UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2004

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

For the transition period from to

Commission File Number 000-21326

Anika Therapeutics, Inc.

(Exact Name of Registrant as Specified 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)

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

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the last 90 days. Yes ý No o

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date. At May 6, 2004 there were 10,069,605 outstanding shares of Common Stock, par value $.01 per share.

PART I: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

Anika Therapeutics, Inc. and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

	March 31, 2004			December 31, 2003
ASSETS
Current assets:
Cash and cash equivalents	$	34,499,000		$	14,592,000
Restricted cash	336,000			818,000
Accounts receivable, net of reserves of $29,000	2,975,000			1,421,000
Inventories	3,622,000			3,627,000
Current portion deferred income taxes	1,270,000			—
Prepaid expenses and other receivables	269,000			81,000
Total current assets	42,971,000			20,539,000
Property and equipment, at cost	10,024,000			9,875,000
Less: accumulated depreciation	(8,849,000		)	(8,684,000		)
	1,175,000			1,191,000
Long-term deposits	143,000			143,000
Deferred income taxes	8,403,000			—
Total Assets	$	52,692,000		$	21,873,000

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	805,000		$	349,000
Income taxes payable	3,099,000			65,000
Accrued expenses	1,095,000			1,297,000
Deferred revenue	2,667,000			378,000
Total current liabilities	7,666,000			2,089,000

Long-term deferred revenue	19,250,000			1,800,000

Stockholders’ equity
Preferred stock, $.01 par value; 1,250,000 shares authorized, no shares issued and outstanding at March 31, 2004 and December 31, 2003	—			—
Common stock, $.01 par value: 30,000,000 shares authorized; 9,991,943 shares issued at March 31, 2004 and December 31, 2003; 9,990,530 and 9,986,405 shares outstanding at March 31, 2004 and December 31, 2003, respectively	100,000			100,000
Additional paid-in-capital	31,466,000			31,480,000
Treasury stock, at cost, 1,413 and 5,538 shares at March 31, 2004 and December 31, 2003, respectively	(7,000		)	(27,000		)
Accumulated deficit	(5,783,000		)	(13,569,000		)
Total stockholders’ equity	25,776,000			17,984,000
Total Liabilities and Stockholders’ Equity	$	52,692,000		$	21,873,000

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

Anika Therapeutics, Inc. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

	Three Months Ended March 31,
	2004			2003

Product revenue	$	5,569,000		$	3,370,000
License and milestone revenue	572,000			14,000
Total revenue	6,141,000			3,384,000
Cost of product revenue	2,721,000			1,969,000
Gross profit	3,420,000			1,415,000
Operating expenses:
Research and development	907,000			809,000
Selling, general and administrative	1,308,000			1,115,000
Total operating expenses	2,215,000			1,924,000
Income (loss) from operations	1,205,000			(509,000		)
Interest income	46,000			42,000
Income (loss) before income tax expense (benefit)	1,251,000			(467,000		)
Income tax expense (benefit)
Provision (benefit) for income taxes	504,000			(154,000		)
Benefit from release of valuation allowance	(7,039,000		)	—
Net income (loss)	$	7,786,000		$	(313,000	)

Basic net income (loss) per common share	$	0.78		$	(0.03	)
Shares used to calculate basic net income (loss) per common share	9,987,410			9,934,280
Diluted net income (loss) per common share	$	0.69		$	(0.03	)
Shares used to calculate diluted net income (loss) per common share	11,257,264			9,934,280

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

Anika Therapeutics, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

For the Three Months Ended

(Unaudited)

	March 31,
	2004			2003

Cash flows from operating activities:
Net income (loss)	$	7,786,000		$	(313,000	)
Adjustments to reconcile net income (loss) to net cash used by operations:
Depreciation	165,000			248,000
Deferred income taxes	(9,673,000		)	—
Changes in operating assets and liabilities:
Accounts receivable	(1,554,000		)	250,000
Inventories	5,000			(250,000		)
Prepaid expenses and other current assets	(188,000		)	75,000
Accounts payable	456,000			(126,000		)
Accrued expenses	(202,000		)	(155,000		)
Customer deposit	—			(327,000		)
Deferred revenue	19,739,000			182,000
Income taxes payable	3,034,000			—
Net cash provided by (used in) operating activities	19,568,000			(416,000		)

Cash flows from investing activities
Restricted cash	482,000			—
Purchase of property and equipment	(149,000		)	(96,000		)
Net cash provided by (used in) investing activities	333,000			(96,000		)

Cash flows from financing activities
Proceeds from exercise of stock options	6,000			—
Net cash provided by financing activities	6,000			—

Increase (decrease) in cash and cash equivalents	19,907,000			(512,000		)
Cash and cash equivalents at beginning of period	14,592,000			11,002,000
Cash and cash equivalents at end of period	$	34,499,000		$	10,490,000

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

ANIKA THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Nature of Business

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

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

2. Basis of Presentation

The accompanying consolidated financial statements have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission and in accordance with accounting principles generally accepted in the United States. In the opinion of management, these consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to fairly state the financial position of the Company as of March 31, 2004, the results of its operations and cash flows for the three months ended March 31, 2004 and 2003.

The accompanying consolidated financial statements and related notes should be read in conjunction with the Company’s annual financial statements filed with its Annual Report on Form 10-K for the year ended December 31, 2003. The results of operations for the three months ended March 31, 2004 are not necessarily indicative of the results to be expected for the year ending December 31, 2004 or any future periods. See “Risk Factors and Certain Factors Affecting Future Operating Results.”

3. Summary of Significant Accounting Policies

Use of Estimates

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

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Anika Therapeutics, Inc. and its wholly owned subsidiary, Anika Securities, Inc. (a Massachusetts Securities Corporation) and Anika Therapeutics UK, Ltd. All intercompany transactions and balances have been eliminated in consolidation. As of March 2003 the UK subsidiary was dissolved.

Cash and Cash Equivalents

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

Financial Instruments

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

Revenue Recognition

Product revenue is recognized upon confirmation of regulatory compliance and shipment to the customer as long as there is (1) persuasive evidence of an arrangement, (2) delivery has occurred and risk of loss has passed, (3) the sales price is fixed or determinable and (4) collection of the related receivable is probable. Amounts billed or collected prior to recognition of revenue are classified as deferred revenue. When determining whether risk of loss has transferred to customers on product sales or if the sales price is fixed or determinable the Company evaluates both the contractual terms and conditions of its distribution and supply agreements as well as its business practices. Under our agreement with Bausch & Lomb, the price for units sold in a calendar year is dependent on total unit volume of sales of certain ophthalmic products during the year. Accordingly, unit prices for sales occurring in interim quarters are subject to possible retroactive price adjustments when the actual annual unit volume for the year becomes known. In accordance with the Company’s revenue recognition policy, the amount of revenue subject to the contracted price adjustment is recorded as deferred revenue until the annual unit volume becomes known and the sales price becomes fixed. ORTHOVISC has been sold through several distribution arrangements as well as outsource order-processing arrangements (“logistic agents”). Sales of product through third party logistics agents in certain markets are recognized as revenue upon shipment by the logistics agent to the customer.

