenses                                                                                                                                                                                     |       | 220,445               |       | 1,025,481 |   |
| Total current assets                                                                                                                                                                                 |       | 57,605,882            |       | 52,410,140 |   |
| Property and  equipment, at cost                                                                                                                                                                     |       | 13,255,240            |       | 11,949,439 |   |
| Less: accumulated  depreciation                                                                                                                                                                      |       | (10,237,232           | )          | (9,853,177 | ) |
|                                                                                                                                                                                                 |       | 3,018,008             |       | 2,096,262 |   |
| Long-term  deposits and other                                                                                                                                                                        |       | 193,050               |       | 143,060 |   |
| Deferred income  taxes                                                                                                                                                                               |       | 7,296,689             |       | 7,968,481 |   |
| Total Assets                                                                                                                                                                                         |       | $                     | 68,113,629 |   | $ | 62,617,943 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                        | ** ** | ** **            | ** ** | ** ** | ** ** |
| Current liabilities:                                                                                                                                                                                 |       |                  |       |   |   |
| Accounts payable                                                                                                                                                                                     |       | $                     | 965,180    |   | $ | 1,277,782 |   |
| Accrued expenses                                                                                                                                                                                     |       | 1,573,835             |       | 1,718,916 |   |
| Deferred revenue                                                                                                                                                                                     |       | 2,905,099             |       | 2,830,046 |   |
| Income taxes payable                                                                                                                                                                                 |       | 17,253                |       | — |   |
| Total current liabilities                                                                                                                                                                            |       | 5,461,367             |       | 5,826,744 |   |
| Other long-term  liabilities                                                                                                                                                                         |       | 64,525                |       | — |   |
| Long-term  deferred revenue                                                                                                                                                                          |       | 17,099,712            |       | 18,900,000 |   |
| Commitments and  contingencies (Note 8)                                                                                                                                                              |       |                  |       |   |   |
| Stockholders’ equity                                                                                                                                                                            |       |                  |       |   |   |
| Preferred stock, $.01 par value; 1,250,000 shares  authorized, no shares issued and outstanding at December 31, 2006 and  2005                                                                  |       | —                |       | — |   |
| Common stock, $.01 par value; 30,000,000 shares  authorized, 10,772,654 shares issued and outstanding at December 31,  2006, 10,500,393 shares issued and outstanding at December 31, 2005 |       | 107,727               |       | 105,004 |   |
| Additional paid-in-capital                                                                                                                                                                           |       | 37,262,768            |       | 34,272,881 |   |
| Retained earnings                                                                                                                                                                                    |       | 8,117,530             |       | 3,513,314 |   |
| Total stockholders’ equity                                                                                                                                                                      |       | 45,488,025            |       | 37,891,199 |   |
| Total Liabilities and Stockholders’                                                                                                                                                             |       | $                     | 68,113,629 |   | $ | 62,617,943 |   |

 

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

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**AnikaTherapeutics, Inc. and Subsidiary**

**ConsolidatedStatements of Operations**

| ** **                                          | ** ** | **For the Years Ended December 31,** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                          | ** ** | **2006**                                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| Product revenue                                     |       | $                                                             | 23,953,285 |   | $ | 20,533,889 |   | $ | 22,285,985 |   |
| Licensing,  milestone and contract revenue          |       | 2,887,329                                                     |       | 9,300,723 |   | 4,179,060 |   |
| Total revenue                                       |       | 26,840,614                                                    |       | 29,834,612 |   | 26,465,045 |   |
| Operating expenses:                                 |       |                                                          |       |   |   |   |   |
| Cost of product revenue                             |       | 11,117,861                                                    |       | 11,144,090 |   | 9,948,593 |   |
| Research & development                     |       | 3,616,435                                                     |       | 4,730,664 |   | 4,087,272 |   |
| Selling, general & administrative          |       | 6,678,845                                                     |       | 5,409,329 |   | 6,041,417 |   |
| Total operating  expenses                           |       | 21,413,141                                                    |       | 21,284,083 |   | 20,077,282 |   |
| Income from  operations                             |       | 5,427,473                                                     |       | 8,550,529 |   | 6,387,763 |   |
| Interest income, net                                |       | 2,100,749                                                     |       | 1,241,113 |   | 388,945 |   |
| Income before  income taxes                         |       | 7,528,222                                                     |       | 9,791,642 |   | 6,776,708 |   |
| Income tax expense  (benefit)                       |       |                                                          |       |   |   |   |   |
| Provision for income taxes                          |       | 2,924,006                                                     |       | 3,899,104 |   | 2,625,631 |   |
| Benefit from release of valuation allowance         |       | —                                                        |       | — |   | (7,038,792 | ) |
| Net income                                          |       | $                                                             | 4,604,216  |   | $ | 5,892,538 |   | $ | 11,189,869 |   |
| Basic net income per  share:                        |       |                                                          |       |   |   |   |   |
| Net income                                          |       | $                                                             | 0.43       |   | $ | 0.57 |   | $ | 1.11 |   |
| Basic weighted average common shares outstanding    |       | 10,639,028                                                    |       | 10,410,920 |   | 10,103,835 |   |
| Diluted net  income per share:                      |       |                                                          |       |   |   |   |   |
| Net income                                          |       | $                                                             | 0.41       |   | $ | 0.52 |   | $ | 0.98 |   |
| Diluted weighted  average common shares outstanding |       | 11,155,249                                                    |       | 11,428,201 |   | 11,384,155 |   |

 

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

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**Anika Therapeutics, Inc. and SubsidiaryConsolidated Statements of Stockholders’ Equity**

| ** **                            | ** ** | **Common Stock**      | ** ** | **Treasury Stock**  | ** ** | **Retained**                     | ** ** | ** **                 | ** ** |
|---------------------------------------|------------|----------------------------|------------|--------------------------|------------|----------------------------------|------------|----------------------------|------------|
| ** **                            | ** ** | **Number of  Shares** | ** ** | **$.01 Par  Value** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Number of  Shares** | ** ** | **Cost** | ** ** | **Earnings  (Accumulated  Deficit)** | ** ** | **Total  Stockholders’  Equity** | ** ** |
| Balance,  December 31, 2003      |       | 9,991,943                  |       | $                        | 99,919     |                             | $          | 31,480,005                 |       |   | 5,538 |   |   | $ | (26,868 | ) | $ | (13,569,093 | ) |   | $ | 17,983,963 |   |   |
| Exercise of common  stock options     |       | 265,529                    |       | 2,656                    |       | 548,635                          |       |                       | (5,538     | ) |   | 26,868 |   | — |   |   | 578,159 |   |   |
| Tax benefit related  to stock options |       | —                     |       | —                   |       | 609,866                          |       |                       | —     |   |   | — |   | — |   |   | 609,866 |   |   |
| Net income                            |       | —                     |       | —                   |       | —                           |       |                       | —     |   |   | — |   | 11,189,869 |   |   | 11,189,869 |   |   |
| Balance,  December 31, 2004      |       | 10,257,472                 |       | 102,575                  |       | 32,638,506                       |       |                       | —     |   |   | — |   | (2,379,224 | ) |   | 30,361,857 |   |   |
| Exercise of common  stock options     |       | 242,921                    |       | 2,429                    |       | 553,762                          |       |                       | —     |   |   | — |   | — |   |   | 556,191 |   |   |
| Tax benefit  related to stock options |       | —                     |       | —                   |       | 1,080,613                        |       |                       | —     |   |   | — |   | — |   |   | 1,080,613 |   |   |
| Net income                            |       | —                     |       | —                   |       | —                           |       |                       | —     |   |   | — |   | 5,892,538 |   |   | 5,892,538 |   |   |
| Balance,  December 31, 2005      |       | 10,500,393                 |       | 105,004                  |       | 34,272,881                       |       |                       | —     |   |   | — |   | 3,513,314 |   |   | 37,891,199 |   |   |
| Exercise of common  stock options     |       | 272,261                    |       | 2,723                    |       | 1,216,751                        |       |                       | —     |   |   | — |   | — |   |   | 1,219,474 |   |   |
| Tax benefit  related to stock options |       | —                     |       | —                   |       | 505,931                          |       |                       | —     |   |   | — |   | — |   |   | 505,931 |   |   |
| FAS 123R stock  option expense        |       | —                     |       | —                   |       | 1,267,205                        |       |                       | —     |   |   | — |   | — |   |   | 1,267,205 |   |   |
| Net income                            |       | —                     |       | —                   |       | —                           |       |                       | —     |   |   | — |   | 4,604,216 |   |   | 4,604,216 |   |   |
| Balance,  December 31, 2006      |       | 10,772,654                 |       | $                        | 107,727    |                             | $          | 37,262,768                 |       |   | — |   |   | $ | — |   | $ | 8,117,530 |   |   | $ | 45,488,025 |   |   |

 

