<PAGE>   1

                                    FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   (Mark One)

     [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
                For the quarterly period ended December 31, 1998

                                       OR

     [ ] 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                              (I.R.S. Employer
incorporation or organization                               Identification No.)

 11 State Street, Woburn, Massachusetts                            01801  
----------------------------------------                    -------------------
(Address of principal executive offices)                        (Zip Code)

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


     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 [ ]

     The number of shares outstanding of the registrant's class of Common Stock
as of January 22, 1999 was 9,060,654 which includes 78,003 shares held in
treasury.




<PAGE>   2
                             POLYMEDICA CORPORATION
                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----

PART I  -   FINANCIAL INFORMATION

Item 1  -   Unaudited Financial Statements

            Consolidated Balance Sheets at December 31 and 
              March 31, 1998                                                  3

            Consolidated Statements of Operations for the 
              three and nine months ended December 31, 1998 
              and 1997                                                        5

            Consolidated Statements of Cash Flows for the nine 
              months ended December 31, 1998 and 1997                         6

            Notes to Consolidated Financial Statements                        7

Item 2  -   Management's Discussion and Analysis of Financial 
              Condition and Results of Operations                            11

PART II -   OTHER INFORMATION

Item 6  -   Exhibits and Reports on Form 8-K                                 21

Signatures                                                                   22

Exhibit Index                                                                23




                                        2


<PAGE>   3


                         PART I - FINANCIAL INFORMATION


ITEM 1. UNAUDITED FINANCIAL STATEMENTS


                             POLYMEDICA CORPORATION
                           CONSOLIDATED BALANCE SHEETS
           (Dollars in thousands, except share and per share amounts)

<TABLE>
<CAPTION>
                                                                DEC. 31,        MARCH 31,
                                                                 1998            1998
                                                               --------         --------
                                                              (UNAUDITED)
<S>                                                            <C>              <C>    

ASSETS

Current assets:
    Cash and cash equivalents                                  $  9,157         $ 6,440
    Accounts receivable -- trade (net of
      allowances of $6,502 and $3,914 as of
      December 31 and March 31, 1998, respectively)              29,184          21,207
    Inventories                                                   7,064           4,857
    Deferred tax asset                                            2,075           2,075
    Prepaid expenses and other
      current assets                                              1,780             845
                                                               --------         -------

             Total current assets                                49,260          35,424

Property, plant, and equipment, net                               6,847           6,285
Intangible assets, net                                           37,847          39,555
Direct-response advertising, net                                 14,157          10,899
Other assets, net                                                   316             238
                                                               --------         -------

             Total assets                                      $108,427         $92,401
                                                               ========         =======

</TABLE>



















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



                                        3


<PAGE>   4


                             POLYMEDICA CORPORATION
                           CONSOLIDATED BALANCE SHEETS
           (Dollars in thousands, except share and per share amounts)


<TABLE>
<CAPTION>
                                                                    DEC. 31,       MARCH 31,
                                                                     1998            1998
                                                                  (UNAUDITED)                
                                                                  -----------      --------
<S>                                                                <C>             <C>    

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
    Accounts payable -- trade                                      $ 10,276        $ 8,221
    Accrued expenses                                                  4,497          3,805
    Senior debt and notes payable                                     2,000          2,329
                                                                   --------        -------

         Total current liabilities                                   16,773         14,355

Senior debt and notes payable, net                                   19,644         20,577
Revolving credit facility                                             5,000             --
Deferred income taxes                                                 7,832          4,541
                                                                   --------        -------

         Total liabilities                                           49,249         39,473
                                                                   --------        -------

Commitments

Shareholders' equity:
    Preferred stock $.01 par value; 2,000,000 shares
       authorized, none issued or outstanding                            --             --
    Common stock $.01 par value; 20,000,000
       shares authorized; 9,059,304 and 8,909,718
       issued as of December 31 and March 31, 1998,
       respectively                                                      91             89
    Treasury stock, at cost, (78,003 and 129,560
       shares as of December 31 and March 31, 1998,
       respectively)                                                   (288)          (706)
    Additional paid-in capital                                       54,737         54,498
    Retained earnings (deficit)                                       5,359           (164)
    Notes receivable from officers                                     (721)          (789)
                                                                   --------        -------

         Total shareholders' equity                                  59,178         52,928
                                                                   --------        -------

         Total liabilities and
            shareholders' equity                                   $108,427        $92,401
                                                                   ========        =======

</TABLE>


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



                                        4


<PAGE>   5


                             POLYMEDICA CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)
                    (In thousands, except per share amounts)


<TABLE>
<CAPTION>
                                                      THREE MONTHS ENDED          NINE MONTHS ENDED     
                                                    ---------------------       ---------------------
                                                    DEC. 31,      DEC. 31,      DEC. 31,      DEC. 31,
                                                     1998           1997         1998          1997    
                                                    -------       -------       -------       -------
<S>                                                 <C>           <C>           <C>           <C>    

Net product sales                                   $28,791       $20,668       $74,275       $52,269

Cost of product sales                                13,965        10,220        35,764        24,927
                                                    -------       -------       -------       -------

Gross margin                                         14,826        10,448        38,511        27,342

Operating expenses:
  Selling, general, and administrative               11,351         7,838        29,231        20,411
  Research and development                               43            25           152           236
                                                    -------       -------       -------       -------
                                                     11,394         7,863        29,383        20,647

Income from operations                                3,432         2,585         9,128         6,695