The Company recognizes non-refundable upfront payments received as part of supply, distribution, and marketing arrangements, ratably over the terms of the arrangements to which the payments apply. Milestone payments received as part of supply, distribution, and marketing arrangements are evaluated under Emerging Issues Task Force No. 00-21, “Revenue Arrangements with Multiple Deliverables,” to determine whether the delivered item has value to the customer on a stand-alone basis and whether objective and reliable evidence of the fair value of the undelivered item exists. The Company recognizes milestone payments as revenue upon achievement of the milestone only if (1) it represents a separate unit of accounting as defined in EITF 00-21, (2) the milestone payments are non-refundable, (3) substantive effort is involved in achieving the milestone, and (4) the amount of the milestone is reasonable in relation to the effort expended or the risk associated with achievement of the milestone. If any of these conditions are not met, the Company will defer the milestone payments and recognize them as revenue over the term of the agreement as it completes its performance obligations. The Company will apply recognition of deferred milestone payments over the term of the agreement, on a cumulative basis, on the date the milestone is achieved. As such, the term over which deferred milestone payments are recognized as revenue will be begin on the effective date of the related arrangement to which the payment applies. In February 2004, in connection with entering the OBI Agreement, the Company received a milestone payment of $20 million as a result of obtaining FDA approval for ORTHOVISC. The Company evaluated the terms of the OBI Agreement and the circumstances under which the milestone was paid and

determined that the milestone payment did not meet all of the conditions to be recognized as revenue upon achievement, therefore, the Company deferred the recognition of revenue on the milestone payment of $20 million and is recognizing it ratably over the expected ten-year term of the OBI Agreement beginning with the first quarter of 2004.

Stock-Based Compensation

Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” requires that companies either recognize compensation expense for grants of stock options and other equity instruments based on fair value, or provide pro forma disclosure of net income (loss) and net income (loss) per share in the notes to the financial statements. At March 31, 2004, the Company has stock options outstanding under three stock-based compensation plans. The Company accounts for those plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, no compensation cost has been recognized under SFAS 123 for the Company’s employee stock option plans. Had compensation cost for the awards under those plans been determined based on the grant date fair values, consistent with the method required under SFAS 123, the Company’s net income (loss) and net income (loss) per share would have been reduced to the pro forma amounts indicated below:

	Three Months Ended March 31,
	2004			2003
Net income (loss)
As reported	$	7,786,000		$	(313,000	)
Add: Stock-based employee compensation expense included in reported net income (loss)	—			—
Deduct: Total stock-based employee compensation under the fair-value-based method for all awards	(216,000		)	(172,000		)
Pro forma net income (loss)	$	7,570,000		$	(485,000	)
Basic net income (loss) per share
As reported	$	0.78		$	(0.03	)
Proforma	$	0.76		$	(0.05	)
Diluted net income (loss) per share
As reported	$	0.69		$	(0.03	)
Proforma	$	0.67		$	(0.05	)

The Company has determined that it will continue to account for stock-based compensation for employees under APB Opinion No. 25 as modified by FIN 44 and elect the disclosure-only alternative under SFAS No. 123 for stock-based compensation awarded in 2004 and 2003 using the Black-Scholes option pricing model prescribed by SFAS No. 123. The Company did not award any stock-based compensation in the three month period ended March 31, 2004.

Disclosures About Segments of an Enterprise and Related Information

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions regarding how to allocate resources and assess performance. The Company’s chief decision-making group consists of its three executive officers, including the chief executive officer and the chief financial officer. Based on the criteria established by SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” the Company has one reportable operating segment, the results of which are disclosed in the accompanying consolidated financial

statements. Substantially all of the operations and assets of the Company have been derived from and are located in the United States.

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

	Percent of Product Revenue Three Months Ended March 31,
	2004		2003
Bausch & Lomb Incorporated	26.4	%	37.8	%
Ortho Biotech Products L.P.	23.5	%	—
Pharmaren AG/Biomeks	8.6	%	12.1	%
Advanced Medical Optics	9.9	%	15.3	%
Boehringer Ingelheim Vetmedica	16.4	%	25.6	%
	84.8	%	90.8	%

As of March 31, 2004, two customers represented 84.3% of the Company’s accounts receivable balance.

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

	Three Months Ended March 31,
	2004				2003
	Revenue		Percent of Revenue		Revenue		Percent of Revenue
Geographic location:
United States	$	5,313,000	86.5	%	$	2,854,000	84.3	%
Turkey	528,000		8.6	%	408,000		12.1	%
Middle East	30,000		0.5	%	30,000		0.9	%
Other/Europe	270,000		4.4	%	92,000		2.7	%
Total	$	6,141,000	100.0	%	$	3,384,000	100.0	%

4. Earnings Per Share

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

Shares used in calculating basic and diluted earnings per share for the three month period ending March 31, are as follows:

	Three Months Ended March 31,
	2004	2003
Weighted average number of shares of common stock outstanding	9,987,410	9,934,280
Dilutive stock options	1,269,854	—
Shares used in calculating diluted earnings per share	11,257,264	9,934,280

Outstanding stock options to purchase approximately 109,000 shares at March 31, 2003 are excluded from the calculation of diluted weighted average shares outstanding because the Company incurred a loss for the three month period and to include them would have been antidilutive. Options to purchase approximately 386,000, and 700,000 shares were outstanding at March 31, 2004, and 2003, respectively, but not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price during the period.

5. Restricted Cash

At December 19, 2003, in connection with the issuance of an irrevocable letter of credit to one of the Company’s vendors the Company had deposited $818,000 with its bank to collateralize the letter of credit. These funds are restricted from the Company’s use during the term of the letter of credit, which by its terms was to expire in April 2004, although the Company is entitled to all interest earned on the funds. A portion of the letter of credit was drawn upon by the Company’s vendor in January 2004 and the restriction on the funds equivalent to the amount drawn was released and $336,000 remained. The remainder of the letter of credit was drawn upon by the Company’s vendor in April 2004, prior to its expiration, and the remainder of the restricted funds were released to the Company.