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

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**Anika Therapeutics, Inc. and SubsidiaryConsolidated Statements of Cash Flows**

| ** **                                                                         | ** ** | **For the Years Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| Cash flows from  operating activities:                                             |       |                                                          |       |   |   |   |   |
| Net income                                                                         |       | $                                                             | 4,604,216  |   | $ | 5,892,538 |   | $ | 11,189,869 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities: |       |                                                          |       |   |   |   |   |
| Depreciation                                                                       |       | 384,055                                                       |       | 459,906 |   | 709,504 |   |
| Stock-based compensation expense                                                   |       | 1,267,205                                                     |       | — |   | — |   |
| Deferred income taxes                                                              |       | 659,976                                                       |       | 1,911,270 |   | (11,180,836 | ) |
| Provision for inventory reserve                                                    |       | 56,380                                                        |       | 49,452 |   | 3,079 |   |
| Tax benefit from exercise of stock options                                         |       | (505,931                                                      | )          | 1,080,613 |   | 609,866 |   |
| Changes in  operating assets and liabilities:                                      |       |                                                          |       |   |   |   |   |
| Accounts receivable                                                                |       | (1,443,268                                                    | )          | 287,440 |   | (932,570 | ) |
| Inventories                                                                        |       | (2,181,298                                                    | )          | 906,653 |   | (603,284 | ) |
| Prepaid expenses                                                                   |       | 805,036                                                       |       | 313,037 |   | (1,257,661 | ) |
| Long-term deposits and other                                                       |       | (49,990                                                       | )          | — |   | — |   |
| Accounts payable                                                                   |       | (312,602                                                      | )          | 486,771 |   | 442,219 |   |
| Accrued expenses                                                                   |       | (145,081                                                      | )          | (322,099 | ) | 743,769 |   |
| Deferred revenue                                                                   |       | (1,725,235                                                    | )          | (4,613,654 | ) | 24,165,724 |   |
| Income taxes payable                                                               |       | 523,184                                                       |       | — |   | (64,883 | ) |
| Other long-term liabilities                                                        |       | 64,525                                                        |       | — |   | — |   |
| Net cash provided  by operating activities                                         |       | 2,001,172                                                     |       | 6,451,927 |   | 23,824,796 |   |
| Cash flows from  investing activities:                                             |       |                                                          |       |   |   |   |   |
| Restricted cash                                                                    |       | —                                                        |       | — |   | 817,960 |   |
| Purchase of property and equipment                                                 |       | (1,305,801                                                    | )          | (1,600,821 | ) | (473,664 | ) |
| Net cash (used  in) provided by investing activities                               |       | (1,305,801                                                    | )          | (1,600,821 | ) | 344,296 |   |
| Cash flows from  financing activities:                                             |       |                                                          |       |   |   |   |   |
| Proceeds from exercise of stock options                                            |       | 1,219,474                                                     |       | 556,191 |   | 578,159 |   |
| Tax benefit from exercise of stock options                                         |       | 505,931                                                       |       | — |   | — |   |
| Net cash provided  by financing activities                                         |       | 1,725,405                                                     |       | 556,191 |   | 578,159 |   |
| Increase in cash and cash equivalents                                              |       | 2,420,776                                                     |       | 5,407,297 |   | 24,747,251 |   |
| Cash and cash  equivalents at beginning of year                                    |       | 44,746,656                                                    |       | 39,339,359 |   | 14,592,108 |   |
| Cash and cash  equivalents at end of year                                          |       | $                                                             | 47,167,432 |   | $ | 44,746,656 |   | $ | 39,339,359 |   |
| Supplemental  disclosure of cash flow information:                                 |       |                                                          |       |   |   |   |   |
| Cash paid for  income taxes                                                        |       | $                                                             | 1,077,506  |   | $ | 637,199 |   | $ | 7,156,053 |   |

 

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

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**AnikaTherapeutics, Inc. and SubsidiaryNotes to Consolidated Financial Statements**

**1. Nature ofBusiness**

Anika Therapeutics, Inc. (“Anika,” the “Company,”“we,” “us,” or “our”) develops, manufactures and commercializes therapeuticproducts for tissue protection,healing and repair. These products are based on hyaluronic acid (“HA”),a naturally occurring, biocompatible polymer found throughout the body. Due toits unique biophysical and biochemical properties, HA plays an important rolein a number of physiological functions such as the protection and lubricationof soft tissues and joints, the maintenance of the structural integrity oftissues, and the transport of molecules to and within cells. The Company’scurrently manufactured and marketed products consist of ORTHOVISC®, which is an HA product used in thetreatment of some forms of osteoarthritis in humans; AMVISC®, AMVISC® Plus, STAARVISCTM-II, and ShellGelÔ,each an injectable ophthalmic viscoelastic HA product; and HYVISC®, which is an HA product used in thetreatment of equine osteoarthritis, and INCERT®, which is an HA based anti-adhesive forsurgical applications currently marketed in three countries outside of the U.S.In the U.S. ORTHOVISC is marketed by DePuy Mitek, Inc., a subsidiary ofJohnson & Johnson, under the terms of a licensing, distribution,supply and marketing agreement. Outside the U.S., ORTHOVISC has been approvedfor sale since 1996 and is marketed by distributors in approximately 20countries. HYVISC is marketed in the U.S. through Boehringer IngelheimVetmedica, Inc. We developed and manufacture AMVISC® andAMVISC® Plus for Bausch & Lomb Incorporated undera multiyear supply agreement. Products in development include, ELEVESSTM, an HA based dermal fillerused for cosmetic tissue augmentation applications and next generationosteoarthritis / joint health related products. ** **In June 2006, weentered into a license and development agreement and a supply agreement withGalderma Pharma S.A. and Galderma S.A. for exclusive worldwide development andcommercialization of ELEVESS.

The Company is subject torisks common to companies in the biotechnology and medical device industriesincluding, but not limited to, development by the Company or its competitors ofnew technological innovations, dependence on key personnel, protection ofproprietary technology, commercialization of existing and new products, andcompliance with FDA government regulations and approval requirements as well asthe ability to grow the Company’s business.

**2. Summary ofSignificant Accounting Policies**

**Use of Estimates**

The preparation offinancial statements in conformity with generally accepted accountingprinciples in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates.

**Principles ofConsolidation**

The accompanyingconsolidated financial statements include the accounts of Anika Therapeutics, Inc.and its wholly owned subsidiary, Anika Securities, Inc. (a MassachusettsSecurities Corporation). All intercompany balances and transactions have beeneliminated in consolidation.

**Cash and CashEquivalents**

Cash and cash equivalentsconsists of cash and highly liquid investments with original maturities of90 days or less.

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**FinancialInstruments**

SFAS No. 107, “DisclosuresAbout Fair Value of Financial Instruments”, requires disclosure about fairvalue of financial instruments. Financial instruments consist of cashequivalents, accounts receivable, and accounts payable. The estimated fairvalues of the Company’s financial instruments approximate their carryingvalues.

**Revenue Recognition**

The Company’s revenuerecognition policies are in accordance with the Securities and ExchangeCommission’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 IssuesTask Force Issue No. 00-21,*Revenue Arrangements with Multiple Deliverables*.

***Product Revenue***

The Company recognizesrevenue from the sales of products it manufactures upon confirmation ofregulatory compliance and shipment to the customer as long as there is (1) persuasiveevidence of an arrangement, (2) delivery has occurred and risk of loss haspassed, (3) the sales price is fixed or determinable and (4) collectionof the related receivable is reasonably assured. Amounts billed or collectedprior to recognition of revenue are classified as deferred revenue. Whendetermining whether risk of loss has transferred to customers on product salesor if the sales price is fixed or determinable the Company evaluates both thecontractual terms and conditions of its distribution and supply agreements aswell as its business practices. Product revenue also includes royalties.Royalty revenue is based on our distributor’s sales and recognized in the sameperiod our distributor records their sale of the product.

***License, Milestone and Contract Revenue***

On June 30, 2006, the Company entered into aLicense and Development Agreement with Galderma Pharma S.A., a joint venturebetween Nestlé and L’Oréal, and a Supply Agreement with Galderma Pharma S.A.and Galderma S.A., an affiliate of Galderma Pharma S.A., for the exclusiveworldwide development and commercialization of hyaluronic acid based CTAproducts. Galderma Pharma S.A. and Galderma S.A. are jointly referred to asGalderma. Under the agreements, the Company is responsible for thedevelopment and manufacturing of the CTA products, and Galderma is responsiblefor the commercialization, including distribution and marketing, of the CTAproducts worldwide. The agreements includean upfront payment, milestones upon achievement of predefined regulatory goals,funding of certain ongoing development activities, payments for the supply ofCTA products, royalties on sales and sales threshold achievement payments for meeting certain net sales targets. TheCompany accounts for the agreements in accordance with the Emerging Issues TaskForce Issue No. 00-21, “Revenue Arrangements with MultipleDeliverables” (EITF 00-21). Under EITF 00-21, in order to accountfor an element as a separate unit of accounting, the element must havestand-alone value and there must be objective and reliable evidence of fairvalue of the undelivered elements. Based on the review of the agreements, theCompany believes that two separate units of accounting exist: a combinedlicense and development unit and a manufacturing and supply unit. Milestonepayments related to achieving regulatory goals under the license anddevelopment unit are subject to certain refund clauses, which are expected toexpire by June 2007. Pursuant to this model, the Company will recognizepayments received under the license and development unit upon expiration ofrefund contingencies, over the period in which the Company performs itsobligations, which approximates the contractual term of 10 years. Using thecontingency-adjusted performance model, the intial and subsequent milestonepayments, once earned, are recognized as contract and license fee revenue. Paymentsfrom the manufacturing and supply unit will be recognized postcommercialization as product is delivered.

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Under the terms of the agreements, the Company receivedon June 30, 2006 a non-refundable, upfront payment of $1,000,000, whichthe Company will recognize over a 10 year period. Milestone payments under theagreements are related to regulatory approvals of the CTA products in theUnited States and Europe. Achievements of both regulatory approvals wouldentitle the Company to aggregate milestone payments of up to $5,000,000 for theinitial CTA product. The Company would also receive up to an additional$1,500,000 upon regulatory approvals in the United States and Europe for eachadditional CTA product that the parties agree to develop and market. Inaddition, the agreements contain payment terms for supplying Galderma with CTAproducts and royalties based on sales of the Company’s CTA products byGalderma to its customers. The agreements provide for sales thresholdachievement payments of up to $14,500,000 if CTA product net sales exceedcertain net sales targets. Under the terms of the agreements, Galderma willsupport the development of the Company’s CTA products, including reimbursementfor certain clinical development costs for the enhancement of the initial CTAproduct, line extensions and clinical trial support, and the Company will makeappropriate regulatory filings with the U.S. Food and Drug Administration andregulators in the European Union to enhance features of its initial CTA product.The agreements have an initial term of ten years, unless earlier terminatedpursuant to any one of several early termination rights of each party. Incertain circumstances, an early termination of the agreements will require theCompany to refund to Galderma certain product development milestone paymentsand reimbursements of development costs. Following the initial term, theagreements will automatically renew for an additional three year period if acertain net sales target has been exceeded, unless terminated by Galderma priorto the expiration of the initial term.