Other income and expense:
   Gain on sale of wound care business                   --            --         1,597         4,126
   Investment income                                    105           175           358           507
   Interest expense                                    (627)         (665)       (1,877)       (2,042)
                                                    -------       -------       -------       -------
                                                       (522)         (490)           78         2,591

Income before income taxes                            2,910         2,095         9,206         9,286
Income tax provision                                  1,164           712         3,683         3,157
                                                    -------       -------       -------       -------

Net income                                          $ 1,746       $ 1,383       $ 5,523       $ 6,129
                                                    =======       =======       =======       =======

Net income per weighted average share, basic        $   .20       $   .16       $   .62       $   .71
                                                    =======       =======       =======       =======

Net income per weighted average share, diluted      $   .18       $   .14       $   .57       $   .63
                                                    =======       =======       =======       =======


Weighted average shares, basic                        8,933         8,756         8,844         8,609

Weighted average shares, diluted                      9,832         9,975         9,774         9,654


</TABLE>








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


                                        5


<PAGE>   6


                             POLYMEDICA CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
                                 (In Thousands)


<TABLE>
<CAPTION>
                                                                              NINE MONTHS ENDED DEC. 31,   
                                                                              -------------------------
                                                                                1998             1997    
                                                                              --------         --------
<S>                                                                           <C>              <C>     

Cash flows from operating activities:
    Net income                                                                $  5,523         $  6,129
    Adjustments to reconcile net income to net cash flows
       from operating activities:
         Gain on sale of wound care business                                    (1,597)          (4,126)
         Depreciation and amortization                                           2,446            2,439
         Amortization of direct-response advertising                             3,869            1,450
         Direct-response advertising                                            (7,126)          (9,573)
         Deferred income taxes                                                   3,291            3,715
         Provision for bad debts                                                 4,628            2,025
         Provision for sales allowances                                          2,302            2,208
         Provision for inventory obsolescence                                       --               25
         Changes in assets and liabilities:
             Accounts receivable--trade                                        (14,908)         (14,026)
             Inventories                                                        (2,206)          (1,934)
             Prepaid expenses and other assets                                  (1,018)            (127)
             Accounts payable--trade                                             2,054            3,514
             Accrued expenses                                                      692            3,820
                                                                              --------         --------

               Total adjustments                                                (7,573)         (10,590)
                                                                              --------         --------

               Net cash flows from operating activities                         (2,050)          (4,461)
                                                                              --------         --------

Cash flows from investing activities:
    Proceeds from sale of wound care business, net of related expenses           1,597            8,428
    Purchase of property, plant, and equipment                                  (1,218)          (2,069)
                                                                              --------         --------

               Net cash flows from investing activities                            379            6,359
                                                                              --------         --------

Cash flows from financing activities:
    Borrowings under revolving credit facility                                   5,000               --
    Repayment of senior debt and notes payable                                  (1,329)          (1,329)
    Proceeds from issuance of common stock                                         656            1,576
    Repayment of officer notes receivable                                           68              110
                                                                              --------         --------

                Net cash flows from financing activities                         4,395              357
                                                                              --------         --------

Net increase in cash and cash equivalents                                        2,724            2,255
                                                                              --------         --------

Effect of exchange rate changes on cash                                             (7)               4

Cash and cash equivalents at
    beginning of period                                                          6,440           11,028
                                                                              --------         --------

Cash and cash equivalents at end of period                                    $  9,157         $ 13,287
                                                                              ========         ========
</TABLE>





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



                                        6


<PAGE>   7


                             POLYMEDICA CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


1.       The unaudited consolidated financial statements included herein have
been prepared by PolyMedica Corporation ("PolyMedica" or the "Company"), without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission 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 generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. The Company believes, however, that its disclosures are adequate to
make the information presented not misleading. 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 the Company's Annual Report on Form 10-K for the year
ended March 31, 1998 and its Quarterly Report on Form 10-Q for the periods ended
June 30 and September 30, 1998.

         The preparation of financial statements in conformity with generally
accepted accounting principles 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 financial
statements and the reported amounts of revenue and expenses during the reported
period. Actual results could differ from those estimates.

2.       Inventories consist of the following: (In thousands)

<TABLE>
<CAPTION>
                                                 DEC. 31,     MARCH 31,
                                                  1998          1998   
                                                 -------      --------
         <S>                                     <C>           <C>   

         Raw materials                           $  571        $1,058
         Work in process                            424           296
         Finished goods                           6,069         3,503
                                                 ------        ------
                                                 $7,064        $4,857
                                                 ======        ======
</TABLE>


3.       In accordance with Statement of Position 93-7, direct-response
advertising and related costs for all periods presented are capitalized and
amortized to selling, general and administrative expense 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. Revenues generated from new customers as a result of
direct-response advertising have historically resulted in a revenue stream
lasting seven years. Management has selected a more conservative four-year
amortization period, as described in the "Factors Affecting Future Operating
Results - Direct Response Advertising" in Item 2 - "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in this Form 10-Q.
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 benefits
expected to result directly from such advertising.



                                        7


<PAGE>   8


         The Company capitalized direct-response advertising of $1.58 million
and $4.48 million in the three months ended December 31, 1998 and 1997,
respectively. A total of $1.41 million and $731,000 in direct-response
advertising was amortized and charged to selling, general and administrative
expense for the three months ended December 31, 1998 and 1997, respectively. A
total of $7.13 million and $9.57 million of direct-response advertising was
capitalized in the nine months ended December 31, 1998 and 1997, respectively. A
total of $3.87 million and $1.45 million in direct-response advertising was
amortized and charged to selling, general and administrative expense in the nine
months ended December 31, 1998 and 1997, respectively. As of December 31 and
March 31, 1998, accumulated amortization was $6.41 million and $2.54 million,
which resulted in a net capitalized direct-response advertising asset of $14.16
million and $10.90 million, respectively.

