##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2003

OR

|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|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 No. 0-19842

PolyMedica Corporation

(Exact name of registrant as specified in its charter)


|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Massachusetts                                                  |  | 04-3033368                          
|                                                               |  |                                     
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer
Identification No.)
|                                                               |  |                                     
|11 State Street, Woburn, Massachusetts                         |  | 01801                               
|                                                               |  |                                     
|(Address of principal executive offices)                       |  | (Zip Code)                          
|                                                               |  |                                     

(781) 933-2020(Registrants telephone number, including
area code)

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

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

As of August 18, 2003, there were 12,399,268 shares of the registrants
Common Stock issued and outstanding and an additional 915,714 shares held in treasury.





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TABLE OF CONTENTS



|                                                 |                                                                                               |                                            |  |  |  |  |  | 
|------------------------------------------------ | --------------------------------------------------------------------------------------------- | ------------------------------------------ |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION                  
|                                                 | Item 1. Financial Statements                                                                 
|                                                 |                                                                                               | Consolidated Balance Sheets               
|                                                 |                                                                                               | Consolidated Statements of Operations     
|                                                 |                                                                                               | Consolidated Statements of Cash Flows     
|                                                 |                                                                                               | Notes to Consolidated Financial Statements
|                                                 | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                 | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                                                 | Item 4. Controls and Procedures                                                              
|PART II  OTHER INFORMATION                     
|                                                 | Item 1. Legal Proceedings                                                                    
|                                                 | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                      
|Exhibit Index                                   
|EX-10.65 RESTRICTED STOCK AGREEMENT             
|EX-10.66 AMENDED EMPLOYEE AGREEMENT             
|EX-31.1 CERTIFICATION BY CHIEF EXECUTIVE OFFICER
|EX-31.2 CERTIFICATION BY CHIEF FINANCIAL OFFICER
|EX-32.1 SECT. 906 CERTIFICATION OF THE CEO & CFO



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##### Table of Contents



POLYMEDICA CORPORATION
TABLE OF CONTENTS

|              |  |                                                                                       |    |  |                                                                                         |  |      |   |  |  |  |  | 
|------------- |  | ------------------------------------------------------------------------------------- | -- |  | --------------------------------------------------------------------------------------- |  | ---- | - |  |  |  |  | 
|              |  |                                                                                       |    |  |                                                                                         |  | Page |   |  |  | 
|              |  |                                                                                       |    |  |                                                                                         |  |      |   |  |  | 
|PART I -      |  | FINANCIAL INFORMATION                                                                 |    |  |                                                                                         | 
|Item 1 -      |  | Financial Statements (unaudited)                                                      |    |  |                                                                                         | 
|              |  |                                                                                       |    |  | Consolidated Balance Sheets as of June 30 and March 31, 2003                            |  |      | 3 | 
|              |  |                                                                                       |    |  | Consolidated Statements of Operations for the three months ended
June 30, 2003 and 2002 |  |      | 5 | 
|              |  |                                                                                       |    |  | Consolidated Statements of Cash Flows for the three months ended
June 30, 2003 and 2002 |  |      | 6 | 
|              |  |                                                                                       |    |  | Notes to Consolidated Financial Statements                                              |  |      | 7 | 
|Item 2 -      |  | Managements Discussion and Analysis of Financial Condition
and Results of Operations |    |  | 17                                                                                      | 
|Item 3 -      |  | Quantitative and Qualitative Disclosures About Market Risk                            |    |  | 30                                                                                      | 
|Item 4 -      |  | Controls and Procedures                                                               |    |  | 31                                                                                      | 
|PART II -     |  | OTHER INFORMATION                                                                     |    |  |                                                                                         | 
|Item 1  -     |  | Legal Proceedings                                                                     |    |  | 32                                                                                      | 
|Item 6  -     |  | Exhibits and Reports on Form 8-K                                                      |    |  | 33                                                                                      | 
|Signatures    |  |                                                                                       | 34 | 
|Exhibit Index |  |                                                                                       | 35 | 

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PART I  FINANCIAL INFORMATION




Item 1. Financial Statements




PolyMedica Corporation
Consolidated Balance Sheets
(Unaudited)(In thousands, except share and per share amounts)

|                                                 |  |                                                                                                               |                      |   |          |         |           |   |        |         | 
|------------------------------------------------ |  | ------------------------------------------------------------------------------------------------------------- | -------------------- | - | -------- | ------- | --------- | - | ------ | ------- | 
|                                                 |  |                                                                                                               |                      |   | June 30, |         | March 31,
|                                                 |  |                                                                                                               |                      |   | 2003     |         | 2003     
|                                                 |  |                                                                                                               |                      |   |          |         |          
|ASSETS                                           |  |                                                                                                               |                      |   |          |         |           |  
|Current assets:                                  |  |                                                                                                               |                      |   |          |         |           |  
|                                                 |  | Cash and cash equivalents                                                                                     |                      | $ | 25,637   |         |           | $ | 27,162 |        
|                                                 |  | Investments                                                                                                   |                      |   | 7,007    |         |           |   | 1,442  |        
|                                                 |  | Accounts receivable (net of allowances of
$26,503 and $22,556 as of June 30
and March 31, 2003, respectively) |                      |   | 51,407   |         |           |   | 61,168 |        
|                                                 |  | Inventories                                                                                                   |                      |   | 16,464   |         |           |   | 18,850 |        
|                                                 |  | Deferred income taxes                                                                                         |                      |   | 13,960   |         |           |   | 13,960 |        
|                                                 |  | Prepaid expenses and other current assets                                                                     |                      |   | 6,427    |         |           |   | 3,438  |        
|                                                 |  |                                                                                                               |                      |   |          |         |           |  
|                                                 |  |                                                                                                               | Total current assets |   |          | 120,902 |           |   |        | 126,020 | 
|Property, plant and equipment, net               |  |                                                                                                               | 54,756               |   |          |         | 53,304    |  
|Goodwill (Note 4)                                |  |                                                                                                               | 5,946                |   |          |         | 5,946     |  
|Intangible assets, net                           |  |                                                                                                               | 43                   |   |          |         | 108       |  
|Direct-response advertising, net (Notes 5 and 6) |  |                                                                                                               | 67,559               |   |          |         | 64,061    |  
|Other assets                                     |  |                                                                                                               | 1,962                |   |          |         | 1,530     |  
|                                                 |  |                                                                                                               |                      |   |          |         |           |  
|                                                 |  |                                                                                                               | Total assets         |   | $        | 251,168 |           |   | $      | 250,969 | 
|                                                 |  |                                                                                                               |                      |   |          |         |           |  

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

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PolyMedica Corporation
Consolidated Balance Sheets
(Unaudited)(In thousands, except share and per share amounts)

|                                                            |                                                                                                                        |                                            |        |          |         |           |        |         |         | 
|----------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | -------- | ------- | --------- | ------ | ------- | ------- | 
|                                                            |                                                                                                                        |                                            |        | June 30, |         | March 31,
|                                                            |                                                                                                                        |                                            |        | 2003     |         | 2003     
|                                                            |                                                                                                                        |                                            |        |          |         |          
|LIABILITIES AND SHAREHOLDERS EQUITY                        |                                                                                                                        |                                            |        |          |         |           |        |        
|Current liabilities:                                        |                                                                                                                        |                                            |        |          |         |           |        |        
|                                                            | Accounts payable                                                                                                       |                                            | $      | 4,323    |         |           | $      | 12,576  |        
|                                                            | Accrued expenses (Note 8)                                                                                              |                                            |        | 16,544   |         |           |        | 17,003  |        
|                                                            | Current portion, capital lease obligations and note payable                                                            |                                            |        | 1,568    |         |           |        | 2,310   |        
|                                                            |                                                                                                                        |                                            |        |          |         |           |        |        
|                                                            |                                                                                                                        | Total current liabilities                  |        |          | 22,435  |           |        |         | 31,889  | 
|Long-term note payable, capital lease and other obligations |                                                                                                                        |                                            | 2,134  |          |         |           | 1,877  |        
|Deferred income taxes                                       |                                                                                                                        |                                            | 20,528 |          |         |           | 20,528 |        
|                                                            |                                                                                                                        |                                            |        |          |         |           |        |        
|                                                            |                                                                                                                        | Total liabilities                          |        |          | 45,097  |           |        |         | 54,294  | 
|Commitments
and contingencies (Note 9)                      |                                                                                                                        |                                            |        |          |         |           |        |        
|Shareholders equity:                                       |                                                                                                                        |                                            |        |          |         |           |        |        
|                                                            | Preferred stock, $0.01 par value; 2,000,000 shares
authorized, none issued or outstanding                              |                                            |        |         |         |           |        |        |        
|                                                            | Common stock, $0.01 par value; 50,000,000 shares
authorized; 13,314,982 shares issued as of June 30
and March 31, 2003 |                                            |        | 133      |         |           |        | 133     |        
|                                                            | Treasury stock, at cost (964,350 and 1,029,393 shares as
of June 30 and March 31, 2003, respectively)                  |                                            |        | (19,736  | )       |           |        | (21,067 | )      
|                                                            | Deferred compensation                                                                                                  |                                            |        |         |         |           |        | (54     | )      
|                                                            | Additional paid-in capital                                                                                             |                                            |        | 119,360  |         |           |        | 119,375 |        
|                                                            | Retained earnings                                                                                                      |                                            |        | 106,314  |         |           |        | 98,288  |        
|                                                            |                                                                                                                        |                                            |        |          |         |           |        |        
|                                                            |                                                                                                                        | Total shareholders equity                 |        |          | 206,071 |           |        |         | 196,675 | 
|                                                            |                                                                                                                        |                                            |        |          |         |           |        |        
|                                                            |                                                                                                                        | Total liabilities and shareholders equity |        | $        | 251,168 |           |        | $       | 250,969 | 
|                                                            |                                                                                                                        |                                            |        |          |         |           |        |        

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

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PolyMedica Corporation
Consolidated Statements of Operations
(Unaudited)(In thousands, except per share amounts)

|                                                                                                          |                   |         |        |                    |      |          |         |     |       |  
|--------------------------------------------------------------------------------------------------------- | ----------------- | ------- | ------ | ------------------ | ---- | -------- | ------- | --- | ----- | -
|                                                                                                          |                   |         |        | Three Months Ended
|                                                                                                          |                   |         |        |                   
|                                                                                                          |                   |         |        | June 30,           |      | June 30,
|                                                                                                          |                   |         |        | 2003               |      | 2002    
|                                                                                                          |                   |         |        |                    |      |         
|Net revenues                                                                                              |                   | $       | 98,937 |                    |      | $        | 81,601  |    
|Cost of sales                                                                                             |                   |         | 35,769 |                    |      |          | 28,857  |    
|                                                                                                          |                   |         |        |                    |      |          |         |    
|Gross margin                                                                                              |                   |         | 63,168 |                    |      |          | 52,744  |    
|Selling, general and administrative expenses                                                              |                   |         | 45,488 |                    |      |          | 38,028  |    
|                                                                                                          |                   |         |        |                    |      |          |         |    
|Income from operations                                                                                    |                   |         | 17,680 |                    |      |          | 14,716  |    
|Other income and expense:                                                                                 |                   |         |        |                    |      |          |         |    
|                                                                                                          | Investment income |         |        | 223                |      |          |         | 44  |      
|                                                                                                          | Interest expense  |         |        | (17                | )    |          |         | (37 | )    
|                                                                                                          | Other expense     |         |        | (43                | )    |          |         | (11 | )    
|                                                                                                          |                   |         |        |                    |      |          |         |    
|                                                                                                          |                   |         | 163    |                    |      |          | (4      | )  
|Income before income taxes                                                                                |                   |         | 17,843 |                    |      |          | 14,712  |    
|Income tax provision                                                                                      |                   |         | 6,745  |                    |      |          | 5,561   |    
|                                                                                                          |                   |         |        |                    |      |          |         |    
|Income before cumulative effect of
change in accounting principle                                         |                   |         | 11,098 |                    |      |          | 9,151   |    
|Cumulative effect of change in accounting
principle, net of taxes of $9,187 (Note 4)                      |                   |         |       |                    |      |          | (14,615 | )  
|                                                                                                          |                   |         |        |                    |      |          |         |    
|Net income (loss)                                                                                         |                   | $       | 11,098 |                    |      | $        | (5,464  | )  
|                                                                                                          |                   |         |        |                    |      |          |         |    
|Income before cumulative effect of change in
accounting principle per weighted average
share:             |                   |         |        |                    |      |          |         |    
|                                                                                                          |                   | Basic   |        | $                  | 0.90 |          |         | $   | 0.75  |  
|                                                                                                          |                   | Diluted |        | $                  | 0.88 |          |         | $   | 0.73  |  
|Cumulative effect of change in accounting
principle per weighted average share:                           |                   |         |        |                    |      |          |         |    
|                                                                                                          |                   | Basic   |        | $                  |     |          |         | $   | (1.20 | )
|                                                                                                          |                   | Diluted |        | $                  |     |          |         | $   | (1.17 | )
|Net income (loss) per weighted average share:                                                             |                   |         |        |                    |      |          |         |    
|                                                                                                          |                   | Basic   |        | $                  | 0.90 |          |         | $   | (0.45 | )
|                                                                                                          |                   | Diluted |        | $                  | 0.88 |          |         | $   | (0.45 | )
|Cash dividend per share                                                                                   |                   | $       | 0.25   |                    |      | $        |        |    
|Weighted average shares, basic                                                                            |                   |         | 12,310 |                    |      |          | 12,167  |    
|Weighted average shares, diluted                                                                          |                   |         | 12,672 |                    |      |          | 12,578  |    
|Weighted average shares, diluted, used in
the calculation of net income (loss) per
weighted average share |                   |         | 12,672 |                    |      |          | 12,167  |    

