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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 September 30, 2003

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 [  ]

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
October 31, 2003, there were 25,556,171 shares of the registrants
Common Stock issued and outstanding and an additional 320 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 4. Submission of Matters to a Vote of Security Holders                                  
|                                                | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                     
|Exhibit Index                                  
|EX-10.1 LETTER AGREEMENT - JOHN K.P. STONE     
|EX-10.2 LETTER AGREEMENT - WARREN K. TROWBRIDGE
|EX-10.3 LETTER AGREEMENT - STEPHEN C. FARRELL  
|EX-31.1 SECT. 302 CERTIFICATION OF C.E.O.      
|EX-31.2 SECT. 302 CERTIFICATION OF C.F.O.      
|EX-32.1 SECT. 906 CERTIFICATION                



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POLYMEDICA CORPORATION
TABLE OF CONTENTS

|              |  |                                                                                       |                                                                                                      |  |    |      |  | 
|------------- |  | ------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------- |  | -- | ---- |  | 
|              |  |                                                                                       |                                                                                                      |  |    | Page
|              |  |                                                                                       |                                                                                                      |  |    |     
|PART I -      |  | FINANCIAL INFORMATION                                                                 |                                                                                                      |  |    |     
|Item 1 -      |  | Financial Statements (unaudited)                                                      |                                                                                                      |  |    |     
|              |  |                                                                                       | Consolidated Balance Sheets as of September 30 and March 31, 2003                                    |  |    | 3    | 
|              |  |                                                                                       | Consolidated Statements of Operations for the three and six months ended September 30, 2003 and 2002 |  |    | 5    | 
|              |  |                                                                                       | Consolidated Statements of Cash Flows for the six months ended September 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                            |                                                                                                      |  | 33 |     
|Item 4 -      |  | Controls and Procedures                                                               |                                                                                                      |  | 34 |     
|PART II -     |  | OTHER INFORMATION                                                                     |                                                                                                      |  |    |     
|Item 1 -      |  | Legal Proceedings                                                                     |                                                                                                      |  | 35 |     
|Item 4 -      |  | Submission of Matters to a Vote of Security Holders                                   |                                                                                                      |  | 36 |     
|Item 6 -      |  | Exhibits and Reports on Form 8-K                                                      |                                                                                                      |  | 36 |     
|Signatures    |  |                                                                                       | 37                                                                                                   | 
|Exhibit Index |  |                                                                                       | 38                                                                                                   | 

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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)

|                                          |  |                                                                                                                    |                      |   |               |         |           |   |        |         | 
|----------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------ | -------------------- | - | ------------- | ------- | --------- | - | ------ | ------- | 
|                                          |  |                                                                                                                    |                      |   | September 30, |         | March 31,
|                                          |  |                                                                                                                    |                      |   | 2003          |         | 2003     
|                                          |  |                                                                                                                    |                      |   |               |         |          
|ASSETS                                    |  |                                                                                                                    |                      |   |               |         |           |  
|Current assets:                           |  |                                                                                                                    |                      |   |               |         |           |  
|                                          |  | Cash and cash equivalents                                                                                          |                      | $ | 35,577        |         |           | $ | 27,162 |        
|                                          |  | Investments                                                                                                        |                      |   | 7,381         |         |           |   | 1,442  |        
|                                          |  | Accounts receivable (net of allowances of
$26,498 and $22,556 as of September
30 and March 31, 2003, respectively) |                      |   | 49,451        |         |           |   | 61,168 |        
|                                          |  | Inventories (Note 3)                                                                                               |                      |   | 16,905        |         |           |   | 18,850 |        
|                                          |  | Deferred income taxes                                                                                              |                      |   | 13,960        |         |           |   | 13,960 |        
|                                          |  | Prepaid expenses and other current assets                                                                          |                      |   | 5,983         |         |           |   | 3,438  |        
|                                          |  |                                                                                                                    |                      |   |               |         |           |  
|                                          |  |                                                                                                                    | Total current assets |   |               | 129,257 |           |   |        | 126,020 | 
|Property, plant and equipment, net        |  |                                                                                                                    | 59,954               |   |               |         | 53,304    |  
|Goodwill (Note 4)                         |  |                                                                                                                    | 5,946                |   |               |         | 5,946     |  
|Intangible assets, net                    |  |                                                                                                                    | 207                  |   |               |         | 108       |  
|Direct-response advertising, net (Note 5) |  |                                                                                                                    | 71,772               |   |               |         | 64,061    |  
|Other assets                              |  |                                                                                                                    | 1,990                |   |               |         | 1,530     |  
|                                          |  |                                                                                                                    |                      |   |               |         |           |  
|                                          |  |                                                                                                                    | Total assets         |   | $             | 269,126 |           |   | $      | 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)

|                                              |                                                                                                                                                   |                                            |        |               |         |           |        |         |         | 
|--------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ------------- | ------- | --------- | ------ | ------- | ------- | 
|                                              |                                                                                                                                                   |                                            |        | September 30, |         | March 31,
|                                              |                                                                                                                                                   |                                            |        | 2003          |         | 2003     
|                                              |                                                                                                                                                   |                                            |        |               |         |          
|LIABILITIES AND SHAREHOLDERS EQUITY          |                                                                                                                                                   |                                            |        |               |         |           |        |        
|Current liabilities:                          |                                                                                                                                                   |                                            |        |               |         |           |        |        
|                                              | Accounts payable                                                                                                                                  |                                            | $      | 3,449         |         |           | $      | 12,576  |        
|                                              | Accrued expenses (Note 7)                                                                                                                         |                                            |        | 19,021        |         |           |        | 17,003  |        
|                                              | Current portion, capital lease obligations and note payable                                                                                       |                                            |        | 872           |         |           |        | 2,310   |        
|                                              |                                                                                                                                                   |                                            |        |               |         |           |        |        
|                                              |                                                                                                                                                   | Total current liabilities                  |        |               | 23,342  |           |        |         | 31,889  | 
|Long-term capital lease and other obligations |                                                                                                                                                   |                                            | 2,284  |               |         |           | 1,877  |        
|Deferred income taxes                         |                                                                                                                                                   |                                            | 20,528 |               |         |           | 20,528 |        
|                                              |                                                                                                                                                   |                                            |        |               |         |           |        |        
|                                              |                                                                                                                                                   | Total liabilities                          |        |               | 46,154  |           |        |         | 54,294  | 
|Commitments and contingencies (Note 8)        |                                                                                                                                                   |                                            |        |               |         |           |        |        
|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; 25,359,056 and 24,920,488 issued as of
September 30 and March 31, 2003, respectively |                                            |        | 254           |         |           |        | 249     |        
|                                              | Treasury stock, at cost (1,340 and 349,310 shares as of
September 30 and March 31, 2003, respectively)                                            |                                            |        | (27           | )       |           |        | (7,149  | )      
|                                              | Deferred compensation                                                                                                                             |                                            |        | (52           | )       |           |        | (54     | )      
|                                              | Additional paid-in capital                                                                                                                        |                                            |        | 107,483       |         |           |        | 105,341 |        
|                                              | Retained earnings                                                                                                                                 |                                            |        | 115,314       |         |           |        | 98,288  |        
|                                              |                                                                                                                                                   |                                            |        |               |         |           |        |        
|                                              |                                                                                                                                                   | Total shareholders equity                 |        |               | 222,972 |           |        |         | 196,675 | 
|                                              |                                                                                                                                                   |                                            |        |               |         |           |        |        
|                                              |                                                                                                                                                   | Total liabilities and shareholders equity |        | $             | 269,126 |           |        | $       | 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 |      | Six Months Ended
|                                                                                              |                          |         |         | Sept. 30,          |      | Sept. 30,        |        | Sept. 30, |      | Sept. 30,
|                                                                                              |                          |         |         | 2003               |      | 2002             |        | 2003      |      | 2002     
|                                                                                              |                          |         |         |                    |      |                  |        |           |      |          
|Net revenues                                                                                  |                          | $       | 105,222 |                    |      | $                | 88,012 |           |      | $         | 204,159 |     |      | $ | 169,613 |    
|Cost of sales                                                                                 |                          |         | 38,260  |                    |      |                  | 31,208 |           |      |           | 74,029  |     |      |   | 60,065  |    
|                                                                                              |                          |         |         |                    |      |                  |        |           |      |           |         |     |      |   |         |    
|Gross margin                                                                                  |                          |         | 66,962  |                    |      |                  | 56,804 |           |      |           | 130,130 |     |      |   | 109,548 |    
|Selling, general and administrative expenses                                                  |                          |         | 47,583  |                    |      |                  | 40,977 |           |      |           | 93,071  |     |      |   | 79,005  |    
|                                                                                              |                          |         |         |                    |      |                  |        |           |      |           |         |     |      |   |         |    
|Income from operations                                                                        |                          |         | 19,379  |                    |      |                  | 15,827 |           |      |           | 37,059  |     |      |   | 30,543  |    
|Other income and expense:                                                                     |                          |         |         |                    |      |                  |        |           |      |           |         |     |      |   |         |    
|                                                                                              | Investment income/(loss) |         |         | 104                |      |                  |        | (12       | )    |           |         | 327 |      |   |         | 32  |      
|                                                                                              | Interest expense         |         |         | (20                | )    |                  |        | (34       | )    |           |         | (37 | )    |   |         | (70 | )    
|                                                                                              | Other expense            |         |         | (10                | )    |                  |        |          |      |           |         | (53 | )    |   |         | (12 | )    
|                                                                                              |                          |         |         |                    |      |                  |        |           |      |           |         |     |      |   |         |    
|                                                                                              |                          |         | 74      |                    |      |                  | (46    | )         |      |           | 237     |     |      |   | (50     | )  
|Income before income taxes                                                                    |                          |         | 19,453  |                    |      |                  | 15,781 |           |      |           | 37,296  |     |      |   | 30,493  |    
|Income tax provision                                                                          |                          |         | 7,353   |                    |      |                  | 5,965  |           |      |           | 14,098  |     |      |   | 11,526  |    
|                                                                                              |                          |         |         |                    |      |                  |        |           |      |           |         |     |      |   |         |    
|Income before cumulative effect of
change in accounting principle                             |                          |         | 12,100  |                    |      |                  | 9,816  |           |      |           | 23,198  |     |      |   | 18,967  |    
|Cumulative effect of change in accounting
principle, net of taxes of $9,187 (Note 4)          |                          |         |        |                    |      |                  |       |           |      |           |        |     |      |   | (14,615 | )  
|                                                                                              |                          |         |         |                    |      |                  |        |           |      |           |         |     |      |   |         |    
|Net income                                                                                    |                          | $       | 12,100  |                    |      | $                | 9,816  |           |      | $         | 23,198  |     |      | $ | 4,352   |    
|                                                                                              |                          |         |         |                    |      |                  |        |           |      |           |         |     |      |   |         |    
|Income before cumulative effect of change in
accounting principle per weighted average
share: |                          |         |         |                    |      |                  |        |           |      |           |         |     |      |   |         |    
|                                                                                              |                          | Basic   |         | $                  | 0.49 |                  |        | $         | 0.40 |           |         | $   | 0.94 |   |         | $   | 0.78  |  
|                                                                                              |                          | Diluted |         | $                  | 0.47 |                  |        | $         | 0.39 |           |         | $   | 0.91 |   |         | $   | 0.76  |  
|Cumulative effect of change in accounting
principle per weighted average share:               |                          |         |         |                    |      |                  |        |           |      |           |         |     |      |   |         |    
|                                                                                              |                          | Basic   |         | $                  |     |                  |        | $         |     |           |         | $   |     |   |         | $   | (0.60 | )
|                                                                                              |                          | Diluted |         | $                  |     |                  |        | $         |     |           |         | $   |     |   |         | $   | (0.59 | )
|Net income per weighted average share:                                                        |                          |         |         |                    |      |                  |        |           |      |           |         |     |      |   |         |    
|                                                                                              |                          | Basic   |         | $                  | 0.49 |                  |        | $         | 0.40 |           |         | $   | 0.94 |   |         | $   | 0.18  |  
|                                                                                              |                          | Diluted |         | $                  | 0.47 |                  |        | $         | 0.39 |           |         | $   | 0.91 |   |         | $   | 0.17  |  
|Cash dividend per share                                                                       |                          | $       | 0.125   |                    |      | $                |       |           |      | $         | 0.25    |     |      | $ |        |    
|Weighted average shares, basic                                                                |                          |         | 24,920  |                    |      |                  | 24,342 |           |      |           | 24,770  |     |      |   | 24,338  |    
|Weighted average shares, diluted                                                              |                          |         | 25,810  |                    |      |                  | 24,879 |           |      |           | 25,577  |     |      |   | 25,018  |    