The Company entered into an exclusive worldwidedevelopment and commercialization agreement (the OrthoNeutrogena Agreement) in July 2004,for the Company’s CTA products with the OrthoNeutrogena, a division ofOrtho-McNeil Pharmaceuticals, Inc., an affiliate of Johnson &Johnson. On September 1,2005, the Company announced that it had mutually agreed with OrthoNeutrogena toterminate its development and commercialization agreement. The Company receiveda payment of $3,115,000 from OrthoNeutrogena including a $2,300,000 contracttermination fee. Given that there were no continuing performance obligationswith respect to the development and commercialization agreement or the relatedtermination agreement, all amounts were recognized during the third quarter of2005, including approximately $251,000 of previously deferred revenue under theperformance-based model. Total contract revenue recognized during 2005 relatedto the agreements with OrthoNeutrogena was $6,537,094.

In December 2003 theCompany entered into a ten-year licensing and supply agreement (the “JNJ Agreement”)with Ortho Biotech Products, L.P., a member of the Johnson & Johnsonfamily of companies, to market ORTHOVISC in the U.S. In mid-2005, theagreement was assigned to DePuy Mitek, Inc., a subsidiary of Johnson &Johnson. Under the JNJ Agreement, DePuy Mitek performs sales, marketing anddistribution functions and licensed the right to further develop andcommercialize ORTHOVISC as well as other new products for the treatment of painassociated with osteoarthritis based on the Company’s viscosupplementationtechnology. In support of the license, the JNJ Agreement provides that DePuyMitek will fund post-marketing clinical trials for new indications ofORTHOVISC. The Company received an initial payment of $2,000,000 upon enteringinto the JNJ Agreement, a milestone payment of $20,000,000 in February 2004,as a result of obtaining FDA approval of ORTHOVISC and a milestone payment of$5,000,000 in December 2004 for planned upgrades to our manufacturingoperations. The Company evaluated the terms of the JNJ Agreement and determinedthat the upfront fee and milestone payments did not meet the conditions to berecognized separately from the supply agreement, therefore, the Company havedeferred non refundable payments received of $27,000,000 which we arerecognizing ratably over the expected ten year term of the JNJ Agreement. Underthe JNJ Agreement, we are the exclusive supplier of ORTHOVISC to Johnson &Johnson. The JNJ Agreement provides for additional sales-based milestonepayments to us contingent upon achieving specified sales targets, in additionto royalty and transfer fees. The JNJ Agreement is subject to early 

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terminationin certain circumstances and is otherwise renewable by DePuy Mitek forconsecutive five-year terms.

**Accounts Receivableand Allowance for Doubtful Accounts**

Trade accounts receivableare recorded at the invoiced amount and do not bear interest. The allowance fordoubtful accounts is the Company’s best estimate of the amount of probablecredit losses in its existing accounts receivable. The Company determines theallowance based on specific identification. The Company reviews its allowancefor doubtful accounts at least quarterly. Past due balances over 90 days arereviewed individually for collectibility. Account balances are charged offagainst the allowance when the Company feels it is probable the receivable willnot be recovered. The Company does not have any off-balance-sheet creditexposure related to its customers.

**Inventories**

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

**Property andEquipment**

Propertyand equipment are carried at cost less accumulated depreciation. Costs of majoradditions and betterments are capitalized; maintenance and repairs that do notimprove or extend the life of the respective assets are charged to operations.On disposal, the related accumulated depreciation or amortization is removedfrom the accounts and any resulting gain or loss is included in results ofoperations. Depreciation is computed using the straight-line method over theestimated useful lives of the assets as follows:

| Machinery and equipment |   | 3–8  years                                  |
|-------------------------|--------|--------------------------------------------------|
| Furniture and fixtures  |   | 3–5  years                                  |
| Leasehold improvements  |   | Shorter of lease  term or  estimated useful life |

 

The Company accounts for impairment of long-livedassets in accordance with SFAS No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets.”  SFAS No. 144establishes a uniform accounting model for long-lived assets to be disposed of.This Statement also requires that long-lived assets be reviewed for impairmentwhenever events or changes in circumstances indicate that the carrying amountof an asset may not be recoverable. Recoverability of assets to be held andused is measured by comparing the carrying amount of an asset to estimatedundiscounted future net cash flows expected to be generated by the asset. Ifthe carrying amount of the asset exceeds its estimated future cash flows, animpairment charge is recognized by the amount by which the carrying amount ofthe asset exceeds the fair value of the asset. As of December 31, 2006 and2005, long-lived assets consisted of machinery, equipment and leaseholdimprovements.

During the years ended December 31,2006, 2005, and 2004 the Company did not record losses on impairment.

**Research andDevelopment**

Research and developmentcosts consists primarily of salaries and related expenses for personnel andfees paid to outside consultants and outside service providers, including costsassociated with licensing, milestone and contract revenue. Research anddevelopment costs are expensed as incurred.

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**Income Taxes**

The Company provides forincome taxes in accordance with SFAS No. 109, “Accounting for IncomeTaxes.” SFAS No. 109 requires the recognition of deferred tax assets andliabilities for the expected future tax consequences of temporary differencesbetween the financial reporting and tax basis of assets and liabilities.

**Stock-BasedCompensation**

Effective January 1,2006, the Company adopted the provisions of Statement of Financial AccountingStandards No. 123R, (“SFAS 123R”), “Share-Based Payment,” whichestablishes accounting for equity instruments exchanged for employee services.Under the provisions of SFAS No. 123R, share-based compensation costis measured at the grant date, based on the calculated fair value of the award,and is recognized as an expense over the employee’s requisite service period(generally the vesting period of the equity grant). Prior to January 1,2006, the Company accounted for share-based compensation to employees inaccordance with Accounting Principles Board Opinion No. 25 (“APB 25”,) “Accountingfor Stock Issued to Employees,” and related interpretations. The Company alsofollowed the disclosure requirements of SFAS No. 123, “Accounting forStock-Based Compensation,” as amended by SFAS 148, “Accounting for Stock-BasedCompensation—Transition and Disclosure.” The Company elected to adopt themodified prospective transition method as provided by SFAS 123R and,accordingly, financial statement amounts for the prior periods presented inthis Annual Report on Form 10-K have not been restated to reflectthe fair value method of expensing share-based compensation. See Note 9for additional disclosures.

**Concentration ofCredit Risk and Significant Customers**

SFAS No. 105,“Disclosure of Information About Financial Instruments with Off-Balance-Sheet-Riskand Financial Instruments with Concentrations of Credit Risk” requiresdisclosure of any significant off-balance-sheet-risk, or concentrations ofcredit risk. The Company has no significant off-balance sheet or concentrationsof credit risk such as foreign exchange contracts, option contracts or otherforeign hedging arrangements. The Company, by policy, limits the amount ofcredit exposure to any one financial institution, and routinely assesses thefinancial strength of its customers. As a result, the Company believes that itsaccounts receivable credit risk exposure is limited and has not experiencedsignificant write-downs in its accounts receivable balances. As ofDecember 31, 2006, Bausch & Lomb, Boehringer Ingelheim Vetmedica,JNJ, and Staar Surgical combined, represented 89% of the Company’s accountsreceivable balance. As of December 31, 2005, Bausch & Lomb,Boehringer Ingelheim Vetmedica, Pharmaren, JNJ, Staar Surgical and Ferrer Grupocombined, represented 91% of the Company’s accounts receivable balance.

**ReportingComprehensive Income**

SFAS No. 130, “ReportingComprehensive Income” establishes standards for reporting and display ofcomprehensive income and its components in the financial statements.Comprehensive income is the total of net income and all other non-owner changesin equity including such items as unrealized holding gains/losses onsecurities, foreign currency translation adjustments and minimum pensionliability adjustments. The Company had no such items for the years endedDecember 31, 2006, 2005, and 2004 and as a result, comprehensive income isthe same as reported net income for all periods presented.

**Disclosures AboutSegments of an Enterprise and Related Information**

Operating segments areidentified as components of an enterprise about which separate discretefinancial information is available for evaluation by the chief operatingdecision maker, or decision-making 

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group,in making decisions regarding how to allocate resources and assess performance.The Company’s chief operating decision maker is its Chief Executive Officer.Based on the criteria established by SFAS No. 131, “Disclosures aboutSegments of an Enterprise and Related Information,” the Company has onereportable operating segment, the results of which are disclosed in theaccompanying consolidated financial statements. All of the operations andassets of the Company have been derived from and are located in the UnitedStates.

**Recent AccountingPronouncements**

On July 13, 2006, FASB Interpretation (FIN)No. 48, *Accounting for Uncertainty inIncome Taxes—An Interpretation of FASB Statement No. 109*, wasissued. FIN 48 clarifies the accounting for uncertainty in income taxesrecognized in an enterprise’s financial statements in accordance with FASBStatement No. 109, *Accounting forIncome Taxes.* FIN 48 also prescribes a recognition thresholdand measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return.The new FASB standard also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure, andtransition and is effective for fiscal years beginning after December 15,2006. We are currently evaluating the impact of adopting FIN 48 on ourfinancial statements.

On September 15, 2006, the FASB issuedSFAS No. 157, “Fair Value Measurements” (SFAS 157). ThisStatement defines fair value, establishes a framework for measuring fair valuein generally accepted accounting principles (GAAP), and expands disclosuresabout fair value measurements. This Statement applies under other accountingpronouncements that require or permit fair value measurements, the Board havingpreviously concluded in those accounting pronouncements that fair value is therelevant measurement attribute. Accordingly, this Statement does not requireany new fair value measurements. SFAS 157 is effective for the Company asof January 1, 2008. The Company is currently evaluating the potentialimpact of adopting SFAS 157.

On September 13,2006, the Securities and Exchange Commission issued Staff AccountingBulletin No. 108, *Considering theEffects of Prior Year Misstatements When Quantifying Misstatements in CurrentYear Financial Statements*, or SAB 108. SAB 108 providesguidance on how prior year misstatements should be taken into considerationwhen quantifying misstatements in current year financial statements for thepurposes of determining whether the current year’s financial statements arematerially misstated. SAB 108 becomes effective for accounting yearsending after November 15, 2006. The adoption of this SAB did not have anyimpact on our financial statements.

