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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 December 31, 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
February 12, 2004, there were 26,262,345 shares of the registrants
Common Stock issued.





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TABLE OF CONTENTS



|                                                   |                                                                                               |                                            |  |  |  |  |  | 
|-------------------------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------ |  |  |  |  |  | 
|PART I - FINANCIAL INFORMATION                    
|                                                   | Item 1. Financial Statements                                                                 
|                                                   |                                                                                               | Consolidated Balance Sheets               
|                                                   |                                                                                               | Consolidated Statements of Operations     
|                                                   |                                                                                               | Consolidated Statements of Cash Flows     
|                                                   |                                                                                               | Notes to Consolidated Financial Statements
|                                                   | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                   | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                                                   | Item 4. Controls and Procedures                                                              
|PART II  OTHER INFORMATION                       
|                                                   | Item 1. Legal Proceedings                                                                    
|                                                   | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                        
|Exhibit Index                                     
|EX-10.4 RETENTION AGREEMENT WARREN K. TROWBRIDGE  
|EX-10.5 EMPLOYMENT AGREEMENT WARREN K. TROWBRIDGE 
|EX-10.6 RETENTION AGREEMENT JOHN K.P. STONE III   
|EX-10.7 EMPLOYMENT AGREEMENT JOHN K.P. STONE III  
|EX-10.8 RETENTION AGREEMENT STEPHEN C. FARRELL    
|EX-10.9 EMPLOYMENT AGREEMENT STEPHEN C. FARRELL   
|EX-10.10 LETTER OF RESIGNATION ARTHUR A. SICILIANO
|EX-10.11 RETENTION AGREEMENT ARTHUR A. SICILIANO  
|EX-10.12 EMPLOYMENT AGREEMENT ARTHUR A. SICILIANO 
|EX-10.13 SEVERANCE AGREEMENT ARTHUR A. SICILIANO  
|EX-10.14 SEVERANCE AGREEMENT WARREN K. TROWBRIDGE 
|EX-31.1 CERTIFICATION BY CHIEF EXECUTIVE OFFICER  
|EX-31.2 CERTIFICATION BY CHIEF FINANCIAL OFFICER  
|EX-32.1 SECT. 1350 CERTIFICATION OF C.E.O. & C.F.O



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##### Table of Contents



POLYMEDICA CORPORATION
TABLE OF CONTENTS

|              |  |                                                                                       |    |  |                                                                                                      |  |      |   | 
|------------- |  | ------------------------------------------------------------------------------------- | -- |  | ---------------------------------------------------------------------------------------------------- |  | ---- | - | 
|              |  |                                                                                       |    |  |                                                                                                      |  | Page
|              |  |                                                                                       |    |  |                                                                                                      |  |     
|PART I  -     |  | FINANCIAL INFORMATION                                                                 |    |  |                                                                                                      | 
|Item 1  -     |  | Financial Statements (unaudited)                                                      |    |  |                                                                                                      | 
|              |  |                                                                                       |    |  | Consolidated Balance Sheets as of December 31 and March 31, 2003                                     |  |      | 3 | 
|              |  |                                                                                       |    |  | Consolidated Statements of Operations for the three and nine months ended
December 31, 2003 and 2002 |  |      | 5 | 
|              |  |                                                                                       |    |  | Consolidated Statements of Cash Flows for the nine months ended
December 31, 2003 and 2002           |  |      | 6 | 
|              |  |                                                                                       |    |  | Notes to Consolidated Financial Statements                                                           |  |      | 7 | 
|Item 2  -     |  | Managements Discussion and Analysis of Financial Condition
and Results of Operations |    |  | 18                                                                                                   | 
|Item 3  -     |  | Quantitative and Qualitative Disclosures About Market Risk                            |    |  | 32                                                                                                   | 
|Item 4 -      |  | Controls and Procedures                                                               |    |  | 32                                                                                                   | 
|PART II -     |  | OTHER INFORMATION                                                                     |    |  |                                                                                                      | 
|Item 1 -      |  | Legal Proceedings                                                                     |    |  | 33                                                                                                   | 
|Item 6  -     |  | Exhibits and Reports on Form 8-K                                                      |    |  | 34                                                                                                   | 
|Signatures    |  |                                                                                       | 35 | 
|Exhibit Index |  |                                                                                       | 36 | 