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)

|                                                  |                                                              |                                             |                                        |                                                    |         |                  |         |         |         |         |         |  
|------------------------------------------------- | ------------------------------------------------------------ | ------------------------------------------- | -------------------------------------- | -------------------------------------------------- | ------- | ---------------- | ------- | ------- | ------- | ------- | ------- | -
|                                                  |                                                              |                                             |                                        |                                                    |         | Six Months Ended
|                                                  |                                                              |                                             |                                        |                                                    |         | September 30,   
|                                                  |                                                              |                                             |                                        |                                                    |         | 2003             |         | 2002   
|                                                  |                                                              |                                             |                                        |                                                    |         |                  |         |        
|Cash flows from operating activities:             |                                                              |                                             |                                        |                                                    |         |                  |         |        
|                                                  | Net income                                                   |                                             | $                                      | 23,198                                             |         |                  | $       | 4,352   |        
|                                                  | Adjustments to reconcile net income to net cash flows:       |                                             |                                        |                                                    |         |                  |         |         |        
|                                                  |                                                              | Impairment of goodwill, net of taxes        |                                        |                                                    |        |                  |         |         | 14,615  |        
|                                                  |                                                              | Depreciation and amortization               |                                        |                                                    | 3,909   |                  |         |         | 2,791   |        
|                                                  |                                                              | Amortization of direct-response advertising |                                        |                                                    | 21,254  |                  |         |         | 17,358  |        
|                                                  |                                                              | Direct-response advertising expenditures    |                                        |                                                    | (28,965 | )                |         |         | (23,497 | )      
|                                                  |                                                              | Provision for bad debts                     |                                        |                                                    | 11,330  |                  |         |         | 12,508  |        
|                                                  |                                                              | Provision for sales allowances/returns      |                                        |                                                    | 9,909   |                  |         |         | 8,202   |        
|                                                  |                                                              | Stock-based compensation                    |                                        |                                                    | 195     |                  |         |         | 6       |        
|                                                  |                                                              | Loss on sale of equipment                   |                                        |                                                    | 45      |                  |         |         |        |        
|                                                  |                                                              | Changes in assets and liabilities:          |                                        |                                                    |         |                  |         |         |         |        
|                                                  |                                                              |                                             | Accounts receivable                    |                                                    |         | (9,522           | )       |         |         | (22,689 | )      
|                                                  |                                                              |                                             | Inventories                            |                                                    |         | 1,945            |         |         |         | 1,019   |        
|                                                  |                                                              |                                             | Prepaid expenses and other assets      |                                                    |         | (2,534           | )       |         |         | (1,716  | )      
|                                                  |                                                              |                                             | Accounts payable                       |                                                    |         | (9,127           | )       |         |         | (811    | )      
|                                                  |                                                              |                                             | Accrued expenses and other liabilities |                                                    |         | 2,326            |         |         |         | 468     |        
|                                                  |                                                              |                                             |                                        |                                                    |         |                  |         |        
|                                                  |                                                              |                                             |                                        | Net cash flows from operating activities           |         |                  | 23,963  |         |         |         | 12,606  |  
|                                                  |                                                              |                                             |                                        |                                                    |         |                  |         |        
|Cash flows from investing activities:             |                                                              |                                             |                                        |                                                    |         |                  |         |        
|                                                  | Purchase of investments                                      |                                             |                                        | (5,939                                             | )       |                  |         |        |        
|                                                  | Purchase of customer list                                    |                                             |                                        | (212                                               | )       |                  |         |        |        
|                                                  | Purchase of property, plant and equipment                    |                                             |                                        | (10,407                                            | )       |                  |         | (12,077 | )      
|                                                  |                                                              |                                             |                                        |                                                    |         |                  |         |        
|                                                  |                                                              |                                             |                                        | Net cash flows used by investing activities        |         |                  | (16,558 | )       |         |         | (12,077 | )
|                                                  |                                                              |                                             |                                        |                                                    |         |                  |         |        
|Cash flows from financing activities:             |                                                              |                                             |                                        |                                                    |         |                  |         |        
|                                                  | Proceeds from issuance of common stock                       |                                             |                                        | 9,073                                              |         |                  |         | 724     |        
|                                                  | Repurchase of common stock                                   |                                             |                                        |                                                   |         |                  |         | (659    | )      
|                                                  | Contributions to deferred compensation plans                 |                                             |                                        | (308                                               | )       |                  |         | (1,274  | )      
|                                                  | Payment of dividends declared on common stock                |                                             |                                        | (6,171                                             | )       |                  |         |        |        
|                                                  | Payment of obligations under capital leases and note payable |                                             |                                        | (1,584                                             | )       |                  |         | (370    | )      
|                                                  |                                                              |                                             |                                        |                                                    |         |                  |         |        
|                                                  |                                                              |                                             |                                        | Net cash flows from/(used by) financing activities |         |                  | 1,010   |         |         |         | (1,579  | )
|                                                  |                                                              |                                             |                                        |                                                    |         |                  |         |        
|                                                  |                                                              |                                             |                                        | Net change in cash and cash equivalents            |         |                  | 8,415   |         |         |         | (1,050  | )
|Cash and cash equivalents at beginning of period  |                                                              |                                             | 27,162                                 |                                                    |         |                  | 27,884  |        
|                                                  |                                                              |                                             |                                        |                                                    |         |                  |         |        
|Cash and cash equivalents at end of period        |                                                              | $                                           | 35,577                                 |                                                    |         | $                | 26,834  |        
|                                                  |                                                              |                                             |                                        |                                                    |         |                  |         |        
|Supplemental disclosure of cash flow information: |                                                              |                                             |                                        |                                                    |         |                  |         |        
|                                                  | Assets purchased under capital lease                         |                                             | $                                      | 98                                                 |         |                  | $       | 281     |        
|                                                  | Disposal of equipment                                        |                                             |                                        | 355                                                |         |                  |         | 77      |        

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 and our unaudited
consolidated financial statements included in our Quarterly Report on Form 10-Q
for the period ended June 30, 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 revenues and expenses during the reported period. Estimates
and judgments are used for, including, but not limited to, determination of
appropriate Medicare reimbursement rates, the allowances for doubtful
accounts and sales allowances, 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.

On September 5, 2003, PolyMedicas Board of Directors (the Board)
declared a two-for-one split of PolyMedicas common stock, payable on September
29, 2003. The two-for-one stock split was effected in the form of a 100% stock
dividend paid to shareholders of record as of the close of business on
September 19, 2003. This resulted in the new issuance of 11.82 million shares
of common stock plus the issuance of 854,000 shares held in treasury together
with a decrease in additional paid-in capital and an increase in treasury stock
equivalent to the cost value of the treasury shares issued and a decrease in
additional paid-in capital equivalent to the par value of the newly issued
shares. All share and per share amounts have been restated to reflect the
retroactive effect of the stock split, except for PolyMedicas capitalization.