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

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PolyMedica Corporation
Consolidated Statements of Cash Flows
(Unaudited)(In thousands)

|                                                  |                                                               |                                             |                                        |                                             |         |                    |        |        |         |         |        |  
|------------------------------------------------- | ------------------------------------------------------------- | ------------------------------------------- | -------------------------------------- | ------------------------------------------- | ------- | ------------------ | ------ | ------ | ------- | ------- | ------ | -
|                                                  |                                                               |                                             |                                        |                                             |         | Three Months Ended
|                                                  |                                                               |                                             |                                        |                                             |         | June 30,          
|                                                  |                                                               |                                             |                                        |                                             |         |                   
|                                                  |                                                               |                                             |                                        |                                             |         | 2003               |        | 2002  
|                                                  |                                                               |                                             |                                        |                                             |         |                    |        |       
|Cash flows from operating activities:             |                                                               |                                             |                                        |                                             |         |                    |        |       
|                                                  | Net income (loss)                                             |                                             | $                                      | 11,098                                      |         |                    | $      | (5,464 | )      
|                                                  | Adjustments to reconcile net income (loss) to net cash flows: |                                             |                                        |                                             |         |                    |        |        |        
|                                                  |                                                               | Impairment of goodwill, net of taxes        |                                        |                                             |        |                    |        |        | 14,615  |        
|                                                  |                                                               | Depreciation and amortization               |                                        |                                             | 1,889   |                    |        |        | 1,332   |        
|                                                  |                                                               | Amortization of direct-response advertising |                                        |                                             | 10,364  |                    |        |        | 8,507   |        
|                                                  |                                                               | Direct-response advertising expenditures    |                                        |                                             | (13,862 | )                  |        |        | (11,513 | )      
|                                                  |                                                               | Provision for bad debts                     |                                        |                                             | 5,653   |                    |        |        | 5,941   |        
|                                                  |                                                               | Provision for sales allowances/returns      |                                        |                                             | 5,219   |                    |        |        | 3,715   |        
|                                                  |                                                               | Stock-based compensation                    |                                        |                                             | 54      |                    |        |        |        |        
|                                                  |                                                               | Loss on sale of equipment                   |                                        |                                             | 43      |                    |        |        | 11      |        
|                                                  |                                                               | Changes in assets and liabilities:          |                                        |                                             |         |                    |        |        |         |        
|                                                  |                                                               |                                             | Accounts receivable                    |                                             |         | (1,111             | )      |        |         | (12,885 | )     
|                                                  |                                                               |                                             | Inventories                            |                                             |         | 2,386              |        |        |         | (4,432  | )     
|                                                  |                                                               |                                             | Prepaid expenses and other assets      |                                             |         | (3,126             | )      |        |         | (1,297  | )     
|                                                  |                                                               |                                             | Accounts payable                       |                                             |         | (8,253             | )      |        |         | 9,022   |       
|                                                  |                                                               |                                             | Accrued expenses and other liabilities |                                             |         | (303               | )      |        |         | (1,882  | )     
|                                                  |                                                               |                                             |                                        |                                             |         |                    |        |       
|                                                  |                                                               |                                             |                                        | Net cash flows from operating activities    |         |                    | 10,051 |        |         |         | 5,670  |  
|                                                  |                                                               |                                             |                                        |                                             |         |                    |        |       
|Cash flows from investing activities:             |                                                               |                                             |                                        |                                             |         |                    |        |       
|                                                  | Purchase of investments                                       |                                             |                                        | (5,565                                      | )       |                    |        |       |        
|                                                  | Purchase of property, plant and equipment                     |                                             |                                        | (3,272                                      | )       |                    |        | (5,763 | )      
|                                                  |                                                               |                                             |                                        |                                             |         |                    |        |       
|                                                  |                                                               |                                             |                                        | Net cash flows used by investing activities |         |                    | (8,837 | )      |         |         | (5,763 | )
|                                                  |                                                               |                                             |                                        |                                             |         |                    |        |       
|Cash flows from financing activities:             |                                                               |                                             |                                        |                                             |         |                    |        |       
|                                                  | Proceeds from issuance of common stock                        |                                             |                                        | 1,315                                       |         |                    |        | 330    |        
|                                                  | Repurchase of common stock                                    |                                             |                                        |                                            |         |                    |        | (659   | )      
|                                                  | Contributions to deferred compensation plans                  |                                             |                                        | (157                                        | )       |                    |        | (1,204 | )      
|                                                  | Payment of dividends declared on common stock                 |                                             |                                        | (3,072                                      | )       |                    |        |       |        
|                                                  | Payment of obligations under capital leases and note payable  |                                             |                                        | (825                                        | )       |                    |        | (183   | )      
|                                                  |                                                               |                                             |                                        |                                             |         |                    |        |       
|                                                  |                                                               |                                             |                                        | Net cash flows used by financing activities |         |                    | (2,739 | )      |         |         | (1,716 | )
|                                                  |                                                               |                                             |                                        |                                             |         |                    |        |       
|                                                  |                                                               |                                             |                                        | Net decrease in cash and cash equivalents   |         |                    | (1,525 | )      |         |         | (1,809 | )
|Cash and cash equivalents at beginning of period  |                                                               |                                             | 27,162                                 |                                             |         |                    | 27,884 |       
|                                                  |                                                               |                                             |                                        |                                             |         |                    |        |       
|Cash and cash equivalents at end of period        |                                                               | $                                           | 25,637                                 |                                             |         | $                  | 26,075 |       
|                                                  |                                                               |                                             |                                        |                                             |         |                    |        |       
|Supplemental disclosure of cash flow information: |                                                               |                                             |                                        |                                             |         |                    |        |       
|                                                  | Assets purchased under capital lease                          |                                             | $                                      | 46                                          |         |                    | $      | 63     |        
|                                                  | Disposal of equipment                                         |                                             |                                        | 312                                         |         |                    |        | 29     |        

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

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PolyMedica Corporation
Notes to Consolidated Financial Statements
(Unaudited)

1. Basis of Presentation

Company

PolyMedica Corporation and its subsidiaries (PolyMedica) is a leading
provider of direct-to-consumer medical products, conducting business through
its Liberty Diabetes, Liberty Respiratory, and Pharmaceuticals segments.

Accounting

The unaudited consolidated financial statements included herein have been
prepared by PolyMedica pursuant to the rules and regulations of the Securities
and Exchange Commission (SEC) and include, in the opinion of management, all
adjustments, consisting of normal, recurring adjustments, necessary for a fair
presentation of interim period results. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted pursuant to such rules and regulations.

The results for the interim periods presented are not necessarily
indicative of results to be expected for the full fiscal year. It is suggested
that these interim consolidated financial statements be read in conjunction
with the audited consolidated financial statements included in our Annual
Report on Form 10-K for the fiscal year ended March 31, 2003.

The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make certain estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the
reported amounts of revenue and expenses during the reported period. Estimates
and judgments are used for, including, but not limited to, determination of
appropriate Medicare reimbursement rates, the allowance for doubtful accounts
and sales returns, valuation of inventory, goodwill, direct-response
advertising, accrued expenses, accruals for Medicare adjustments, uncertainties
that management determines are estimable and probable, and depreciation and
amortization. Actual results could differ from those estimates.

Certain amounts in the prior period consolidated financial statements have
been reclassified to conform with the current period Form 10-Q presentation.

2. Revenue Recognition

We recognize revenue related to product sales to customers who have placed
orders, upon shipment, provided that risk of loss has passed to the customer
and we have received and verified the required written forms, if applicable, to
bill Medicare, other third-party payers, and customers. We record revenue at
the amounts expected to be collected from Medicare, other third-party payers,
and directly from customers. Revenue recognition is delayed for product
shipments for which we have not yet received the required written forms, until
the period in which those documents are collected and verified.

Revenue for Medicare reimbursement is calculated based on
government-determined reimbursement prices for Medicare-covered items. We
exclude from revenue amounts billed in excess of the government-determined
reimbursement prices. As a result, our contractual allowances are immaterial.
The reimbursements that Medicare pays us are subject to review by appropriate
government regulators. Medicare reimburses at 80% of the government-determined
reimbursement prices for reimbursable supplies and we bill the remaining
balance to either third-party payers or directly to customers.

Approximately $67.95 million and $56.90 million of net revenues for the
three months ended June 30, 2003 and 2002, respectively, were reimbursable by
Medicare for products provided to Medicare beneficiaries.

Sales allowances are recorded for estimated product returns as a reduction
of revenue. We analyze sales allowances using historical data adjusted for
significant changes in volume, customer demographics, and business

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conditions. These allowances are adjusted to reflect actual returns. During the
three months ended June 30, 2003 and 2002, we provided for sales allowances at
a rate of approximately 5.0% and 4.4% of gross revenues, respectively.

3. Inventories

Inventories consist of the following:

|                |  |          |        |           |  |   |        | 
|--------------- |  | -------- | ------ | --------- |  | - | ------ | 
|                |  | June 30, |        | March 31,
|(In thousands)  |  | 2003     |        | 2003     
|                |  |          |        |          
|Raw materials   |  | $        | 1,605  |           |  | $ | 1,453  | 
|Work in process |  |          | 396    |           |  |   | 480    | 
|Finished goods  |  |          | 14,463 |           |  |   | 16,917 | 
|                |  |          |        |           |  |   |        | 
|                |  | $        | 16,464 |           |  | $ | 18,850 | 
|                |  |          |        |           |  |   |        | 

Due to the medical nature of the products we provide, customers sometimes
request supplies before we have received the required written documents, if
applicable, to bill Medicare, other third-party payers and customers. Because
we do not recognize revenue until we have received and verified such documents,
included in inventories as of June 30 and March 31, 2003, is $2.00 million and
$2.57 million, respectively, of inventory shipped to customers for which we
have received an order but have not yet received the required written
documents, if applicable, to bill Medicare, other third-party payers, and
customers and recognize revenue.

4. Goodwill and Other Intangible Assets

In July 2001, the Financial Accounting Standards Board (the FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and
Other Intangible Assets. SFAS No. 142 requires that ratable amortization of
goodwill and certain intangible assets be replaced with periodic impairment
tests of the goodwill and that other intangible assets be amortized over their
useful lives unless these lives are determined to be indefinite. SFAS No. 142
is effective for fiscal years beginning after December 15, 2001, and thus was
adopted by PolyMedica on April 1, 2002.

The first step of the transitional impairment test was completed in the
quarter ended September 30, 2002, which resulted in the determination that the
carrying value of the net assets related to our PolyMedica Pharmaceuticals
(U.S.A.), Inc. and PolyMedica Healthcare, Inc. reporting units, included in our
Pharmaceuticals segment, exceeded their fair value. As a result, we performed
the second step of the transitional impairment test in the quarter ended
December 31, 2002, to measure the amount of the impairment loss, in which we
compared the implied fair value of the goodwill in these two reporting units
with the carrying amount of the goodwill. We determined that the carrying value
of the goodwill for these reporting units exceeded the implied fair value of
that goodwill by $23.80 million. We recorded a $23.80 million ($14.62 million
net of taxes) impairment loss related to these reporting units as a cumulative
effect of a change in accounting principle retroactive to April 1, 2002.

Goodwill included in the PolyMedica Pharmaceuticals (U.S.A.), Inc. and
PolyMedica Healthcare, Inc. reporting units is a result of PolyMedicas
acquisition of an Alcon urological product line, including over-the-counter and
prescription urology products, in December 1992. Net of the impairment loss,
the remaining goodwill related to these reporting units as of June 30, 2003 was
$1.00 million. Including the amount of goodwill recorded in our Liberty
Diabetes segment, which was not considered to be impaired under our
transitional impairment test, PolyMedicas total goodwill as of June 30, 2003
was $5.95 million.

We are required to perform impairment tests under SFAS No. 142 annually
and whenever events or changes in circumstance suggest that the carrying value
of an asset may not be recoverable and record any impairment as a cost of
continuing operations.

We have three reporting units with goodwill: Liberty Medical Supply, Inc.
(Liberty), included in the Liberty Diabetes reporting segment, and PolyMedica
Pharmaceuticals (U.S.A.), Inc. and PolyMedica Healthcare, Inc., both included
in the Pharmaceuticals reporting segment. The carrying amounts of goodwill and
intangible assets, excluding direct-response advertising,  as of June 30 and March 31, 2003, by reportable segment, were
as follows:

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|                                    |  |          |        |           |  |   |        |  
|----------------------------------- |  | -------- | ------ | --------- |  | - | ------ | -
|(in thousands)                      |  | June 30, |        | March 31,
|                                    |  | 2003     |        | 2003     
|                                    |  |          |        |          
|Liberty Diabetes:                   |  |          |        |           |  |   |        |  
|Goodwill                            |  | $        | 4,951  |           |  | $ | 4,951  |  
|                                    |  |          |        |           |  |   |        |  
|Customer list                       |  | $        | 1,816  |           |  | $ | 1,816  |  
|Accumulated amortization            |  |          | (1,773 | )         |  |   | (1,708 | )
|                                    |  |          |        |           |  |   |        |  
|                                    |  | $        | 43     |           |  | $ | 108    |  
|                                    |  |          |        |           |  |   |        |  
|Pharmaceuticals:                    |  |          |        |           |  |   |        |  
|Goodwill                            |  | $        | 995    |           |  | $ | 995    |  
|                                    |  |          |        |           |  |   |        |  
|Total consolidated goodwill         |  | $        | 5,946  |           |  | $ | 5,946  |  
|                                    |  |          |        |           |  |   |        |  
|Total amortizable intangible assets |  |          | 1,816  |           |  |   | 1,816  |  
|Total accumulated amortization      |  |          | (1,773 | )         |  |   | (1,708 | )
|                                    |  |          |        |           |  |   |        |  
|                                    |  | $        | 43     |           |  | $ | 108    |  
|                                    |  |          |        |           |  |   |        |  

Amortization expense for intangible assets was approximately $65,000 and
$184,000 for the three months ended June 30, 2003 and 2002, respectively. The
remaining net value of the intangible assets as of June 30, 2003, $43,000, will be
fully amortized in the fiscal year ending March 31, 2004.