4.       As of December 31, 1998, Liberty Medical's gross unbilled receivables
included in accounts receivable - trade were $19.25 million. This increase in
the unbilled receivables balance as of December 31, 1998 primarily is a result
of record shipments by Liberty Medical during the three months ended December
31, 1998.

5.       In July 1998, the Company realized $1.6 million in cash from Innovative
Technologies Group plc ("IT") pursuant to a prepayment agreement as full and
final settlement of a $4 million unsecured promissory note issued to the Company
in connection with the July 1997 sale to IT of certain assets related to the
Company's wound care business. The $1.6 million cash received, net of related
expenses, is recorded as Other Income in the nine months ended December 31,
1998.

         At the time of the July 1997 sale, the Company recognized $9 million of
cash received. Through December 31, 1998, the Company has realized total
proceeds of $10.6 million. The Company could realize up to an additional $4.5
million if IT achieves certain milestones, which would bring the total potential
value of the sale to $15.1 million. Gain on the sale for the nine months ended
December 31, 1998 and 1997, is as follows:



<TABLE>
<CAPTION>
(In thousands, except per share data)                       Nine Months Ended
                                                                 Dec. 31,
                                                             1998       1997
                                                            ------     ------
<S>                                                         <C>         <C>   

Gain on sale of wound care business                         $1,597     $4,126
Provision for income taxes related to gain                     639      1,403
                                                            ------     ------
Gain on sale, net of income taxes                           $  958     $2,723
                                                            ======     ======
Income per common share, diluted, related to 
gain on sale of wound care business                         $  .10     $  .28
                                                            ======     ======
</TABLE>


6.       Promotional and sample costs, whose benefit is expected to assist sales
in future interim periods, are allocated among those interim periods based upon
the benefit received. The Company capitalized $448,000 of costs as Prepaid
Expenses and Other Current Assets as of June 30, 1998 related to contacting and
qualifying non-insulin using seniors with diabetes who first became Medicare
eligible on July 1, 1998. The balance of such costs as of December 31, 1998, was
$149,000, reflecting $299,000 recorded as selling, general and administrative
expense during the six



                                        8


<PAGE>   9


months ended December 31, 1998. The $149,000 balance will be expensed during the
quarter ended March 31, 1999.

7. Calculations of earnings per share are as follows:

<TABLE>
<CAPTION>

(In thousands, except per share data)                  Three Months Ended        Nine Months Ended                          
                                                             Dec. 31,                  Dec. 31,     
                                                        1998        1997          1998       1997  
                                                       ------      ------        ------     ------
<S>                                                    <C>         <C>           <C>        <C>   
                
Net income                                             $1,746      $1,383        $5,523     $6,129                
                                                                                                                  
BASIC:                                                                                                            
Weighted average common stock outstanding,                                                                        
   net of treasury stock, end of  period                8,933       8,756         8,844      8,609                
Net income per common share, basic                     $  .20      $  .16        $ 0.62     $ 0.71                
                                                       ======      ======        ======     ======                
                                                                                                                  
DILUTED:                                                                                                          
Weighted average common stock outstanding,                                                                        
   net of treasury stock, end of period                 8,933       8,756         8,844      8,609                
Weighted average common stock equivalents                 899       1,219           930      1,045                
                                                       ------      ------        ------     ------
Weighted average common stock outstanding,                                                                        
   net of treasury stock, end of period                 9,832       9,975         9,774      9,654                
Net income per common share, diluted                   $  .18      $  .14        $ 0.57     $ 0.63                
                                                       ======      ======        ======     ======                
                                                            
<CAPTION>

8.       The Company's total comprehensive income was as follows:



(In thousands)                                         Three Months Ended        Nine Months Ended
                                                            Dec. 31,                  Dec. 31,
                                                        1998        1997          1998       1997
                                                       ------      ------        ------     ------
<S>                                                    <C>         <C>           <C>        <C>   

Net income                                             $1,746      $1,383        $5,523     $6,129

Other comprehensive expense, net of tax:
 Currency translation adjustment                           --          --            --        225
                                                       ------      ------        ------     ------
Total other comprehensive expense                          --          --            --        225
                                                       ------      ------        ------     ------
Total comprehensive income                             $1,746      $1,383        $5,523     $6,354

</TABLE>


9.       During the three months ended December 31, 1998, the Company borrowed
$5 million under the Company's $7.5 million collateralized revolving credit
facility. Under the terms of this facility, which is collateralized by certain
assets of the Company, the Company is required to repay all principal balances
on March 31, 2001. The interest rate is tied to the Company's funded debt to
EBITDA ratio and averaged 7.75% during the three months ended December 31, 1998.

10.      On January 11, 1999, the Company's common stock began trading on the
Nasdaq National Market under the symbol PLMD. Previously, the Company's common
stock had traded on the American Stock Exchange under the symbol PM.




                                        9


<PAGE>   10


11.      Many older computer software programs refer to years in terms of their
final two digits only. Such programs may interpret the year 2000 to mean the
year 1900 instead. If not corrected, those programs could cause date-related
transaction failures.

         The Company is currently addressing this concern. It has performed a
detailed assessment of all internal computer systems and, as discussed below, is
developing and implementing plans to correct any problems. The Company expects
these projects to be successfully completed during the remainder of 1999.