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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)

|                                          |                                                                                                                   |                      |        |              |         |           |        |        |         | 
|----------------------------------------- | ----------------------------------------------------------------------------------------------------------------- | -------------------- | ------ | ------------ | ------- | --------- | ------ | ------ | ------- | 
|                                          |                                                                                                                   |                      |        | December 31, |         | March 31,
|                                          |                                                                                                                   |                      |        | 2003         |         | 2003     
|                                          |                                                                                                                   |                      |        |              |         |          
|ASSETS                                    |                                                                                                                   |                      |        |              |         |           |        |       
|Current assets:                           |                                                                                                                   |                      |        |              |         |           |        |       
|                                          | Cash and cash equivalents                                                                                         |                      | $      | 49,871       |         |           | $      | 27,162 |        
|                                          | Marketable securities                                                                                             |                      |        | 7,091        |         |           |        | 1,442  |        
|                                          | Accounts receivable (net of allowances of
$27,759 and $22,556 as of December
31 and March 31, 2003, respectively) |                      |        | 50,439       |         |           |        | 61,168 |        
|                                          | Inventories (Note 3)                                                                                              |                      |        | 20,207       |         |           |        | 18,850 |        
|                                          | Deferred income taxes                                                                                             |                      |        | 13,960       |         |           |        | 13,960 |        
|                                          | Prepaid expenses and other current assets                                                                         |                      |        | 3,995        |         |           |        | 3,438  |        
|                                          |                                                                                                                   |                      |        |              |         |           |        |       
|                                          |                                                                                                                   | Total current assets |        |              | 145,563 |           |        |        | 126,020 | 
|Property, plant and equipment, net        |                                                                                                                   |                      | 62,302 |              |         |           | 53,304 |       
|Goodwill (Note 4)                         |                                                                                                                   |                      | 5,946  |              |         |           | 5,946  |       
|Intangible assets, net                    |                                                                                                                   |                      | 301    |              |         |           | 108    |       
|Direct-response advertising, net (Note 5) |                                                                                                                   |                      | 59,421 |              |         |           | 64,061 |       
|Other assets                              |                                                                                                                   |                      | 1,374  |              |         |           | 1,530  |       
|                                          |                                                                                                                   |                      |        |              |         |           |        |       
|                                          |                                                                                                                   | Total assets         |        | $            | 274,907 |           |        | $      | 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)