5. Direct-Response Advertising

In accordance with Statement of Position 93-7 (SOP 93-7),
direct-response advertising and associated costs for our diabetes supplies and
related products, included in the Liberty Diabetes segment, for the periods
presented are capitalized and amortized to selling, general and administrative
expenses on an accelerated basis during the first two years of a four-year
period. The amortization rate is such that 55% of such costs are expensed after
two years from the date they are incurred, and the remaining 45% is expensed on
a straight-line basis over the next two years. Management assesses the
realizability of the amounts of direct-response advertising costs reported as
assets at each balance sheet date by comparing the carrying amounts of such
assets to the probable remaining future net cash flows expected to result
directly from such advertising. We expense in the period advertising that does
not meet the capitalization requirements of SOP 93-7.

Direct-response advertising and related costs for our respiratory
supplies, included in the Liberty Respiratory segment, for all periods
presented are capitalized and amortized to selling, general and administrative
expenses on a straight-line basis over a two-year period.

Any change in existing accounting rules or a business change that impacts
expected net cash flows or that shortens the period over which such net cash
flows are estimated to be realized, currently four years for our diabetes
products and two years for our respiratory supplies, could result in
accelerated charges against our earnings. For recent developments regarding the
accounting treatment of our advertising costs, please see Note 6. In
addition, new or different marketing initiatives that may not qualify for
direct-response advertising could result in accelerated charges against our
earnings.

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In accordance with SOP 93-7, we recorded the following activity related to
our direct-response advertising asset for the periods presented:

|                                                   |  |                    |        |          |  |   |        | 
|-------------------------------------------------- |  | ------------------ | ------ | -------- |  | - | ------ | 
|                                                   |  | Three months ended
|                                                   |  |                   
|                                                   |  | June 30,           |        | June 30,
|(in thousands)                                     |  | 2003               |        | 2002    
|                                                   |  |                    |        |         
|Capitalized direct-response
advertising            |  | $                  | 13,862 |          |  | $ | 11,513 | 
|Direct-response advertising
amortization           |  |                    | 10,364 |          |  |   | 8,507  | 
|                                                   |  |                    |        |          |  |   |        | 
|Increase in direct-response
advertising asset, net |  | $                  | 3,498  |          |  | $ | 3,006  | 
|                                                   |  |                    |        |          |  |   |        | 
|Beginning direct-response advertising
asset, net   |  |                    | 64,061 |          |  |   | 52,112 | 
|                                                   |  |                    |        |          |  |   |        | 
|Ending direct-response advertising
asset, net      |  | $                  | 67,559 |          |  | $ | 55,118 | 
|                                                   |  |                    |        |          |  |   |        | 

6.     Direct-Response Advertising  Recent Developments

As discussed in Note 5, since acquiring
Liberty in August 1996, we have
capitalized direct-response advertising costs in accordance with SOP 93-7. For
several months, we have been discussing the appropriateness of this practice
with the SEC. On June 20, 2003, the SEC informed us that it believes that our
advertising costs do not qualify for capitalization under the direct-response
advertising exception in SOP 93-7. As we believe that our historical
accounting for advertising costs is appropriate and that our advertising qualifies for
capitalization, we responded to the SEC and have been engaged in ongoing
discussions regarding SOP 93-7 and its application to us. If we restate our financial statements, historical
expensing of previously capitalized advertising costs would result in the
following adjusted consolidated financial statement results:

|                                                                                              |         |      |                             |      |             |      |             |      |             |   |        |       |   |   |        |       |  
|--------------------------------------------------------------------------------------------- | ------- | ---- | --------------------------- | ---- | ----------- | ---- | ----------- | ---- | ----------- | - | ------ | ----- | - | - | ------ | ----- | -
|                                                                                              |         |      | Three Months Ended June 30,
|                                                                                              |         |      |                            
|                                                                                              |         |      | As Reported                 |      | If Adjusted |      | As Reported |      | If Adjusted
|(in thousands, except per share data)                                                         |         | 2003 |                             | 2003 |             | 2002 |             | 2002
|                                                                                              |         |      |                             |      |             |      |             |      |            
|Income before income taxes                                                                    |         | $    | 17,843                      |      |             | $    | 14,345      |      |             | $ | 14,712 |       |   | $ | 11,706 |      
|Income before cumulative effect of change in
accounting principle                             |         |      | 11,098                      |      |             |      | 8,923       |      |             |   | 9,151  |       |   |   | 7,281  |      
|Net income (loss)                                                                             |         | $    | 11,098                      |      |             | $    | 8,923       |      |             | $ | (5,464 | )     |   | $ | (7,334 | )    
|Income per weighted average share before
cumulative effect of change in accounting
principle: |         |      |                             |      |             |      |             |      |             |   |        |       |   |   |        |      
|                                                                                              | Basic   |      | $                           | 0.90 |             |      | $           | 0.72 |             |   | $      | 0.75  |   |   | $      | 0.60  |  
|                                                                                              | Diluted |      | $                           | 0.88 |             |      | $           | 0.70 |             |   | $      | 0.73  |   |   | $      | 0.58  |  
|Net income (loss) per weighted average share:                                                 |         |      |                             |      |             |      |             |      |             |   |        |       |   |   |        |      
|                                                                                              | Basic   |      | $                           | 0.90 |             |      | $           | 0.72 |             |   | $      | (0.45 | ) |   | $      | (0.60 | )
|                                                                                              | Diluted |      | $                           | 0.88 |             |      | $           | 0.70 |             |   | $      | (0.45 | ) |   | $      | (0.60 | )

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7. New Accounting Pronouncements

In May 2003, the FASB issued SFAS No. 150, Accounting For Certain
Financial Instruments with Characteristics of Both Liabilities and Equity,
which establishes standards for how an issuer of financial instruments
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances) if, at inception, the monetary value of the obligation is based
solely or predominantly on a fixed monetary amount known at inception,
variations in something other than the fair value of the issuers equity shares
or variations inversely related to changes in the fair value of the issuers
equity shares. SFAS No. 150 is effective for financial instruments entered into
or modified after May 31, 2003, and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003. The adoption of SFAS
No. 150 is not expected to have a material impact on our financial position or
results of operations.

In December 2002, the FASB issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities (FIN 46). In general, a
variable interest entity is a corporation, partnership, trust or other legal
structure used for business purposes that either (a) does not have equity
investors with characteristics of a controlling financial interest or (b) has
equity investors that do not provide sufficient financial resources for the
entity to support its activities. A variable interest entity often holds
financial assets, including loans or receivables, real estate or other
property. FIN 46 requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entitys activities or entitled to receive a majority of the
entitys residual returns or both. Additionally, companies with significant
investments in variable interest entities, even if not required to consolidate
the variable interest entity, have enhanced disclosure requirements. FIN 46 is
effective immediately for certain disclosure requirements and variable interest
entities created after January 31, 2003 and is effective for periods beginning
after June 15, 2003 for variable interest entities created before February 1,
2003. The adoption of this statement is not expected to have a material impact
on our financial position or results of operations.

In August 2001, the FASB issued SFAS No. 143, Accounting for Obligations
Associated with the Retirement of Long-Lived Assets. The provisions of SFAS
No. 143 apply to all entities that incur obligations associated with the
retirement of tangible long-lived assets. SFAS No. 143 is effective for
financial statements issued for fiscal years beginning after June 15, 2002 and
thus was adopted, as required, on April 1, 2003. The adoption of this statement
has not had a material impact on our financial position or results of
operations.

8. Accrued Expenses

Accrued expenses consist of the following:

|                                                         |  |          |        |           |  |   |        |  
|-------------------------------------------------------- |  | -------- | ------ | --------- |  | - | ------ | -
|                                                         |  | June 30, |        | March 31,
|(In thousands)                                           |  | 2003     |        | 2003     
|                                                         |  |          |        |          
|Salaries and benefits                                    |  | $        | 5,882  |           |  | $ | 8,641  |  
|Income tax payable                                       |  |          | 1,581  |           |  |   | (1,181 | )
|Amounts reserved for overpayments by Medicare and others |  |          | 4,941  |           |  |   | 4,941  |  
|Other                                                    |  |          | 4,140  |           |  |   | 4,602  |  
|                                                         |  |          |        |           |  |   |        |  
|                                                         |  | $        | 16,544 |           |  | $ | 17,003 |  
|                                                         |  |          |        |           |  |   |        |  

Amounts reserved for overpayments by Medicare and others represent amounts
due to Medicare and related amounts due to insurers and Medicare beneficiaries
that arise in the normal course of business as well as those related to a
change in interpretation of the reimbursement formula for albuterol and
ipratropium combinations used in our Liberty Respiratory segment. When we
established the reserve for albuterol and ipratropium combinations in the fiscal year ended March 31, 2002, $5.03 million
was charged to selling, general and administrative expenses for billing
adjustments prior to July 1, 2001 and $823,000 represented billing adjustments
related to the quarter ended September 30, 2001. In the fiscal year ended March
31, 2003, we recorded a benefit of $2.32 million related to a reduction in this
reserve following a favorable determination by one of

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the four Medicare carriers that our original method of billing for albuterol
and ipratropium combinations was proper.

9. Commitments and Contingencies

Our compliance with Medicare regulations may be reviewed by federal or
state agencies, including the Department of Health and Human Services, the
Department of Justice (DOJ), and the Food and Drug Administration (FDA).
The U.S. Attorneys Office for the Southern District of Florida, with the
assistance of the Federal Bureau of Investigation (FBI) and Department of
Health & Human Services Office of Inspector General (OIG), is investigating
allegations of healthcare fraud, improper revenue recognition and obstruction
of justice by Liberty and Liberty Home Pharmacy Corporation (Liberty Home
Pharmacy). Both civil and criminal investigations are being conducted. We are
cooperating with the investigations. Since July 1, 2001 we have spent
approximately $10.28 million on outside legal and accounting fees primarily
preparing for and responding to the investigations and the lawsuits described
below. This work has been conducted under the direction of legal counsel who
report to the Oversight Committee, a special Board committee comprised of three
outside directors, which was established to oversee our response to the
investigations and the related litigation.

PolyMedica and three individuals who are or were officers of PolyMedica
are defendants in a lawsuit alleging violations of certain sections and rules
of the Securities Exchange Act of 1934 (the Exchange Act), which was
initiated in U.S. District Court for the District of Massachusetts in November
2000. In addition, there is a derivative action against certain directors and
two individuals who are or were officers in Massachusetts state court alleging
certain breaches of fiduciary duty. In July 2003, new lawsuits alleging
violations of certain sections and rules of the Exchange Act were filed
concerning PolyMedicas accounting treatment of direct-response advertising. In
addition to PolyMedica, certain current or former officers of PolyMedica have
been named as defendants in these lawsuits. PolyMedica believes it has
meritorious defenses to the claims made against it in the actions in which it
is a defendant and intends to contest the claims vigorously.

If any of these investigations or legal proceedings referred to above
results in a determination that we have failed to comply with the regulations
governing Medicare reimbursement or financial reporting or have otherwise
committed healthcare fraud or securities law violations, we could be subject to
delays or loss of reimbursement, substantial fines or penalties, and other
sanctions. An adverse determination could have a material effect on our
financial position and results of operations. We do not consider an unfavorable
outcome to the various claims probable and have therefore not recorded any
charges related to their outcome. An unfavorable outcome could have a material
effect on our financial position and results of operations.

In addition, the following recent events have occurred in In re:
PolyMedica Corp. Shareholder Derivative Litigation, a proceeding described in
Item 1 of Part II, Legal Proceedings. On June 26, 2003, the parties filed a motion to remand
the proceeding to Middlesex Superior Court for the purpose of approving a
potential settlement. The settlement agreement recites certain corporate
governance changes made by PolyMedica, such as the addition of three new
outside directors to its board since September 2001, the appointment of a lead
director, and enhancements to PolyMedicas compliance functions.
Pursuant to this agreement, PolyMedica
denied all liability and the factual allegations in the complaint and has agreed to pay only plaintiffs attorneys
fees and expenses in an amount to be determined by the Court and
notice costs. PolyMedica will
seek and expects to receive reimbursement of such attorneys fees from its insurer. The settlement is subject to
approval by the Middlesex Superior Court. We can provide no assurance that the
settlement will be approved by the Court. We are unable to express an opinion
as to the likely outcome of this litigation.

In June 2002, Liberty was served with an administrative subpoena from the
U.S. Attorneys Office for the Southern District of Illinois seeking documents
relevant to an ongoing investigation of Medicare reimbursement of depth shoes
and inserts. Liberty has been informed that it is not a target of that
investigation. Liberty completed its response to the subpoena in November 2002.