**3. Net Income perCommon Share**

The Company reports earnings per share in accordancewith SFAS No. 128, “Earnings per Share,” which establishes standards forcomputing and presenting earnings per share. Basic earnings per share iscomputed by dividing net income by the weighted average number of common sharesoutstanding during the period. Diluted earnings per share is computed bydividing net income by the weighted average number of common shares outstandingand the number of dilutive potential common share equivalents during theperiod. Under the treasury stock method, unexercised “in-the-money” stockoptions 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 theaverage market price during the period.

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Sharesused in calculating basic and diluted earnings per share for each of the yearsended December 31, 2006, 2005 and 2004, are as follows:

| ** **                                                               | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|--------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Net income                                                               |       | $          | 4,604,216  |       | $          | 5,892,538  |       | $ | 11,189,869 |   |
| Basic weighted  average common shares outstanding                        |       | 10,639,028 |       | 10,410,920 |       | 10,103,835 |       |
| Dilutive  potential common shares                                        |       | 516,221    |       | 1,017,281  |       | 1,280,320  |       |
| Diluted weighted average  common and potential common shares outstanding |       | 11,155,249 |       | 11,428,201 |       | 11,384,155 |       |
|                                                                          |            |            |            |            |            |            |            |  |  |  |

 

Options to purchase approximately 193,075, 85,341, and14,000 shares were outstanding at December 31, 2006, 2005 and 2004,respectively, but not included in the computation of diluted earnings per sharebecause the options’ exercise prices were greater than the average market priceduring the period.

**4. Allowance forDoubtful Accounts**

Asummary of the allowance for doubtful account activity is as follows:

| ** **                      | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Balance,  beginning of the year |       | $                     | 22,558     |   | $ | 22,558 |   | $ | 28,750 |   |
| Amounts provided                |       | 27,166                |       | — |   | — |   |
| Amounts written  off            |       | —                |       | — |   | (6,192 | ) |
| Balance, end of the year        |       | $                     | 49,724     |   | $ | 22,558 |   | $ | 22,558 |   |

 

**5. Inventories**

Inventoriesconsist of the following:

| ** **      | ** ** | **December 31,** | ** ** |
|-----------------|------------|-----------------------|------------|
| ** **      | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Raw Materials   |       | $                     | 2,935,075  |   | $ | 1,594,313 |   |
| Work-in-Process |       | 2,132,665             |       | 1,506,565 |   |
| Finished Goods  |       | 327,856               |       | 169,800 |   |
| Total           |       | $                     | 5,395,596  |   | $ | 3,270,678 |   |

 

**6.Property & Equipment**

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

| ** **                     | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Machinery and  equipment       |       | $                     | 6,581,394  |   | $ | 6,407,333 |   |
| Furniture and  fixtures        |       | 736,824               |       | 736,824 |   |
| Leasehold  improvements        |       | 3,510,875             |       | 3,449,469 |   |
| Construction in  progress      |       | 2,426,147             |       | 1,355,813 |   |
|                           |       | 13,255,240            |       | 11,949,439 |   |
| Less accumulated  depreciation |       | (10,237,232           | )          | (9,853,177 | ) |
| Total                          |       | $                     | 3,018,008  |   | $ | 2,096,262 |   |

 

Depreciation expense was $384,055, $459,906 and$709,504 for the years ended December 31, 2006, 2005 and 2004,respectively.

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**7. Accrued Expenses**

Accruedexpenses consist of the following:

| ** **            | ** ** | **December 31,** | ** ** |
|-----------------------|------------|-----------------------|------------|
| ** **            | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Payroll and  benefits |       | $                     | 979,939    |   | $ | 1,006,760 |   |
| Professional fees     |       | 217,500               |       | 346,970 |   |
| Clinical trial        |       | 113,860               |       | 150,522 |   |
| Other                 |       | 262,536               |       | 214,664 |   |
| Total                 |       | $                     | 1,573,835  |   | $ | 1,718,916 |   |

 

**8. Commitments andContingencies**

*OperatingLeases.**  *TheCompany’s corporate headquarters is located in Woburn, Massachusetts, where itleases approximately 10,000 square feet of administrative and research anddevelopment space. The lease on this facility terminates in December 2007.The Company also leases approximately 37,000 square feet of space at a separatelocation in Woburn, Massachusetts, for its manufacturing facility andwarehouse. The lease for this facility terminates in February 2009. Rentalexpense in connection with the leases, totaled $791,137, $723,707, and$699,970, for the years ended December 31, 2006, 2005, and 2004,respectively.

Futureminimum lease payments under noncancelable operating leases, includingfacilities and office equipment leases, at December 31, 2006 are asfollows:

| ** ** | ** ** | **Amount** | ** ** |
|------------|------------|------------|------------|
| 2007       |       | $          | 801,948    |   |
| 2008       |       | 679,686    |       |
| 2009       |       | 135,270    |       |
| 2010       |       | 26,387     |       |
| 2011       |       | 13,193     |       |
| Thereafter |       | —     |       |
| Total      |       | $          | 1,656,484  |   |

 

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On January 4,2007, we entered into a new lease, pursuant to which we will lease a newheadquarters facility (the “Lease”), consisting of approximately 134,000 squarefeet of general office, research and development and manufacturing spacelocated in Bedford, Massachusetts. The Lease has an initial term of ten and ahalf years, and is expected to commence on approximately May 1, 2007 oncecertain agreed upon landlord improvements are completed. We have an optionunder the Lease to extend its terms for up to four periods beyond the originalexpiration date subject to the condition that we notify the landlord that weare exercising each option at least one year prior to the expiration of theoriginal or current term thereof. The first three renewal options each extendthe term an additional five years with the final renewal option extending theterm six years. We currently expect our administrative, research anddevelopment personnel to begin occupying the Bedford facility by the end of2007, and for the buildout and validation for the new manufacturing space to becompleted by late 2008. Assuming a lease commencement date of May 1, 2007,future minimum lease payments related to this lease are as follows:

| ** ** | ** ** | **Amount** | ** ** |
|------------|------------|------------|------------|
| 2007       |       | $          | 208,334    |   |
| 2008       |       | 479,167    |       |
| 2009       |       | 562,500    |       |
| 2010       |       | 677,083    |       |
| 2011       |       | 837,500    |       |
| Thereafter |       | 5,298,583  |       |
| Total      |       | $          | 8,063,167  |   |

 

*Guarantor Arrangements.*   Incertain of its contracts, the Company warrants to its customers that theproducts it manufactures conform to the product specifications as in effect atthe time of delivery of the product. The Company may also warrant that theproducts it manufactures do not infringe, violate or breach any U.S. patent orintellectual property rights, trade secret or other proprietary information ofany third party. On occasion, the Company contractually indemnifies itscustomers against any and all losses arising out of or in any way connectedwith any claim or claims of breach of its warranties or any actual or allegeddefect in any product caused by the negligence or acts or omissions of theCompany. The Company maintains a products liability insurance policy that limitsits exposure. Based on the Company’s historical activity in combination withits insurance policy coverage, the Company believes the estimated fair value ofthese indemnification agreements is minimal. The Company has no accruedwarranties and has no history of claims paid.

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**9. Stock OptionPlan**

EffectiveJanuary 1, 2006, the Company adopted the provisions SFAS 123R, whichestablished accounting for equity instruments exchanged for employee services. The Company estimates the fair value of stockoptions and stock appreciation rights using the Black-Scholes valuation model.Fair value of restricted stock is measured by the grant-date price of theCompany’s shares. Key input assumptions used to estimate the fair value ofstock options and stock appreciation rights include the exercise price of theaward, the expected option term, the expected volatility of the Company’s stockover the option’s expected term, the risk-free interest rate over the option’sexpected term, and the Company’s expected annual dividend yield. The Companyuses historical data on exercise of stock options and other factors to estimatethe expected term of share-based awards. The expected volatility assumption isbased on the unadjusted historical volatility of the Company’s commonstock. The risk-free interest rate assumption is based on U.S. Treasuryinterest rates at the time of grant. The fair value of each stock option andstock appreciation rights award during 2006, 2005 and 2004 was estimated on thegrant date using the Black-Scholes option-pricing model with the followingassumptions:

| ** **               | ** ** | **Twelve Months Ended** | ** ** |
|--------------------------|------------|-----------------------------------|------------|
| ** **               | ** ** | **December 31,  2006**       | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
| Risk-free  interest rate |       | 4.32% –  5.03%          |       | 3.54% –  4.53% |   | 2.35% –  3.54% |   |
| Expected  volatility     |       | 63.92% –  65.82%        |       | 68.45% –  71.38% |   | 72.9% –  100.14% |   |
| Expected lives  (years)  |       | 4                                 |       | 4 |   | 4 |   |
| Expected dividend yield  |       | 0.00%                             |       | 0.00% |   | 0.00% |   |

 

The Company recorded $1,267,205 of share-basedcompensation expense for the twelve months ended December 31, 2006 forstock options, stock appreciation rights and restricted stock awards. TheCompany presents the expenses related to stock-based compensation awards in thesame expense line items as cash compensation paid to the same employees. Priorto 2006, the Company granted stock options to employees and members of theBoard of Directors. During 2006, the Company granted 262,050 shares ofshare-based stock appreciation to members of its Board of Directors and companyofficers. The Company also granted 12,500 shares of stock options and 27,200 sharesof restricted stock to non-officer employees during 2006. These awards weregranted under the Stock Option and Incentive Plan approved by the Board ofDirectors on April 4, 2003. The Company did not recognize compensationexpense for employee share-based awards for the twelve months ended December 31,2005 and 2004, when the exercise price of the Company’s employee stock awardsequaled the market price of the underlying stock on the date of grant.