|                                              |                                                                                                                                                  |                                            |        |              |         |           |        |         |         | 
|--------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ------ | ------------ | ------- | --------- | ------ | ------- | ------- | 
|                                              |                                                                                                                                                  |                                            |        | December 31, |         | March 31,
|                                              |                                                                                                                                                  |                                            |        | 2003         |         | 2003     
|                                              |                                                                                                                                                  |                                            |        |              |         |          
|LIABILITIES AND SHAREHOLDERS EQUITY          |                                                                                                                                                  |                                            |        |              |         |           |        |        
|Current liabilities:                          |                                                                                                                                                  |                                            |        |              |         |           |        |        
|                                              | Accounts payable                                                                                                                                 |                                            | $      | 3,281        |         |           | $      | 12,576  |        
|                                              | Accrued expenses (Note 7)                                                                                                                        |                                            |        | 24,300       |         |           |        | 17,003  |        
|                                              | Current portion, capital lease obligations and note payable                                                                                      |                                            |        | 274          |         |           |        | 2,310   |        
|                                              |                                                                                                                                                  |                                            |        |              |         |           |        |        
|                                              |                                                                                                                                                  | Total current liabilities                  |        |              | 27,855  |           |        |         | 31,889  | 
|Long-term capital lease and other obligations |                                                                                                                                                  |                                            | 1,800  |              |         |           | 1,877  |        
|Deferred income taxes                         |                                                                                                                                                  |                                            | 15,653 |              |         |           | 20,528 |        
|                                              |                                                                                                                                                  |                                            |        |              |         |           |        |        
|                                              |                                                                                                                                                  | Total liabilities                          |        |              | 45,308  |           |        |         | 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; 25,803,805 and 24,920,488 issued as of
December 31 and March 31, 2003, respectively |                                            |        | 258          |         |           |        | 249     |        
|                                              | Treasury stock, at cost (0 and 349,310 shares as of
December 31 and March 31, 2003, respectively)                                                |                                            |        |             |         |           |        | (7,149  | )      
|                                              | Deferred compensation                                                                                                                            |                                            |        |             |         |           |        | (54     | )      
|                                              | Additional paid-in capital                                                                                                                       |                                            |        | 115,694      |         |           |        | 105,341 |        
|                                              | Retained earnings                                                                                                                                |                                            |        | 113,647      |         |           |        | 98,288  |        
|                                              |                                                                                                                                                  |                                            |        |              |         |           |        |        
|                                              |                                                                                                                                                  | Total shareholders equity                 |        |              | 229,599 |           |        |         | 196,675 | 
|                                              |                                                                                                                                                  |                                            |        |              |         |           |        |        
|                                              |                                                                                                                                                  | Total liabilities and shareholders equity |        | $            | 274,907 |           |        | $       | 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 |      | Nine Months Ended
|                                                                                              |                        |         |         | Dec. 31,           |      | Dec. 31,          |        | Dec. 31, |      | Dec. 31,
|                                                                                              |                        |         |         | 2003               |      | 2002              |        | 2003     |      | 2002    
|                                                                                              |                        |         |         |                    |      |                   |        |          |      |         
|Net revenues                                                                                  |                        | $       | 106,463 |                    |      | $                 | 89,917 |          |      | $        | 310,622 |      |      | $ | 259,530 |     
|Cost of sales                                                                                 |                        |         | 40,399  |                    |      |                   | 31,695 |          |      |          | 114,428 |      |      |   | 91,760  |     