         Year 2000 problems could affect production, distribution, financial,
administrative and communication operations. Systems critical to the Company's
business which have been identified as non-Year 2000 compliant are either being
replaced or corrected through programming modifications or upgrades. In
addition, the Company is addressing Year 2000 readiness from other aspects of
the business, including customer order-taking, manufacturing, raw materials
supply and plant process equipment. The Company intends to have remediated and
replaced systems operational by June 1999 to allow time for testing and
verification. In addition to the Company's in-house efforts, the Company is in
the process of asking vendors, major customers, service suppliers,
communications providers and banks whose systems failures potentially could have
a significant impact on operations to verify Year 2000 readiness. The Company is
testing such systems where appropriate and possible. The Company does not have
any Year 2000 contingency plan.

         External and internal costs specifically associated with modifying
internal use software for Year 2000 compliance are expensed as incurred. To
date, expenditures related to the Year 2000 problem have not been material. Such
costs do not include normal system upgrades and replacements. The Company does
not expect the future costs relating to Year 2000 remediation to have a material
effect on its results of operations or financial condition.

         The above expectations are subject to uncertainties. For example, if
the Company is unsuccessful in identifying or fixing all Year 2000 problems in
its critical operations, or if it is affected by the inability of suppliers or
major customers (such as a large drug wholesaler or distributor) to continue
operations due to such a problem, its results of operations or financial
condition could be materially impacted.

         The total costs that the Company incurs in connection with the Year
2000 problems will be influenced by its ability to successfully identify Year
2000 systems' flaws, the nature and amount of programming required to fix the
affected programs, the related labor and/or consulting costs for such
remediation, and the ability of third parties with whom the Company has business
relationships to successfully address their own Year 2000 concerns. These and
other unforeseen factors could have a material adverse effect on the results of
operations or financial condition.

         The estimates and conclusions herein contain forward-looking statements
and are based on management's best estimates of future events. Risks to
completing the plan include the availability of resources, the Company's ability
to discover and correct the potential Year 2000 sensitive problems which could
have a serious impact on specific facilities, and the ability of suppliers to
bring their systems into Year 2000 compliance.

12.      Certain amounts in the prior period financial statements have been
reclassified to conform with the current year presentation.




                                       10


<PAGE>   11



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

OVERVIEW

Business

         PolyMedica is a leading provider of targeted medical products and
services primarily focused in the diabetes supplies and consumer healthcare
markets. PolyMedica sells diabetes supplies through its wholly-owned subsidiary,
Liberty Medical Supply, Inc. Liberty Medical is the leading patient-focused,
direct to consumer distributor of more than 200 name-brand diabetes products to
insulin and non-insulin using, Medicare-eligible seniors with diabetes.
PolyMedica also holds a leading position in the over-the-counter urinary health
market and distributes a broad range of other medical products, including
digital thermometers and compliance products, primarily to food and drug
retailers and mass merchandisers nationwide. The Company also markets,
manufactures and distributes a line of prescription urological and suppository
products.

Diabetes Supplies

         Liberty Medical is the leading direct to consumer distributor of
diabetes testing supplies to patients covered by Medicare. Liberty Medical
provides a simple, reliable way for seniors to obtain their diabetes testing
supplies and the related Medicare and insurance benefits to which they are
entitled. Liberty Medical offers a wide array of products from a full range of
name-brand manufacturers, contacts the patient's doctor to obtain the required
prescription information and written documentation, files the appropriate
insurance forms and bills Medicare and private insurers directly. This service
frees the patient from paying for his or her diabetes-related upfront expense,
and offers the convenience of free home delivery of supplies.

         In July 1998, the Company began shipping diabetes supplies to
non-insulin using seniors covered for the first time by Medicare. Many of the
customer orders shipped were from the Company's database of seniors who had
previously contacted the Company in response to its television advertising.

         Effective July 1, 1998 and October 1, 1998, Medicare instituted certain
changes in Type II coverage and reimbursement policy, respectively. See "Factors
Affecting Future Operating Results Healthcare Reimbursement" for further
discussion.

Consumer Healthcare

         The Company's consumer healthcare products are focused on three areas:
female urinary tract discomfort, digital thermometers and medication compliance
products. In the urinary tract discomfort area, the Company's products are
AZO-STANDARD(R), which provides relief from urinary tract discomfort, and
AZO-CRANBERRY(R), a dietary supplement which helps maintain a healthy urinary
tract. In January 1998, the Company introduced AZO Test Strips(TM), an in-home
urinary tract infection testing kit.

         The Company's consumer healthcare products also include digital,
digital flexible tip, basal and glass thermometers, as well as approximately 40
other home-use diagnostic and compliance products. PolyMedica has patented and
introduced a new Flexible Tip Thermometer with Fever




                                       11


<PAGE>   12


Alarm(TM) that first became available for the 1997-1998 cough and cold season.
The Company custom manufactures and/or distributes its other consumer healthcare
products under private label and under the brand names of BASIS(R), MEDI-AID(R),
PolyMedica and PeeDee Dose(TM).

Professional Products

         PolyMedica's professional products represent one of the broadest lines
of prescription urology products excluding anti-infectives, available, including
urinary analgesics, anti-spasmodics, local anesthetics and suppositories.
URISED(R), CYSTOSPAZ(R) and CYSTOSPAZ-M(R) analgesics and anti-spasmodics
provide effective symptomatic relief for urinary pain, burning and spasms. Many
urology offices, as well as hospitals, purchase the local anesthetic
ANESTACON(R) for use in diagnostic procedures and the catheterization process.
B&O(R) and AQUACHLORAL(R) suppositories are used by patients unable to tolerate
oral dosages of systemic analgesics and sedatives.