The Company had previouslyadopted the provisions of Statement of Financial Accounting Standards No. 123,“Accounting for Stock-Based Compensation,” (“SFAS 123”), as amended by SFAS No. 148,“Accounting for Stock-Based Compensation—Transition and Disclosure” throughdisclosure only. The following table illustrates the effects on net income andearnings per share for the twelve months ended 

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December 31, 2005 and 2004 as if the Company hadapplied the fair value recognition provisions of SFAS 123 to share-basedemployee awards.

| ** **                                                                                                     | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                     | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Net income                                                                                                     |       |                  |       |   |   |
| As reported                                                                                                    |       | $                     | 5,892,538  |   | $ | 11,189,869 |   |
| Add: Stock-based  employee compensation expense included in reported net income                                |       | —                |       | — |   |
| Deduct: Total  stock-based employee compensation under the fair-value-based method for all  awards, net of tax |       | (697,191              | )          | (481,466 | ) |
| Proforma net  income                                                                                           |       | $                     | 5,195,347  |   | $ | 10,708,403 |   |
| Basic net income  per share                                                                                    |       |                  |       |   |   |
| As reported                                                                                                    |       | $                     | 0.57       |   | $ | 1.11 |   |
| Proforma                                                                                                       |       | $                     | 0.50       |   | $ | 1.06 |   |
| Diluted net  income per share                                                                                  |       |                  |       |   |   |
| As reported                                                                                                    |       | $                     | 0.52       |   | $ | 0.98 |   |
| Proforma                                                                                                       |       | $                     | 0.45       |   | $ | 0.94 |   |

 

Forthe twelve months ended December 31, 2006, the adoption of SFAS 123R hadthe following effect on the Company’s consolidated statements of operations:

| Cost of product  revenue                    |   | $         | 252,098 |   |
|---------------------------------------------|--------|-----------|---------|--------|
| Research &  development            |   | 40,964    |    |
| Selling,  general & administrative |   | 974,143   |    |
| Income from  operations                     |   | 1,267,205 |    |
| Income tax  benefits                        |   | (312,524  | )       |
| Net stock-based  compensation expense       |   | $         | 954,681 |   |
| Effect on basic  net income per share       |   | $         | 0.09    |   |
| Effect on diluted net  income per share     |   | $         | 0.09    |   |

 

The Company had reserved 3,485,000 shares of commonstock for the grant of stock options to employees, directors, consultants andadvisors under the Anika Therapeutics, Inc. 1993 Stock Option Plan, asamended (the “1993 Plan”). In addition, the Company also established theDirectors’ Stock Option Plan (the “Directors’ Plan”) and reserved 40,000 sharesof 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 approximately662,000 shares reserved under the plan were released. On April 4, 2003 theBoard of Directors approved the 2003 Anika Therapeutics, Inc. Stock Optionand Incentive Plan (the “2003 Plan”). The Company has reserved 1,500,000 sharesof common stock for grant of stock options to employees, directors, consultantsand advisors under the 2003 Plan, which was approved by stockholders on June 4,2003. The Company issues new shares upon share option exercise from itsauthorized shares. Stock-based awards are granted with an exercise price equalto the market price of the Company’s stock on the date of grant. Awards containservice condition and generally vest over 4 years with 25% of the sharesvesting on each of the four anniversary dates from the grant date. Awards have10-year contractual terms.

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Combinedstock options and stock appreciation rights activity under the three plans issummarized as follows for the years end December 31, 2006, 2005, and 2004:

| ** **                                                    | ** ** | **2006**                   | ** ** | **2005**                                               | ** ** | **2004**                   | ** ** |
|---------------------------------------------------------------|------------|----------------------------|------------|--------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                    | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise  Price per  Share** | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise  Price per  Share** | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise  Price per  Share** | ** ** |
| Outstanding at  beginning of year                             |       | 1,795,394                  |       |                                                   | $          | 5.80                       |       |   | 1,707,305 |   |   | $ | 4.16 |   |   | 2,072,297 |   |   | $ | 3.51 |   |   |
| Granted                                                       |       | 274,550                    |       |                                                   | $          | 11.54                      |       |   | 409,525 |   |   | $ | 10.46 |   |   | 207,000 |   |   | $ | 12.60 |   |   |
| Cancelled                                                     |       | (249,604                   | )          |                                                   | $          | 9.85                       |       |   | (78,515 | ) |   | $ | 5.47 |   |   | (275,925 | ) |   | $ | 7.73 |   |   |
| Expired                                                       |       | (667                       | )          |                                                   | $          | 4.75                       |       |   | — |   |   | — |   |   | (25,000 | ) |   | $ | 2.63 |   |   |
| Exercised                                                     |       | (272,261                   | )          |                                                   | $          | 4.48                       |       |   | (242,921 | ) |   | $ | 2.29 |   |   | (271,067 | ) |   | $ | 2.13 |   |   |
| Outstanding at  end of year                                   |       | 1,547,412                  |       |                                                   | $          | 6.39                       |       |   | 1,795,394 |   |   | $ | 5.80 |   |   | 1,707,305 |   |   | $ | 4.16 |   |   |
| Options  exercisable at end of year                           |       | 1,022,262                  |       |                                                   | $          | 4.55                       |       |   | 1,030,507 |   |   | $ | 3.90 |   |   | 1,015,055 |   |   | $ | 3.32 |   |   |
| Weighted average fair  value of options granted at fair value |       |                       |       |                                                   | $          | 6.05                       |       |   |   |   |   | $ | 5.76 |   |   |   |   |   | $ | 7.45 |   |   |

 

Therestricted stock activity for the year ended December 31, 2006 is asfollows:

| ** **                           | ** ** | **Restricted Stock  Twelve Months Ended  December 31, 2006** | ** ** |
|--------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **                           | ** ** | **Number of  Shares**                                                            | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** |
| Outstanding at  beginning of year    |       |                                                                                  | —     |   |   |   | — |   |   |
| Granted                              |       |                                                                                  | 27,200     |   |   |   | $ | 11.65 |   |   |
| Cancelled                            |       |                                                                                  | (3,300     | ) |   |   | $ | 10.51 |   |   |
| Exercised                            |       |                                                                                  | —     |   |   |   | — |   |   |
| Expired                              |       |                                                                                  | —     |   |   |   | — |   |   |
| Outstanding at  end of year          |       |                                                                                  | 23,900     |   |   |   | $ | 11.80 |   |   |
| Shares exercisable at  end of period |       |                                                                                  | —     |   |   |   | — |   |   |

 

The aggregate intrinsic value of stock options andstock appreciation rights fully vested and outstanding at December 31,2006 was $8,921,023 and $10,653,459, respectively. The total intrinsic value ofoptions and  stock appreciation rightsexercised was $2,130,816, $2,880,654, and $2,498,613 for the years endedDecember 31, 2006, 2005 and 2004, respectively. The total fair value ofoptions and stock appreciation rights vested during the years endedDecember 31, 2006, 2005 and 2004 was $1,125,195, $716,757 and $681,606,respectively. Total tax benefits realized from stock option exercises were$505,931 and $1,080,613 for the years ended December 31, 2006 and 2005,respectively. The Company received $1,219,474 and $556,191 for exercises ofstock options during the years ended December 31, 2006 and 2005,respectively.

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Asummary of the activity for nonvested stock options and stock appreciationrights awards as of December 31, 2006 and changes during the twelve monthperiod is presented below:

| ** **                           | ** ** | **Number of  Shares** | ** ** | **Weighted  Average Grant  Date Fair Value  per Share** | ** ** |
|--------------------------------------|------------|----------------------------|------------|-----------------------------------------------------------------------------|------------|
| Nonvested at  January 1, 2006   |       |                       | 766,838    |                                                                        |       |   | $ | 4.92 |   |   |
| Granted                              |       |                       | 274,550    |                                                                        |       |   | $ | 6.04 |   |   |
| Vested                               |       |                       | (266,634   | )                                                                           |       |   | $ | 4.22 |   |   |
| Cancelled                            |       |                       | (249,604   | )                                                                           |       |   | $ | 5.68 |   |   |
| Nonvested at  December 31, 2006 |       |                       | 525,150    |                                                                        |       |   | $ | 5.50 |   |   |

 

Generally, stock-based awards vest in equal, annualinstallments up to four years after the date of grant and have an expirationdate no later than ten years after the date of grant. There are 572,365 optionsavailable for future grant at December 31, 2006.

Thefollowing table summarizes significant ranges of outstanding options and stockappreciation rights under the three plans at December 31, 2006:

| ** **                                  | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **Range of Exercise Prices** | ** ** | ** **                   | ** ** | **Number  Outstanding**      | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $0.90 - $1.05                               |       |                         | 272,838    |                         |       |   | 5.59 |   |   |   | $ | 1.02 |   |   | 235,901 |   |   | 5.52 |   |   |   | $ | 1.02 |   |   |
| $1.06 - $4.75                               |       |                         | 313,602    |                         |       |   | 4.55 |   |   |   | $ | 1.42 |   |   | 308,600 |   |   | 4.73 |   |   |   | $ | 1.38 |   |   |
| $4.76 - $9.21                               |       |                         | 326,262    |                         |       |   | 4.57 |   |   |   | $ | 7.13 |   |   | 224,300 |   |   | 2.95 |   |   |   | $ | 6.42 |   |   |
| $9.22 - $10.69                              |       |                         | 332,385    |                         |       |   | 7.55 |   |   |   | $ | 9.61 |   |   | 186,073 |   |   | 6.99 |   |   |   | $ | 9.31 |   |   |
| $10.70 - $15.45                             |       |                         | 302,325    |                         |       |   | 9.30 |   |   |   | $ | 12.06 |   |   | 67,388 |   |   | 8.76 |   |   |   | $ | 12.11 |   |   |
|                                        |       |                         | 1,547,412  |                         |       |   | 6.31 |   |   |   | $ | 6.39 |   |   | 1,022,262 |   |   | 5.20 |   |   |   | $ | 4.55 |   |   |
|                                             |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

As of December 31,2006, the weighted average fair value per share for options and stockappreciation rights for shares outstanding and vested were $3.81 and $2.95,respectively. As of December 31, 2006, there was approximately $3.2million, net of forfeiture assumptions, of total unrecognized compensation costrelated to nonvested share-based compensation arrangements granted under theCompany’s stock plans. That cost is expected to be recognized over a weightedaverage period of 2.59 years.