In addition to those described above, we have certain contingent
liabilities, including but not limited to, litigation that arises in the
ordinary course of business. We accrue contingent liabilities when it is
probable that future expenditures will be made and such expenditures can be
reasonably estimated.

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10. Segment Information

Our reportable segments are strategic business units or divisions that
offer different products. These units have separate financial information that
is evaluated by senior management. Effective for the quarter ended September
30, 2002, we changed the way we segment our business for reporting purposes, in
order to reflect how management currently views operations. The new segments
are as follows:

Liberty Diabetes Through our Liberty Diabetes segment, we provide
diabetes testing supplies and related products to customers suffering from
diabetes and related chronic diseases. We offer a wide array of diabetes
supplies from a broad range of manufacturers.

Liberty Respiratory Through our Liberty Respiratory segment, we provide
prescription respiratory medications and supplies to customers suffering from
chronic obstructive pulmonary disease (COPD).

Pharmaceuticals Through our Pharmaceuticals segment, we provide
prescription oral medications not covered by Medicare directly to existing
Liberty customers and sell prescription urology and suppository products,
over-the-counter female urinary discomfort products, and home medical
diagnostic kits.

Selling, general and administrative expenses attributable to PolyMedicas
corporate headquarters are allocated to the operating segments according to the
segments relative percentage of total revenue. Other expenses incurred by
Liberty Diabetes that were incurred on behalf of all Florida businesses for
shared services, were allocated to the operating segments primarily in
accordance with the segments relative percentage of total employees. However,
segment assets belonging to PolyMedicas corporate headquarters, which included
$24.56 million and $17.40 million of cash, cash equivalents and investments as
of June 30 and March 31, 2003, respectively, are not allocated as they are
considered separately for management evaluation purposes. As a result of these
allocations and the start-up nature of some of the businesses included in our
Liberty Diabetes and Pharmaceuticals segments, the segment information may not
be indicative of the financial position or results of operations that would
have been achieved had these segments operated as unaffiliated entities. The
depreciation and amortization amounts below include amortization of
direct-response advertising. We do not organize our units geographically, as
our products are sold throughout the United States only. There are no
intersegment sales for the periods presented. Information concerning the
operations in these reportable segments, restated to reflect the way we
currently segment our business, is as follows:

|                                       |  |                    |        |          |  |   |        | 
|-------------------------------------- |  | ------------------ | ------ | -------- |  | - | ------ | 
|                                       |  | Three months ended
|                                       |  | June 30,           |        | June 30,
|(In thousands)                         |  | 2003               |        | 2002    
|                                       |  |                    |        |         
|Net Revenues:                          |  |                    |        |          |  |   |        | 
|Liberty Diabetes                       |  | $                  | 67,529 |          |  | $ | 58,514 | 
|Liberty Respiratory                    |  |                    | 19,867 |          |  |   | 16,580 | 
|Pharmaceuticals                        |  |                    | 11,541 |          |  |   | 6,507  | 
|                                       |  |                    |        |          |  |   |        | 
|Total                                  |  | $                  | 98,937 |          |  | $ | 81,601 | 
|                                       |  |                    |        |          |  |   |        | 
|Depreciation and Amortization Expense: |  |                    |        |          |  |   |        | 
|Liberty Diabetes                       |  | $                  | 7,229  |          |  | $ | 5,516  | 
|Liberty Respiratory                    |  |                    | 4,850  |          |  |   | 4,065  | 
|Pharmaceuticals                        |  |                    | 174    |          |  |   | 258    | 
|                                       |  |                    |        |          |  |   |        | 
|Total                                  |  | $                  | 12,253 |          |  | $ | 9,839  | 
|                                       |  |                    |        |          |  |   |        | 
|Income before Income Taxes:            |  |                    |        |          |  |   |        | 
|Liberty Diabetes                       |  | $                  | 11,332 |          |  | $ | 10,246 | 
|Liberty Respiratory                    |  |                    | 5,261  |          |  |   | 3,890  | 
|Pharmaceuticals                        |  |                    | 1,250  |          |  |   | 576    | 
|                                       |  |                    |        |          |  |   |        | 
|Total                                  |  | $                  | 17,843 |          |  | $ | 14,712 | 
|                                       |  |                    |        |          |  |   |        | 

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|                       |  |          |         |           |  |   |         | 
|---------------------- |  | -------- | ------- | --------- |  | - | ------- | 
|                       |  | June 30, |         | March 31,
|                       |  | 2003     |         | 2003     
|                       |  |          |         |          
|Segment assets:        |  |          |         |           |  |   |         | 
|Liberty Diabetes       |  | $        | 149,106 |           |  | $ | 152,457 | 
|Liberty Respiratory    |  |          | 43,253  |           |  |   | 46,928  | 
|Pharmaceuticals        |  |          | 15,959  |           |  |   | 17,961  | 
|Corporate Headquarters |  |          | 42,850  |           |  |   | 33,623  | 
|                       |  |          |         |           |  |   |         | 
|Total                  |  | $        | 251,168 |           |  | $ | 250,969 | 
|                       |  |          |         |           |  |   |         | 

11. Accounting for Stock-Based Compensation

In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure  an amendment of FASB
Statement No. 123. SFAS No. 148 amends SFAS No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. As
provided for in SFAS No. 123, we have elected to apply Accounting Principles
Board (APB) No. 25 Accounting for Stock Issued to Employees and related
interpretations in accounting for our stock-based compensation plans. SFAS No.
123 defines a fair value method of accounting for stock options and other
equity instruments. Under the fair value method, compensation cost is measured
at the grant date based on the fair value of the award and is recognized over
the service period, which is usually the vesting period. APB No. 25 does not
require employee options to be expensed when granted with an exercise price
equal to fair market value, provided other criteria are met.

The following is a reconciliation of net income (loss) per weighted average
share had we adopted SFAS No. 123:

|                                                                                                          |  |                    |        |               |  |   |        |  
|--------------------------------------------------------------------------------------------------------- |  | ------------------ | ------ | ------------- |  | - | ------ | -
|                                                                                                          |  | Three Months Ended |       
|(in
thousands, except per share data)                                                                     |  | June 30, 2003      |        | June 30, 2002
|                                                                                                          |  |                    |        |              
|                                                                                                         
|Net income (loss)                                                                                         |  | $                  | 11,098 |               |  | $ | (5,464 | )
|Add back: Stock compensation
costs, net of tax, on options
granted below fair market value                |  |                    | 64     |               |  |   |       |  
|Less: Stock compensation
costs, net of tax, had all
employee options been recorded
at fair value          |  |                    | (1,462 | )             |  |   | (1,672 | )
|                                                                                                          |  |                    |        |               |  |   |        |  
|Adjusted net income (loss)                                                                                |  | $                  | 9,700  |               |  | $ | (7,136 | )
|                                                                                                          |  |                    |        |               |  |   |        |  
|Weighted average shares, basic                                                                            |  |                    | 12,310 |               |  |   | 12,167 |  
|Weighted average shares,
diluted, used in the
calculation of net income
(loss) per weighted average
share |  |                    | 12,672 |               |  |   | 12,167 |  
|Net income (loss) per weighted
average share, basic, as
reported                                          |  | $                  | 0.90   |               |  | $ | (0.45  | )
|Net income (loss) per weighted
average share, diluted, as
reported                                        |  | $                  | 0.88   |               |  | $ | (0.45  | )
|Adjusted net income (loss) per
weighted average share, basic                                              |  | $                  | 0.79   |               |  | $ | (0.59  | )
|Adjusted net income (loss) per
weighted average share, diluted                                            |  | $                  | 0.77   |               |  | $ | (0.59  | )

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The fair value of each option granted during the three months ended June
30, 2003 and 2002 is estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions:

|                        |  |      |       |      |  |  |       |  
|----------------------- |  | ---- | ----- | ---- |  |  | ----- | -
|                        |  | 2003 |       | 2002
|                        |  |      |       |     
|Dividend yield          |  |      | 2.35  | %    |  |  | 2.91  | %
|Expected volatility     |  |      | 89.20 | %    |  |  | 89.73 | %
|Risk-free interest rate |  |      | 2.45  | %    |  |  | 3.81  | %
|Expected life           |  |      | 5.0   |      |  |  | 4.0   |  

Weighted-average fair value of options granted at fair value during the
three months ended June 30,:

|     |  |   |       | 
|---- |  | - | ----- | 
|2003 |  | $ | 26.27 | 
|2002 |  |   | 19.85 | 

12. Stockholders Equity  Cash Dividends

On May 15, 2003, we paid a $0.25 per share cash dividend on 12,289,718
common shares outstanding for a total payment of $3.07 million to our common
shareholders of record as of the close of business on May 5,
2003.  While a significant decline in our cash
balances or another business change could cause us to reduce,
suspend, or eliminate the quarterly payment of dividends to
shareholders, the current
intention of our Board is to pay a cash dividend on a quarterly basis for the
foreseeable future.

13. Income Before Cumulative Effect of Change in Accounting Principle per Share

Calculations of income before cumulative effect of change in accounting
principle per weighted average share are as follows:

|                                                                                                       |  |                    |        |               |  |   |        | 
|------------------------------------------------------------------------------------------------------ |  | ------------------ | ------ | ------------- |  | - | ------ | 
|(In thousands, except per share data)                                                                  |  | Three Months Ended
|                                                                                                       |  | June 30, 2003      |        | June 30, 2002
|                                                                                                       |  |                    |        |              
|Income before cumulative effect of change in accounting principle                                      |  | $                  | 11,098 |               |  | $ | 9,151  | 
|BASIC:                                                                                                 |  |                    |        |               |  |   |        | 
|Weighted average common stock outstanding, net of treasury
stock, end of period                        |  |                    | 12,310 |               |  |   | 12,167 | 
|Income before cumulative effect of change in accounting
principle per weighted average share, basic    |  | $                  | 0.90   |               |  | $ | 0.75   | 
|                                                                                                       |  |                    |        |               |  |   |        | 
|DILUTED:                                                                                               |  |                    |        |               |  |   |        | 
|Weighted average common stock outstanding, net of treasury
stock, end of period                        |  |                    | 12,310 |               |  |   | 12,167 | 
|Weighted average dilutive common stock equivalents                                                     |  |                    | 362    |               |  |   | 411    | 
|                                                                                                       |  |                    |        |               |  |   |        | 
|Weighted average common stock and dilutive common stock
equivalents outstanding, net of treasury stock |  |                    | 12,672 |               |  |   | 12,578 | 
|Income before cumulative effect of change in accounting
principle per weighted average share, diluted  |  | $                  | 0.88   |               |  | $ | 0.73   | 
|                                                                                                       |  |                    |        |               |  |   |        | 

Potentially Dilutive Stock Options

Options to purchase 707,871 and 664,537 shares of common stock were
outstanding as of June 30, 2003 and 2002, respectively, but were not included
in the computation of diluted earnings per share because the options exercise
prices were greater than the average market price of the common shares.

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14. Comprehensive Income

Our total comprehensive income is equal to our net income (loss) for the
three months ended June 30, 2003 and 2002.

15. Subsequent Events

On July 18, 2003 our Board declared a cash dividend of $0.25 per share of
PolyMedicas common stock to shareholders of record as of the close of business
on August 5, 2003, paid on August 15, 2003. The current intention of the Board
is to pay a cash dividend on a quarterly basis for the foreseeable future.

Effective July 11, 2003, we entered into a third Restricted Stock
Agreement (the July Agreement) with Mr. Shanaman, Lead Director and Interim
Chief Executive Officer, which awarded him an additional 5,000 restricted
shares previously earned or to be earned going forward based upon his
provision of services as Interim Chief Executive Officer.

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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

The statements contained in this Quarterly Report on Form 10-Q that are
not purely historical are 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. For this purpose, any statements contained herein that
are not statements of historical fact may be deemed to be forward-looking
statements including, without limitation, statements regarding
expected future cash dividends and revenue, gross margin and operating margin trends. Without limiting the foregoing, the words believes,
anticipates, plans, expects, and similar expressions are intended to
identify forward-looking statements. There are a number of important factors
that could cause our actual results to differ materially from those indicated
or suggested by such forward-looking statements. These factors include, without
limitation, those set forth in the section titled Factors Affecting
Future Operating Results in this Quarterly Report on
Form 10-Q. All forward-looking statements included in this
Quarterly Report on Form 10-Q are based on information available
to us on the date hereof, and we assume no obligation to update any
such forward-looking statements.

Business

PolyMedica is a leading provider of direct-to-consumer medical products,
conducting business through its Liberty Diabetes, Liberty Respiratory and
Pharmaceuticals segments. Through our Liberty Diabetes segment we provide
direct-to-consumer diabetes testing supplies and related products primarily to
Medicare-eligible customers suffering from diabetes and related chronic
diseases. Through our Liberty Respiratory segment we provide direct-to-consumer
prescription respiratory medications and supplies primarily to
Medicare-eligible customers suffering from chronic obstructive pulmonary
disease (COPD). Through our Pharmaceuticals segment we provide prescription
oral medications not covered by Medicare directly to consumers and sell
prescription urology and suppository products, over-the-counter female urinary
discomfort products and home medical diagnostic kits.