Other

         On January 11, 1999, the Company's common stock began trading on the
Nasdaq National Market under the symbol PLMD. Previously, the Company's common
stock had traded on the American Stock Exchange under the symbol PM.

         In accordance with Statement of Position 93-7, direct-response
advertising and related costs for all periods presented are capitalized and
amortized to selling, general and administrative expense 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. Revenues generated from new customers as a result of
direct-response advertising have historically resulted in a revenue stream
lasting seven years. Management has selected a more conservative four-year
amortization period. 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 benefits expected to result directly from such advertising.

         Although the use of certain of the Company's products is somewhat
seasonal in nature, the Company does not believe its net product sales, in the
aggregate, are generally subject to material seasonal fluctuations.

         The Company operates from manufacturing and distribution facilities
located in Massachusetts, Florida and Colorado. Virtually all of the Company's
product sales are denominated in U.S. dollars. The Company's research and
development activities are funded from ongoing operations and relate to the
manufacture of pharmaceutical products.

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






                                       12


<PAGE>   13


RESULTS OF OPERATIONS

Three Months Ended December 31, 1998 Compared to Three Months Ended December 31,
1997

         Total net product sales increased by 39.3% to $28.79 million in the
three months ended December 31, 1998, as compared with $20.67 million in the
three months ended December 31, 1997. This increase is primarily the result of
the increase in Liberty Medical sales.

         Net product sales of diabetes supplies increased by 52.2% to $22.09
million in the three months ended December 31, 1998, as compared with $14.52
million in the three months ended December 31, 1997. This growth is primarily
due to larger than anticipated first-time shipments to non-insulin using (Type
II) diabetics and increased shipments to existing insulin using (Type I)
diabetic customers. Liberty Medical sales gains during the third quarter further
strengthened its position as the leading direct to consumer distributor of
diabetes testing supplies to seniors. The number of seniors with diabetes
covered by Medicare more than doubled on July 1, 1998 when Medicare
reimbursement was extended to Type II diabetics, a group of approximately 2
million patients.

         Net product sales of consumer healthcare products increased by 21.2% to
$4.13 million in the three months ended December 31, 1998, as compared with
$3.41 million in the three months ended December 31, 1997. Sales of both the AZO
product line and advanced thermometry products increased during the three months
ended December 31, 1998. The Company added to its product line by introducing
AZO Test Strips in January 1998, sales of which were not included in the three
months ended December 31, 1997.

         In the professional products group, there was $45,000 of non-recurring
net product sales of the Company's institutional wound care products in the
three months ended December 31, 1997. Excluding the wound care product sales,
net product sales decreased by 4.7% to $2.57 million in the three months ended
December 31, 1998, as compared with $2.69 million in the three months ended
December 31, 1997.

         As a percentage of net product sales, overall gross margins were 51.5%
in the three months ended December 31, 1998 and 50.6% in the three months ended
December 31, 1997. Gross margins in the three months ended December 31, 1998
increased due to an improved gross margin on sales of diabetes related products.

         As a percentage of net product sales, selling, general and
administration expenses ("SG&A expenses") were 39.4% for the three months ended
December 31, 1998 as compared with 37.9% for the three months ended December 31,
1997. SG&A expenses increased by 44.8% in the three months ended December 31,
1998 to $11.35 million as compared with $7.84 million in the three months ended
December 31, 1997. This dollar increase is primarily attributable to SG&A
expenses related to the expansion of Liberty Medical.

         Investment income decreased by 40.0% to $105,000 in the three months
ended December 31, 1998 as compared with $175,000 in the three months ended
December 31, 1997 as the Company earned interest on lower average cash balances
due to investments in direct-response advertising and Liberty Medical
infrastructure. Interest expense decreased by 5.7% to $627,000 in the three
months ended December 31, 1998, as compared with $665,000 in the three months
ended December 31, 1997, primarily reflecting lower outstanding principal on the
Guaranteed Senior Secured Notes due




                                       13


<PAGE>   14


January 31, 2003 (the "Hancock Notes") to the John Hancock Mutual Life Insurance
Company ("Hancock").

         Pretax income was $2.91 million in the three months ended December 31,
1998, which compares to $2.10 million in the three months ended December 31,
1997. The Company's net income was $1.75 million, or $0.18 per diluted common
share, in the three months ended December 31, 1998. This performance compares
with net income of $1.38 million, or $0.14 per diluted common share, in the
three months ended December 31, 1997.

Nine Months Ended December 31, 1998 Compared to Nine Months Ended December 31,
1997

         Total net product sales increased by 42.1% to $74.28 million in the
nine months ended December 31, 1998, as compared with $52.27 million in the nine
months ended December 31, 1997. This increase is primarily the result of the
increase in Liberty Medical sales.

         Net product sales of diabetes supplies increased by 67.8% to $56.51
million in the nine months ended December 31, 1998, as compared with $33.69
million in the nine months ended December 31, 1997. This growth is primarily due
to larger than anticipated first-time shipments to non-insulin using (Type II)
diabetics since July 1, 1998 and increased shipments to existing insulin using
(Type I) diabetic customers.

         Net product sales of consumer healthcare products increased by 28.6% to
$10.55 million in the nine months ended December 31, 1998 as compared with $8.20
million in the nine months ended December 31, 1997. Sales of both the AZO
product line and advanced thermometry products increased during the nine months
ended December 31, 1998. The Company has added to its product line by
introducing AZO Test Strips in January 1998, sales of which were not included in
the nine months ended December 31, 1997.