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 and Accounts Receivable
|-- |  | -------------------------------------------

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. As a result, our contractual allowances are
immaterial. 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

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Medicare-covered items. 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 $70.86 million and $60.56 million of net revenues for the
three months ended September 30, 2003 and 2002, respectively, were reimbursable
by Medicare for products provided to Medicare beneficiaries. Approximately
$138.80 million and $117.46 million of net revenues for the six months ended
September 30, 2003 and 2002, respectively, were reimbursable by Medicare for
products provided to Medicare beneficiaries.

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.

Sales allowances are recorded for estimated product returns as well as
estimated claim denials, 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 and claim denials. During the three months ended September 30,
2003 and 2002, we provided for sales returns and allowances at a rate of
approximately 4.3% and 4.9% of gross revenues, respectively. During each of the
six months ended September 30, 2003 and 2002, we provided for sales returns and
allowances at a rate of approximately 4.6% of gross revenues.

Our accounts receivable are generally due from Medicare, private insurance
companies, Medicaid and our customers. The collection process is time consuming
and complex and typically involves the submission of claims to multiple payers
whose payment of claims may be contingent upon the payment of another payer. As
a result, our collection efforts may be active up to 1 1/2 years from the
initial billing date. In accordance with applicable regulatory requirements, we
make reasonable and appropriate efforts to collect our accounts receivable,
including deductible and copayment amounts, in a consistent manner for all
payer classes. During the three months ended September 30, 2003 and 2002, we
provided for allowances for doubtful accounts at a rate of approximately 5.4%
and 7.5% of net revenues, respectively. During the six months ended September
30, 2003 and 2002, we provided for allowances for doubtful accounts at a rate
of approximately 5.6% and 7.4% of net revenues, respectively.

Accounts receivable allowances consist of an allowance for doubtful
accounts, an allowance for product returns, and other sales
allowances. As of September 30 and March 31, 2003, accounts
receivable allowances were $26.50 million and $22.56
million, respectively, or 34.9% and 26.9% of gross accounts
receivable, respectively.



|3. |  | Inventories
|-- |  | -----------

Inventories consist of the following:

|                |  |               |        |           |  |   |        | 
|--------------- |  | ------------- | ------ | --------- |  | - | ------ | 
|                |  | September 30, |        | March 31,
|(in thousands)  |  | 2003          |        | 2003     
|                |  |               |        |          
|Raw materials   |  | $             | 1,483  |           |  | $ | 1,453  | 
|Work in process |  |               | 432    |           |  |   | 480    | 
|Finished goods  |  |               | 14,990 |           |  |   | 16,917 | 
|                |  |               |        |           |  |   |        | 
|                |  | $             | 16,905 |           |  | $ | 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 September 30 and March 31, 2003, is $2.08 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.

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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 September 30 and
March 31, 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 September 30
and March 31, 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 Medical), 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
September 30 and March 31, 2003, by reportable segment, were as follows:

|                                    |  |               |        |           |  |   |        |  
|----------------------------------- |  | ------------- | ------ | --------- |  | - | ------ | -
|                                    |  | September 30, |        | March 31,
|(in thousands)                      |  | 2003          |        | 2003     
|                                    |  |               |        |          
|Liberty Diabetes:                   |  |               |        |           |  |   |        |  
|Goodwill                            |  | $             | 4,951  |           |  | $ | 4,951  |  
|                                    |  |               |        |           |  |   |        |  
|Customer list                       |  | $             | 2,028  |           |  | $ | 1,816  |  
|Accumulated amortization            |  |               | (1,821 | )         |  |   | (1,708 | )
|                                    |  |               |        |           |  |   |        |  
|                                    |  | $             | 207    |           |  | $ | 108    |  
|                                    |  |               |        |           |  |   |        |  
|Pharmaceuticals:                    |  |               |        |           |  |   |        |  
|Goodwill                            |  | $             | 995    |           |  | $ | 995    |  
|                                    |  |               |        |           |  |   |        |  
|Total consolidated goodwill         |  | $             | 5,946  |           |  | $ | 5,946  |  
|                                    |  |               |        |           |  |   |        |  
|Total amortizable intangible assets |  |               | 2,028  |           |  |   | 1,816  |  
|Total accumulated amortization      |  |               | (1,821 | )         |  |   | (1,708 | )
|                                    |  |               |        |           |  |   |        |  
|                                    |  | $             | 207    |           |  | $ | 108    |  
|                                    |  |               |        |           |  |   |        |  

In the quarter ended September 30, 2003, we purchased a customer list,
consisting primarily of diabetes patients, for approximately $212,000, from a
small healthcare company. We purchased this list in an effort to expand our
customer base through means other than direct-response advertising. We will
amortize the cost of the customer list to selling, general and administrative
expenses on an accelerated basis during the first two years of a four-year
period, such that 55% of the cost is expensed after two years from the date of
acquisition and the remaining 45% is expensed on a straight-line basis over the
next two years, identical to our accounting treatment of direct-response
advertising for our Liberty Diabetes segment.

Amortization expense for intangible assets was approximately $48,000 and
$184,000 for the three months ended September 30, 2003 and 2002, respectively,
and approximately $113,000 and $368,000 for the six months ended September 30,
2003 and 2002, respectively. As of September 30, 2003, amortization expense on
existing intangibles for the remainder of fiscal 2004 and the next four fiscal
years is as follows (table in thousands):

|      |  |   |     | 
|----- |  | - | --- | 
|2004  |  | $ | 34  | 
|2005  |  |   | 57  | 
|2006  |  |   | 48  | 
|2007  |  |   | 48  | 
|2008  |  |   | 20  | 
|      |  |   |     | 
|Total |  | $ | 207 | 
|      |  |   |     | 



|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

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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. Advertising that does not meet the
capitalization requirements of SOP 93-7 is expensed in the current period.

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. In addition, new or different
marketing initiatives that may not qualify for direct-response advertising
could result in accelerated charges against our earnings.

On
September 4, 2003, we
announced that we had concluded discussions with the SEC regarding
our capitalization of advertising costs under the direct-response
advertising exception in SOP 93-7, and that we would continue to
capitalize these costs related to the acquisition of new customers,
rather than expensing these
costs as incurred. Accordingly, we will not restate our historical financial
statements, the possibility of which was discussed in previous SEC filings.

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 |        | Six months ended
|                                                   |  | September 30,      |        | September 30,    |  | September 30, |        | September 30,
|(in thousands)                                     |  | 2003               |        | 2002             |  | 2003          |        | 2002         
|                                                   |  |                    |        |                  |  |               |        |              
|Capitalized
direct-response
advertising            |  | $                  | 15,103 |                  |  | $             | 11,984 |               |  | $ | 28,965 |  |  | $ | 23,497 | 
|Direct-response
advertising
amortization           |  |                    | 10,890 |                  |  |               | 8,851  |               |  |   | 21,254 |  |  |   | 17,358 | 
|                                                   |  |                    |        |                  |  |               |        |               |  |   |        |  |  |   |        | 
|Increase in
direct-response
advertising asset,
net |  | $                  | 4,213  |                  |  | $             | 3,133  |               |  | $ | 7,711  |  |  | $ | 6,139  | 
|                                                   |  |                    |        |                  |  |               |        |               |  |   |        |  |  |   |        | 
|Beginning
direct-response
advertising asset,
net   |  |                    | 67,559 |                  |  |               | 55,118 |               |  |   | 64,061 |  |  |   | 52,112 | 
|                                                   |  |                    |        |                  |  |               |        |               |  |   |        |  |  |   |        | 
|Ending
direct-response
advertising asset,
net      |  | $                  | 71,772 |                  |  | $             | 58,251 |               |  | $ | 71,772 |  |  | $ | 58,251 | 
|                                                   |  |                    |        |                  |  |               |        |               |  |   |        |  |  |   |        | 



|6. |  | 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. We adopted SFAS No.
150, as required, on July 1, 2003. The adoption of this statement has not had
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

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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 December
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.



|7. |  | Accrued Expenses
|-- |  | ----------------

Accrued expenses consist of the following:

|                                                         |  |               |        |           |  |   |        |  
|-------------------------------------------------------- |  | ------------- | ------ | --------- |  | - | ------ | -
|                                                         |  | September 30, |        | March 31,
|(in thousands)                                           |  | 2003          |        | 2003     
|                                                         |  |               |        |          
|Salaries and benefits                                    |  | $             | 8,344  |           |  | $ | 8,641  |  
|Income tax payable                                       |  |               | 1,868  |           |  |   | (1,181 | )
|Amounts reserved for overpayments by Medicare
and others |  |               | 4,941  |           |  |   | 4,941  |  
|Other                                                    |  |               | 3,868  |           |  |   | 4,602  |  
|                                                         |  |               |        |           |  |   |        |  
|                                                         |  | $             | 19,021 |           |  | $ | 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 quarter ended September 30, 2002, we recorded a benefit of
$2.22 million related to a reduction in this reserve following a favorable
determination by one of the four Medicare carriers that our original method of
billing for albuterol and ipratropium combinations was proper.

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



|8. |  | Commitments and Contingencies
|-- |  | -----------------------------

Our compliance with Medicare regulations may be reviewed by federal or
state agencies, including the Department of Health and Human Services Office
of Inspector General (OIG), the Department of Justice (DOJ), and the United
States 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 OIG, is investigating allegations of healthcare
fraud, improper revenue recognition and obstruction of justice by
Liberty Medical 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 $10.58 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 overall direction of the Oversight Committee, a special
Board committee comprised of three non-employee directors, which was
established to oversee our response to the investigations and the related
litigation.