Liberty Diabetes

As of June 30, 2003, we had approximately 563,000 active diabetes
customers, as compared to approximately 473,000 as of June 30, 2002. Many of
these customers also suffer from other chronic diseases. We define a person as
an active customer if that person has placed an order and we have shipped
supplies to that person in the past twelve months. We meet the
needs of customers suffering from diabetes by:



| |  |  | providing mail order delivery of supplies direct to our
customers homes;                             
| | - |  | ------------------------------------------------------------------------------------------------------
|
| |  |  | billing Medicare and/or private insurance companies directly
for those supplies that are reimbursable;
|
| |  |  | providing 24-hour telephone support to customers; and                                                 
|
| |  |  | using sophisticated software and advanced order fulfillment systems to provide products.              

In the United States, there are approximately seventeen million people
with diabetes, including at least seven million seniors. Of the seventeen
million people with diabetes, it is estimated that approximately eleven million
are diagnosed, with the remaining six million unaware that they have the
disease. While a portion of the seven million seniors with diabetes are covered
by managed care or reside in extended care facilities, we believe that the
balance are potential customers of ours.

Liberty Respiratory

Our Liberty Respiratory segment operates similarly to our Liberty Diabetes
segment, as we deliver products to customers homes and bill Medicare and
private insurance companies (if applicable) directly for those prescription
respiratory medications and supplies that are reimbursable. As a participating
Medicare provider and third-party insurance biller, we provide a simple,
reliable way for customers to obtain their supplies for respiratory disease
treatment. As of June 30, 2003, we had approximately 65,000 active customers
for our prescription respiratory medications and supplies, compared to
approximately 51,000 as of June 30, 2002. We define a person as an active
customer if that person has placed an order and we have shipped supplies to
that person in the past twelve months. In the United States, there are
approximately sixteen million people with COPD, including approximately four
million seniors.

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Pharmaceuticals

Through our Pharmaceuticals segment we provide prescription oral
medications not covered by Medicare directly to consumers and sell prescription
urology and suppository products, over-the-counter female urinary discomfort
products and home medical diagnostic kits. We sell our female urinary
discomfort products and home medical diagnostic kits under our AZO brand name
through a network of large drug store chains, major supermarkets, mass
merchandisers and drug wholesalers in the United States. Our line of
prescription urology products includes urinary analgesics, antispasmodics,
local anesthetics and analgesic suppositories. Our primary customers for these
urology products are large drug wholesalers in the United States.

Business Strategies

Our principal strategy is to leverage our operating platform and
compliance management protocol to expand our business. This strategy includes
the following elements:

Continue growth in our direct to consumer businesses by expanding our
customer base.Since the August 1996 acquisition of Liberty, we have invested
in an ongoing program of direct-response television advertising to reach a
larger portion of the Medicare-eligible patient market. This campaign has
resulted in a significant increase in sales as we have expanded our active
Medicare-eligible diabetes customers from approximately 17,000 at the time of
Libertys acquisition to approximately 563,000 customers. In addition, we now
have approximately 65,000 active customers for our prescription respiratory
medications and supplies. We also use radio and print advertising to further
broaden our customer base. We continue to seek opportunities to deliver new
products to a broader customer base by leveraging our mail-order distribution
system and software for billing and customer monitoring. To manage our growth
effectively, we are continually improving our operations, information systems,
and regulatory compliance activities.

As a result of the expansion of our customer base, and emerging ability to
leverage the value of our customer base by marketing a range of products to our
customers, including those that are newly acquired, we are considering a number
of new marketing initiatives. These initiatives may include the use of
broad-based advertising that may not qualify as direct-response advertising and
therefore, would be expensed as incurred. We are also considering expanding our
customer base by purchasing businesses that provide products to consumers that
are complementary to our existing products.

Continue growth in our non-Medicare initiatives. During the three months
ended June 30, 2003, we continued the growth of Liberty Medical Supply Pharmacy
(Liberty Pharmacy), which is part of our Pharmaceuticals segment, and which
offers prescription oral medications not covered by Medicare directly to
consumers. We expect to continue to grow Liberty Pharmacy through fiscal year
2004.

Continue adding complementary products and businesses.New business
initiatives, in various stages of development, include a new clinical
laboratory that offers a glycohemoglobin (HbA1c) test, the results of which
tell the patient or physician what the patients blood glucose level has
averaged over the previous two or three months, and a medical office building
pharmacy, which opened in the first quarter of fiscal year 2004, providing
retail pharmacy services within office buildings occupied by physician groups
and other medical professionals. We expect to open additional pharmacies in
fiscal year 2004. In order to take advantage of economies of scale in
production and marketing, we continue to evaluate opportunities for the
acquisition of businesses and products to complement our existing product lines
and new business initiatives. In selecting and evaluating acquisition
candidates, we examine the market potential for products that can be
distributed through our existing marketing infrastructure and which utilize our
strengths in sales, marketing and distribution. We also continue to consider
adding businesses, manufacturing capabilities and new products that capitalize
upon our established brand franchise.

Status of Chief Executive Officer Search

On August 4, 2002, Steven J. Lee, Chief Executive Officer, Chairman and a
director of PolyMedica, retired as Chief Executive Officer, effective as of
that date. Mr. Lee continued to serve as Chairman and a director through
December 31, 2002. In connection with Mr. Lees
retirement, we incurred a one-time selling, general and administrative expense
of approximately $1.30 million in the fiscal year ended March 31, 2003.
Pursuant to this agreement, these amounts will generally be paid in cash over a
twenty-four month period. We continue to work with the executive recruitment
firm of Heidrick & Struggles, which is assisting our Board in its search for a
new chief executive officer.

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Samuel L. Shanaman, Lead Director, is performing the functions of the
chief executive officer on an interim basis until a successor is named. As
compensation for his services as Interim Chief Executive Officer, we pay Mr.
Shanaman a nominal salary in cash in addition to his vesting in a fixed number
of shares (currently 51 shares) of restricted common stock for every day Mr.
Shanaman works. The fair value of the shares ($38.60 under his current
agreement dated July 11, 2003) and the cash, is recorded as a selling, general
and administrative expense in our consolidated statements of operations, as the
income is earned by Mr. Shanaman. Mr. Shanaman became fully vested in the 8,345
restricted shares awarded under his first agreement entered into in October
2002, during the quarter ended March 31, 2003 and the 3,600 restricted shares
awarded under his second agreement entered into in March 2003, during the
quarter ended June 30, 2003. We then entered into the July 11, 2003 agreement,
which awarded an additional 5,000 restricted shares previously earned
or to be earned going forward based upon his provision of services as
Interim Chief Executive Officer.

Other

Advertising rates may fluctuate during the year, which may affect our
acquisition of new customers. We may purchase less advertising when rates are
higher, which generally occurs in November and December. As a result, our
acquisition of new customers during this period is generally reduced and our
net revenues may fluctuate accordingly.

We operate from manufacturing and distribution facilities located in
Massachusetts and Florida, respectively. Virtually all of our product sales
are denominated in U.S. dollars.

Expense items include cost of sales and selling, general and
administrative expenses.



| |  |  | Cost of sales consists primarily of purchased finished goods
for sale in our markets and, to a lesser extent, materials, direct
labor, and overhead costs for products that we manufacture in our
facility and shipping and handling fees.                                              
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Selling, general and administrative expenses consist
primarily of expenditures for personnel and benefits, as well as
legal and related expenses, allowances for bad debts, rent,
amortization of capitalized direct-response advertising costs and
other amortization and depreciation.

Period-to-period comparisons of changes in net revenues are not
necessarily indicative of results to be expected for any future period.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States of America. The preparation of these consolidated financial
statements requires us to make significant estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. These items are regularly
monitored and analyzed by management 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 various 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.

The following summaries of our critical accounting policies should be read
in conjunction with our consolidated financial statements and the related notes
included in this Quarterly Report on Form 10-Q. While all of our accounting
policies impact the consolidated financial statements, certain policies may be
viewed to be critical. Critical accounting policies are those that are both
most important to the portrayal of our financial condition and results of
operations and that require managements most subjective or complex judgments
and estimates. Management believes the policies that fall within this category
are the policies on revenue recognition and sales allowances, advertising, accounts
receivable and the allowance for doubtful accounts, inventories, goodwill,
accruals for Medicare adjustments, and uncertainties.

Revenue Recognition

We recognize revenue related to product sales to customers who have placed
orders, upon shipment, provided that risk of loss has passed to the customer
and we have received and verified the required written forms, if applicable, to

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bill Medicare, other third-party payers, and customers. We record revenue at
the amounts expected to be collected from Medicare, other third-party payers,
and directly from customers. We analyze various factors in determining revenue
recognition, including a review of specific transactions, current Medicare
regulations and reimbursement rates, historical experience, and the
credit-worthiness of customers. The determination of appropriate Medicare rates
for billing and revenue recognition is complex and sometimes subjective and
therefore may require managements interpretation. Sales allowances are
recorded for estimated product returns as a reduction of revenue. We analyze
sales allowances using historical data adjusted for significant changes in
volume, customer demographics, and business conditions. These allowances are
adjusted to reflect actual returns. Changes in these factors could affect the
timing and amount of revenue and costs recognized.

Advertising

In accordance with Statement of Position 93-7(SOP 93-7) we capitalize
and amortize direct-response advertising and related costs when we can
demonstrate that customers have directly responded to our advertisements, among
other things. We assess the realizability of the amounts of direct-response
advertising costs reported as assets at each balance sheet date by comparing
the carrying amounts of such assets to the probable remaining future net cash
flows expected to result directly from such advertising. Managements judgments
include determining the period over which such net cash flows are estimated to
be realized, currently four years for our diabetes supplies and two years for
our respiratory supplies. A business change, including a change in
reimbursement rates, that reduces expected net cash flows or that shortens the
period over which such net cash flows are estimated to be realized could result
in accelerated charges against our earnings. For recent developments regarding
the application of SOP 93-7, please see Note 6 to the consolidated financial
statements.

Non-direct response advertising, promotional and marketing costs are
charged to earnings in the period in which they are incurred.

Accounts Receivable and Allowance for Doubtful Accounts

The valuation of accounts receivable is based upon the credit-worthiness
of customers and third-party payers as well as our historical collection
experience. Allowances for doubtful accounts are recorded as a selling, general
and administrative expense for estimated amounts expected to be uncollectible
from third-party payers and customers. We base our estimates on our historical
collection and write-off experience, current trends, credit policy, and on our
analysis of accounts receivable by aging category. Changes in judgment
regarding these factors could affect the timing and amount of costs recognized.

Inventories

Inventories are carried at the lower of cost or market value. Market value
or the net realizable value to PolyMedica is impacted by the types and levels
of inventory held, forecasted demand, and pricing. Due to the medical nature of
the products that we provide, customers sometimes request supplies before we
have received the required written forms, if applicable, to bill Medicare,
other third-party payers, and customers. As a result, included in inventories
are items shipped to customers for which we have received an order but have not
yet received the required written documents and therefore have not recognized
revenue. The carrying value of inventory shipped to customers of $2.00 million
and $2.57 million as of June 30 and March 31, 2003, respectively, is based upon
historical experience of collection of documents required to bill Medicare,
other third-party payers, and customers. Changes in judgment regarding the
recoverability of inventories, including the carrying value of inventory
shipped to customers, could result in the recording of additional income or
expense.

Goodwill

Subsequent to the transitional impairment test, as prescribed under SFAS
No. 142, we are required to perform impairment tests annually and whenever
events or changes in circumstance suggest that the carrying value of an asset
may not be recoverable. Step one of the impairment test is performed to
determine whether an impairment exists, step two of the impairment test is
performed to determine the amount of the charge to be recorded as a result of
the impairment. See Note 4 to the consolidated financial statements. In
performing impairment tests, we are required to make certain estimates and
assumptions relating to the allocation of certain assets and liabilities to our
reporting units, estimates of the fair values of our reporting units, and the
related fair value of certain of their assets and liabilities. Changes in the
estimates and assumptions used could affect the determination of whether an
impairment exists as well as the quantification of the impairment value, should
one exist.

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Accruals for Medicare Adjustments

The governments Medicare regulations are complex and sometimes subjective
and therefore may require managements interpretation. Accruals for Medicare
adjustments occur in the normal course of business and are recorded when, based
upon our assessment of the facts and circumstances, we believe that the amounts
due are probable and estimable.

Uncertainties

Our compliance with Medicare regulations may be reviewed by federal or
state agencies, including the Department of Health and Human Services, the DOJ,
and the FDA. The U.S. Attorneys Office for the Southern District of Florida,
with the assistance of the FBI and OIG, is investigating allegations of healthcare fraud, improper revenue recognition and obstruction of justice by Liberty
and Liberty Home Pharmacy. Both civil and criminal investigations are being
conducted. We are cooperating with the investigations. Since July 1, 2001 we
have spent approximately $10.28 million on legal and accounting fees primarily
preparing for and responding to, the investigations and lawsuits described
below. This work has been conducted under the direction of legal counsel who
report to the Oversight Committee, a special Board committee comprised of three
outside directors which was established to oversee our response to the
investigations and the related litigation.

In June 2002, Liberty was served with an administrative subpoena from the
U.S. Attorneys Office for the Southern District of Illinois seeking documents
relevant to an ongoing investigation of Medicare reimbursement of depth shoes
and inserts. Liberty has been informed that it is not a target of that
investigation. Liberty completed its response to the subpoena in November 2002.