|                                                                                              |                        |         |         |                    |      |                   |        |          |      |          |         |      |      |   |         |     
|Gross margin                                                                                  |                        |         | 66,064  |                    |      |                   | 58,222 |          |      |          | 196,194 |      |      |   | 167,770 |     
|Selling, general and administrative expenses                                                  |                        |         | 62,539  |                    |      |                   | 41,000 |          |      |          | 155,610 |      |      |   | 120,005 |     
|                                                                                              |                        |         |         |                    |      |                   |        |          |      |          |         |      |      |   |         |     
|Income from operations                                                                        |                        |         | 3,525   |                    |      |                   | 17,222 |          |      |          | 40,584  |      |      |   | 47,765  |     
|Other income and expense:                                                                     |                        |         |         |                    |      |                   |        |          |      |          |         |      |      |   |         |     
|                                                                                              | Investment income, net |         |         | 174                |      |                   |        | 160      |      |          |         | 501  |      |   |         | 191  |      
|                                                                                              | Interest expense       |         |         | (20                | )    |                   |        | (41      | )    |          |         | (57  | )    |   |         | (111 | )    
|                                                                                              | Other expense          |         |         | (194               | )    |                   |        | (1       | )    |          |         | (247 | )    |   |         | (12  | )    
|                                                                                              |                        |         |         |                    |      |                   |        |          |      |          |         |      |      |   |         |     
|                                                                                              |                        |         | (40     | )                  |      |                   | 118    |          |      |          | 197     |      |      |   | 68      |     
|Income before income taxes                                                                    |                        |         | 3,485   |                    |      |                   | 17,340 |          |      |          | 40,781  |      |      |   | 47,833  |     
|Income tax provision                                                                          |                        |         | 1,317   |                    |      |                   | 6,937  |          |      |          | 15,415  |      |      |   | 18,463  |     
|                                                                                              |                        |         |         |                    |      |                   |        |          |      |          |         |      |      |   |         |     
|Income before cumulative effect of
change in accounting principle                             |                        |         | 2,168   |                    |      |                   | 10,403 |          |      |          | 25,366  |      |      |   | 29,370  |     
|Cumulative effect of change in accounting
principle, net of taxes of $9,187 (Note 4)          |                        |         |        |                    |      |                   |       |          |      |          |        |      |      |   | (14,615 | )   
|                                                                                              |                        |         |         |                    |      |                   |        |          |      |          |         |      |      |   |         |     
|Net income                                                                                    |                        | $       | 2,168   |                    |      | $                 | 10,403 |          |      | $        | 25,366  |      |      | $ | 14,755  |     
|                                                                                              |                        |         |         |                    |      |                   |        |          |      |          |         |      |      |   |         |     
|Income before cumulative effect of change in
accounting principle per weighted average
share: |                        |         |         |                    |      |                   |        |          |      |          |         |      |      |   |         |     
|                                                                                              |                        | Basic   |         | $                  | 0.08 |                   |        | $        | 0.42 |          |         | $    | 1.01 |   |         | $    | 1.20  |  
|                                                                                              |                        | Diluted |         | $                  | 0.08 |                   |        | $        | 0.41 |          |         | $    | 0.98 |   |         | $    | 1.17  |  
|Cumulative effect of change in accounting
principle per weighted average share:               |                        |         |         |                    |      |                   |        |          |      |          |         |      |      |   |         |     
|                                                                                              |                        | Basic   |         | $                  |     |                   |        | $        |     |          |         | $    |     |   |         | $    | (0.60 | )
|                                                                                              |                        | Diluted |         | $                  |     |                   |        | $        |     |          |         | $    |     |   |         | $    | (0.58 | )
|Net income per weighted average share:                                                        |                        |         |         |                    |      |                   |        |          |      |          |         |      |      |   |         |     
|                                                                                              |                        | Basic   |         | $                  | 0.08 |                   |        | $        | 0.42 |          |         | $    | 1.01 |   |         | $    | 0.60  |  
|                                                                                              |                        | Diluted |         | $                  | 0.08 |                   |        | $        | 0.41 |          |         | $    | 0.98 |   |         | $    | 0.59  |  
|Cash dividend per share                                                                       |                        | $       | 0.15    |                    |      | $                 |       |          |      | $        | 0.40    |      |      | $ |        |     
|Weighted average shares, basic                                                                |                        |         | 25,645  |                    |      |                   | 24,595 |          |      |          | 25,062  |      |      |   | 24,424  |     
|Weighted average shares, diluted                                                              |                        |         | 26,636  |                    |      |                   | 25,160 |          |      |          | 25,930  |      |      |   | 25,065  |     