6. Inventories

Inventories consist of the following:

	March 31, 2004		December 31, 2003
Raw materials	$	1,752,000	$	1,537,000
Work-in-process	1,294,000		1,445,000
Finished goods	576,000		645,000
Total	$	3,622,000	$	3,627,000

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

7. Licensing and Distribution Agreements

In December 2003 the Company entered into a ten-year licensing and supply agreement (the OBI Agreement) with Ortho Biotech Products, L.P., a member of the Johnson & Johnson family of companies, to market ORTHOVISC in the U.S. and Mexico. Under the OBI Agreement, Ortho Biotech will perform sales, marketing and distribution functions and licensed the right to further develop and commercialize ORTHOVISC as well as other new products for the treatment of pain associated with osteoarthritis based on the Company’s proprietary viscosupplementation technology. In support of the license, the OBI Agreement provides that Ortho Biotech will fund post-marketing clinical trials for new indications of ORTHOVISC. The Company received an initial payment of $2.0 million upon entering into the OBI Agreement in December 2003 and a milestone payment of $20.0 million in February 2004, as a result of obtaining FDA approval of ORTHOVISC. Under the OBI Agreement, the Company will be the exclusive supplier of ORTHOVISC to Ortho Biotech. The OBI Agreement provides for additional performance- and sales-based milestone payments to the Company contingent upon planned manufacturing upgrades, reimbursement code approval, and achieving specified sales targets, in addition to royalty and transfer fees. The OBI Agreement is subject to early termination in certain circumstances and is otherwise renewable by Ortho Biotech for consecutive five-year terms.

In July 2000, the Company entered into a seven-year supply agreement (the “B&L Agreement”) with Bausch & Lomb Surgical, a unit of Bausch & Lomb, which was subsequently merged into Bausch & Lomb Incorporated. Under the terms of the B&L Agreement the price for units sold in a calendar year is dependent on total unit volume of sales of certain ophthalmic products to all customers during the year. Accordingly, unit prices for sales occurring in interim quarters are subject to possible retroactive price adjustments when the actual annual unit volume for the year becomes known. In accordance with the Company’s revenue recognition policy, the amount of revenue subject to the price adjustment is recorded as deferred revenue until the annual unit volume becomes known and the sales price becomes fixed. At March 31, 2004 and 2003, the deferred revenue under the B&L Agreement amounted to approximately $296,000 and $242,000, respectively.

8. Guarantor Arrangements

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

9. Income Taxes

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

In February 2004, the Company achieved a milestone under the OBI Agreement and received payment of $20.0 million which it expects will be recognized as taxable income in the first quarter of 2004. As a result, the Company expects that it will be able to utilize all of its net operating loss and credit carry-forwards in 2004 to offset part of its taxable income. Based on these expectations, the Company recorded income taxes payable of $2.6 million to estimate its income tax liability for the $20.0 million milestone payment, net of all net operating loss and credit carry-forwards.

In accordance with the Company’s revenue recognition policy, for financial statement purposes, the milestone payment of $20.0 million was deferred and is being recognized ratably over the expected ten-year term of the OBI Agreement. The Company recorded a deferred tax asset of $7.8 million representing the approximate income tax effect of the timing difference of revenue recognition for financial statement purposes and for tax purposes. Based on management’s current expectations regarding future profitability, the Company released the valuation allowance previously established against its deferred tax assets and recorded a one-time income tax benefit of $7.0 million.

The Company also recorded a current provision for taxes of $504,000 related to income for the three months ended March 31, 2004. The effective tax rate for the current provision for the quarter was approximately 40%; the Company anticipates a similar rate for the balance of the year.

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

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding:

• our future sales and product revenues, including possible retroactive price adjustments and expectations of unit volumes or other offsets to price reductions;

• our efforts to increase sales of ophthalmic viscoelastic products and support of the distribution of ORTHOVISC^Ò in the U.S.;

• our manufacturing capacity and efficiency gains and work-in-process manufacturing operations;

• the timing of, scope of and rate of patient enrollment for clinical trials;

• development of possible new products, including plans to advance cosmetic tissue augmentation and post-surgical adhesion therapies into human clinical trials;

• FDA or other regulatory approvals and/or reimbursement approvals of new or potential products;

• negotiations with potential and existing customers, including our performance under any of our distribution or supply agreements or our expectations with respect to sales and milestones pursuant to such agreements;

• the level of our revenue or sales in particular geographic areas and/or for particular products;

• the market share for any of our products;

• our profitability and margin improvements resulting from a higher margin product mix;

• our expectations of the size of the U.S. and European markets for osteoarthritis of the knee;

• our intention to increase market share for ORTHOVISC in international and domestic markets or otherwise penetrate growing markets for osteoarthritis of the knee;

• our current strategy, including our corporate objectives and research and development and collaboration opportunities, including, without limitation, commencement of cosmetic tissue augmentation product and INCERT^Ò clinical trials;

• our ability to achieve performance and sales threshold milestones in our existing and future distribution and supply agreements;

• our expected tax rate and taxable revenues;

• the rate at which we use cash, the amounts used, and the utilization of such cash; and

• possible negotiations or re-negotiations with existing or new distribution or collaboration partners.

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 future events and trends and which do not relate to historical matters, also identify forward-looking statements. You should not rely on forward looking statements because they involve known and unknown risks, uncertainties and other factors, some of which are beyond our control, including those factors described in the section titled “Risk Factors and Certain Factors Affecting Future Operating Results” in this Quarterly Report on Form 10-Q. These risks, uncertainties and other factors may cause our actual results, performance or achievement to be materially different from anticipated future results, performance or achievement, expressed or implied by the forward-looking statements. These forward looking statements are based upon the current assumptions of our management and are only expectations of future results. You should carefully review all of these factors, and you should be aware that there may be other factors that could cause these differences, including those factors discussed herein and in the “Management’s Discussions and Analysis of Financial Condition and Results of Operations” beginning on page 11 of this Quarterly Report on form 10-Q, as well as the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2003 and in our press releases and other filings with the Securities and Exchange Commission. We undertake no obligation to update or revise any forward-looking statement to reflect changes in underlying assumptions or factors of new information, future events or other changes.

Management Overview

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

Our currently marketed products consist of ORTHOVISCÒ, which is an HA product used in the treatment of some forms of osteoarthritis in humans, and HYVISCÒ, which is an HA product used in the treatment of equine osteoarthritis. ORTHOVISC became available for sale in the U.S. on March 1, 2004 and has been approved for sale and marketed internationally since 1996. HYVISC is marketed in the U.S. through an exclusive agreement with Boehringer Ingelheim Vetmedica, Inc. Our ophthalmic products include CoEaseÔ, STAARVISC™-II, and ShellGelÔ, each an injectable ophthalmic viscoelastic HA product, distributed by Advanced Medical Optics, Inc., STAAR Surgical Company, and Cytosol Ophthalmics, Inc., respectively. We also manufacture AMVISC® and AMVISC® Plus, HA viscoelastic supplement products used in ophthalmic surgery, for Bausch & Lomb Incorporated.

		Three Months Ended March 31,
Product revenue by region		2004		2003
ORTHOVISC	U.S.	26	%	—
	Turkey	10	%	12	%
	Canada	2	%	1	%
	Europe	2	%	2	%
	Middle East	1	%	1	%
		41	%	16	%

HYVISC	U.S.	16	%	26	%

Ophthalmic products	U.S.	43	%	58	%

Osteoarthritis Business

ORTHOVISC, our product for the treatment of osteoarthritis of the knee, and HYVISC, our product for the treatment of equine osteoarthritis, contributed 40.9% and 16.4%, respectively, of our product revenue for the three months ended March 31, 2004. In February 2004 we received marketing approval from the FDA for ORTHOVISC and in March 2004 ORTHOVISC was launched in the U.S. by Ortho Biotech. U.S. sales of ORTHOVISC contributed 26.0% of product revenue for the three months ended March 31, 2004. We expect U.S. sales of ORTHOVISC to be the primary driver of revenue growth for 2004.