We are party to the following additional legal proceedings:

           Class Action Lawsuit.We are a defendant in a purported class action
lawsuit in the United States District Court for the District of Massachusetts
against PolyMedica, Steven J. Lee, PolyMedicas former Chief Executive Officer

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and Chairman of the Board, Eric G.
Walters, former Executive Vice President and
Clerk of PolyMedica, and Warren K. Trowbridge, President of Liberty
Healthcare Group, Inc. and a Senior
Vice President of PolyMedica, filed on behalf of purchasers of our 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. The complaint was originally filed
November 27, 2000, and consolidated with a virtually identical later-filed
complaint on July 30, 2001, under the caption In re: PolyMedica Corp.
Securities Litigation, Civ. Action No. 00-12426-REK. A consolidated amended
complaint was filed on October 9, 2001, asserting claims on behalf of a
putative class of purchasers of PolyMedica stock between October 26, 1998 and
August 21, 2001. The Court denied the defendants motion to dismiss the
consolidated complaint on May 10, 2002. 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. 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, a plaintiff 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 and the plaintiffs subsequently filed a consolidated
derivative complaint, alleging 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 Medical and by acquiescing in alleged misconduct by Liberty
Medical. The consolidated
complaint, filed on December 17, 2001, names as defendants PolyMedica, Steven
J. Lee, Arthur A. Siciliano, President of PolyMedica, Eric G. Walters, and five
members of PolyMedicas Board of Directors: Herbert A. Denton, Thomas S.
Soltys, Frank Logerfo, Marcia J. Hooper, and Daniel S. Bernstein. Defendants
motion to dismiss the consolidated complaint was denied on July 16, 2002. On
September 16, 2002, the Court granted defendants motions to report the case to
the Appeals Court and stay the proceedings, but denied defendants motion to
reconsider its denial of the motion to dismiss. 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. The case is currently stayed by the
Appeals Court until November 4, 2003.

On July 1, 2003, the Appeals Court granted a motion to remand the
proceedings to Middlesex Superior Court for purposes of approving a potential
settlement. A settlement agreement has been filed with the Superior Court, and
recites certain corporate governance changes we have made and enhancements to
our 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. 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.

     Litigation Relative to Direct Response Advertising. In July and
August 2003, new lawsuits alleging violations of certain sections and rules of
the Exchange Act were filed concerning PolyMedicas accounting
treatment of advertising costs. In addition to PolyMedica, Steven J. Lee, Samuel
L. Shanaman, Interim Chief Executive Officer and Lead Director, Arthur A.
Siciliano, John K.P. Stone, III, General Counsel and Senior Vice President,
Stephen C. Farrell, Senior Vice President and Chief Financial Officer, Eric
Walters and Warren K. Trowbridge were named as defendants in these lawsuits. The
first complaint, Sved v. PolyMedica Corp., Civ. Act. No. 03-11270-RCL was filed
July 3, 2003. Similar complaints, Gourdji v. PolyMedica Corp., Civ. Act. No.
03-CV-11393, and Thompson v. PolyMedica Corp., Civ. Act. No. 03-CV-11604 were
filed in U.S. District Court for the District of Massachusetts on July 24, 2003
and August 27, 2003, respectively.

Following our announcement on September 4, 2003 that we had concluded our
discussions with the SEC concerning our capitalization of advertising costs
under the direct-response advertising exception in SOP 93-7 and would not
restate our historical financial statements, the parties filed, on September
23, 2003, a stipulated motion to dismiss, with prejudice, the Thompson
complaint, and the Court granted the motion on September 25, 2003. On October
16, 2003, the parties filed a further motion and stipulation for order of
dismissal without prejudice with respect to the remaining shareholder
litigation pending in the U.S. District Court for the District of Massachusetts
concerning PolyMedicas accounting treatment of advertising costs. The court
granted the motion on

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October 23, 2003.

If any of these investigations or legal proceedings referred to above
results in a determination that we have failed to comply with the statutes or
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 (including exclusion from Medicare and other federal
healthcare program participation). We cannot accurately predict the outcome
of these proceedings at this time, and have therefore not recorded any charges
relating to these proceedings. 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.



|9. |  | 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. The 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 Medical 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. Selling, general and
administrative expenses incurred by Liberty Diabetes that were incurred on
behalf of all Florida businesses for shared services, are 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 $33.88 million and $17.40
million of cash, cash equivalents and investments as of September 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 |         | Six months ended
|                                       |  | September 30,      |         | September 30,    |  | September 30, |        | September 30,
|(in thousands)                         |  | 2003               |         | 2002             |  | 2003          |        | 2002         
|                                       |  |                    |         |                  |  |               |        |              
|Net Revenues:                          |  |                    |         |                  |  |               |        |               |  |   |         |  |  |   |         | 
|Liberty Diabetes                       |  | $                  | 70,764  |                  |  | $             | 60,962 |               |  | $ | 138,293 |  |  | $ | 119,476 | 
|Liberty Respiratory                    |  |                    | 20,068  |                  |  |               | 18,609 |               |  |   | 39,935  |  |  |   | 35,189  | 
|Pharmaceuticals                        |  |                    | 14,390  |                  |  |               | 8,441  |               |  |   | 25,931  |  |  |   | 14,948  | 
|                                       |  |                    |         |                  |  |               |        |               |  |   |         |  |  |   |         | 
|Total                                  |  | $                  | 105,222 |                  |  | $             | 88,012 |               |  | $ | 204,159 |  |  | $ | 169,613 | 
|                                       |  |                    |         |                  |  |               |        |               |  |   |         |  |  |   |         | 
|Depreciation and
Amortization
Expense: |  |                    |         |                  |  |               |        |               |  |   |         |  |  |   |         | 
|Liberty Diabetes                       |  | $                  | 7,658   |                  |  | $             | 5,910  |               |  | $ | 14,887  |  |  | $ | 11,426  | 
|Liberty Respiratory                    |  |                    | 5,088   |                  |  |               | 4,098  |               |  |   | 9,938   |  |  |   | 8,163   | 
|Pharmaceuticals                        |  |                    | 164     |                  |  |               | 302    |               |  |   | 338     |  |  |   | 560     | 
|                                       |  |                    |         |                  |  |               |        |               |  |   |         |  |  |   |         | 
|Total                                  |  | $                  | 12,910  |                  |  | $             | 10,310 |               |  | $ | 25,163  |  |  | $ | 20,149  | 
|                                       |  |                    |         |                  |  |               |        |               |  |   |         |  |  |   |         | 

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|                            |  |                    |         |                  |  |               |         |               |  |   |        |  |  |   |        | 
|--------------------------- |  | ------------------ | ------- | ---------------- |  | ------------- | ------- | ------------- |  | - | ------ |  |  | - | ------ | 
|                            |  | Three months ended |         | Six months ended
|                            |  | September 30,      |         | September 30,    |  | September 30, |         | September 30,
|(in thousands)              |  | 2003               |         | 2002             |  | 2003          |         | 2002         
|                            |  |                    |         |                  |  |               |         |              
|Income before Income Taxes: |  |                    |         |                  |  |               |         |               |  |   |        |  |  |   |        | 
|Liberty Diabetes            |  | $                  | 11,717  |                  |  | $             | 8,324   |               |  | $ | 23,052 |  |  | $ | 18,547 | 
|Liberty Respiratory         |  |                    | 5,495   |                  |  |               | 6,881   |               |  |   | 10,758 |  |  |   | 10,778 | 
|Pharmaceuticals             |  |                    | 2,241   |                  |  |               | 576     |               |  |   | 3,486  |  |  |   | 1,168  | 
|                            |  |                    |         |                  |  |               |         |               |  |   |        |  |  |   |        | 
|Total                       |  | $                  | 19,453  |                  |  | $             | 15,781  |               |  | $ | 37,296 |  |  | $ | 30,493 | 
|                            |  |                    |         |                  |  |               |         |               |  |   |        |  |  |   |        | 
|                           
|                            |  | September 30,      |         | March 31,       
|                            |  | 2003               |         | 2003            
|                            |  |                    |         |                 
|Segment assets:             |  |                    |         |                  |  |               |         |              
|Liberty Diabetes            |  | $                  | 159,690 |                  |  | $             | 152,457 |              
|Liberty Respiratory         |  |                    | 41,223  |                  |  |               | 46,928  |              
|Pharmaceuticals             |  |                    | 16,836  |                  |  |               | 17,961  |              
|Corporate Headquarters      |  |                    | 51,377  |                  |  |               | 33,623  |              
|                            |  |                    |         |                  |  |               |         |              
|Total                       |  | $                  | 269,126 |                  |  | $             | 250,969 |              
|                            |  |                    |         |                  |  |               |         |              

Selling, general and administrative expenses attributable to PolyMedicas
corporate headquarters decreased $2.21 million and $2.00 million in the three
and six months ended September 30, 2003, as compared with the three and six
months ended September 30, 2002, respectively. Income before Income Taxes for
our Liberty Respiratory segment for both the three and six months ended
September 30, 2002, included a $2.22 million benefit for the reduction of
accrued amounts due to Medicare and others, as discussed in Note 7.