         In the professional products group, there was $1.07 million
non-recurring net product sales of the Company's institutional wound care
products in the nine months ended December 31, 1997. Excluding the wound care
product sales, recurring net product sales decreased by 22.5% to $7.21 million
in the nine months ended December 31, 1998, as compared with $9.31 million in
the nine months ended December 31, 1997. Certain assets of the wound care
division were sold in July 1997. The decrease in professional products sales is
primarily due to additional shipments of URISED in the nine months ended
December 31, 1997, which was the result of a reduction in the supply of generic
products by the unexpected exit of a major supplier in the marketplace during
that period.

         As a percentage of net product sales, overall gross margins were 51.8%
in the nine months ended December 31, 1998 and 52.3% in the nine months ended
December 31, 1997. Gross margins in the nine months ended December 31, 1998
decreased due to the inclusion of a higher percentage of diabetes related
products, for which gross margins are lower than the company average for
products sold in the three months ended December 31, 1998.

         As a percentage of net product sales, SG&A was 39.4% for the nine
months ended December 31, 1998 as compared with 39.1% for the nine months ended
December 31, 1997. SG&A expenses increased by 43.2% in the nine months ended
December 31, 1998 to $29.23 million as compared with $20.41 million in the nine
months ended December 31, 1997. This dollar increase is primarily attributable
to SG&A expenses related to the expansion of Liberty Medical.




                                       14


<PAGE>   15


         Research and development expenses were $152,000 in the nine months
ended December 31, 1998 as compared with $236,000 in the nine months ended
December 31, 1997. This decrease in research and development costs is a result
of the Company's July 1997 sale of certain assets related to its wound care
business, which was more research and development intensive than the Company's
other businesses.

         Investment income decreased by 29.4% to $358,000 in the nine months
ended December 31, 1998 as compared with $507,000 in the nine months ended
December 31, 1997 as the Company earned interest on lower average cash balances
due to investments in direct-response advertising and in Liberty Medical
infrastructure. Interest expense decreased by 8.1% to $1.88 million in the nine
months ended December 31, 1998 as compared with $2.04 million in the nine months
ended December 31, 1997, primarily reflecting lower outstanding principal on the
Hancock Notes.

         In July 1998, the Company realized $1.6 million in cash from Innovative
Technologies Group plc ("IT") pursuant to a prepayment agreement as full and
final settlement of a $4 million unsecured promissory note issued to the Company
in connection with the July 1997 sale to IT of certain assets related to the
Company's wound care business. The $1.6 million cash received, net of related
expenses, is recorded as Other Income in the nine months ended December 31,
1998.

         The Company recorded $1.60 million and $4.13 million pretax gains from
the sale of the wound care business in the nine months ended December 31, 1998
and 1997, respectively. Excluding these gains, pretax income was $7.61 million
and $5.16 million in the nine months ended December 31, 1998 and 1997,
respectively. Total pretax income was $9.21 million in the nine months ended
December 31, 1998, which compares to $9.29 million in the nine months ended
December 31, 1997.

         The Company recorded $958,000 and $2.72 million after-tax gains from
the sale of the wound care business in the nine months ended December 31, 1998
and 1997, respectively. Excluding the gain described above, net income was $4.57
million, or $0.47 per diluted common share, in the nine months ended December
31, 1998. This performance compares to net income of $3.41 million, or $0.35 per
diluted common share, in the nine months ended December 31, 1997. The Company's
total net income was $5.52 million, or $0.57 per diluted common share, in the
nine months ended December 31, 1998. This performance compares with net income
of $6.13 million, or $0.63 per diluted common share, in the nine months ended
December 31, 1997.

LIQUIDITY AND CAPITAL RESOURCES

         Since its inception, the Company has raised $53.46 million in gross
equity capital, of which $7.16 million was from venture capital financings
before the Company's initial public offering, $39.00 million from its March 1992
initial public offering, $4.55 million from a November 1995 public offering of
700,000 shares of common stock, and $2.75 million from the March 1996 sale of
431,937 shares of its common stock pursuant to Regulation S promulgated under
the Securities Act of 1933. In January 1993, the Company sold to Hancock the
Hancock Notes.

         As of December 31, 1998, working capital was $32.49 million, as
compared with working capital of $21.07 million and $18.42 million as of March
31, 1998 and December 31, 1997, respectively. Cash and cash equivalents were
$9.16 million and $6.44 million as of December 31 and March 31, 1998,
respectively.




                                       15


<PAGE>   16
         During the three months ended December 31, 1998, the Company borrowed
$5 million under the Company's $7.5 million collateralized revolving credit
facility. Under the terms of this facility, the Company is required to repay all
principal balances on March 31, 2001. This facility is collateralized by certain
assets of the Company. Under this facility, the Company is obligated to maintain
certain financial covenants. The interest rate is tied to the Company's funded
debt to EBITDA ratio and averaged 7.75% during the three months ended December
31, 1998.

         Accounts receivable -- trade was $29.18 million and $21.21 million as
of December 31 and March 31, 1998, respectively. As of December 31, 1998,
Liberty Medical's gross unbilled receivables included in accounts receivable -
trade were $19.25 million. This increase in the unbilled receivables balance as
of December 31, 1998 is a result of record shipments by Liberty Medical during
the three months ended December 31, 1998.

         The Company expects that its current working capital, revolving credit
facility and funds generated from future operations will be adequate to meet its
liquidity and capital requirements for current operations. In the event that the
Company undertakes to make acquisitions of complementary businesses or products,
the Company may require substantial additional funding beyond currently
available working capital and funds generated from operations. Currently, the
Company is conducting an active search for the strategic acquisition of
complementary businesses or products. The Company has no present commitments or
agreements with respect to any such acquisition.