International sales of ORTHOVISC increased 56.2% for the three months ended March 31, 2004, compared to the same period in 2003 and contributed 14.9% of product revenue for the period. Increased sales to our distributors in Turkey, Spain, Canada, and Greece were the primary contributors to the increase. We continue to experience pricing pressure in Europe primarily due to competing products, however, we expect that the recent FDA approval and an anticipated mid-year launch of a room temperature version of ORTHOVISC will strengthen our position. We expect continued modest international growth in 2004 as a result of expanded penetration in Europe, including Germany and France, and sales in Egypt under a new distribution and marketing agreement.

HYVISC sales increased 6.4% for the three months ended March 31, 2004 compared to the same

period last year.

Ophthalmic Business

Our ophthalmic business includes HA viscoelastic products used in ophthalmic surgery. Our sales of ophthalmic products contributed 42.7% of our product revenue for the three months ended March 31, 2004 and increased 20.2% compared to the same period in 2003. Sales to Bausch & Lomb accounted for 68.3% of ophthalmic sales for three months ended March 31, 2004 and contributed 29.1% of product revenue for the period. We believe the increase in ophthalmic product sales for the three months ended March 31, 2004 is largely attributable to inventory replenishment patterns of our distributors. We expect sales of ophthalmic products to increase modestly for 2004 as compared to ophthalmic product sales for 2003.

Our distributor for CoEase, Advanced Medical Optics, announced in April their intent to acquire the surgical ophthalmology business of Pfizer, Inc., which includes a competing line of viscoelastic products for use in ocular surgery. We cannot predict the effect this will have on our relationship with Advanced Medical Optics. As a result, in the future we may not be able to sustain current product revenue levels in our ophthalmic business. For the three months ended March 31, 2004, sales to Advanced Medical Optics contributed 23.1% of ophthalmic product revenue.

Research and Development

Our current research and development efforts include chemically modified formulations of HA designed for longer residence time in the body and second generation advances to some of our current product line. In April 2004 we initiated a pilot human clinical trial for INCERT^Ò-S, a chemically modified form of HA designed to act as a barrier to prevent internal tissue adhesion and scarring following spinal surgery. In addition, in May 2004 we initiated a pivotal clinical trial with our product for cosmetic tissue augmentation (CTA), a therapy for correcting dermal defects, including facial wrinkles, scar remediation and lip augmentation. The trial is designed to evaluate the effectiveness of CTA for correcting nasolabial folds. Second generation advances to our current product line in research and development include a room-temperature version of ORTHOVISC, pH-buffered versions for our ophthalmic products and the use of ORTHOVISC-like products for osteoarthritis in other joints.

Our research and development costs increased 12.1% for the three months ended March 31, 2004 compared to the same period in 2003 primarily due to costs associated with the clinical trials for INCERT and CTA. We expect to incur additional costs associated with the human clinical trials for our product candidates in 2004 and to increase personnel-related expenses as we expand our research and development efforts. As a result, we expect an increase in research and development costs in 2004 compared to 2003.

Summary of Critical Accounting Policies; Significant Judgments and Estimates

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

We have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations is discussed throughout Management’s Discussion and Analysis of Financial Condition and

Results of Operations where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see Note 3 in the Notes to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2004.

Revenue Recognition and Allowance for Doubtful Accounts. Product revenue is recognized upon confirmation of regulatory compliance and shipment to the customer as long as there is (1) persuasive evidence of an arrangement, (2) delivery has occurred and risk of loss has passed, (3) the sales price is fixed or determinable and (4) collection of the related receivable is probable. Amounts billed or collected prior to recognition of revenue are classified as deferred revenue. When determining whether risk of loss has transferred to customers on product sales or if the sales price is fixed or determinable we evaluate both the contractual terms and conditions of our distribution and supply agreements as well as our business practices. Under our agreement with Bausch & Lomb, the price for units sold in a calendar year is dependent on total unit volume of sales of certain ophthalmic products during the year. Accordingly, unit prices for sales occurring in interim quarters are subject to possible retroactive price adjustments when the actual annual unit volume for the year becomes known. In accordance with our revenue recognition policy, the amount of revenue subject to the contracted price adjustment is recorded as deferred revenue until the annual unit volume becomes known and the sales price becomes fixed. ORTHOVISC has been sold through several distribution arrangements as well as outsource order-processing arrangements (logistic agents). Sales of product through third party logistics agents in certain markets are recognized as revenue upon shipment by the logistics agent to the customer.

We recognize non-refundable upfront payments received as part of supply, distribution, and marketing arrangements, ratably over the terms of the arrangements to which the payments apply. Milestone payments received as part of supply, distribution, and marketing arrangements are evaluated under Emerging Issues Task Force No. 00-21, “Revenue Arrangements with Multiple Deliverables,” to determine whether the delivered item has value to the customer on a stand-alone basis and whether objective and reliable evidence of the fair value of the undelivered item exists. We recognize milestone payments as revenue upon achievement of the milestone only if (1) it represents a separate unit of accounting as defined in EITF 00-21, (2) the milestone payments are non-refundable, (3) substantive effort is involved in achieving the milestone, and (4) the amount of the milestone is reasonable in relation to the effort expended or the risk associated with achievement of the milestone. If any of these conditions are not met, we will defer the milestone payments and recognize them as revenue over the term of the agreement as it completes its performance obligations. We will apply recognition of deferred milestone payments over the term of the agreement, on a cumulative basis, on the date the milestone is achieved. As such, the term over which deferred milestone payments are recognized as revenue will be begin on the effective date of the related arrangement to which the payment applies. In February 2004, as part of the OBI agreement, we received a milestone payment of $20 million as a result of obtaining FDA approval for ORTHOVISC. We evaluated the terms of the OBI Agreement and the circumstances under which the milestone was paid and determined that the milestone payment did not meet all of the conditions to be recognized upon achievement, therefore, we expect to defer the milestone payment of $20 million and recognize it ratably over the initial ten-year term of the OBI Agreement beginning with the first quarter of 2004.

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

We generally produce finished goods based upon specific orders or in anticipation of specific orders. As a result, we generally do not establish reserves against finished goods. Under certain

circumstances we may purchase raw materials or manufacture work-in-process or finished goods inventory in anticipation of receiving regulatory approval for the use of the raw materials in our manufacturing process or sale of the finished goods inventory. We evaluate the value of inventory on a quarterly basis and may, based on future changes in facts and circumstances, determine that a write-down of inventory is required in future periods.