|10. |  | 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 per weighted average share had
we adopted SFAS No. 123:

|                                                                                                 |  |                    |        |                  |  |               |        |               |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------------------------------ |  | ------------------ | ------ | ---------------- |  | ------------- | ------ | ------------- |  | - | ------ | - |  | - | ------ | -
|                                                                                                 |  | Three months ended |        | Six months ended
|                                                                                                 |  | September 30,      |        | September 30,    |  | September 30, |        | September 30,
|(in thousands, except per share data)                                                            |  | 2003               |        | 2002             |  | 2003          |        | 2002         
|                                                                                                 |  |                    |        |                  |  |               |        |              
|Net income                                                                                       |  | $                  | 12,100 |                  |  | $             | 9,816  |               |  | $ | 23,198 |   |  | $ | 4,352  |  
|Add back: Stock compensation costs,
net of tax, on options granted below
fair market value       |  |                    | 58     |                  |  |               | 35     |               |  |   | 122    |   |  |   | 35     |  
|Less: Stock compensation costs, net
of tax, had all employee options
been recorded at fair value |  |                    | (1,106 | )                |  |               | (1,082 | )             |  |   | (2,499 | ) |  |   | (2,741 | )
|                                                                                                 |  |                    |        |                  |  |               |        |               |  |   |        |   |  |   |        |  
|Adjusted net income                                                                              |  | $                  | 11,052 |                  |  | $             | 8,769  |               |  | $ | 20,821 |   |  | $ | 1,646  |  
|                                                                                                 |  |                    |        |                  |  |               |        |               |  |   |        |   |  |   |        |  
|Weighted average shares, basic                                                                   |  |                    | 24,920 |                  |  |               | 24,342 |               |  |   | 24,770 |   |  |   | 24,338 |  
|Weighted average shares, diluted                                                                 |  |                    | 25,810 |                  |  |               | 24,879 |               |  |   | 25,577 |   |  |   | 25,018 |  

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|                                                            |  |                    |       |                  |  |               |       |               |  |   |       |  |  |   |       | 
|----------------------------------------------------------- |  | ------------------ | ----- | ---------------- |  | ------------- | ----- | ------------- |  | - | ----- |  |  | - | ----- | 
|                                                            |  | Three months ended |       | Six months ended
|                                                            |  |                    |       |                 
|                                                            |  | September 30,      |       | September 30,    |  | September 30, |       | September 30,
|(in thousands, except per share data)                       |  | 2003               |       | 2002             |  | 2003          |       | 2002         
|                                                            |  |                    |       |                  |  |               |       |              
|Net income per weighted
average share, basic, as
reported   |  | $                  | 0.49  |                  |  | $             | 0.40  |               |  | $ | 0.94  |  |  | $ | 0.18  | 
|Net income per weighted
average share, diluted,
as reported |  | $                  | 0.47  |                  |  | $             | 0.39  |               |  | $ | 0.91  |  |  | $ | 0.17  | 
|Adjusted net income per
weighted average share,
basic       |  | $                  | 0.44  |                  |  | $             | 0.36  |               |  | $ | 0.84  |  |  | $ | 0.07  | 
|Adjusted net income per
weighted average share,
diluted     |  | $                  | 0.43  |                  |  | $             | 0.35  |               |  | $ | 0.81  |  |  | $ | 0.07  | 
|                                                           
|                                                            |  | Three months ended |       | Six months ended
|                                                            |  | September 30,      |       | September 30,    |  | September 30, |       | September 30,
|                                                            |  | 2003               |       | 2002             |  | 2003          |       | 2002         
|                                                            |  |                    |       |                  |  |               |       |              
|Weighted-average fair
value of options granted              |  | $                  | 17.75 |                  |  | $             | 13.52 |               |  | $ | 21.16 |  |  | $ | 14.01 | 

The fair value of each option granted during fiscal 2004 and fiscal 2003
is estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions:

|                        |  |                    |       |                  |  |               |       |               |  |  |       |   |  |  |       |  
|----------------------- |  | ------------------ | ----- | ---------------- |  | ------------- | ----- | ------------- |  |  | ----- | - |  |  | ----- | -
|                        |  | Three months ended |       | Six months ended
|                        |  | September 30,      |       | September 30,    |  | September 30, |       | September 30,
|                        |  | 2003               |       | 2002             |  | 2003          |       | 2002         
|                        |  |                    |       |                  |  |               |       |              
|Dividend yield          |  |                    | 1.89  | %                |  |               | 2.91  | %             |  |  | 2.07  | % |  |  | 2.91  | %
|Expected volatility     |  |                    | 98.47 | %                |  |               | 89.73 | %             |  |  | 94.76 | % |  |  | 89.73 | %
|Risk-free interest rate |  |                    | 2.95  | %                |  |               | 2.44  | %             |  |  | 2.75  | % |  |  | 2.55  | %
|Expected life           |  |                    | 5.0   |                  |  |               | 4.0   |               |  |  | 5.0   |   |  |  | 4.0   |  



|11. |  | Income Before Cumulative Effect of Change in Accounting Principle per
Share
|--- |  | ---------------------------------------------------------------------------

Calculations of income before cumulative effect of change in accounting
principle, referring to the April 1, 2002 adoption of SFAS No. 142, Goodwill
and Other Intangible Assets discussed in Note 4, per weighted average share
are as follows:

|                                                                                                       |  |                    |        |                  |  |                |        |                |  |   |        |  |  |   |        | 
|------------------------------------------------------------------------------------------------------ |  | ------------------ | ------ | ---------------- |  | -------------- | ------ | -------------- |  | - | ------ |  |  | - | ------ | 
|                                                                                                       |  | Three months ended |        | Six months ended
|(In thousands, except per share data)                                                                  |  | Sept. 30, 2003     |        | Sept. 30, 2002   |  | Sept. 30, 2003 |        | Sept. 30, 2002
|                                                                                                       |  |                    |        |                  |  |                |        |               
|Income before cumulative effect of change in accounting principle                                      |  | $                  | 12,100 |                  |  | $              | 9,816  |                |  | $ | 23,198 |  |  | $ | 18,967 | 
|BASIC:                                                                                                 |  |                    |        |                  |  |                |        |                |  |   |        |  |  |   |        | 
|Weighted average common stock outstanding, net of treasury
stock, end of period                        |  |                    | 24,920 |                  |  |                | 24,342 |                |  |   | 24,770 |  |  |   | 24,338 | 
|Income before cumulative effect of change in accounting
principle per weighted average share, basic    |  | $                  | 0.49   |                  |  | $              | 0.40   |                |  | $ | 0.94   |  |  | $ | 0.78   | 
|                                                                                                       |  |                    |        |                  |  |                |        |                |  |   |        |  |  |   |        | 
|DILUTED:                                                                                               |  |                    |        |                  |  |                |        |                |  |   |        |  |  |   |        | 
|Weighted average common stock outstanding, net of treasury
stock, end of period                        |  |                    | 24,920 |                  |  |                | 24,342 |                |  |   | 24,770 |  |  |   | 24,338 | 
|Weighted average dilutive common stock equivalents                                                     |  |                    | 890    |                  |  |                | 537    |                |  |   | 807    |  |  |   | 680    | 
|                                                                                                       |  |                    |        |                  |  |                |        |                |  |   |        |  |  |   |        | 
|Weighted average common stock and dilutive common stock
equivalents outstanding, net of treasury stock |  |                    | 25,810 |                  |  |                | 24,879 |                |  |   | 25,577 |  |  |   | 25,018 | 
|Income before cumulative effect of change in accounting
principle per weighted average share, diluted  |  | $                  | 0.47   |                  |  | $              | 0.39   |                |  | $ | 0.91   |  |  | $ | 0.76   | 
|                                                                                                       |  |                    |        |                  |  |                |        |                |  |   |        |  |  |   |        | 

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Potentially Dilutive Stock Options

Options to purchase 244,500 and 2,101,326 shares of common stock were
outstanding as of September 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. During the six months ended September 30, 2003 and 2002, options to
purchase 1,374,470 and 1,321,908 shares of common stock, respectively, were
outstanding, 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.



|12. |  | Comprehensive Income
|--- |  | --------------------

Our total comprehensive income is equal to our net income for the three
and six months ended September 30, 2003 and 2002.



|13. |  | Stockholders Equity  Cash Dividends
|--- |  | -------------------------------------

On August 15, 2003, we paid a $0.125 per share cash dividend on 24,785,074
common shares outstanding for a total payment of $3.10 million to our common
shareholders of record as of the close of business on August 5, 2003. For the
six months ended September 30, 2003, we paid a total of $6.17 million in cash
dividends to our common shareholders of record. On October 6, 2003 our Board
declared a cash dividend of $0.15 per share of PolyMedicas common stock to
shareholders of record as of the close of business on November 5, 2003, payable
on November 17, 2003.

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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, future marketing activities and earnings, revenue, gross margin
and operating margin trends and potential business strategies. Without limiting
the foregoing, the words believes, anticipates, plans, expects, and
similar expressions are intended to identify forward-looking statements. These
statements which give our current expectations or forecasts of future events,
are based on current estimates, projections, beliefs, and assumptions of
PolyMedica and its management, and are not guarantees of future performance.
Actual results may differ materially from those described in the
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. Any forward-looking statements
represent our estimates only as of the day this Quarterly Report was first
filed with the SEC and should not be relied upon as representing our estimates
as of any subsequent date. While we may elect to update forward-looking
statements at some point in the future, we specifically disclaim any obligation
to do so, even if our estimates change.

Business

PolyMedica is a leading provider of direct-to-consumer medical products,
conducting business through its Liberty Diabetes, Liberty Respiratory and
Pharmaceuticals segments. As a participating Medicare provider and third-party
insurance biller, we provide a simple, reliable way for customers to obtain the
needed direct-to-customer healthcare supplies and medications described below.

Liberty Diabetes

Through our Liberty Diabetes segment we provide direct-to-consumer
diabetes testing supplies and related products primarily to Medicare-eligible
customers suffering from diabetes. As of September 30, 2003, our Liberty
Diabetes segment, which consists primarily of Liberty Medical Supply, Inc.
(Liberty Medical), had approximately 584,000 active diabetes customers, as
compared to approximately 500,000 as of September 30, 2002. We consider a
person to be 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 our diabetes customers by:



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

In the United States, there are approximately seventeen million people
with diabetes, including at least seven million seniors which comprise our
primary market. 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. Many of our active diabetes
customers also suffer from other chronic diseases, needs which we try and meet
through products offered through our other segments.