**10. ShareholderRights Plan**

On April 6, 1998, the Board of Directors adopteda shareholder rights agreement (the “Rights Plan”) which was subsequently amendedas of November 5, 2002. In connection with the adoption of the RightsPlan, the Board of Directors declared a dividend distribution of one preferredstock purchase right (a “Right”) for each outstanding share of common stock tostockholders of record as of the close of business on April 23, 1998.Currently, these Rights are not exercisable and trade with the shares of theCompany’s Common Stock.

Under the Rights Plan, the Rights generally becomeexercisable if: (1) a person becomes an “Acquiring Person” by acquiring15% or more of the Company’s Common Stock, (2) a person commences a tenderoffer that would result in that person owning 15% or more of the Company’sCommon 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 personbecomes an “Acquiring Person,” or an “Adverse Person,” each holder of a Right(other than the Acquiring Person or Adverse Person) would be entitled toacquire such number of units of 

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preferred stock (which areequivalent to shares of the Company’s Common Stock) having a value of twice theexercise price of the Right. If, after any such event, the Company enters intoa merger or other business combination transaction with another entity, eachholder of a Right would then be entitled to purchase, at the then-currentexercise price, shares of the acquiring company’s common stock having a valueof twice the exercise price of the Right. The current exercise price per Rightis $45.00.

The Rights will expire at the close of business onApril 6, 2008 (the “Expiration Date”), unless previously redeemed orexchanged by the Company as described below. The Rights may be redeemed inwhole, but not in part, at a price of $0.01 per Right (payable in cash, sharesof the Company’s Common Stock or other consideration deemed appropriate by theBoard 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 personbecomes an “Acquiring Person” or an “Adverse Person”, the Board of Directorsmay, at its option, exchange all or any part of the then outstanding andexercisable Rights for shares of the Company’s Common Stock at an exchangeratio specified in the Rights Plan. Notwithstanding the foregoing, the Board ofDirectors generally will not be empowered to affect such exchange at any timeafter any person becomes the beneficial owner of 50% or more of the Company’sCommon Stock.

Until a Right is exercised, the holder will have norights as a stockholder of the Company (beyond those as an existingstockholder), including the right to vote or to receive dividends.

In connection with theestablishment of the Rights Plan, the Board of Directors approved the creationof Preferred Stock of the Company designated as Series B JuniorParticipating 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 exerciseof the Rights.

**11. StockRepurchase Plan**

In October 1998, theBoard of Directors approved a stock repurchase plan under which the Company isauthorized to purchase up to $4,000,000 of the Company’s Common Stock, with thetotal number of shares repurchased not to exceed 9.9% of the total number ofshares issued and outstanding. Under the plan, shares may be repurchased fromtime to time and in such amounts as market conditions warrant, subject toregulatory considerations. To date, the Company had repurchased a total of762,100 shares at a net cost of approximately $3,873,000 and has reissued allshares upon exercise of employee stock options. No shares were purchased in2006, 2005, and 2004.

**12. EmployeeBenefit Plan**

Employees are eligible to participate in the Company’s401(k) savings plan. Employees may elect to contribute a percentage oftheir compensation to the plan, and the Company will make matchingcontributions up to a limit of 5% of an employee’s compensation. In addition,the Company may make annual discretionary contributions. For the years endedDecember 31, 2006, 2005, and 2004, the Company made matching contributionsof $223,185, $202,081 and $176,604 respectively.

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**13. Revenue byProduct Group, by Significant Customer and by Geographic Region**

Productrevenue by product group is as follows:

| ** **           | ** ** | **Years Ended December 31,** | ** ** |
|----------------------|------------|---------------------------------------------|------------|
| ** **           | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Ophthalmic  Products |       | $                                           | 10,748,765 |   | $ | 10,521,914 |   | $ | 11,532,671 |   |
| ORTHOVISC            |       | 11,340,433                                  |       | 7,938,333 |   | 8,698,826 |   |
| HYVISC               |       | 1,820,617                                   |       | 2,073,642 |   | 2,054,488 |   |
| INCERT               |       | 43,470                                      |       | — |   | — |   |
|                 |       | $                                           | 23,953,285 |   | $ | 20,533,889 |   | $ | 22,285,985 |   |

 

Productrevenue by significant customers as a percent of product revenues is asfollows:

| ** **                           | ** ** | **Percent of Product Revenue  Years Ended December 31,** | ** ** |
|--------------------------------------|------------|----------------------------------------------------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                                                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Bausch &  Lomb Incorporated |       | 40.8                                                                                   | %          | 45.6 | % | 38.3 | % |
| Depuy Mitek /  Ortho Biotech         |       | 21.8                                                                                   | %          | 8.0 | % | 21.0 | % |
| Pharmaren AG /  Biomeks              |       | 16.7                                                                                   | %          | 23.2 | % | 13.6 | % |
| Boehringer  Ingelheim Vetmedica      |       | 7.6                                                                                    | %          | 10.1 | % | 9.2 | % |
| Advanced Medical  Optics             |       | —                                                                                 |       | 1.2 | % | 9.9 | % |
|                                 |       | 86.9                                                                                   | %          | 88.1 | % | 92.0 | % |

 

Revenuesby geographic location in total and as a percentage of total revenues are asfollows:

| ** **               | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------|------------|---------------------------------------------|------------|
| ** **               | ** ** | **2006**                                    | ** ** | **2006** | ** ** | **2006** | ** ** |
| ** **               | ** ** | **Revenue**                                 | ** ** | **Percent of  Revenue** | ** ** | **Revenue** | ** ** | **Percent of  Revenue** | ** ** | **Revenue** | ** ** | **Percent of  Revenue** | ** ** |
| **Geographic location:** |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| United States            |       | $                                           | 17,743,274 |   |   | 66.1 | % |   | $ | 21,090,250 |   |   | 70.7 | % |   | $ | 19,767,337 |   |   | 74.7 | % |   |
| Europe                   |       | 3,668,479                                   |       |   | 13.7 | % |   | 3,166,728 |   |   | 10.6 | % |   | 3,115,086 |   |   | 11.8 | % |   |
| Turkey                   |       | 3,998,226                                   |       |   | 14.9 | % |   | 4,763,509 |   |   | 16.0 | % |   | 3,024,246 |   |   | 11.4 | % |   |
| Other                    |       | 1,430,635                                   |       |   | 5.3 | % |   | 814,125 |   |   | 2.7 | % |   | 558,376 |   |   | 2.1 | % |   |
| Total                    |       | $                                           | 26,840,614 |   |   | 100.00 | % |   | $ | 29,834,612 |   |   | 100.00 | % |   | $ | 26,465,045 |   |   | 100.00 | % |   |

 

Substantially alllicensing, milestone and contract revenue was derived in the United States for2006, 2005 and 2004.

**14. Income Taxes**

Income tax expense (benefit) was $2,924,006,$3,899,104 and ($4,413,161) for the years ended December 31, 2006, 2005,and 2004, respectively. Prepaid taxes of $663,338 was included in the prepaidexpenses at December 31, 2005.

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Thecomponents of the provision for income taxes and benefit from release ofvaluation allowance are as follows:

| ** **                                    | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Current:                                      |       |                                        |       |   |   |   |   |
| Federal                                       |       | $                                           | 1,991,829  |   | $ | 1,787,165 |   | $ | 5,845,304 |   |
| State                                         |       | 272,201                                     |       | 200,915 |   | 922,371 |   |
|                                          |       | 2,264,030                                   |       | 1,988,080 |   | 6,767,675 |   |
| Deferred:                                     |       |                                        |       |   |   |   |   |
| Federal                                       |       | 580,694                                     |       | 1,298,303 |   | (3,680,232 | ) |
| State                                         |       | 79,282                                      |       | 612,721 |   | (461,812 | ) |
|                                          |       | 659,976                                     |       | 1,911,024 |   | (4,142,044 | ) |
| Provision for  income taxes                   |       | 2,924,006                                   |       | 3,899,104 |   | 2,625,631 |   |
| Benefit from  release of valuation allowance: |       |                                        |       |   |   |   |   |
| Federal                                       |       | —                                      |       | — |   | (5,759,759 | ) |
| State                                         |       | —                                      |       | — |   | (1,279,033 | ) |
|                                          |       | —                                      |       | — |   | (7,038,792 | ) |
| Tax expense (benefit)                         |       | $                                           | 2,924,006  |   | $ | 3,899,104 |   | $ | (4,413,161 | ) |

 

The Company receives a tax deduction upon the exerciseof nonqualified stock options and disqualifying dispositions by employees forthe difference between the exercise price and the market price of theunderlying common stock on the date of exercise. The benefit of the related taxdeduction in the amounts of $505,931, $1,080,613 and $609,866 were not recordedthrough the tax provision; rather, they were credited directly to additionalpaid in capital in 2006, 2005 and 2004, respectively.