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

In February 2004, we achieved a milestone under the OBI Agreement and received payment of $20.0 million which we expect will be recognized as taxable income in the first quarter of 2004. As a result, we expect that we will be able to utilize all of our net operating loss and credit carry-forwards in 2004 to offset part of our taxable income. In accordance with our revenue recognition policy, for financial statement purposes, the milestone payment of $20.0 million was deferred and is being recognized ratably over the expected ten-year term of the OBI Agreement. We recorded a deferred tax asset of $7.8 million representing the approximate income tax effect of the timing difference of revenue recognition for financial statement purposes and for tax purposes. Based on management’s current expectations regarding future profitability, we released the valuation allowance previously established against our deferred tax assets and recorded a one-time income tax benefit of $7.0 million.

Results of Operations

Product revenue. Product revenue for the three months ended March 31, 2004 was $5,569,000, an increase of $2,199,000, or 65.3%, compared to $3,370,000 for three months ended March 31, 2003. Product sales included shipments to our U.S. distributor of ORTHOVISC, Ortho Biotech, and related royalty fees tied to ORTHOVISC end-user sales.

	Three Months Ended March 31,
	2004		2003
Ophthalmic Products	$	2,374,000	$	1,975,000
ORTHOVISC^â	2,275,000		530,000
HYVISC^â	920,000		865,000
	$	5,569,000	$	3,370,000

Ophthalmic product sales increased $399,000, or 20.2%, for the three months ended March 31, 2004 compared to the same period last year. The increase is attributable to increased sales to all of our ophthalmic distributors. Sales to Bausch & Lomb increased 26.8% for the three months ended March 31, 2004 compared to the same period last year and contributed 29.1% of product revenue. We believe the increase to be primarily due to inventory replenishment patterns. ORTHOVISC sales increased $1,745,000, or 329.2%, for the three months ended March 31, 2004 compared to the same period last year. The increase is primarily due to sales to our U.S. distributor, Ortho Biotech, following FDA marketing approval in February 2004, and royalty fees tied to end-user sales. U. S. sales of ORTHOVISC were 26.0% of product sales for the period. International sales of ORTHOVISC increased 56.1% for the three months ended March 31, 2004 compared to the same period last year. The increase in international sales was primarily due to increased sales to our Turkish distributor combined with increased sales in Europe and Canada. Sales of HYVISC increased $55,000, or 6.4%, for the three months ended March 31, 2004 compared to the same period last year. Sales of HYVISC were made to a single customer under an exclusive agreement.

Licensing and milestone revenue. Licensing and milestone revenue for the three months ended March 31, 2004 was $572,000, an increase of $558,000 compared to $14,000 for the same period last year. Licensing and milestone revenue included $550,000 for the ratable recognition of the $2.0 million up-front and $20.0 million milestone payments from Ortho Biotech and maintenance payments on certain supply

agreements with distributors of our ophthalmic products over the related terms of the applicable agreements.

Gross profit. Gross profit for the three months ended March 31, 2004 was $3,420,000, or 55.7% of revenue, an increase of $2,005,000, or 141.7%, from gross profit of $1,415,000, or 41.8% of revenue, for three months ended March 31, 2003. Gross margin on product revenue was 51.1% for the three months ended March 31, 2004 compared with 41.6% for the three months ended March 31, 2003. Gross margin for three months ended March 31, 2004, as compared with same periods last year, benefited from a shift in sales mix toward higher margin osteoarthritis products and efficiencies in our manufacturing operations.

Research & development. Research and development expenses for the three months ended March 31, 2004 was $907,000, an increase of $98,000, or 12.1%, compared to $809,000 for the three months ended March 31, 2003. Research and development expenses include costs associated with our in-house research and development efforts for the development of new medical applications for our HA-based technology, the management of clinical trials, and the preparation and processing of applications for regulatory approvals at various relevant stages of development. The increase in research and development expenses for the three months ended March 31, 2004 is primarily attributable to expenditures associated with preparation for the pilot study for INCERT-S initiated in April 2004 and the pivotal clinical trial for our product for cosmetic tissue augmentation initiated in May 2004. The increase was partially offset by costs incurred in the first quarter 2003 associated with the completion of our pivotal clinical trial for ORTHOVISC.

Selling, general & administrative. Selling, general and administrative expenses for the three months ended March 31, 2004 was $1,308,000, an increase of $193,000, or 17.3%, compared to $1,115,000 for the same period last year. The increase is primarily attributable to an increase in personnel related costs of $271,000 partially offset by lower professional service fees of $91,000 primarily attributable to lower legal costs.

Interest income. Interest income for the three months ended March 31, 2004 was $46,000, a 9.5% increase, compared to $42,000 for the same period last year. The increase is primarily attributable to higher average balance in cash and investments partially offset by lower interest rates.

Income taxes. Provision for income taxes was $504,000 for the three months ended March 31, 2004 compared to an income tax benefit of $154,000 for the three months ended March 31, 2003. The effective tax rate for the current provision for the three months ended March 31, 2004 was approximately 40%; we anticipate a similar rate for the balance of the year. In 2002 federal tax law changed to allow for a five year carryback period and a suspension of certain limitations on the use of alternative minimum tax losses. We filed an income tax carryback claim to carry our 2001 tax loss back to prior tax years. As a result of the carryback claim, in the first quarter of 2003, we received a refund of approximately $154,000 of taxes paid in prior years.

We have determined that we will likely utilize all of our net operating loss and credit carry-forwards as a result of the receipt of the $20 million milestone payment in February 2004 from Ortho Biotech. In addition, based on our current expectations regarding future profitability, we released the previously established valuation allowance against our deferred tax assets and recorded a one-time income tax benefit of $7.0 million.

LIQUIDITY AND CAPITAL RESOURCES

We require cash to fund our operating expenses and to make capital expenditures. We expect that our requirement for cash to fund these uses will increase as the scope of our operations expand. Historically we have funded our cash requirements from available cash and investments on hand. At March 31, 2004, cash and cash equivalents totaled $34.5 million compared $14.6 million at December 31, 2003. We received a $20.0 million milestone payment in February 2004 as a result of obtaining FDA approval for ORTHOVISC.

Cash provided by operating activities was $19.6 million for the three months ended March 31, 2004 compared with cash used in operating activities of $416,000 for the three months ended March 31, 2003. Cash provided by operating activities in the first three months of 2004 resulted primarily from net income of $7.8 million, an increase in deferred revenue of $19.7 million and an increase in income taxes payable of $3.0 million. The increase in cash provided by operating activities was partially offset by an increase in the deferred tax asset and a net increase in other current assets and liabilities of $1.5 million primarily due to a $1.6 million increase in accounts receivable. The increase in deferred revenue was primarily due to the $20.0 million milestone payment received from Ortho Biotech in February 2004 related to FDA approval of ORTHOVISC combined with unit pricing provisions under our supply agreement with Bausch & Lomb Surgical. The increase in income taxes payable includes the current provision for income taxes of $504,000 and the tax affect of the $20.0 million milestone payment in February 2004 partially offset by net operating loss and credit carry-forwards. The increase in deferred tax asset primarily resulted from the tax affect of the deferred revenue associated with the $20.0 million milestone payment partially offset by the tax affect of the utilization of net operating loss and credit carry-forwards combined with the release of the valuation allowance. Accounts receivable increased primarily due to increased sales including sales of ORTHOVISC to Ortho Biotech.