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)

|                                                  |                                                              |                                             |                                        |                                                       |         |                   |         |         |         |         |         |  
|------------------------------------------------- | ------------------------------------------------------------ | ------------------------------------------- | -------------------------------------- | ----------------------------------------------------- | ------- | ----------------- | ------- | ------- | ------- | ------- | ------- | -
|                                                  |                                                              |                                             |                                        |                                                       |         | Nine Months Ended
|                                                  |                                                              |                                             |                                        |                                                       |         | December 31,     
|                                                  |                                                              |                                             |                                        |                                                       |         | 2003              |         | 2002   
|                                                  |                                                              |                                             |                                        |                                                       |         |                   |         |        
|Cash flows from operating activities:             |                                                              |                                             |                                        |                                                       |         |                   |         |        
|                                                  | Net income                                                   |                                             | $                                      | 25,366                                                |         |                   | $       | 14,755  |        
|                                                  | Adjustments to reconcile net income to net cash flows:       |                                             |                                        |                                                       |         |                   |         |         |        
|                                                  |                                                              | Impairment of goodwill, net of taxes        |                                        |                                                       |        |                   |         |         | 14,615  |        
|                                                  |                                                              | Impairment of direct-response advertising   |                                        |                                                       | 14,443  |                   |         |         |        |        
|                                                  |                                                              | Deferred income taxes                       |                                        |                                                       | (4,875  | )                 |         |         |        |        
|                                                  |                                                              | Depreciation and amortization               |                                        |                                                       | 5,989   |                   |         |         | 4,497   |        
|                                                  |                                                              | Amortization of direct-response advertising |                                        |                                                       | 32,628  |                   |         |         | 26,630  |        
|                                                  |                                                              | Direct-response advertising expenditures    |                                        |                                                       | (42,431 | )                 |         |         | (34,059 | )      
|                                                  |                                                              | Provision for bad debts                     |                                        |                                                       | 16,807  |                   |         |         | 19,199  |        
|                                                  |                                                              | Provision for sales allowances/returns      |                                        |                                                       | 14,792  |                   |         |         | 12,606  |        
|                                                  |                                                              | Stock-based compensation                    |                                        |                                                       | 246     |                   |         |         | 158     |        
|                                                  |                                                              | Loss on sale of equipment                   |                                        |                                                       | 240     |                   |         |         |        |        
|                                                  |                                                              | Changes in assets and liabilities:          |                                        |                                                       |         |                   |         |         |         |        
|                                                  |                                                              |                                             | Accounts receivable                    |                                                       |         | (20,870           | )       |         |         | (35,642 | )      
|                                                  |                                                              |                                             | Inventories                            |                                                       |         | (1,357            | )       |         |         | 864     |        
|                                                  |                                                              |                                             | Prepaid expenses and other assets      |                                                       |         | (454              | )       |         |         | (2,265  | )      
|                                                  |                                                              |                                             | Accounts payable                       |                                                       |         | (9,295            | )       |         |         | (2,033  | )      
|                                                  |                                                              |                                             | Accrued expenses and other liabilities |                                                       |         | 7,661             |         |         |         | 1,072   |        
|                                                  |                                                              |                                             |                                        |                                                       |         |                   |         |        
|                                                  |                                                              |                                             |                                        | Net cash provided by operating activities             |         |                   | 38,890  |         |         |         | 20,397  |  
|                                                  |                                                              |                                             |                                        |                                                       |         |                   |         |        
|Cash flows from investing activities:             |                                                              |                                             |                                        |                                                       |         |                   |         |        
|                                                  | Purchase of marketable securities                            |                                             |                                        | (11,448                                               | )       |                   |         |        |        
|                                                  | Proceeds from maturing marketable securities                 |                                             |                                        | 5,799                                                 |         |                   |         |        |        
|                                                  | Purchase of customer lists                                   |                                             |                                        | (338                                                  | )       |                   |         |        |        
|                                                  | Purchase of property, plant and equipment                    |                                             |                                        | (14,859                                               | )       |                   |         | (15,712 | )      
|                                                  |                                                              |                                             |                                        |                                                       |         |                   |         |        
|                                                  |                                                              |                                             |                                        | Net cash used in investing activities                 |         |                   | (20,846 | )       |         |         | (15,712 | )
|                                                  |                                                              |                                             |                                        |                                                       |         |                   |         |        
|Cash flows from financing activities:             |                                                              |                                             |                                        |                                                       |         |                   |         |        
|                                                  | Proceeds from issuance of common stock                       |                                             |                                        | 17,318                                                |         |                   |         | 1,896   |        
|                                                  | Repurchase of common stock                                   |                                             |                                        |                                                      |         |                   |         | (659    | )      
|                                                  | Contributions to deferred compensation plans                 |                                             |                                        | (364                                                  | )       |                   |         | (1,319  | )      
|                                                  | Payment of dividends declared on common stock                |                                             |                                        | (10,007                                               | )       |                   |         |        |        
|                                                  | Payment of obligations under capital leases and note payable |                                             |                                        | (2,282                                                | )       |                   |         | (571    | )      
|                                                  |                                                              |                                             |                                        |                                                       |         |                   |         |        
|                                                  |                                                              |                                             |                                        | Net cash provided by / (used in) financing activities |         |                   | 4,665   |         |         |         | (653    | )
|                                                  |                                                              |                                             |                                        |                                                       |         |                   |         |        
|                                                  |                                                              |                                             |                                        | Net increase in cash and cash equivalents             |         |                   | 22,709  |         |         |         | 4,032   |  
|Cash and cash equivalents at beginning of period  |                                                              |                                             | 27,162                                 |                                                       |         |                   | 27,884  |        
|                                                  |                                                              |                                             |                                        |                                                       |         |                   |         |        
|Cash and cash equivalents at end of period        |                                                              | $                                           | 49,871                                 |                                                       |         | $                 | 31,916  |        
|                                                  |                                                              |                                             |                                        |                                                       |         |                   |         |        
|Supplemental disclosure of cash flow information: |                                                              |                                             |                                        |                                                       |         |                   |         |        
|                                                  | Assets purchased under capital lease                         |                                             | $                                      | 247                                                   |         |                   | $       | 435     |        
|                                                  | Disposal of equipment                                        |                                             |                                        | 664                                                   |         |                   |         | 188     |        