Liberty Respiratory

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). As of September 30, 2003, our Liberty Respiratory segment,
which consists of Liberty Home Pharmacy Corporation (Liberty Home Pharmacy),
had approximately 67,000 active customers for our COPD prescription medications
and supplies, as compared to approximately 55,000 active customers as of
September 30, 2002. We consider a person to be an active customer if that
person has placed an order and we have shipped supplies to that person in the
past twelve months.

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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. In the United
States, there are approximately sixteen million people with COPD, including
approximately four million seniors. While a portion of the four million seniors
with COPD are covered by managed care or reside in extended care facilities, we
believe that the balance are potential customers of ours.

Pharmaceuticals

Through our Pharmaceuticals segment we provide direct-to-consumer
prescription oral medications not covered by Medicare through Liberty Medical
Supply Pharmacy (Liberty Pharmacy) and also function as a
manufacturer and provider of prescription urology and suppository
products,
over-the-counter female urinary discomfort products and home medical diagnostic
kits. We sell our over-the-counter female urinary discomfort products and home medical
diagnostic kits under our AZO brand name to a network of large drug store
chains, major supermarkets, mass merchandisers and drug wholesalers in the
United States through PolyMedica Healthcare, Inc. Our line of prescription
urology products, which includes urinary analgesics, antispasmodics, local
anesthetics and analgesic suppositories, are sold to large drug wholesalers in
the United States through PolyMedica Pharmaceuticals USA, Inc.

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 Medical, 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 Medicals acquisition to approximately 584,000 customers as of
September 30, 2003. In addition, we now have approximately 67,000 active
customers for our prescription respiratory medications and supplies. We also
use radio and print advertising and most recently, the purchase of outside
customer lists, 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 working to
improve 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 or the list of customers to whom
such businesses provide products or services.

Continue growth in our non-Medicare initiatives.We continue to grow
Liberty Pharmacy, a direct-to-consumer non-Medicare initiative that commenced
operations in fiscal 2003. Liberty Pharmacy, part of our Pharmaceuticals
segment, offers direct-to-consumer prescription oral medications not covered by
Medicare. In the three and six months ended September 30, 2003, Liberty
Pharmacy net revenues were $9.98 million and $18.31 million, respectively, as
compared with $4.51 million and $7.58 million in the three and six months ended
September 30, 2002, respectively. We expect the business to continue growing
through the remainder of fiscal year 2004.

Continue adding complementary products and businesses.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.

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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. 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.

Samuel L. Shanaman, our Lead Director, is performing the functions of the
chief executive officer on an interim basis until a successor is named. Mr.
Shanamans compensation for his services as Interim Chief Executive Officer,
consists primarily of restricted stock and a nominal salary. For every day Mr.
Shanaman works, he vests in a fixed number of shares of common stock under a
restricted stock agreement. Currently, he vests in 102 shares of common stock
for each workday. The fair value of the vested shares ($19.30 per share under
his current agreement dated July 11, 2003) and the nominal salary he receives,
are recorded as selling, general and administrative expenses in our
consolidated statements of operations.

Mr. Shanaman became fully vested in the 16,690 restricted shares awarded
under his first agreement entered into in October 2002, during the quarter
ended March 31, 2003 and the 7,200 restricted shares awarded under his second
agreement entered into in March 2003, during the quarter ended June 30, 2003.
We then entered into a third agreement on July 11, 2003, which awarded an
additional 10,000 restricted shares. During the quarter ended September 30,
2003, Mr. Shanaman became fully vested in 7,320 shares of the 10,000 awarded
under the third agreement, with 2,680 to be earned going forward based upon his
provision of services as Interim Chief Executive Officer.

Stock Split in the Form of 100% Common Stock Dividend

On September 5, 2003, our Board declared a two-for-one split of our common
stock, payable on September 29, 2003 to all stockholders of record as of the
close of business on September 19, 2003. The stock split was effected in the
form of a 100% common stock dividend. All share and per share amounts in this
Quarterly Report on Form 10-Q have been restated to reflect the retroactive
effect of the stock split, except for our capitalization.

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, each as more fully described below:



| |  |  | 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.

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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
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. As a result, our contractual allowances are
immaterial. 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 well as estimated claim denials, 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 and claim denials. 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 5 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.

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Our accounts receivable are generally due from Medicare, private insurance
companies, Medicaid and our customers. The collection process is time consuming
and complex and typically involves the submission of claims to multiple payers
whose payment of claims may be contingent upon the payment of another payer. As
a result, our collection efforts may be active up to 1 1/2 years from the
initial billing date. In accordance with applicable regulatory requirements, we
make reasonable and appropriate efforts to collect our accounts receivable,
including deductible and copayment amounts, in a consistent manner for all
payer classes.

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 $2.08 million
and $2.57 million as of September 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.

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 Office
of Inspector General (OIG), the Department of Justice (DOJ), and the United
States 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 OIG, is investigating allegations of healthcare
fraud, improper revenue recognition and obstruction of justice by
Liberty Medical 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 $10.58 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 overall direction of the Oversight Committee, a special
Board committee comprised of three non-employee directors, which was
established to oversee our response to the investigations and the related
litigation.

We are party to the following additional legal proceedings:

-     Class Action Lawsuit.We are a defendant in a purported class action
lawsuit in the United States District Court for the District of Massachusetts
against PolyMedica, Steven J. Lee, PolyMedicas former Chief Executive Officer
and Chairman of the Board, Eric G. Walters, former Executive Vice
President and Clerk of
PolyMedica, and Warren K. Trowbridge,

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President of Liberty Healthcare Group,
Inc. and a Senior Vice President of PolyMedica, filed on
behalf of purchasers of our 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. The
complaint was originally filed November 27, 2000, and consolidated with a
virtually identical later-filed complaint on July 30, 2001, under the caption
In re: PolyMedica Corp. Securities Litigation, Civ. Action No. 00-12426-REK. A
consolidated amended complaint was filed on October 9, 2001, asserting claims
on behalf of a putative class of purchasers of PolyMedica stock between October
26, 1998 and August 21, 2001. The Court denied the defendants motion to
dismiss the consolidated complaint on May 10, 2002. 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. 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, a plaintiff 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 and the plaintiffs subsequently filed a consolidated
derivative complaint, alleging 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 Medical and by acquiescing in alleged misconduct by Liberty Medical. The consolidated
complaint, filed on December 17, 2001, names as defendants PolyMedica, Steven
J. Lee, Arthur A. Siciliano, President of PolyMedica, Eric G. Walters, and five
members of PolyMedicas Board of Directors: Herbert A. Denton, Thomas S.
Soltys, Frank Logerfo, Marcia J. Hooper, and Daniel S. Bernstein. Defendants
motion to dismiss the consolidated complaint was denied on July 16, 2002. On
September 16, 2002, the Court granted defendants motions to report the case to
the Appeals Court and stay the proceedings, but denied defendants motion to
reconsider its denial of the motion to dismiss. 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. The case is currently stayed by the
Appeals Court until November 4, 2003.

On July 1, 2003, the Appeals Court granted a motion to remand the
proceedings to Middlesex Superior Court for purposes of approving a potential
settlement. A settlement agreement has been filed with the Superior Court, and
recites certain corporate governance changes we have made and enhancements to
our 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. 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.

-     Litigation Relative to Direct Response Advertising. In July and
August 2003, new lawsuits alleging violations of certain sections and rules of
the Exchange Act were filed concerning PolyMedicas accounting treatment of
advertising costs. In addition to PolyMedica, Steven J. Lee, Samuel
L. Shanaman, Interim Chief Executive Officer and Lead Director, Arthur A.
Siciliano, John K.P. Stone, III, General Counsel and Senior Vice President,
Stephen C. Farrell, Senior Vice President and Chief Financial Officer, Eric
Walters and Warren K. Trowbridge were named as defendants in these lawsuits. The
first complaint, Sved v. PolyMedica Corp., Civ. Act. No. 03-11270-RCL was filed
July 3, 2003. Similar complaints, Gourdji v. PolyMedica Corp., Civ. Act. No.
03-CV-11393, and Thompson v. PolyMedica Corp., Civ. Act. No. 03-CV-11604 were
filed in U.S. District Court for the District of Massachusetts on July 24, 2003
and August 27, 2003, respectively.

Following our announcement on September 4, 2003 that we had concluded our
discussions with the SEC concerning our capitalization of advertising costs
under the direct-response advertising exception in SOP 93-7 and would not
restate our historical financial statements, the parties filed, on September
23, 2003, a stipulated motion to dismiss, with prejudice, the Thompson
complaint, and the Court granted the motion on September 25, 2003. On October
16, 2003, the parties filed a further motion and stipulation for order of
dismissal without prejudice with respect to the remaining shareholder
litigation pending in the U.S. District Court for the District of Massachusetts
concerning PolyMedicas accounting treatment of advertising costs. The court
granted the motion on October 23, 2003.