Cash provided by investing activities was $333,000 for the three months ended March 31, 2004 primarily reflecting the release of restricted cash of $482,000 and which was partially offset by capital expenditures of $149,000, primarily for manufacturing and computer equipment.

RISK FACTORS AND CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS

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

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

Our HA products under development, including a product for the cosmetic tissue augmentation market, INCERT^®, a product designed to prevent surgical adhesions, and certain second-generation versions of our existing ophthalmic and osteoarthritis products, have not obtained U.S. or foreign regulatory approval for commercial marketing and sale. We believe that these products will be regulated as Class III medical devices in the U.S. and will require a PMA prior to marketing. We cannot assure you that:

• we will begin or successfully complete clinical trials for these products;

• the clinical data will support the efficacy of these products;

• we will be able to successfully complete the FDA or foreign regulatory approval process; or

• additional clinical trials will support a PMA application and/or FDA approval or foreign regulatory approval in a timely manner or at all.

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

• the approval may include significant limitations on the indications and other claims sought for use for which the products may be marketed;

• the approval may include other significant conditions of approval such as post-market testing, tracking, or surveillance requirements; and

• meaningful sales may never be achieved.

Once obtained, marketing approval can be withdrawn by the FDA for a number of reasons, including, among others, the failure to comply with regulatory standards, or the occurrence of unforeseen problems following initial approval. We may be required to make further filings with the FDA under certain circumstances. The FDA’s regulations require a PMA supplement for certain changes if they affect the safety and effectiveness of an approved device, including, but not limited to, new indications for use, labeling changes, the use of a different facility to manufacture, process or package the device, and changes in performance or design specifications. Changes in manufacturing procedures or methods of manufacturing that may affect safety and effectiveness may be deemed approved after a 30-day notice unless the FDA requests a 135-day supplement. Our failure to receive approval of a PMA supplement regarding the use of a different manufacturing facility or any other change affecting the safety or effectiveness of an approved device on a timely basis, or at all, may have a material adverse effect on our business, financial condition, and results of operations. The FDA could also limit or prevent the manufacture or distribution of our products and has the power to require the recall of such products. Significant delay or cost in obtaining, or failure to obtain FDA approval to market products, any FDA limitations on the use of our products, or any withdrawal or suspension of approval or rescission of approval by the FDA could have a material adverse effect on our business, financial condition, and results of operations.

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

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

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

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

The process of obtaining approvals from the FDA and other regulatory authorities can be costly, time consuming, and subject to unanticipated delays. We cannot assure you that approvals or clearances of our products will be granted or that we will have the necessary funds to develop certain of our products.

Any failure to obtain, or delay in obtaining such approvals or clearances, could adversely affect our ability to market our products.

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

From our inception through December 31, 1996 and 1999 through 2002 we have incurred annual operating losses. For the year ended December 31, 2003, we recorded net income of $827,000. For the three months ended March 31, 2004 we recorded net income of $7.8 million and as of March 31, 2004, we had an accumulated deficit of approximately $5.8 million. Our ability to maintain profitability is uncertain. The continued development of our products will require the commitment of substantial resources to conduct research and preclinical and clinical development programs, and the establishment of sales and marketing capabilities or distribution arrangements either by us or our partners. We cannot assure you that we will be able to develop these products or new medical applications of our existing products or technology, or that if developed, the necessary regulatory approvals will be obtained, or if obtained, that sales, marketing and distribution capabilities and arrangements will be established in order to permit us to maintain profitability.

Substantial competition could materially affect our financial performance.

We compete with many companies, including, among others, large pharmaceutical companies and specialized medical products companies. Many of these companies have substantially greater financial and other resources, larger research and development staffs, more extensive marketing and manufacturing organizations and more experience in the regulatory process than us. We also compete with academic institutions, governmental agencies and other research organizations that may be involved in research, development and commercialization of products. Because a number of companies are developing or have developed HA products for similar applications and have received FDA approval, the successful commercialization of a particular product will depend in part upon our ability to complete clinical studies and obtain FDA marketing and foreign regulatory approvals prior to our competitors, or, if regulatory approval is not obtained prior to competitors, to identify markets for our products that may be sufficient to permit meaningful sales of our products. For example, several of our competitors obtained FDA and foreign regulatory approvals before us for marketing HA products with applications similar to that of ORTHOVISC. Thus, the successful commercialization of ORTHOVISC will depend in part on our ability to effectively market ORTHOVISC against more established products with a longer sales history. There can be no assurance that we will be able to compete against current or future competitors or that competition will not have a material adverse effect on our business, financial condition and results of operations. In the past we have experienced volatility in our international sales of ORTHOVISC including ongoing competitive factors as well as economic issues, and potential regional conflict and political uncertainties. As a result, we are uncertain of the extent of our future sales in these markets.

We are uncertain regarding the success of our clinical trials.

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

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

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

We cannot assure you that such marketing partners will not seek to renegotiate their current agreements on terms less favorable to us. Under the terms of the B&L Agreement, effective January 1, 2001, we became Bausch & Lomb’s exclusive provider of AMVISC and AMVISC Plus ophthalmic viscoelastic products, in the U.S. and international markets. The B&L Agreement expires December 31, 2007, and superceded an existing supply contract with Bausch & Lomb that was set to expire December 31, 2001. The B&L Agreement is subject to early termination and/or reversion to a non-exclusive basis under certain circumstances. The B&L Agreement lifts contractual restrictions on our ability to sell certain ophthalmic products to other companies, subject to our payment of royalties. In exchange, we agreed to a reduction in unit selling prices retroactively effective to April 1, 2000 and the elimination of minimum unit purchase obligations by Bausch & Lomb.

We have not achieved incremental sales of our ophthalmic products to Bausch & Lomb and/or other companies sufficient to offset the effects of the price reduction and royalties to Bausch & Lomb and there can be no assurances that we will be able to do so in the future. The reduction in unit prices resulted in a decrease in our revenue and gross profit from the sale of AMVISC to Bausch & Lomb. We expect revenue from Bausch & Lomb in 2004 to be relatively consistent with 2003. In addition, under certain circumstances, Bausch & Lomb has the right to terminate the agreement, and/or the agreement may revert to a non-exclusive basis; in each case, we cannot make any assurances that such circumstances will not occur. For the three months ended March 31, 2004 and 2003, sales of AMVISC products to Bausch & Lomb accounted for 26.4% and 37.8% of total revenues, respectively. Although we intend to continue to seek new ophthalmic product customers, there can be no assurances that we will be successful in obtaining new customers or to achieve meaningful sales to such new customers.