PolyMedica and three individuals who are or were officers of PolyMedica
are defendants in a lawsuit alleging violations of certain sections and rules
of the Securities Exchange Act of 1934 (the Exchange Act), which was
initiated in U.S. District Court for the District of Massachusetts in November
2000. In addition, there is a derivative action against certain directors and
two individuals who are or were officers in Massachusetts state court alleging
certain breaches of fiduciary duty. In July 2003, new lawsuits alleging
violations of certain sections and rules of the Exchange Act were filed
concerning PolyMedicas accounting treatment of direct-response advertising. In
addition to PolyMedica, certain current or former officers of PolyMedica have
been named as defendants in these lawsuits. PolyMedica believes it has
meritorious defenses to the claims made against it in the actions in which it
is a defendant and intends to contest the claims vigorously. Please see
Item 1 of Part II, Legal Proceedings, for a more complete description of these
claims.

In
addition, the following recent events have occurred in In re:
PolyMedica Corp. Shareholder Derivative Litigation, a proceeding
described in Item 1 of Part II, Legal Proceedings. On
June 26, 2003, the parties filed a motion to remand the
proceeding to Middlesex Superior Court for the purpose of approving a
potential settlement. The settlement agreement recites certain
corporate governance changes made by PolyMedica., such as the
addition of three new outside directors to its board since September
2001, the appointment of a lead director, and enhancements to
PolyMedicas compliance functions. Pursuant to this agreement,
PolyMedica denied all liability and the factual allegations in the
complaint and has agreed to pay only plaintiffs
attorneys fees in an amount to be determined by the Court and
notice costs. PolyMedica will seek and expects to receive
reimbursement of such attorneys fees from its insurer. The settlement is subject to
approval by the Middlesex Superior Court. We can provide no assurance
that the settlement will be approved by the Court. We are unable to
express an opinion as to the likely outcome of this litigation.

If any of the investigations or legal proceedings referred to above
results in a determination that we have failed to comply with the regulations
governing Medicare reimbursement or financial reporting or have otherwise
committed healthcare fraud or securities law violations, we could be subject to
delays or loss of reimbursement, substantial fines or penalties, and other
sanctions. Although we do not consider an unfavorable outcome to the various
claims probable, we cannot accurately predict their ultimate disposition, and
have therefore not recorded any charges related to their outcome. An
unfavorable outcome could have a material effect on our financial position and
results of operations.

In addition to those described above, we have certain contingent
liabilities, including but not limited to, litigation that arises in the
ordinary course of business. We accrue contingent liabilities when it is
probable that future expenditures will be made and such expenditures can be
reasonably estimated.

Compliance and Regulatory Affairs

We have a Compliance and Regulatory Affairs Department that is comprised
of five groups: monitoring, investigations and special projects, internal
reviews, contracts and licensing and external communications. Although each
group is distinct, the Senior Vice President of Regulatory Affairs
and the Chief
Compliance Officer coordinate activities within the department in order to
promote the common goal of ensuring compliance with all federal, state and
local laws and regulations applicable to our businesses. We have continued to
expand the size and capabilities of our Compliance

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and Regulatory Affairs Department.

The compliance program is designed to prevent violations of applicable
fraud and abuse laws and, if such violations occur, to promote early and
accurate detection and prompt resolution. These objectives are achieved through
education, monitoring, disciplinary action and other appropriate remedial
measures. As a condition of employment, all personnel are required to attend
corporate compliance certification classes annually. In addition, each employee
receives a compliance manual that has been developed to communicate standards
of conduct and compliance policies and procedures.

The monitoring group performs oversight functions to ensure compliance
with policies and procedures and applicable laws. These functions include
telephonic monitoring of contacts between employees and customers, healthcare
professionals, payers and other outside contacts.

The investigations and special projects and internal reviews groups are
responsible for conducting a variety of internal reviews of operations to
ensure compliance with healthcare program requirements and applicable laws.

The contracts and licensing group monitors compliance with provider
contracting and licensing requirements, which includes random, internal onsite
inspections. As appropriate, we also use external audit resources to supplement
our internal auditing and monitoring activities.

The external communications group monitors communications with third
parties to ensure timely responses to requests for documents and other requests
and oversees the receipt and timely dissemination of supplier bulletin
information.

Corporate Governance

In August 2001, our Board established an Oversight Committee, a special
Board committee now consisting of three non-employee directors, to oversee our
response to the investigations and the related litigation described in Item 1
of Part II, Legal Proceedings of this Form 10-Q. The Oversight Committee is
advised on legal matters by our legal counsel and other appropriate independent
advisors. The Oversight Committee will continue to play an active role as these
investigations proceed. Its authority includes monitoring the Compliance and
Regulatory Affairs Department and that departments compliance program to
ensure compliance with Medicare and internal Company policies.

Over the
past two years, we have expanded and strengthened our
Board through the addition of four new directors. We have also established the
position of Lead Director, to be elected annually by our non-employee
directors. Samuel Shanaman, Interim Chief Executive Officer, currently holds
that position. The role of the Lead Director is to chair regular meetings of
the non-employee directors, providing a strong focal point for both the Board
and our shareholders.

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Results of Operations

Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002

The following table presents consolidated statements of operations
expressed as a percentage of net revenues:

|                                             |                     |                    |      |                    |       |          |      |      |       | 
|-------------------------------------------- | ------------------- | ------------------ | ---- | ------------------ | ----- | -------- | ---- | ---- | ----- | 
|                                             |                     |                    |      | Three months ended
|                                             |                     |                    |      |                   
|                                             |                     |                    |      | June 30,           |       | June 30,
|                                             |                     |                    |      | 2003               |       | 2002    
|                                             |                     |                    |      |                    |       |         
|Net revenues:                                |                     |                    |      |                    |       |          |      |     
|                                             | Liberty Diabetes    |                    |      | 68.3               | %     |          |      | 71.7 | %    
|                                             | Liberty Respiratory |                    |      | 20.1               |       |          |      | 20.3 |      
|                                             | Pharmaceuticals     |                    |      | 11.6               |       |          |      | 8.0  |      
|                                             |                     |                    |      |                    |       |          |      |     
|                                             |                     | Total net revenues |      |                    | 100.0 |          |      |      | 100.0 | 
|Cost of sales                                |                     |                    | 36.2 |                    |       |          | 35.4 |     
|                                             |                     |                    |      |                    |       |          |      |     
|Gross margin                                 |                     |                    | 63.8 |                    |       |          | 64.6 |     
|Selling, general and administrative
expenses |                     |                    | 46.0 |                    |       |          | 46.6 |     
|                                             |                     |                    |      |                    |       |          |      |     
|Income from operations                       |                     |                    | 17.9 | %                  |       |          | 18.0 | %   
|                                             |                     |                    |      |                    |       |          |      |     

Total net revenues increased 21.2% to $98.94 million in the three months
ended June 30, 2003, as compared with $81.60 million in the three months ended
June 30, 2002. This increase was the result of the growth in sales in each of
our Liberty Diabetes, Liberty Respiratory and Pharmaceuticals segments.

Net revenues from our Liberty Diabetes segment increased 15.4% to $67.53
million in the three months ended June 30, 2003, as compared with $58.51
million in the three months ended June 30, 2002. This increase was due
primarily to the growth in our customer base, which grew 19.0% to approximately
563,000 active customers as of June 30, 2003, from approximately 473,000 as of
June 30, 2002, primarily as a result of our advertising. Fluctuations
in the order volume, order frequency and mix of product for new and existing
customers, also contributed to the change in net revenues for the three months
ended June 30, 2003, as compared with the three months ended June 30, 2002.

Net revenues from our Liberty Respiratory segment increased 19.8% to
$19.87 million in the three months ended June 30, 2003, as compared with $16.58
million in the three months ended June 30, 2002. This increase was due
primarily to the growth in our customer base, which grew 27.5% to approximately
65,000 as of June 30, 2003, from approximately 51,000 as of June 30, 2002,
primarily as a result of our advertising. Recent growth in our Liberty
Respiratory segment has slowed as a result of lower than expected utilization
and responses to our advertisements in the quarter ended June 30, 2003.
Fluctuations in the order volume, order frequency and mix of product for new
and existing customers, also contributed to the change in net revenues for the
three months ended June 30, 2003, as compared with the three months ended June
30, 2002.

Net revenues from our Pharmaceuticals segment increased 77.4% to $11.54
million in the three months ended June 30, 2003, as compared with $6.51 million
in the three months ended June 30, 2002, due primarily to the growth in our
Liberty Pharmacy sales of prescription oral medications, not covered by
Medicare. Sales of these products represented 72.1% and 47.2% of total
Pharmaceuticals segment net revenues in the three months ended June 30, 2003
and 2002, respectively. We expect this trend of increasing sales from Liberty
Pharmacy to continue. The current customer base for these products consists
primarily of existing Liberty Diabetes and Liberty Respiratory customers, and
their spouses.

As a percentage of total net revenues, overall gross margins were 63.8% in
the three months ended June 30, 2003, as compared with 64.6% in the three
months ended June 30, 2002. Gross margins in the three months ended June 30,
2003 decreased primarily as a result of the increase in net revenues generated
from lower-margin prescription oral medication sales. Liberty Pharmacy,
although profitable, has significantly lower gross and operating margins than
our historical businesses. As a result, future consolidated earnings growth is
projected to be less than future consolidated revenue growth.

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As a percentage of total net revenues, selling, general and administrative
expenses were 46.0% in the three months ended June 30, 2003, as compared with
46.6% in the three months ended June 30, 2002. Selling, general and
administrative expenses increased by 19.6% in the three months ended June 30,
2003 to $45.49 million, as compared with $38.03 million in the three months
ended June 30, 2002. The slight decrease in selling, general and administrative
expense as a percentage of net revenues was primarily attributable to a
decrease in legal and related expenses of approximately $685,000 in the three
months ended June 30, 2003, as compared with the three months ended June 30,
2002.

Investment income increased 406.9% to $223,000 in the three months ended
June 30, 2003 as compared with $44,000 in the three months ended June 30, 2002,
due primarily to gains realized on investments held in the executive deferred
compensation plans, which also serve to decrease compensation expense recorded
as part of selling, general and administrative expenses, coupled with higher interest rates earned
on approximately $7.01 million of short-term investments held during the
quarter ended June 30, 2003. There were no short-term investments held during
the quarter ended June 30, 2002. Interest expense decreased 54.4% to $17,000 in
the three months ended June 30, 2003, as compared with $37,000 in the three
months ended June 30, 2002.

The provision for income taxes was $6.75 million and $5.56 million in the
three months ended June 30, 2003 and 2002, respectively, which resulted in an
effective tax rate of 37.8% in each of the three months ended June 30, 2003 and
2002. The effective tax rates in the three months ended June 30, 2003 and 2002
were higher than the Federal U.S. statutory rates due primarily to state taxes.
Our effective tax rate may vary from period to period based on changes in
estimated taxable income or loss, changes to federal or state tax laws, future
expansion into areas with varying country, state, or local income tax rates,
and the deductibility of certain costs and expenses by jurisdiction.

Liquidity and Capital Resources

Our business is currently funded through cash
flow from operations. Our cash and cash equivalents balance decreased $1.53
million to $25.64 million as of June 30, 2003, as compared with $27.16 million
as of March 31, 2003, due primarily to the purchase of $5.57 million of
short-term investments during the three months ended June 30, 2003, offset by
cash flows generated from operations. Cash flows from operations of $10.05
million for the three months ended June 30, 2003, were generated by net income
of $11.10 million, offset by cash used to fund certain areas of our operations,
including a decrease in accounts payable in the quarter ended June 30, 2003 of
$8.25 million to $4.32 million as of June 30, 2003, as compared with $12.58
million as of March 31, 2003.

In the three months ended June 30, 2003 and 2002, we used $8.84 million
and $5.76 million of cash for investing activities, respectively. The $3.07
million increase in total cash used for investing activities was due to $5.56
million used to purchase short-term investments net of a decrease in capital
expenditures of $2.49 million in the three months ended June 30, 2003, as
compared with the three months ended June 30, 2002. Property, plant and
equipment purchases totaled $3.27 million and $5.76 million for the three
months ended June 30, 2003 and 2002, respectively. Higher spending in the
prior year first quarter for capital expenditures was related to the
construction of a new 64,000 square foot respiratory supplies facility and a
new 59,000 square foot distribution center, as compared with the renovation of
an existing 120,000 square foot Port St. Lucie facility purchased in January
2003, in the current year first quarter.

In the three months ended June 30, 2003, we used $2.74 million of cash for
financing activities, which consisted of $157,000 set aside for
executive deferred compensation plans, $825,000 used to repay capital lease and
note payable obligations, and $3.07 million of cash dividends paid to
shareholders of record as of May 5, 2003, offset by $1.31 million of proceeds
recognized from the issuance of PolyMedica common stock.

On July 18, 2003 our Board declared a cash dividend of $0.25 per share of
PolyMedicas common stock to shareholders of record as of the close of business
on August 5, 2003, paid on August 15, 2003. While a significant decline in our cash balances or
another business change could cause us to reduce, suspend, or
eliminate the quarterly payment of dividends to shareholders, the current intention of the Board
is to pay a cash dividend on a quarterly basis for the foreseeable
future. We
expect the quarterly cash dividend payment, if paid, to average $3.0 million.

We believe that our cash and cash equivalents balance as of June 30, 2003
of $25.64 million and cash flows generated from operations, will be sufficient
to meet working capital, capital expenditure and financing needs, including the
payment of dividends to shareholders, for future business operations for the
next twelve months. In the event that we undertake to make acquisitions of
complementary businesses, products or technologies, we may require substantial

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additional funding beyond currently available working capital and funds
generated from operations. Other factors which could negatively affect our
liquidity include a reduction in the demand for our products, an unfavorable
outcome of pending litigation and investigations, or a reduction in Medicare
reimbursement for our products (see Uncertainties in Critical
Accounting Policies).