YEAR 2000 COMPLIANCE

         The Company has conducted a review of its computer systems to identify
the systems that are affected by the year 2000 problem. The year 2000 problem is
the result of computer programs being written using two digits rather than four
to define the applicable year, which may result in some programs being unable to
recognize the year 2000 in date fields, or recognizing it as the year 1900,
resulting in malfunctions and system failures. The Company is in the process of
upgrading its systems in an effort to make more detailed data available on a
system wide basis in a timely manner. Such costs will be capitalized and
amortized over the useful life of the new software. The Company believes that
with planned modifications to existing software and conversions, the year 2000
issue will not pose significant operational problems for the Company's computer
systems. The Company will continue to address any further year 2000 issues and
believes that any costs relating to such issues will not be material to the
Company's financial condition or results of operations. (See Note 11 in "Notes
to Consolidated Financial Statements.")

FACTORS AFFECTING FUTURE OPERATING RESULTS

         The statements contained in this Report 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,
including, but not limited to, statements regarding the Company's expectations,
hopes, intentions or strategies regarding the future. Forward-looking statements
include, among others: statements regarding future benefits from the Company's
advertising and promotional expenditures; statements regarding future product
revenue levels; statements regarding product development, introduction and
marketing; and statements regarding future acquisitions; and statements
regarding Year 2000 compliance. All forward-looking statements included in this
Report are based on information available to the Company on the date hereof, and
the Company assumes no obligation to update any such forward-looking statements.
It is important to note that the Company's actual results could differ
materially from those in such forward-looking statements.



                                       16


<PAGE>   17
         The future operating results of the Company remain difficult to
predict. The Company continues to face many risks and uncertainties which could
affect its operating results, including without limitation, those described
below.

         Healthcare Reimbursement

         Political, economic and regulatory influences are resulting in
fundamental changes in the healthcare industry in the United States. The Company
anticipates that Congress and state legislatures will continue to review and
assess alternative healthcare delivery systems and payment methods. Sales of a
large portion of the Company's products depend to a significant extent on the
availability of reimbursement to the Company's customers by government and
private insurance plans.

         Any further reduction in the reimbursement provisions currently in
effect for the Company's diabetes supplies products which are reimbursable under
Medicare would reduce the Company's revenues and earnings.

         The processing of third-party reimbursements is a labor-intensive
effort, and delays in processing claims for reimbursement may increase working
capital requirements. Final determination of reimbursements are subject to audit
by Medicare. Medicare audits of the Company to date have not resulted in any
significant adjustments. Future audits may, however, result in retroactive
adjustments for past charges for products and services, and such adjustments
could affect the future operations and earnings of the Company.

         Effective October 1, 1998, new Medicare reimbursement guidelines
generally provide that quarterly orders of diabetes supplies to existing
customers must be administratively verified before shipment and that all doctors
orders for diabetic supplies are valid for a period of six months. In addition,
the new regulations require that Type I Medicare diabetic customers who test
more frequently than three times per day or Type II Medicare diabetic customers
who test more frequently than one time per day visit their physician every six
months and maintain a 30-day log book for compliance.

         The Company's customer service department, as part of its ongoing
administrative contact with existing customers to obtain approval documents and
answer product questions, will continue to determine testing supply levels and
verify compliance testing and the renewal of doctors orders. Management is
currently evaluating the effects of implementing these new guidelines.

         Ability to Manage Growth

         The Company has expanded its operations rapidly, which has created
significant demands on the Company's systems, its administrative, operational,
development and financial personnel and its other resources. Additional
expansion by the Company may further strain the Company's management, financial
and other resources, including its working capital resources, as a result of
delays in processing claims for third-party reimbursement. Although the Company
has recently upgraded its systems and other steps have been taken to address
these issues, there can be no assurance that such steps will be effective.



                                       17


<PAGE>   18

         Direct-Response Advertising

         In accordance with Statement of Position 93-7, direct-response
advertising and related costs for all periods presented are capitalized and
amortized to selling, general and administrative expense 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. Revenues generated from new customers as a result of direct-response
advertising have historically resulted in a revenue stream lasting seven years.
Management has selected a more conservative four-year amortization period.
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 benefits
expected to result directly from such advertising. The Company can expect
fluctuations in its advertising costs to attract and retain new customers. The
Company expects that it will continue to incur substantial direct-response
advertising and related costs in connection with the further expansion of its
diabetes supplies business.

         Competition

         The Company is engaged in rapidly evolving and highly competitive
fields. Competition from other sellers of diabetes supplies, manufacturers of
healthcare products, pharmaceutical companies and other competitors is intense
and expected to increase. Many of these companies have substantially greater
capital resources, research and development staffs, facilities and experience in
marketing and distribution of products than does the Company. There can be no
assurance that the Company's competitors will not succeed in developing products
and services that are more effective than any that are being developed or sold
by the Company.

         The Company believes that the principal competitive factors in the
healthcare products industry include the ability to identify and respond to
customer needs, quality and breadth of service and product offerings, price and
technical expertise. The Company believes that its ability to compete also
depends in part on a number of competitive factors outside its control,
including the ability to hire and retain employees, the development by others of
products and services that are competitive with the Company's products and
services, the price at which others offer comparable products and services and
the extent of its competitors' responsiveness to customer needs.