Our distributor for CoEase, Advanced Medical Optics, announced in April their intent to acquire the surgical ophthalmology business of Pfizer, Inc. which includes a competing line of viscoelastic products for use in ocular surgery. We cannot predict the effect this will have on our relationship with Advanced Medical Optics. As a result, we may not be able to sustain current product revenue levels in our ophthalmic business.

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

In December 2003 we entered into a ten-year licensing and supply agreement with Ortho Biotech Products, L.P., a member of the Johnson & Johnson family of companies, to market ORTHOVISC in the U.S. and Mexico. Under the OBI Agreement Ortho Biotech will perform sales, marketing and distribution functions. Additionally, Ortho Biotech licensed the right to further develop and commercialize ORTHOVISC as well as new products for the treatment of pain associated with

osteoarthritis. We cannot assure you that Ortho Biotech will be able to market ORTHOVISC effectively or to establish sales levels to the extent that Anika and Ortho Biotech believe are possible in the timeframes expected, or at all, nor can we assure you that we will be able to achieve the performance- and sales- based milestones provided in the OBI Agreement. For the three months ended March 31, 2004, sales of ORTHOVISC to Ortho Biotech accounted for 23.5% of total revenue. Furthermore, we cannot predict whether the license granted to Ortho Biotech in the OBI Agreement to further develop and commercialize ORTHOVISC as well as new products for the treatment of pain associated with osteoarthritis based on our proprietary viscosupplementation technology will result in any new products or indications for use.

We will need to obtain the assistance of additional marketing partners to bring new and existing products to market and to replace certain marketing partners. The failure to establish strategic partnerships for the marketing and distribution of our products on acceptable terms will have a material adverse effect on our business, financial condition, and results of operations.

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

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

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

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

determined to be valid, enforceable, and broad in scope, there can be no assurance that competitors will not be able to design around such patents and compete with us using the resulting alternative technology.

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

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

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

Pursuant to the B&L Agreement, we have agreed to transfer to Bausch & Lomb, upon expiration of the term of the B&L agreement on December 31, 2007, or in connection with earlier termination in certain circumstances, our manufacturing process, know-how and technical information, which relate to only AMVISC products. Upon expiration of the B&L Agreement, there can be no assurance that Bausch & Lomb will continue to use us to manufacture AMVISC and AMVISC Plus. If Bausch & Lomb discontinues the use of us as a manufacturer after such time, our business, financial condition, and results of operations would likely be materially and adversely affected.

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

Our results of operations are dependent upon the continued operation of our manufacturing facility in Woburn, Massachusetts. The operation of biomedical manufacturing plants involves many risks, including the risks of breakdown, failure or substandard performance of equipment, the occurrence of natural and other disasters, and the need to comply with the requirements of directives of government agencies, including the FDA. In addition, we rely on a single supplier for syringes and a small number of

suppliers for a number of other materials required for the manufacturing and delivery of our HA products. Although we believe that alternative sources for many of these and other components and raw materials that we use in our manufacturing processes are available, any supply interruption could harm our ability to manufacture our products until a new source of supply is identified and qualified. We may not be able to find a sufficient alternative supplier in a reasonable time period, or on commercially reasonable terms, if at all, and our ability to produce and supply our products could be impaired.

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

The utilization of animals in research and development and product commercialization is subject to increasing focus by animal rights activists. The activities of animal rights groups and other organizations that have protested animal based research and development programs or boycotted the products resulting from such programs could cause an interruption in our manufacturing processes and research and development efforts. The occurrence of material operational problems, including but not limited to the events described above, could have a material adverse effect on our business, financial condition, and results of operations during the period of such operational difficulties.

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

Our future success depends on substantial growth in product sales. There can be no assurance that such growth can be achieved or, if achieved, can be sustained. We expect sales of ORTHOVISC to grow in 2004 as a result of FDA approval and the entering into of the OBI Agreement with Ortho Biotech. There can be no assurance that even if substantial growth in product sales and the demand for our products is achieved, we will be able to:

• develop the necessary manufacturing capabilities;

• obtain the assistance of additional marketing partners;

• attract, retain and integrate the required key personnel;

• implement the financial, accounting and management systems needed to manage growing demand for our products.

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

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

Our business strategy may include the future acquisition of businesses, technologies, services or products that we believe are a strategic fit with our business. If we undertake any acquisition, the process of integrating an acquired business, technology, service or product may result in unforeseen operating difficulties and expenditures and may absorb significant management attention that would otherwise be available for ongoing development of our business. Moreover, we may fail to realize the anticipated benefits of any acquisition as rapidly as expected or at all. Future acquisitions could reduce stockholders’ ownership, cause us to incur debt, expose us to future liabilities and result in amortization expenses related to intangible assets with definite lives. In addition, acquisitions involve other risks, including diversion of management resources otherwise available for ongoing development of our business and risks associated

with entering new markets with which we have limited experience or where experienced distribution alliances are not available. Our future profitability may depend in part upon our ability to develop further our resources to adapt to these new products or business areas and to identify and enter into satisfactory distribution networks. We may not be able to identify suitable acquisition candidates in the future or consummate future acquisitions.

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

In the U.S. and other markets, health care providers, such as hospitals and physicians, that purchase health care products, such as our products, generally rely on third party payers, including Medicare, Medicaid and other health insurance and managed care plans, to reimburse all or part of the cost of the health care product. We depend upon the distributors for our products to secure reimbursement and reimbursement approvals. Reimbursement by third party payers may depend on a number of factors, including the payer’s determination that the use of our products is clinically useful and cost-effective, medically necessary and not experimental or investigational. Since reimbursement approval is required from each payer individually, seeking such approvals can be a time consuming and costly process which, in the future, could require us or our marketing partners to provide supporting scientific, clinical and cost-effectiveness data for the use of our products to each payer separately. Significant uncertainty exists as to the reimbursement status of newly approved health care products, and third party payers are increasingly attempting to contain the costs of health care products and services by limiting both coverage and the level of reimbursement for new therapeutic products and by refusing in some cases to provide coverage for uses of approved products for disease indications for which the FDA has not granted marketing approval. In addition, Congress and certain state legislatures have considered reforms that may affect current reimbursement practices, including controls on health care spending through limitations on the growth of Medicare and Medicaid spending. There can be no assurance that third party reimbursement coverage will be available or adequate for any products or services developed by us. Outside the U.S., the success of our products is also dependent in part upon the availability of reimbursement and health care payment systems. Lack of adequate coverage and reimbursement provided by governments and other third party payers for our products and services could have a material adverse effect on our business, financial condition, and results of operations.