TheCompany’s effective tax rate varied from the U.S. federal statuatory rate due,principally, to the impact of research and development and other credits, andnondeductible compensation expenses related to SFAS 123R. A reconciliation ofthe U.S. federal statutory tax rate to the effective tax rate for the periodsending December 31 is as follows:

| ** **                                                     | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                     | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Computed expected  tax expense                                 |       | 34.0                                        | %          | 34.0 | % | 34.0 | % |
| State tax expense  (net of federal benefit)                    |       | 3.8                                         | %          | 4.3 | % | 2.8 | % |
| State deferred  tax assets rate change                         |       | —                                      |       | 4.5 | % | — |   |
| Permanent items,  including nondeductible expenses             |       | 1.8                                         | %          | -0.9 | % | 0.9 | % |
| Federal and state  research and development, and other credits |       | -1.6                                        | %          | -1.4 | % | -1.8 | % |
| Other                                                          |       | 0.8                                         | %          | -0.7 | % | — |   |
| Federal rate  difference                                       |       | —                                      |       | — |   | 2.9 | % |
| Change in  valuation allowance related to income tax benefit   |       | —                                      |       | — |   | -103.9 | % |
| Tax (benefit) expense                                          |       | 38.8                                        | %          | 39.8 | % | -65.1 | % |

 

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TheCompany records a deferred tax asset or liability based on the differencebetween the financial statement and tax bases of assets and liabilities, asmeasured by the enacted tax rates assumed to be in effect when thesedifferences reverse. The approximate income tax effect of each type oftemporary difference and carryforward is as follows:

| ** **                 | ** ** | **Years ended December 31,** | ** ** |
|----------------------------|------------|---------------------------------------------|------------|
| ** **                 | ** ** | **2006**                                    | ** ** | **2005** | ** ** |
| Deferred tax assets:       |       |                                        |       |   |   |
| Depreciation               |       | $                                           | 755,442    |   | $ | 653,708 |   |
| FAS 123R expense           |       | 248,680                                     |       | — |   |
| Accrued expenses and other |       | 257,490                                     |       | 143,274 |   |
| Inventory reserve          |       | 23,336                                      |       | 84,354 |   |
| Deferred revenue           |       | 7,324,642                                   |       | 8,388,230 |   |
| Deferred tax asset         |       | $                                           | 8,609,590  |   | $ | 9,269,566 |   |

 

As of December 31, 2006 and 2005, managementdetermined that it is more likely than not that the deferred tax assets will berealized and, therefore, a valuation allowance has not been recorded. As of December 31,2004, based on management’s expectations regarding future profitability, theCompany released the valuation allowance previously established against itsdeferred tax assets and recorded a one-time income tax benefit of $7,038,792.

In 2004, the Company achieved milestones under the JNJAgreement and received payments totaling $27,000,000 which the Companyrecognized as taxable income in 2004. As a result, the Company has determinedthat it will be able to utilize all of its net operating loss and creditcarry-forwards in 2004 to offset part of its taxable income. In accordance withthe Company’s revenue recognition policy, for financial statement purposes, themilestone payments totaling $27,000,000 were deferred and are being recognizedratably over the expected ten-year term of the JNJ Agreement. The Companyrecorded a deferred tax asset of approximately $7,300,000 representing theapproximate income tax effect of the timing difference of revenue recognitionfor financial statement purposes and for tax purposes related to these milestonepayments as of December 31, 2006.

The Company has a pendingIRS audit related to its 2004 tax return. The Company is currently in theprocess of finalizing the audit results with the IRS. It is expected that theoutcome of the IRS audit will not be material to the Company’s financialstatements.

**15. Quarterly Financial Data (Unaudited)**

| ** **                         | ** ** | **Quarter ended** | ** ** | **Quarter ended** | ** ** | **Quarter ended** | ** ** | **Quarter ended** | ** ** |
|------------------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|
| **Year 2006**                 | ** ** | **December 31,**  | ** ** | **September 30,** | ** ** | **June 30,**      | ** ** | **March 31,**     | ** ** |
| Product revenue                    |       |                   | $          | 5,077,561              |       |                   |       | $                      | 5,494,407  |   |   |   | $ | 7,115,484 |   |   |   | $ | 6,265,833 |   |   |
| Total revenue                      |       |                   | 5,888,956  |                   |       |                   | 6,200,657  |                   |       |   | 7,798,041 |   |   |   | 6,952,960 |   |   |
| Cost of product  revenue           |       |                   | 3,054,111  |                   |       |                   | 2,125,028  |                   |       |   | 2,890,904 |   |   |   | 3,047,818 |   |   |
| Gross profit on  product revenue   |       |                   | 2,023,450  |                   |       |                   | 3,369,379  |                   |       |   | 4,224,580 |   |   |   | 3,218,015 |   |   |
| Net income                         |       |                   | $          | 1,046,762              |       |                   |       | $                      | 1,324,640  |   |   |   | $ | 1,352,065 |   |   |   | $ | 880,749 |   |   |
| Per common share  information      |       |                   |       |                   |       |                   |       |                   |       |   |   |   |   |   |   |   |   |
| Basic net income per share         |       |                   | $          | 0.10                   |       |                   |       | $                      | 0.12       |   |   |   | $ | 0.13 |   |   |   | $ | 0.08 |   |   |
| Basic common shares outstanding    |       |                   | 10,745,819 |                   |       |                   | 10,676,943 |                   |       |   | 10,601,336 |   |   |   | 10,526,672 |   |   |
| Diluted net income per share       |       |                   | $          | 0.09                   |       |                   |       | $                      | 0.12       |   |   |   | $ | 0.12 |   |   |   | $ | 0.08 |   |   |
| Diluted common  shares outstanding |       |                   | 11,196,213 |                   |       |                   | 11,130,225 |                   |       |   | 10,955,156 |   |   |   | 11,218,360 |   |   |

 

65

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| ** **                         | ** ** | **Quarter ended** | ** ** | **Quarter ended** | ** ** | **Quarter ended** | ** ** | **Quarter ended** | ** ** |
|------------------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|
| **Year 2005**                 | ** ** | **December 31,**  | ** ** | **September 30,** | ** ** | **June 30,**      | ** ** | **March 31,**     | ** ** |
| Product revenue                    |       |                   | $          | 4,773,825              |       |                   |       | $                      | 5,998,995  |   |   |   | $ | 4,084,132 |   |   |   | $ | 5,676,937 |   |   |
| Total revenue                      |       |                   | 5,466,026  |                   |       |                   | 10,057,874 |                   |       |   | 7,019,425 |   |   |   | 7,291,287 |   |   |
| Cost of product  revenue           |       |                   | 2,266,156  |                   |       |                   | 3,766,762  |                   |       |   | 2,117,208 |   |   |   | 2,993,964 |   |   |
| Gross profit on  product revenue   |       |                   | 2,507,669  |                   |       |                   | 2,232,233  |                   |       |   | 1,966,924 |   |   |   | 2,682,973 |   |   |
| Net income                         |       |                   | $          | 822,302                |       |                   |       | $                      | 2,531,507  |   |   |   | $ | 1,336,489 |   |   |   | $ | 1,202,240 |   |   |
| Per common share  information      |       |                   |       |                   |       |                   |       |                   |       |   |   |   |   |   |   |   |   |
| Basic net income per share         |       |                   | $          | 0.08                   |       |                   |       | $                      | 0.24       |   |   |   | $ | 0.13 |   |   |   | $ | 0.12 |   |   |
| Basic common shares outstanding    |       |                   | 10,496,453 |                   |       |                   | 10,482,850 |                   |       |   | 10,391,538 |   |   |   | 10,269,389 |   |   |
| Diluted net income per share       |       |                   | $          | 0.07                   |       |                   |       | $                      | 0.22       |   |   |   | $ | 0.12 |   |   |   | $ | 0.11 |   |   |
| Diluted common  shares outstanding |       |                   | 11,412,632 |                   |       |                   | 11,480,570 |                   |       |   | 11,537,538 |   |   |   | 11,264,595 |   |   |

 

During the second quarter of 2005, the Company’sophthalmic sales were significantly impacted as a result of a voluntary productrecall instigated by our discovery of defective vendor-supplied finished goodspackaged with our HA viscoelastic product. This voluntary recall resulted in adecrease of $1,359,000 in sales of ophthalmic product for the three monthsended June 30, 2005 and a corresponding similar increase in third quartersales as we completed restocking of our customers, with very little impact onrevenue from the recall for the nine and twelve months ended September 30and December 31, 2005, respectively.

On September 1, 2005,the Company announced that it had mutually agreed with OrthoNeutrogena toterminate its development and commercialization agreement. Under the terms ofthe termination agreement, we received a termination payment of $3,115,000 fromOrthoNeutrogena including $815,000 for all outstanding clinical study costs incurredand committed to by the Company at the termination date. Given there are nocontinuing performance obligations with respect to the development andcommercialization agreement or the related termination agreement, all amountswere recognized as contract revenue during the third quarter of 2005 under theperformance-based model. See Notes 2.

**ITEM9.**                CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

**ITEM9A.**        CONTROLS AND PROCEDURES

(a)          Evaluationof disclosure controls and procedures.

As required by Rule 13a-15under the Securities Exchange Act of 1934 (“Exchange Act”), we carried out anevaluation under the supervision and with the participation of the ourmanagement, including our chief executive officer and chief financial officer,of the effectiveness of the design and operation of our disclosure controls andprocedures as of the end of the period covered by this report. Based upon thatevaluation, the chief executive officer and principal financial officer haveconcluded that our disclosure controls and procedures are reasonably effectiveto ensure that material information relating to us required to be disclosed byus in reports we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in Securities andExchange Commission rules and forms. Disclosure controls and proceduresinclude, without limitation, controls and procedures designed to ensure thatinformation required to be disclosed by the Company in the reports it files orsubmits under the Exchange Act is accumulated and communicated to the Company’smanagement, including our chief executive officer and chief financial officer,or persons performing similar functions, as appropriate to allow timelydecisions regarding required disclosure. In designing and evaluating thedisclosure controls and procedures, our management recognized that any controlsand procedures, no 

66

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matterhow well designed and operated, can provide only reasonable assurances ofachieving the desired control objectives, and management necessarily wasrequired to apply its judgment in designing and evaluating the controls andprocedures. On an on-going basis, we review and document our disclosurecontrols and procedures, and our internal control over financial reporting, andmay from time to time make changes aimed at enhancing their effectiveness andto ensure that our systems evolve with our business.

(b)         Changes in internalcontrols over financial reporting.

There were no changes inour internal control over financial reporting during the fourth quarter offiscal year 2006 that have materially affected, or that are reasonably likelyto materially affect, our internal controls over financial reporting.

**Management’s Reporton Internal Control Over Financial Reporting**

Our management is responsible for establishing andmaintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and15d-15(f) under the Securities Exchange Act of 1934. Our internal controlover financial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted accounting principles.

Because of its inherent limitations, internal controlover financial reporting can provide only reasonable assurance and may notprevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of ourinternal control over financial reporting as of December 31, 2006. Inmaking this assessment, management used the criteria set forth by the Committeeof Sponsoring Organizations of the Treadway Commission (“COSO”) in InternalControl-Integrated Framework.