Our contractual obligations for future annual minimum lease, rental and
advertising commitments as of June 30, 2003, were not materially different from
those as of March 31, 2003, disclosed in our Annual Report on Form 10-K for the
fiscal year ended March 31, 2003.

Accounting Pronouncements

In May 2003, the FASB issued SFAS No. 150, Accounting For Certain
Financial Instruments with Characteristics of Both Liabilities and Equity,
which establishes standards for how an issuer of financial instruments
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances) if, at inception, the monetary value of the obligation is based
solely or predominantly on a fixed monetary amount known at inception,
variations in something other than the fair value of the issuers equity shares
or variations inversely related to changes in the fair value of the issuers
equity shares. SFAS No. 150 is effective for financial instruments entered into
or modified after May 31, 2003, and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003. The adoption of SFAS
No. 150 is not expected to have a material impact on our financial position or
results of operations.

In December 2002, the FASB issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities (FIN 46). In general, a
variable interest entity is a corporation, partnership, trust or other legal
structure used for business purposes that either (a) does not have equity
investors with characteristics of a controlling financial interest or (b) has
equity investors that do not provide sufficient financial resources for the
entity to support its activities. A variable interest entity often holds
financial assets, including loans or receivables, real estate or other
property. FIN 46 requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entitys activities or entitled to receive a majority of the
entitys residual returns or both. Additionally, companies with significant
investments in variable interest entities, even if not required to consolidate
the variable interest entity, have enhanced disclosure requirements. FIN 46 is
effective immediately for certain disclosure requirements and variable interest
entities created after January 31, 2003 and is effective for periods beginning
after June 15, 2003 for variable interest entities created before February 1,
2003. The adoption of this statement is not expected to have a material impact
on our financial position or results of operations.

In August 2001, the FASB issued SFAS No. 143, Accounting for Obligations
Associated with the Retirement of Long-Lived Assets. The provisions of SFAS
No. 143 apply to all entities that incur obligations associated with the
retirement of tangible long-lived assets. SFAS No. 143 is effective for
financial statements issued for fiscal years beginning after June 15, 2002 and
thus was adopted, as required, on April 1, 2003. The adoption of this statement
has not had a material impact on our financial position or results of
operations.

Factors Affecting Future Operating Results

Our future
operating results remain difficult to predict. We continue to face many risks
and uncertainties which could affect our operating results, including without
limitation, those described below.

We could experience significantly reduced profits if Medicare changes, delays or denies reimbursement

Sales of a significant portion of our Liberty Diabetes and Liberty
Respiratory medications and supplies depend on the continued availability of
reimbursement of our customers by government and private insurance plans. Any
reduction in Medicare reimbursement currently available for our products would
reduce our revenues. Without a corresponding reduction in the cost of such
products, the result would be a reduction in our overall profit margin.
Similarly, any increase in the cost of such products would reduce our overall
profit margin unless there was a corresponding increase in Medicare
reimbursement. Our profits could also be affected by the imposition of more
stringent regulatory requirements for Medicare reimbursement or adjustments to
previously reimbursed amounts.

Federal governmental authorities are continually considering changes to
laws and regulations applicable to us as

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they relate to billing requirements and reimbursement levels of our products.
Legislation and regulations are pending relating to:

  Medicare reform proposals

The United States House of Representatives (House) and Senate (Senate)
are considering Medicare reform and coverage of outpatient prescription drug
legislation that include proposals to freeze durable medical equipment (DME)
payments through 2010, reduce payments for covered outpatient drugs to 85
percent of the average wholesale price (AWP) of such drugs, require certain
DME to be competitively bid, and implement a competitive acquisition program
for outpatient drugs and biologics. If this legislation is enacted, it will
likely include one or more of these changes.

If enacted, these proposals could apply to us. If competitive bidding for
DME is enacted, we would begin the process of understanding the bidding
requirements and working with the appropriate officials in preparing bids for
products that are covered. The other proposals could result in payment
reductions for certain products. This legislation is also likely to authorize
certain regulatory relief in the administrative process of the Medicare claims
and payment rules. It is uncertain at this time whether such legislation will
be enacted and become law.

  Inherent reasonableness

Final regulations have been implemented by the Centers for Medicare and
Medicaid Services (CMS) that develop a process for identifying whether a
payment may be reduced or increased for a category of items or services if it
is determined that such payment is grossly deficient or excessive. The process
set forth in these regulations could affect the payment for the items that we
provide.

Litigation may materially adversely affect us

PolyMedica and three individuals who are or were officers of PolyMedica
are defendants in a lawsuit alleging violations of certain sections and rules
of the Securities Exchange Act of 1934 (the Exchange Act), which was
initiated in U.S. District Court for the District of Massachusetts in November
2000. In addition, there is a derivative action against certain directors and
two individuals who are or were officers in Massachusetts state court alleging
certain breaches of fiduciary duty. In July 2003, new lawsuits alleging
violations of certain sections and rules of the Exchange Act were filed
concerning PolyMedicas accounting treatment of direct-response advertising. In
addition to PolyMedica, certain current or former officers of PolyMedica have
been named as defendants in these lawsuits. PolyMedica believes it has
meritorious defenses to the claims made against it in the actions in which it
is a defendant and intends to contest the claims vigorously. Although we do not
consider an unfavorable outcome to the various claims probable, we cannot
accurately predict their ultimate disposition, and have therefore not recorded
any charges related to their outcome. An unfavorable outcome could have a
material effect on our financial position and results of operations. Please see
Item 1 of Part II, Legal Proceedings, for a more complete description of these
claims.

We could experience significantly reduced profits as the result of an unfavorable outcome to current governmental investigations

The regulations that govern Medicare reimbursement are complex and our
compliance with those regulations may be reviewed by federal agencies,
including the Department of Health and Human Services, the DOJ, and the FDA.
The U.S. Attorneys Office for the Southern District of Florida, with the
assistance of the FBI and OIG, is investigating allegations of healthcare
fraud, improper revenue recognition and obstruction of justice by Liberty and
Liberty Home Pharmacy. Both civil and criminal investigations are being
conducted. We are cooperating with the investigations. We cannot accurately
predict the outcome of these proceedings at this time, and have therefore not
recorded any charges relating to their outcome.

If any of these investigations results in a determination that we have
failed to comply with the regulations governing Medicare reimbursement or
financial reporting or have otherwise committed healthcare fraud or securities
law violations, we could be subject to delays or loss of reimbursement,
substantial fines or penalties, and other sanctions. An adverse determination
could have a material effect on our financial position and results of
operations. At this time, we cannot accurately predict the outcome of these
proceedings, and have therefore not recorded any charges relating to their
outcome.

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In June 2002, Liberty was served with an administrative subpoena from the
U.S. Attorneys Office for the Southern District of Illinois seeking documents
relevant to an ongoing investigation of Medicare reimbursement of depth shoes
and inserts. Liberty has been informed that it is not a target of that
investigation. Liberty completed its response to the subpoena in November 2002.

Shortening or eliminating amortization of our direct-response advertising costs could adversely affect our operating results

Any change in existing accounting rules or a business change that impacts
expected net cash flows or that shortens the period over which such net cash
flows are estimated to be realized, currently four years for our diabetes
products and two years for our respiratory supplies, could result in
accelerated charges against our earnings. For recent developments regarding
the accounting treatment of our advertising costs, please see Note 6 to our
consolidated financial statements. In addition, new or different marketing
initiatives that may not qualify for direct-response advertising could result
in accelerated charges against our earnings.

Geopolitical events may reduce our ability to obtain favorable advertising rates for our direct-response advertising efforts, which may adversely affect our operating results

The effectiveness of our direct-response advertising is subject to the
risks arising from geopolitical events. For example, around the clock news
coverage on the war in Iraq and the war on terrorism affected our ability to
obtain favorable rates for our product advertisements and thus affected our
ability to obtain new customers. Such geopolitical events may continue in the
foreseeable future and may have a negative impact on our results of operations.

Our stock price could be volatile

The trading price of our common stock has been volatile and is likely to
continue to be volatile. The stock market in general, and the market for
healthcare-related companies in particular, has experienced extreme volatility.
This volatility has often been unrelated to the operating performance of
particular companies. Investors may not be able to sell their common stock at
or above the price at which they purchased the stock. Prices for the common
stock will be determined in the marketplace and may be influenced by many
factors, including variations in our financial results, changes in earnings
estimates by industry research analysts, investors perceptions of us and
general economic, industry and market conditions.

We plan to continue our rapid expansion; if we do not manage our growth
successfully, our growth and profitability may slow or stop

We have expanded our operations rapidly and plan to continue to expand.
This expansion has created significant demand on our administrative,
operational and financial personnel and other resources. Additional expansion
in existing or new markets could strain these resources and increase our need
for capital. Our personnel, systems, procedures, controls and existing space
may not be adequate to support further expansion.

The profitability of our Liberty Diabetes and Liberty Respiratory segments will
decrease if we do not receive recurring orders from customers

We generally incur losses and negative cash flow with respect to the first
order from a new customer for Liberty Diabetes and Liberty Respiratory
supplies, due primarily to the marketing and regulatory compliance costs
associated with initial customer qualification. Accordingly, the profitability
of these segments depends in large part on recurring and sustained reorders.
Reorder rates are inherently uncertain due to several factors, many of which
are outside our control, including changing customer preferences, competitive
price pressures, customer transition to extended care facilities, customer
mortality and general economic conditions.

We could experience significantly reduced profits from our Liberty Diabetes
segment if improved technologies that eliminate the need for consumable testing
supplies are developed for glucose monitoring

The majority of our Liberty Diabetes net revenues are from consumable
testing supplies, used to draw and test small quantities of blood for the
purpose of measuring and monitoring glucose levels. Numerous research efforts
are underway to develop more convenient and less intrusive glucose measurement
techniques. The commercialization and widespread acceptance of new technologies
that eliminate or reduce the need for consumable testing supplies could
negatively affect our Liberty Diabetes segment.

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We could experience a charge to earnings as a result of an impairment of our goodwill

We are required to perform impairment tests under SFAS No. 142 annually
and whenever events or changes in circumstance suggest that the carrying value
of an asset may not be recoverable. The valuation of our goodwill is based upon
the results of these impairment tests. Changes in assumptions used and
forecasted results of operations of the reporting unit carrying goodwill, could
affect the quantification of an impairment value, should one exist.

We could be liable for harm caused by products that we sell

The sale of medical products entails the risk that users will make product
liability claims. A product liability claim could be expensive. While
management believes that our insurance provides adequate coverage, no assurance
can be made that adequate coverage will exist for these claims.

We could lose customers and revenues to new or existing competitors

Competition from other sellers of products offered through our Liberty
Diabetes, Liberty Respiratory and Pharmaceuticals segments, manufacturers of
healthcare products, pharmaceutical companies and other competitors is intense
and expected to increase. Many of our competitors and potential competitors are
large companies with well-known names and substantial resources. These
companies may develop products and services that are more effective or less
expensive than any that we are developing or selling. They may also promote and
market these products more successfully than we promote and market our
products.

Loss of use of manufacturing or data storage facilities would significantly
reduce revenues and profits from our businesses

We manufacture substantially all of our prescription urology and
suppository products and many of our AZO brand name products at our facility in
Woburn, Massachusetts. In addition, we process and store most of our customer
data in our facility in Port St. Lucie, Florida. If we cannot use any of these
facilities as a result of the FDA, Occupational Safety and Health
Administration or other regulatory action, fire, natural disaster or other
event, our revenues and profits would decrease significantly. We might also
incur significant expense in remedying the problem or securing alternative
manufacturing or data storage sources.

If we or our suppliers do not comply with applicable government regulations, we
may be prohibited from selling our products

The majority of the products that we sell are regulated by the FDA and
other regulatory agencies. If any of these agencies mandate a suspension of
production or sales of our products or mandate a recall, we may lose sales and
incur expenses until we are in compliance with the regulations or change to
another acceptable supplier.

We could have difficulty selling our pharmaceuticals products if we cannot
maintain and expand our sales to distributors

We rely on third party distributors to market and sell our
over-the-counter female urinary discomfort products and prescription urology
and suppository products. Future sales of these products depend in part on our
maintaining and expanding marketing and distribution relationships with
pharmaceutical, medical device, personal care and other distributors and on the
success of those distributors in marketing and selling our products.

Our quarterly revenues or operating results could vary, which may cause the
market price of our securities to decline

We have experienced fluctuations in our quarterly operating results and
anticipate that such fluctuations could continue. Results may vary
significantly depending on a number of factors, including:



| |  |  | changes in reimbursement guidelines and amounts;         
| | - |  | ---------------------------------------------------------
|
| |  |  | changes in regulations affecting the healthcare industry;
|
| |  |  | the timing of customer orders;                           

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| |  |  | the timing and cost of our advertising campaigns;                                                 
| | - |  | --------------------------------------------------------------------------------------------------
|
| |  |  | the timing of the introduction or acceptance of new products offered by us or our competitors; and
|
| |  |  | changes in the mix and costs of our products.                                                     
|

| |  |  | Product mix and costs are significantly influenced by
the product brand chosen by the customers of our mail-order
diabetes supply business. We provide a wide range of product
brand choices to our customers, purchased at varying costs from
suppliers. Our ability to sustain current gross margin levels is
dependent both on our ability to continue securing favorable
pricing from suppliers and on the brand choices of our customers.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A reduction in working capital or another business change could prevent us from
paying dividends to shareholders

A significant decline in our cash balances or another business change
could cause us to reduce, suspend, or eliminate the quarterly payment of
dividends to shareholders.