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If any of these investigations or legal proceedings referred to above
results in a determination that we have failed to comply with the statutes or
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 (including exclusion from Medicare and other federal
healthcare program participation). We cannot accurately predict the outcome
of these proceedings at this time, and have therefore not recorded any charges
relating to these proceedings. 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

Our Compliance and Regulatory Affairs Department works 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. For instance, as a condition of employment,
personnel are required to attend annual corporate compliance certification
classes. In addition, each employee receives a compliance manual that has been
developed to communicate standards of conduct and compliance policies and
procedures. Our Compliance and Regulatory Affairs Department which was
previously comprised of five groups, was recently expanded to seven groups:



| |  |  | The Business Systems Groupdesigns, develops and maintains
databases for data tracking and analysis for each group in the
Compliance and Regulatory Affairs Department.                                                                                                                                                                                                               
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The Monitoring Groupperforms 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 Groupis a specialized
group responsible for investigating and bringing closure to compliance
issues brought forth from various avenues. This group is responsible
for completing and/or providing support for a variety of projects
deemed necessary, by corporate or senior management, to continue our
commitment to healthcare compliance.
|
| |  |  | The Internal Reviews Groupis responsible for conducting a variety
of internal reviews of business operations to ensure compliance with
healthcare program requirements and applicable laws.                                                                                                                                                                                          
|
| |  |  | The Contracts and Licensing Groupis responsible for monitoring
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 review and
monitoring activities.                                                                                
|
| |  |  | The External Communications Groupis responsible for monitoring
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.                                                                                                                         
|
| |  |  | The Health Insurance Portability and Accountability Act (HIPAA)
Grouphandles all questions, requests, correspondence, reports of abuse
and any other issues arising out of the federal regulations regarding
customers protected health information.                                                                                                                              

Although each group is distinct and is assigned its own responsibilities,
the Senior Vice President of Regulatory Affairs and 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 continue to expand the size and capabilities
of our Compliance and Regulatory Affairs Department.

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Corporate Governance

In August 2001, our Board established an Oversight Committee, a special
Board committee consisting of three non-employee directors, to monitor and
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 outside legal counsel and other
appropriate independent advisors. The Oversight Committee also monitors the
activities of 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.

Results of Operations

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

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

|                                             |                     |                    |      |                    |       |               |      |      |       | 
|-------------------------------------------- | ------------------- | ------------------ | ---- | ------------------ | ----- | ------------- | ---- | ---- | ----- | 
|                                             |                     |                    |      | Three months ended
|                                             |                     |                    |      | September 30,      |       | September 30,
|                                             |                     |                    |      | 2003               |       | 2002         
|                                             |                     |                    |      |                    |       |              
|Net revenues:                                |                     |                    |      |                    |       |               |      |     
|                                             | Liberty Diabetes    |                    |      | 67.2               | %     |               |      | 69.3 | %    
|                                             | Liberty Respiratory |                    |      | 19.1               |       |               |      | 21.1 |      
|                                             | Pharmaceuticals     |                    |      | 13.7               |       |               |      | 9.6  |      
|                                             |                     |                    |      |                    |       |               |      |     
|                                             |                     | Total net revenues |      |                    | 100.0 |               |      |      | 100.0 | 
|Cost of sales                                |                     |                    | 36.4 |                    |       |               | 35.5 |     
|                                             |                     |                    |      |                    |       |               |      |     
|Gross margin                                 |                     |                    | 63.6 |                    |       |               | 64.5 |     
|Selling, general and
administrative expenses |                     |                    | 45.2 |                    |       |               | 46.6 |     
|                                             |                     |                    |      |                    |       |               |      |     
|Income from operations                       |                     |                    | 18.4 | %                  |       |               | 17.9 | %   
|                                             |                     |                    |      |                    |       |               |      |     

Total net revenues increased 19.6% to $105.22 million in the three months
ended September 30, 2003, as compared with $88.01 million in the three months
ended September 30, 2002, primarily due to increased revenues generated from
our Liberty Diabetes and Pharmaceuticals segments.

Net revenues from our Liberty Diabetes segment increased 16.1% to $70.76
million in the three months ended September 30, 2003, as compared with $60.96
million in the three months ended September 30, 2002. This increase was due
primarily to the growth in our customer base, which grew 16.8% to approximately
584,000 active customers as of September 30, 2003, from approximately 500,000
as of September 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 September 30, 2003, as compared with the three months ended
September 30, 2002.

Net revenues from our Liberty Respiratory segment increased 7.8% to $20.07
million in the three months ended September 30, 2003, as compared with $18.61
million in the three months ended September 30, 2002. This increase was due
primarily to the growth in our customer base, which grew 21.8% to approximately
67,000 as of September 30, 2003, from approximately 55,000 as of September 30,
2002, primarily as a result of our advertising. Net revenue growth in our
Liberty Respiratory segment has slowed recently as a result of several factors,
including a lower than expected response rate to our advertisements, increased
competition and lower product utilization by our customers. We are addressing
these issues by prospecting less deeply for new customers, expanding our
efforts to acquire customers through internal

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cross-referrals and other avenues and by introducing, on a trial basis,
nebulizers that may be easier to use and allow shorter treatment times.

Net revenues from our Pharmaceuticals segment increased 70.5% to $14.39
million in the three months ended September 30, 2003, as compared with $8.44
million in the three months ended September 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 69.4% and 53.4% of
total Pharmaceuticals segment net revenues in the three months ended September
30, 2003 and 2002, respectively. We expect this trend of increasing sales from
Liberty Pharmacy to continue through the remainder of fiscal 2004. 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 63.6% in
the three months ended September 30, 2003, as compared with 64.5% in the three
months ended September 30, 2002. Gross margins in the three months ended
September 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 other businesses.

As a percentage of total net revenues, selling, general and administrative
expenses were 45.2% in the three months ended September 30, 2003, as compared
with 46.6% in the three months ended September 30, 2002. Selling, general and
administrative expenses increased by 16.1% in the three months ended September
30, 2003 to $47.58 million, as compared with $40.98 million in the three months
ended September 30, 2002. The decrease in selling, general and administrative
expenses as a percentage of net revenues was primarily attributable to realized
economies of scale resulting from our growing business, together with reduced
legal and related expenses and $1.30 million less of charges related to the
termination of an executive officer, partially offset by a $2.22 million
benefit for the reduction of accrued amounts due to Medicare and others
recorded in the year-earlier quarter.

The provision for income taxes was $7.35 million and $5.97 million in the
three months ended September 30, 2003 and 2002, respectively, which resulted in
an effective tax rate of 37.8% in each of the three months ended September 30,
2003 and 2002. The effective tax rates in the three months ended September 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 state or local income tax rates,
and the deductibility of certain costs and expenses by jurisdiction.

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Six Months Ended September 30, 2003 Compared to Six Months Ended September 30,
2002

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

|                                             |                     |                    |      |                  |       |               |      |      |       | 
|-------------------------------------------- | ------------------- | ------------------ | ---- | ---------------- | ----- | ------------- | ---- | ---- | ----- | 
|                                             |                     |                    |      | Six months ended
|                                             |                     |                    |      | September 30,    |       | September 30,
|                                             |                     |                    |      | 2003             |       | 2002         
|                                             |                     |                    |      |                  |       |              
|Net revenues:                                |                     |                    |      |                  |       |               |      |     
|                                             | Liberty Diabetes    |                    |      | 67.7             | %     |               |      | 70.4 | %    
|                                             | Liberty Respiratory |                    |      | 19.6             |       |               |      | 20.8 |      
|                                             | Pharmaceuticals     |                    |      | 12.7             |       |               |      | 8.8  |      
|                                             |                     |                    |      |                  |       |               |      |     
|                                             |                     | Total net revenues |      |                  | 100.0 |               |      |      | 100.0 | 
|Cost of sales                                |                     |                    | 36.3 |                  |       |               | 35.4 |     
|                                             |                     |                    |      |                  |       |               |      |     
|Gross margin                                 |                     |                    | 63.7 |                  |       |               | 64.6 |     
|Selling, general and
administrative expenses |                     |                    | 45.6 |                  |       |               | 46.6 |     
|                                             |                     |                    |      |                  |       |               |      |     
|Income from operations                       |                     |                    | 18.1 | %                |       |               | 18.0 | %   
|                                             |                     |                    |      |                  |       |               |      |     

Total net revenues increased 20.4% to $204.16 million in the six months
ended September 30, 2003, as compared with $169.61 million in the six months
ended September 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 15.7% to $138.29
million in the six months ended September 30, 2003, as compared
with $119.48
million in the six months ended September 30, 2002. This increase was due
primarily to the growth in our customer base, which grew 16.8% to approximately
584,000 active customers as of September 30, 2003, from approximately 500,000
as of September 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
six months ended September 30, 2003, as compared with the six months ended
September 30, 2002.

Net revenues from our Liberty Respiratory segment increased 13.5% to
$39.94 million in the six months ended September 30, 2003, as compared with
$35.19 million in the six months ended September 30, 2002. This increase was
due primarily to the growth in our customer base, which grew 21.8% to
approximately 67,000 as of September 30, 2003, from approximately 55,000 as of
September 30, 2002, primarily as a result of our advertising. Net revenue
growth in our Liberty Respiratory segment has slowed recently as a result of
several factors, including a lower than expected response rate to our
advertisements, increased competition and lower product utilization by our
customers. We are addressing these issues by prospecting less deeply for new
customers, expanding our efforts to acquire customers through internal
cross-referrals and other avenues and by introducing, on a trial basis,
nebulizers that may be easier to use and allow shorter treatment times.

Net revenues from our Pharmaceuticals segment increased 73.5% to $25.93
million in the six months ended September 30, 2003, as compared with $14.95
million in the six months ended September 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 70.6% and 50.7% of total
Pharmaceuticals segment net revenues in the six months ended September 30, 2003
and 2002, respectively. We expect this trend of increasing sales from Liberty
Pharmacy to continue through the remainder of fiscal 2004. 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 63.7% in
the six months ended September 30, 2003, as compared with 64.6% in the six
months ended September 30, 2002. Gross margins in the six months ended
September 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.