         Dependence on Reorders - Change in Demand for Diabetes Supplies

         The Company generally incurs negative cash flow with respect to the
first order for its diabetes supplies from a customer due primarily to customer
acquisition costs, including advertising and Medicare and secondary insurance
compliance costs. Accordingly, the profitability of the Company's diabetes
supplies business depends on recurring orders. Reorder rates are inherently
uncertain and are subject to several factors, many of which are outside of the
Company's control, including customer shifts to nursing homes or other forms of
managed care, customer mortality, changing customer preferences, customer
approvals of quarterly orders, general economic conditions and customer
satisfaction. Furthermore, efforts are underway to improve treatment of, and to
seek a cure for, diabetes. Significant developments in either area could
substantially reduce or eliminate the demand for the diabetes supplies sold by
the Company.



                                        18


<PAGE>   19


         Dependence on Suppliers

         The Company purchases several of its consumer healthcare products,
including its thermometers, from suppliers based in the People's Republic of
China, usually using molds and tooling owned by or committed exclusively to the
Company. To date, the Company has not experienced difficulties in obtaining
timely delivery from these suppliers. Although the Company believes there are
alternate sources available for these products, there can be no assurance that
the Company would be able to acquire products from other sources on a timely or
cost-effective basis in the event current foreign suppliers were unable to
supply these products on a timely basis.

         Although the Company has three long-term purchase contracts with
respect to its diabetes supplies business, it operates principally on a
purchase-order basis. Each of the Company's over-the-counter products for
urinary tract discomfort and urinary tract health is manufactured by a single
supplier. Some of the Company's professional products also are manufactured by
single suppliers. PolyMedica is currently taking steps to provide alternate
sources of supply for both of these lines of products, but such efforts are not
yet complete.

         Dependence on Single Manufacturing Facility for Professional Products

         A majority of the Company's professional products are manufactured at
its headquarters facility in Woburn, Massachusetts. While the Company maintains
business interruption insurance, any prolonged inability to utilize this
facility as a result of fire, natural disaster or other event would have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company complies with Good Manufacturing Practices
("GMP") regulations, prescribed by the Food and Drug Administration ("FDA"), in
its internal manufacturing facilities. The FDA enforces the GMP regulations
through its plant inspection program. If the Company fails to comply with GMP
regulations, the Company could be required to make material expenditures and
could experience manufacturing delays to return to compliance.

         Product Liability

         The testing, manufacturing, marketing and sale of medical and consumer
products entail an inherent risk that product liability claims will be asserted
against the Company or its third-party distributors. Certain manufacturers of
healthcare products have been subjected to significant claims for damages
allegedly resulting from their products. The Company currently maintains product
liability insurance coverage which it believes to be adequate for its present
purposes, but there can be no assurance that in the future the Company will be
able to maintain such coverage on acceptable terms or that current insurance or
insurance subsequently obtained will provide adequate coverage against any or
all potential claims.

         Reliance on Distributors for Consumer Healthcare and Professional
         Products; Limited Direct Marketing Experience

         The Company has a limited direct marketing and sales organization, and
relies on its current distributors, for the sale of consumer healthcare and
professional products. The Company's ability to sell its consumer healthcare and
professional products will depend in part on its ability to enter into marketing
and distribution agreements with pharmaceutical, medical device, personal care
and other 





                                       19


<PAGE>   20


distributors in the United States and other countries. If the Company enters
into any such agreements, there can be no assurance that the Company's
third-party distributors will be able to market the Company's products
effectively.

         Integration of Other Businesses, Products and Technologies

         As part of its growth strategy, the Company currently intends to expand
through the acquisition of other businesses, products and technologies. The
Company regularly reviews such potential acquisitions, some of which may be
material. There can be no assurance that the Company will successfully acquire
any businesses, products or technologies, or that any such acquired businesses,
products or technologies will be profitable. The Company does not currently have
any commitments or agreements with respect to any such acquisition.

         Government Regulation

         Certain aspects of the Company's business are subject to federal and
state regulation. Federal regulation covers, among other things, reimbursement
for diabetes testing supplies and the manufacturing, distribution and sale of
the Company's drugs and medical devices. The Company believes that its
operations comply with applicable federal and state laws and regulations in all
material respects. However, changes in the law or new interpretations of
existing laws could have a material adverse effect on the market for the
Company's products and services on permissible activities of the Company, and
the relative costs associated with doing business.





                                       20


<PAGE>   21
                           PART II - OTHER INFORMATION

                             POLYMEDICA CORPORATION



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)      See Exhibit Index immediately following this report and incorporated
         herein by reference.

(b)      There were no reports on Form 8-K filed during the three months ended
         December 31, 1998.



                                       21


<PAGE>   22


                                   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/ Steven J. Lee 
                                        ---------------------------------------
                                        Steven J. Lee
                                        Chairman and Chief Executive Officer
                                        (Principal Executive Officer)




                                        /s/ Eric G. Walters
                                        ---------------------------------------
                                        Eric G. Walters
                                        Chief Financial Officer, Treasurer,
                                        and Clerk (Principal Financial and
                                        Accounting Officer)





Dated: January 25, 1999


                                       22


<PAGE>   23
                                  EXHIBIT INDEX

                             POLYMEDICA CORPORATION



Exhibit                            Description
-------                            -----------


10.69  -  Letter Agreement dated November 2, 1998 between the Registrant and 
          John Hancock Mutual Life Insurance Company.

 27.1  -  Financial Data Schedule - Nine Months Ended December 31, 1998.

 27.2  -  Financial Data Schedule - Restated Nine Months Ended December 31, 
          1997.