We may make acquisitions that will strain our financial and operational
resources

We regularly review potential acquisitions of businesses and products.
Acquisitions involve a number of risks that might adversely affect our
financial and operational resources, including:



| |  |  | diversion of the attention of senior management from important business matters;         
| | - |  | -----------------------------------------------------------------------------------------
|
| |  |  | amortization of substantial intangible assets;                                           
|
| |  |  | difficulty in retaining key personnel of an acquired business;                           
|
| |  |  | failure to assimilate operations of an acquired business;                                
|
| |  |  | possible operating losses and expenses of an acquired business;                          
|
| |  |  | exposure to legal claims for activities of an acquired business prior to acquisition; and
|
| |  |  | incurrence of debt and related interest expense.                                         

We may issue preferred stock with rights senior to the common stock

Our articles of organization authorize the issuance of up to 2,000,000
shares of preferred stock without shareholder approval. The shares may have
dividend, voting, liquidation and other rights and preferences that are senior
to the rights of the common stock. The rights and preferences of any such class
or series of preferred stock would be established by our Board in its sole
discretion.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

We own certain money market funds, commercial bonds and mutual funds that
are sensitive to market risks as part of our investment portfolio. The
investment portfolio is used to preserve our capital until it is required to
fund operations. None of the market-risk sensitive instruments held in our
investment portfolio are held for trading purposes. We do, however, hold some
market-risk sensitive instruments in our executive deferred compensation plans,
for trading purposes. These investments are accounted for under SFAS No. 115,
Accounting for certain investments in Debt and Equity Securities. The
investments are recorded at fair value, and changes in fair value are recorded
as compensation expense and investment income for the period. We do not own
derivative financial instruments in our investment portfolio. We do not believe
that the exposure to market risks in our investment portfolio is material.

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Item 4. Controls and Procedures

(a) 
Evaluation of disclosure controls and procedures. PolyMedicas
management, with the participation of PolyMedicas chief
executive officer and chief financial officer, evaluated the
effectiveness of PolyMedicas disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act) as of June 30, 2003. Based on this evaluation,
PolyMedicas chief executive officer and chief financial officer
concluded that, as of June 30, 2003, PolyMedicas
disclosure controls and procedures were (1) designed to ensure
that material information relating to PolyMedica, including its
consolidated subsidiaries, is made known to PolyMedicas chief
executive officer and chief financial officer by others within those
entities, particularly during the period in which this report was
being prepared and (2) effective, in that they provide
reasonable assurance that information required to be disclosed by
PolyMedica in the reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms.

(b)
Changes in internal controls. No change in PolyMedicas
internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred
during the fiscal quarter ended June 30, 2003 that has
materially affected, or is reasonably likely to materially affect,
PolyMedicas internal control over financial reporting.

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PART II  OTHER
INFORMATION




Item 1. Legal Proceedings

U.S. Attorneys Office

The U.S. Attorneys Office for the Southern District of Florida, with the
assistance of the FBI and OIG, is investigating allegations of healthcare
fraud, improper revenue recognition and obstruction of justice by Liberty and
Liberty Home Pharmacy. Both civil and criminal investigations are being
conducted. We are cooperating with the investigations. We cannot accurately
predict the outcome of these proceedings at this time, and have therefore not
recorded any charges relating to their outcome.

In June 2002, Liberty was served with an administrative subpoena from the
U.S. Attorneys Office for the Southern District of Illinois seeking documents
relevant to an ongoing investigation of Medicare reimbursement of depth shoes
and inserts. Liberty has been informed that it is not a target of that
investigation. Liberty completed its response to the subpoena in November 2002.

Class Action Lawsuit

On November 27, 2000, Richard Bowe SEP-IRA filed a purported class action
lawsuit in the United States District Court for the District of Massachusetts
against PolyMedica and Steven J. Lee, PolyMedicas former Chief Executive
Officer and Chairman of the Board, on behalf of himself and purchasers of
common stock. The lawsuit seeks an unspecified amount of damages, attorneys
fees and costs and claims violations of Sections 10(b), 10b-5, and 20(a) of the
Securities Exchange Act of 1934 (the Exchange Act), alleging various
statements were misleading with respect to our revenue and earnings based on an
alleged scheme to produce fictitious sales. At least one virtually identical
lawsuit was subsequently filed in the United States District Court for the
District of Massachusetts against PolyMedica. On July 30, 2001, the Court
granted the plaintiffs motion to consolidate the complaints under the caption
In re: PolyMedica Corp. Securities Litigation, Civ. Action No. 00-12426-REK.

Plaintiffs filed a consolidated amended complaint on October 9, 2001. The
consolidated amended complaint extended the class period to October 26, 1998
through August 21, 2001, and named as defendants PolyMedica, Liberty, Steven J.
Lee, former Chief Executive Officer and Chairman of the Board, Eric G. Walters,
former Executive Vice President and Clerk of PolyMedica, and Keith Trowbridge,
President of Liberty and a Senior Vice President of PolyMedica. Defendants
moved to dismiss the consolidated amended complaint on December 10, 2001.
Plaintiffs filed their opposition to this motion on February 11, 2002, and
defendants filed a reply memorandum on March 11, 2002. The Court denied the
motion without a hearing on May 10, 2002. On June 20, 2002, defendants filed
answers to the consolidated amended complaint. The case is currently in
discovery.

We believe that we have meritorious defenses to the claims made in the
consolidated amended complaint and intend to contest the claims vigorously. We
are unable to express an opinion as to the likely outcome of this litigation.

Derivative Complaint

On August 9, 2001, Roberta Casden filed a purported derivative action in
Massachusetts Superior Court for Middlesex County against our Board. At least
three virtually identical derivative actions were subsequently filed in
Massachusetts Superior Court. On October 11, 2001, the Court granted
plaintiffs motion to consolidate the derivative actions under the caption In
re: PolyMedica Corp. Shareholder Derivative Litigation, Civ. Action No.
01-3446.

On December 17, 2001, plaintiffs filed a consolidated derivative
complaint. The consolidated complaint named as defendants PolyMedica, Steven J.
Lee, former Chief Executive Officer and Chairman of the Board, Arthur A.
Siciliano, President, Eric G. Walters, former Executive Vice President and
Clerk, and five of our directors: Herbert A. Denton, Thomas S. Soltys, Frank
LoGerfo, Marcia J. Hooper, and Daniel S. Bernstein. The Complaint alleges that
the defendants breached their fiduciary duties by, among other things, failing
to exercise reasonable care in the oversight of corporate affairs and
management with respect to the operations of Liberty and by acquiescing in
alleged misconduct by Liberty. The Complaint seeks unspecified damages, the
return of compensation, and other relief, including injunctive relief.
Defendants filed a motion to dismiss the consolidated complaint on January 31,
2002. Plaintiffs filed an opposition to the motion on March 22, 2002 and
defendants filed a reply memorandum on April 19, 2002. The Court heard argument
on the motion to dismiss on April 30, 2002. On July 16, 2002, the Court entered
an order denying the motion to

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dismiss.

On August 8, 2002, defendants filed a motion for reconsideration of the
order denying defendants motion to dismiss, or, in the alternative, to report
the case to the Appeals Court and stay the proceeding. After hearing oral
argument, the Court issued an order, on September 16, 2002, in which it refused
to reconsider its decision, but reported the case to the Appeals Court and
granted defendants motion to stay the action. On September 25, 2002,
plaintiffs filed a motion for reconsideration of the order staying the
proceedings, which they subsequently withdrew on December 26, 2002. On January
23, 2003, the Appeals Court docketed the case under the caption Roberta Casden
v. Daniel S. Bernstein and others, No. 2003-P-0107.

On January 29, 2003, defendants, with plaintiffs assent, filed a motion
requesting the Appeals Court to grant leave to allow the trial court to correct
the docket by adding omitted parties and requesting a stay of appellate
proceedings. On January 30, 2003, the Appeals Court granted leave and stayed
appellate proceedings until March 3, 2003. On February 3, 2003, defendants and
plaintiffs filed a joint motion in the Massachusetts Superior Court for
Middlesex County requesting correction of the docket. On February 4, 2003, the
Superior Court granted the joint motion to correct the docket.

In addition, the Appeals Court granted several joint motions made by the
parties in the Spring of 2003 to stay the action while the parties conducted
settlement discussions. On June 26, 2003, the parties filed a motion to remand
the proceeding to Middlesex Superior Court for the purpose of approving a
potential settlement. On July 1, 2003, the Appeals Court issued a notice that
the motion to remand to Superior Court had been granted. On August 4, 2003,
the parties filed a stipulated motion for dismissal of the appeal without
prejudice. On August 5, 2003, in response to the motion to dismiss, the Court
issued a notice further staying the appellate proceeding until September 3,
2003.

The settlement is subject to approval by the Middlesex Superior Court. The
settlement agreement recites certain corporate governance changes made by the
Company, such as the addition of three new outside directors to its board since
September 2001, the appointment of a lead director, and enhancements to the
Companys compliance functions. Pursuant to this agreement,
PolyMedica denied all liability and the factual allegations in the
complaint and has agreed to pay
only plaintiffs attorneys fees and expenses in an amount to
be determined by the Court and notice costs. Polymedica will seek and expects to
receive reimbursement of such attorneys fees
from its insurer. We can provide no assurance that the settlement will be
approved by the Court. The defendants believe they have meritorious defenses to
the claims made in the consolidated complaint and if the settlement is not
approved, intend to contest the claims vigorously. We are unable to express an
opinion as to the likely outcome of this litigation.

Direct-Response Advertising Shareholder Litigation

On July 3, 2003, Stanley Sved filed a purported class action lawsuit in
the United States District Court for the District of Massachusetts against
PolyMedica, and the following current or former Company officers: Steven J.
Lee, former Chief Executive Officer and Chairman of the Board, Samuel L.
Shanaman, Interim Chief Executive Officer and Lead Director, Arthur A.
Siciliano, President, John K.P. Stone III, Director, Vice Chairman, General
Counsel, and Senior Vice President, Stephen C. Farrell, Senior Vice President
and Chief Financial Officer, Eric Walters, formerly Executive Vice President
and Clerk, and Warren K. Trowbridge, Senior Vice President of PolyMedica and
President of Liberty. The lawsuit was brought on behalf of Mr. Sved and other
purchasers of PolyMedicas common stock for a proposed class period of July 23,
2001 to June 30, 2003 and is captioned Sved v. PolyMedica Corp., Civ. Act. No.
03-11270 RCL. The lawsuit seeks an unspecified amount of damages, attorneys
fees and costs and claims violations of Sections 10(b), 10b-5, and 20(a) of the
Securities Exchange Act of 1934 (the Exchange Act), alleging various
statements were misleading with respect to revenue and earnings based on
PolyMedicas accounting treatment of direct-response advertising. As of July
31, 2003, at least one virtually identical lawsuit had been filed in the United
States District Court for the District of Massachusetts against the same
defendants, Gourdh v. PolyMedica Corp., Civ. Act. No. 03-11393 RCL.

We believe that we have meritorious defenses to the claims made in the
consolidated complaint and intend to contest the claims vigorously. We are
unable to express an opinion as to the likely outcome of this litigation




Item 6. Exhibits and Reports on Form 8-K

(a)  See Exhibit Index immediately following this report, which is
incorporated herein by reference.
PolyMedica furnished a Current Report on Item 9 of Form 8-K, dated April 24, 2003,
reporting its expectations for its fiscal 2004 first quarter
earnings, pursuant to Item 12 of Form 8-K, and furnished
a Current Report on Item 9 of Form 8-K, dated May 28, 2003, reporting its
financial results for the quarter ended March 31, 2003 and the fiscal year
ended March 31, 2003, pursuant to Item 12 of Form 8-K.

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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.

| |  |                                                                     
| |  | --------------------------------------------------------------------
| |  | PolyMedica Corporation                                              
| |  |                                                                     
| |  | (registrant)                                                        
| |  |                                                                     
| |  | /s/ Samuel L. Shanaman                                              
| |  |                                                                     
| |  | Samuel L. Shanaman
Lead Director and Interim Chief Executive Officer
| |  | (Principal Executive Officer)                                       
| |  |                                                                     
| |  | /s/ Stephen C. Farrell                                              
| |  |                                                                     
| |  | Stephen C. Farrell                                                  
| |  | Senior Vice President and Chief Financial Officer                   
| |  | (Principal Financial and Accounting Officer)                        
| |  |                                                                     

Dated: August 18, 2003

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Exhibit Index

|        |  |   |  |                                                                                                                                   |  |  |  | 
|------- |  | - |  | --------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Exhibit |  |   |  | Description                                                                                                                       |  |  |  | 
|        |  |   |  |                                                                                                                                   |  |  |  | 
|10.65   |  | - |  | Restricted Stock Agreement by and between the Registrant
and Samuel L. Shanaman dated July 11, 2003.                             
|10.66   |  | - |  | Amended Employment Agreement by and between the Registrant
and Samuel L. Shanaman dated July 11, 2003.                           
|31.1    |  | - |  | Certification by Chief Executive Officer pursuant to Rule
13a14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.
|31.2    |  | - |  | Certification by Chief Financial Officer pursuant to Rule
13a14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.
|32.1    |  | - |  | Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.          

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