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As a percentage of total net revenues, selling, general and administrative
expenses were 45.6% in the six months ended September 30, 2003, as compared
with 46.6% in the six months ended September 30, 2002. Selling, general and
administrative expenses increased by 17.8% in the six months ended September
30, 2003 to $93.07 million, as compared with $79.00 million in the six months
ended September 30, 2002. The decrease in selling, general and administrative
expenses as a percentage of net revenues was primarily attributable to realized
economies of scale resulting from our growing business, together with reduced
legal and related expenses and $1.24 million less of charges related to the
termination of certain executive officers, partially offset by a $2.22 million
benefit for the reduction of accrued amounts due to Medicare and others
recorded in the year-earlier period.

The provision for income taxes was $14.10 million and $11.53 million in
the six months ended September 30, 2003 and 2002, respectively, which resulted
in an effective tax rate of 37.8% in each of the six months ended September 30,
2003 and 2002. The effective tax rates in the six months ended September 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 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 primarily through cash flow from operations. Our
cash and cash equivalents balance increased $8.42 million to $35.58 million as
of September 30, 2003, as compared with $27.16 million as of March 31, 2003.
Cash flows from operations of $23.96 million for the six months ended September
30, 2003, were generated by net income of $23.20 million and a decrease in net
accounts receivable of $11.72 million, offset by cash used to fund certain
areas of our operations, such as accounts payable which decreased $9.13 million
in the six months ended September 30, 2003.

In the six months ended September 30, 2003 and 2002, we used $16.56
million and $12.08 million of cash for investing activities, respectively. The
$4.48 million increase in total cash used for investing activities was
primarily due to $5.94 million used to purchase short-term investments net of a
decrease in capital expenditures of $1.67 million in the six months ended
September 30, 2003, as compared with the six months ended September 30, 2002.
Property, plant and equipment purchases totaled $10.41 million and $12.08
million for the six months ended September 30, 2003 and 2002, respectively.
Higher spending in the prior year period 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 six month period.

In the six months ended September 30, 2003, we generated $1.01 million of
cash from financing activities, which consisted primarily of $9.07 million of
proceeds raised from the issuance of PolyMedica common stock related to stock
options exercised during the period by non-executive officers, offset primarily
by $6.17 million of cash dividends paid to PolyMedica shareholders.

On August 15, 2003, we paid a $0.125 per share cash dividend on 24,785,074
common shares outstanding for a total payment of $3.10 million to our common
shareholders of record as of the close of business on August 5, 2003. For the
six months ended September 30, 2003, we paid a total of $6.17 million in cash
dividends to our common shareholders of record. On October 6, 2003 our Board
declared a cash dividend of $0.15 per share of PolyMedicas common stock to shareholders
of record as of the close of business on November 5, 2003, payable on November
17, 2003. While a significant decline in our cash balances or another business
change could cause us to reduce or eliminate the 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.

We are subject to government investigations and related litigation, which,
if decided against us, could materially

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affect our liquidity. Please
see Item 1 of Part II, Legal Proceedings, for a more complete description of
these matters. From time to time we conduct internal investigations to
determinate compliance with complicated and subjective billing rules applicable
to Medicare and third-party reimbursement. If we discover billing errors, we
may have to refund amounts previously reimbursed by Medicare or paid by third
parties.

We believe that our cash, cash equivalents and short-term investments
balance as of September 30, 2003 of $42.96 million and cash flows generated
from operations, will be sufficient to meet working capital, capital
expenditure and financing needs. In the
event that we undertake to make acquisitions of complementary businesses,
products or technologies, we may require substantial 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). Please see Factors Affecting
our Future Results for further factors that could materially and adversely
affect our business.

Our contractual obligations for future annual minimum lease, rental and
advertising commitments as of September 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. We adopted SFAS No.
150, as required, on July 1, 2003. The adoption of this statement has not had
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 December 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.

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 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

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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 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 the rate of durable medical
equipment (DME) payments through 2010, reduce payments for covered outpatient
prescription drugs to 85%, from the current 95%, 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. The Medicare conferees have tentatively determined that DME
product payments will be frozen at their current rates. However, beginning in
2005, the Secretary of Health and Human Resources may select up to twelve
products to be competitively bid. After that time, the Secretary may choose
other products to be competitively bid, but the Secretary will have sole
discretion for the selection of the DME products to be bid. In addition, the
conferees are likely to require drug products that are currently administered
by a physician, be paid on either the average sales price in a region or
competitively bid.

If enacted, these proposals could apply to us. If competitive bidding for
DME is enacted, we would begin the process of understanding which products will
be subject to bidding, 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. 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. We cannot accurately predict the outcome of these proceedings at
this time, and have therefore not recorded any charges relating to these
proceedings. 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.
Our interpretation of Medicare regulations may also differ from the
interpretation of federal agencies. 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 Medical and Liberty Home

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Pharmacy and we are conducting our own investigation. Both civil and criminal
investigations are being conducted. We are cooperating with the investigations.
We cannot accurately predict the outcome of these investigations and
proceedings at this time, and have therefore not recorded any charges relating
to these proceedings.

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 these
proceedings.

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 5 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.

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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.

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.

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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;                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| | - |  | 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 or eliminate the 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, investing or financing activities. 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 interim 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 September 30, 2003. Based on this
evaluation, PolyMedicas interim chief executive officer and chief financial
officer concluded that, as of September 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 interim 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 September 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

Please refer to Item 3 of our Annual Report on Form 10-K for the fiscal year
ended March 31, 2003 for a complete description of our legal proceedings. Any
material developments regarding these legal proceedings for the
quarter ended September 30, 2003 are set forth below.

U.S. Attorneys Office

No material developments.

Class Action Lawsuit

No material developments.

Derivative Complaint

For additional information on this matter, please refer to our Annual
Report on Form 10-K for the fiscal year ended March 31, 2003 and our Quarterly
Report on Form 10-Q for the three months ended June 30, 2003.

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. By order issued
September 4, 2003, the Court extended the stay until November 4, 2003.

The settlement is subject to approval by the Middlesex Superior Court. The
settlement agreement was originally filed with the Superior Court on July 11,
2003, and a revised agreement was filed on October 3, 2003. The settlement
agreement recites certain corporate governance changes we made, such as the
addition of three non-employee directors to our Board since September 2001, the
appointment of a Lead Director, and enhancements to our 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 expect 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.

Direct-Response Advertising Shareholder Litigation

For additional information on this matter, please refer to our Annual
Report on Form 10-K for the fiscal year ended March 31, 2003 and our Quarterly
Report on Form 10-Q for the three months ended June 30, 2003.

On August 27, 2003, another virtually identical complaint, Thompson v.
PolyMedica, Civ. Act. No. 03-CV-11604, was filed in the U.S. District Court for
the District of Massachusetts. On September 2, 2003, the Sved and Gourdji
plaintiffs moved to consolidate the cases, and for the appointment of lead
plaintiff and lead counsel. This motion was granted on September 24, 2003.
Further, following our announcement, on September 4, 2003, that we had
concluded our discussions with the SEC concerning our capitalization of
advertising costs under the direct-response advertising exception in SOP 93-7
and would not restate our historical financial statements, the parties filed,
on September 23, 2003, a stipulated motion to dismiss, with prejudice, the
Thompson action, and the court granted the motion on September 25, 2003. On
October 16, 2003, the parties filed a further motion and stipulation for order
of dismissal without prejudice with respect to the remaining shareholder
litigation pending in the U.S. District Court for the District of Massachusetts
concerning PolyMedicas accounting treatment of advertising costs. The court
granted the motion on October 23, 2003.

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Item 4. Submission of Matters to a Vote of Security Holders

At our Annual Meeting of Stockholders held on September 26, 2003, the
following proposals were submitted to a vote of our stockholders:

1.     To elect the following three (3) nominee directors as Class III Directors of
PolyMedica for the ensuing three years:

|                                    |  |     |            |          |  |  |         | 
|----------------------------------- |  | --- | ---------- | -------- |  |  | ------- | 
|Nominees for Election as Directors: |  | FOR |            | WITHHELD
|                                    |  |     |            |         
|Daniel S. Bernstein, M.D.           |  |     | 10,912,287 |          |  |  | 188,598 | 
|Herbert A. Denton                   |  |     | 11,070,008 |          |  |  | 30,877  | 
|Walter R. Maupay, Jr.               |  |     | 10,808,078 |          |  |  | 292,807 | 

2.     To ratify the selection by the Board of PricewaterhouseCoopers
LLP as PolyMedicas public accountants for the fiscal year ending March 31,
2004:

| |  |     |            |         |  |         |         |  |  |  |       |  | 
| |  | --- | ---------- | ------- |  | ------- | ------- |  |  |  | ----- |  | 
| |  | FOR |            | AGAINST |  | ABSTAIN
| |  |     |            |         |  |        
| |  |     | 10,789,406 |         |  |         | 303,824 |  |  |  | 7,655 | 




Item 6. Exhibits and Reports on Form 8-K

(a)  See Exhibit Index immediately following this report, which is
incorporated herein by reference.

(b)  Reports on Form 8-K:

On August 13, 2003, PolyMedica furnished a Current Report on Form 8-K
under Item 12 (Results of Operations and Financial Condition) containing a copy
of its earnings release for the period ended June 30, 2003.

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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: November 3, 2003

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Exhibit Index

|        |  |   |  |                                                                                                                                  
|------- |  | - |  | ---------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |   |  | Description                                                                                                                      
|        |  |   |  |                                                                                                                                  
|10.1    |  | - |  | Letter Agreement amendment to Employment Agreement by and
between the Registrant and John K.P. Stone, III dated August
29, 2003. 
|        |  |   |  |                                                                                                                                  
|10.2    |  | - |  | Letter Agreement amendment to Employment Agreement by and
between the Registrant and Warren K. Trowbridge dated August
29, 2003. 
|        |  |   |  |                                                                                                                                  
|10.3    |  | - |  | Letter Agreement amendment to Employment Agreement by and
between the Registrant and Stephen C. Farrell dated August 29,
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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