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

We had cash and cash equivalents of approximately $34.5 million at March 31, 2004. Our future capital requirements and the adequacy of available funds will depend, however, on numerous factors, including:

• market acceptance of our existing and future products;

• the successful commercialization of products in development;

• progress in our product development efforts;

• the magnitude and scope of such product development efforts,

• progress with preclinical studies, clinical trials and product clearances by the FDA and other agencies;

• the cost and timing of our efforts to manage our manufacturing capabilities and related costs;

• the cost of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights;

• competing technological and market developments;

• the development of strategic alliances for the marketing of certain of our products;

• the terms of such strategic alliances, including provisions (and our ability to satisfy such

provisions) that provide upfront and/or milestone payments to us; and

• the cost of maintaining adequate inventory levels to meet current and future product demands.

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

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

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

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

We are highly dependent on the members of our management and scientific staff, the loss of one or more of whom could have a material adverse effect on us. We believe that our future success will depend in large part upon our ability to attract and retain highly skilled, scientific, managerial and manufacturing personnel. We face significant competition for such personnel from other companies, research and academic institutions, government entities and other organizations. There can be no assurance that we will be successful in hiring or retaining the personnel we require. The failure to hire and retain such personnel could have a material adverse effect on our business, financial condition and results of operations.

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

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

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

During the three months ended March 31, 2004 and 2003, approximately, 14.9% and 15.7%, respectively, of our product sales were to international distributors. Our representatives, agents and distributors who sell products in international markets are subject to the laws and regulations of the foreign jurisdictions in which they operate and in which our products are sold. A number of risks are inherent in

international sales and operations. For example, the volume of international sales may be limited by the imposition of government controls, export license requirements, political and/or economic instability, trade restrictions, changes in tariffs, difficulties in managing international operations, import restrictions and fluctuations in foreign currency exchange rates. Such changes in the volume of sales may have a material adverse effect on our business, financial condition, and results of operations.

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

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

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

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

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

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

We have historically derived the majority of our revenues from a small number of customers, most of whom resell our products to end users and most of whom are significantly larger companies than us. For the three months ended March 31, 2004, three customers accounted for 71.6% of product revenues and

84.3% of our accounts receivable balance. While it is expected that our ability to market ORTHOVISC in the U.S. as a result of the receipt of FDA approval in February 2004, and our entering into the OBI Agreement, will reduce our dependence on Bausch & Lomb for revenues, historically our largest customer, we will still be dependent on a small number of large customers for the majority of our revenues. Our failure to generate as much revenue as expected from these customers or the failure of these customers to purchase our products would seriously harm our business. In addition, if present and future customers terminate their purchasing arrangements with us, significantly reduce or delay their orders, or seek to renegotiate their agreements on terms less favorable to us, our business, financial condition, and results of operations will be adversely affected. If we accept terms less favorable than the terms of the current agreement, such renegotiations may have a material adverse effect on our business, financial condition, and/or results of operations. Furthermore, we may be subject to the perceived or actual leverage the customers may have given their relative size and importance to us in any future negotiations. Any termination, change, reduction or delay in orders could seriously harm our business, financial condition, and results of operations. Accordingly, unless and until we diversify and expand our customer base, our future success will significantly depend upon the timing and size of future purchases by our largest customers and the financial and operational success of these customers. The loss of any one of our major customers or the delay of significant orders from such customers, even if only temporary, could reduce or delay our recognition of revenues, harm our reputation in the industry, and reduce our ability to accurately predict cash flow, and, as a consequence, could seriously harm our business, financial condition, and results of operations.

We, through our international distributors, distribute ORTHOVISC in Canada, Turkey and certain countries in Europe and the Middle East. Due to unfavorable results of the U.S. ORTHOVISC pivotal clinical trial announced on May 31, 2000, marketing efforts in these countries have been negatively affected. There can be no assurance that as a result receiving FDA marketing approval in February 2004 for ORTHOVISC in the U.S. marketing efforts will improve or that international sales levels for ORTHOVISC will improve, maintain historical levels or that sales will occur at all in these countries.

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

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

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

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

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

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Primary Market Risk Exposures

Our primary market risk exposures are in the areas of interest rate risk and foreign currency exchange rate risk. Our investment portfolio of cash equivalent and short-term investments is subject to interest rate fluctuations, but we believe this risk is immaterial due to the short-term nature of these investments. Our exposure to currency exchange rate fluctuations is specific to the extent that certain sales were effected through logistics agents in foreign currencies. The impact of currency exchange rate movements on sales through logistics agents was immaterial for the quarter ended March 31, 2004. Currently, we do not engage in foreign currency hedging activities.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.

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

(b) Changes in internal controls.

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

PART II: OTHER INFORMATION

Item 1. Legal Proceedings

None

Item 6. Exhibits and Reports on Form 8-K

(a)	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 Intentionally Omitted.

3.6 Intentionally Omitted.

3.7 Amendment to the Amended and Restated Articles of Organization of the Company, incorporated herein by reference to Exhibit 3.3 of the Company’s quarterly report on Form 10-Q for the quarterly period ending June 30, 2002 (File no. 000-21326), filed with the Securities and Exchange Commission on August 14, 2002.

3.8 The Amended and Restated Bylaws of the Company, incorporated herein by reference to Exhibit 3.6 to the Company’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2002 (File no. 000-21326), filed with the Securities and Exchange Commission on August 14, 2002.

(4) Instruments Defining the Rights of Security Holders

4.1 Shareholder Rights Agreement dated as of April 6, 1998 between the Company and Firstar Trust Company, incorporated herein by reference to Exhibit 4.1 to the Company’s Registration Statement on Form 8-A12B (File no. 001-14027), filed with the Securities and Exchange Commission on April 7, 1998.

4.2 Amendment to Shareholder Rights Agreement dated as of November 5, 2002 between the Company and American Stock Transfer and Trust Company, as successor to Firstar Trust Company incorporated herein by reference to Exhibit 4.2 to the Company’s quarterly report on Form 10-Q for the quarterly period ended September 30, 2002 (File no. 000-21326), filed with the Securities and Exchange Commission on November 13, 2002.

(10) Material Contracts

(11) Statement Regarding the Computation of Per Share Earnings

11.1 See Note 4 to the Financial Statements included herewith.

(31) Rule 13a-14(a)/15d-14(a) Certifications

* 31.1 Certification of Charles H. Sherwood, Ph.D.

* 31.2 Certification of William J. Knight

(32) Section 1350 Certifications

** 32.1 Section 1350 Certification of Charles H. Sherwood, Ph.D. and William J. Knight

* Filed herewith

** Furnished herewith

(b) Reports on Form 8-K:

The Registrant furnished the following Current Report on Form 8-K during the quarter ended March 31, 2004:

1. Current Report on Form 8-K filed April 29, 2004, attaching a press release announcing financial results for the first quarter of 2004 pursuant to Item 12 - Results of Operations and Financial Conditions.

SIGNATURES

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

	ANIKA THERAPEUTICS, INC.

May 17, 2004	By:	/s/ William J. Knight
		William J. Knight
		Chief Financial Officer and Treasurer
		(Principal Financial Officer and Accounting Officer)