Based on our assessment and those criteria, our managementbelieves that the company maintained effective internal control over financialreporting as of December 31, 2006.

Our management’sassessment of the effectiveness of our internal control over financialreporting as of December 31, 2006 has been audited byPricewaterhouseCoopers LLP, an independent registered public accounting firm,as stated in their report which is included herein.

**ITEM 9B.**       OTHERINFORMATION

None.

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**PART III**

**ITEM 10.**         DIRECTORS,EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information requiredby Item 10 is hereby incorporated by reference to the Registrant’s ProxyStatement (the “Proxy Statement”) for the Annual Meeting of Stockholders to beheld on June 1, 2007.

**ITEM 11.**         EXECUTIVECOMPENSATION

The information requiredby Item 11 is hereby incorporated by reference to the Proxy Statement for theAnnual Meeting of Stockholders to be held on June 1, 2007.

**ITEM 12.**         SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS

The information requiredby Item 12 is hereby incorporated by reference to the Proxy Statement for theAnnual Meeting of Stockholders to be held on June 1, 2007. and Item 5 ofthis Annual Report on Form 10-K under the heading “EquityCompensation Plan Information.”

**ITEM 13.**         CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information requiredby Item 13 is hereby incorporated by reference to the Proxy Statement for the AnnualMeeting of Stockholders to be held on June 1, 2007.

**ITEM 14.**         PRINCIPALACCOUNTING FEES AND SERVICES

The information requiredby Item 14 is hereby incorporated by reference to the Proxy Statement for theAnnual Meeting of Stockholders to be held on June 1, 2007.

**PART IV**

**ITEM 15.**         EXHIBITSAND FINANCIAL STATEMENT SCHEDULES

(a)           Documents filed as partof Form 10-K.

(1)         FinancialStatements

| Report of Independent Registered Public Accounting  Firm |   | 43    |   |
|----------------------------------------------------------|--------|-------|--------|
| Consolidated  Balance Sheets                             |   | 45    |   |
| Consolidated Statements of Operations                    |   | 46    |   |
| Consolidated Statements of Stockholder’s Equity     |   | 47    |   |
| Consolidated Statements of Cash Flows                    |   | 48    |   |
| Notes to Consolidated Financial Statements               |   | 49-66 |   |

 

(2)         Schedules

Schedules have been omitted as all requiredinformation has been disclosed in the financial statements and relatedfootnotes.

(3)         Exhibits

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The list of Exhibits filedas a part of this Annual Report on Form 10-K are set forth on the Exhibit Index(b) below.

| (b) 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.                                                                                                                 |
| 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                                                           |       | 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.                                                                                                              |
| 3.6                                                           |       | 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                                                          |       | 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.                                                                                                                                                                                                                                           |

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| 10.2  |   | 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.                                                                                                     |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.3  |   | 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.                                                                          |
| 10.4  |   | 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.                                                                                    |
| 10.5  |   | 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.                                                                        |
| 10.6  |   | 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.                                                                                                |
| 10.7  |   | 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.                                                                                |
| 10.8  |   | 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.                                                                |
| 10.9  |   | 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. |
| 10.10 |   | 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.                                                 |
| 10.11 |   | 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.                                                                        |

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| 10.12   |   | 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. |
|---------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.13   |   | 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.                    |
| 10.14   |   | 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.                             |
| 10.15   |   | 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.                          |
| 10.16   |   | 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.                                            |
| 10.17   |   | 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.                                                                                                                      |
| **10.18 |   | Supply Agreement dated  as of December 15, 2004 by and between the Company and Bausch &  Lomb, Incorporated, incorporated by reference to the Company’s current report  on Form 8-K (File no. 001-14027), filed with the Securities and  Exchange Commission on December 20, 2004.                                                                                                     |
| 10.19   |   | Lease Amendment dated  October 13, 2004 by and between the Company and MedChem  Products, Inc., incorporated herein by reference to the Company’s annual  report on Form 10-K for the period ended December 31, 2004  (File no. 001-14027), filed with the Securities and Exchange Commission  on March 16, 2005.                                                                          |
| 10.20   |   | Letter Agreement dated  June 30, 2005, as amended, by and between the Company and Kevin W.  Quinlan, incorporated herein by reference to the Company’s current report on  Form 8-K (File no. 001-14027), filed with the Securities and  Exchange Commission on July 12, 2005.                                                                                                                        |
| 10.21   |   | Change in Control, Bonus  and Severance Agreement, dated as of July 11, 2005, by and between the  Company and Kevin W. Quinlan, incorporated herein by reference to the  Company’s current report on Form 8-K (File no. 001-14027),  filed with the Securities and Exchange Commission on July 12, 2005.                                                                                             |

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| 10.22 |   | 2003 Stock Option and  Incentive Plan, as amended, incorporated herein by reference to  Exhibit A of the Company’s Proxy Statement (File no. 001-14027),  filed with the Securities and Exchange Commission on April 30, 2003.                                                                                                                                                                 |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.23 |   | First Amendment to the  Company’s 2003 Stock Option and Incentive Plan incorporated herein by  reference to Exhibit 4.9 of the Company’s Form S-8 (File  no. 333-110326), filed with the Securities and Exchange Commission  on November 7, 2003.                                                                                                                               |
| 10.24 |   | Form of Incentive  Stock Option Agreement under the Company’s 2003 Stock Option and Incentive  Plan, incorporated herein by reference to Exhibit 10.3 to the Company’s  current report on Form 8-K (File no. 001-14027), filed with  the Securities and Exchange Commission on October 5, 2004.                                                                                 |
| 10.25 |   | Form of  Non-Qualified Stock Option Agreement under the Company’s 2003 Stock Option  and Incentive Plan, incorporated herein by reference to Exhibit 10.4 to  the Company’s current report on Form 8-K (File no. 001-14027),  filed with the Securities and Exchange Commission on October 5, 2004.                                                                             |
| 10.26 |   | Form of Stock  Appreciation Right Agreement for Employees under the Company’s 2003 Stock  Option and Incentive Plan, 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, 2006 (File no. 001-14027),  filed with the Securities and Exchange Commission on May 9, 2006.              |
| 10.27 |   | Form of Stock  Appreciation Right Agreement for Non-Employee Directors under the Company’s  2003 Stock Option and Incentive Plan, incorporated herein by reference to  Exhibit 10.2 to the Company’s quarterly report on Form 10-Q  for the quarterly period ended March 31, 2006 (File no. 001-14027),  filed with the Securities and Exchange Commission on May 9, 2006. |
| 10.28 |   | License and Development  Agreement between Anika Therapeutics, Inc. and Galderma Pharma S.A.,  dated as of June 30, 2006, 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, 2006 (File no. 001-14027),  filed with the Securities and Exchange Commission on August 7, 2006.       |
| 10.29 |   | Supply Agreement among  Galderma S.A, Galderma Pharma S.A, and Anika Therapeutics, Inc., dated  as of June 30, 2006., 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, 2006 (File no. 001-14027),  filed with the Securities and Exchange Commission on August 7, 2006.           |
| 10.30 |   | Lease dated  January 4, 2007, between the Company and Farley White Wiggins,  incorporated herein by reference to Exhibit 10.1 to the Company’s  current report on Form 8-K (File no. 001-14027), filed with  the Securities and Exchange Commission on January 10, 2007.                                                                                                             |
| (11)  |   | Statement Regarding the  Computation of Per Share Earnings                                                                                                                                                                                                                                                                                                                                                    |
| 11.1  |   | See Note 3 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.                                                                                                                                                                                                                                                                                                                                                                       |

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| *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 Kevin  W. Quinlan 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 Kevin W. Quinlan, 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                                                                                                                                                                                     |

----

*                    Filedherewith

**             Certainportions of this document have been omitted pursuant to a confidential treatmentrequest filed with the Commission. The omitted portions have been filedseparately with the Commission.

***      Furnished herewith.

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, as amended, the registrant has duly caused this report to besigned on its behalf by the undersigned.

|                            |   |   | ANIKA THERAPEUTICS, INC.  |
|----------------------------|--------|--------|--------------------------------|
| Date: March 13,  2007 | By:    |   | /s/ CHARLES H. SHERWOOD, PH.D. |
|                       |   |   | Charles H. Sherwood, Ph.D.     |
|                       |   |   | *Chief  Executive Officer*     |

 

**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act, this report has been signedbelow by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.

|                                 | **Signature** | ** **                            | ** ** |                      | **Title** | ** ** | ** ** |  | **Date** | ** ** |
|---------------------------------|---------------|---------------------------------------|------------|----------------------|-----------|------------|------------|--|----------|------------|
| /s/ CHARLES H.  SHERWOOD, PH.D. |          | Chief Executive  Officer and Director |       | March 13,  2007 |
| Charles  H. Sherwood, Ph.D.     |          | *(Principal Executive Officer)*       |       |                 |
| /s/ KEVIN W.  QUINLAN           |          | Chief Financial Officer               |       |                 |
| Kevin  W. Quinlan               |          | *(Principal Accounting Officer)*      |       | March 13, 2007  |
| /s/ JOSEPH L.  BOWER            |          |                                  |       |                 |
| Joseph  L. Bower                |          | Director                              |       | March 13, 2007  |
| /s/ EUGENE A.  DAVIDSON, PH.D.  |          |                                  |       |                 |
| Eugene  A. Davidson, Ph.D.      |          | Director                              |       | March 13, 2007  |
| /s/ RAYMOND J.  LAND            |          |                                  |       |                 |
| Raymond  J. Land                |          | Director                              |       | March 13, 2007  |
|                            |          |                                  |       |                 |
| /s/ JOHN C. MORAN               |          |                                  |       |                 |
| John  C Moran                   |          | Director                              |       | March 13, 2007  |
| /s/ STEVEN E.  WHEELER          |          |                                  |       |                 |
| Steven E. Wheeler               |          | Director                              |       | March 13, 2007  |

 

 

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