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 Reports on Form
10-Q for the periods ended June 30 and September 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 overpayments by Medicare and
others, 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. The
issuance of treasury shares resulted in a decrease in additional paid-in
capital and a reduction in treasury stock equivalent to the cost value of the
treasury shares issued and the new issuance of shares was accounted for as a
decrease in additional paid-in capital and an increase in common stock
equivalent to the par value of such 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 of such orders, provided that risk of loss has passed to
the customer and we have received and verified any written documentation
required 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 documentation, until the period in which those documents are collected
and verified.

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Revenue related to Medicare reimbursement is calculated based on
government-determined reimbursement prices for 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 $71.79 million and $62.50 million of net revenues for the
three months ended December 31, 2003 and 2002, respectively, were reimbursable
by Medicare for products provided to Medicare beneficiaries. Approximately
$210.59 million and $179.96 million of net revenues for the nine months ended
December 31, 2003 and 2002, respectively, were reimbursable by Medicare for
products provided to Medicare beneficiaries.

Accounts receivable allowances consist of an allowance for doubtful
accounts, an allowance for product returns, and other sales allowances. As of
December 31 and March 31, 2003, accounts receivable allowances were $27.76
million and $22.56 million, respectively, or 35.5% and 26.9% of gross accounts
receivable, respectively.

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. The reserve for sales allowances and the
rate at which we provide for such allowances are periodically adjusted to
reflect actual returns and claim denials. During the three months ended
December 31, 2003 and 2002, we provided for sales allowances at a rate of
approximately 4.4% and 4.7% of gross revenues, respectively. During the nine
months ended December 31, 2003 and 2002, we provided for sales allowances at a
rate of approximately 4.5% and 4.6% of gross revenues, respectively.

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 18 months 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 December 31, 2003 and 2002, we
provided for allowances for doubtful accounts at a rate of approximately 5.1%
and 7.4% of net revenues, respectively. During the nine months ended December
31, 2003 and 2002, we provided for allowances for doubtful accounts at a rate
of approximately 5.4% and 7.4% of net revenues, respectively.



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

Inventories consist of the following:

|                |  |              |        |           |  |   |        | 
|--------------- |  | ------------ | ------ | --------- |  | - | ------ | 
|                |  | December 31, |        | March 31,
|(in thousands)  |  | 2003         |        | 2003     
|                |  |              |        |          
|Raw materials   |  | $            | 1,088  |           |  | $ | 1,453  | 
|Work in process |  |              | 828    |           |  |   | 480    | 
|Finished goods  |  |              | 18,291 |           |  |   | 16,917 | 
|                |  |              |        |           |  |   |        | 
|                |  | $            | 20,207 |           |  | $ | 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 December 31 and March 31, 2003, is $2.48 million
and $2.57 million, respectively, of inventory shipped to customers for which we
have received an order but have not yet received the written documentation
required to bill Medicare, other third-party payers, and customers and
recognize revenue.

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|4. |  | Goodwill and Other Intangible Assets
|-- |  | ------------------------------------

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

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

Goodwill included in the PolyMedica Pharmaceuticals (U.S.A.), Inc. and
PolyMedica Healthcare, Inc. reporting units is a result of PolyMedicas
acquisition of an Alcon urological product line, including over-the-counter and
prescription urology products, in December 1992. Net of the impairment loss,
the remaining goodwill related to these reporting units as of December 31 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, our total goodwill as of December 31 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
December 31 and March 31, 2003, by reportable segment, were as follows:

|                            |  |              |        |           |  |   |        |  
|--------------------------- |  | ------------ | ------ | --------- |  | - | ------ | -
|                            |  | December 31, |        | March 31,
|(in thousands)              |  | 2003         |        | 2003     
|                            |  |              |        |          
|Liberty Diabetes:           |  |              |        |           |  |   |        |  
|Goodwill                    |  | $            | 4,951  |           |  | $ | 4,951  |  
|                            |  |              |        |           |  |   |        |  
|Customer list               |  | $            | 2,154  |           |  | $ | 1,816  |  
|Accumulated amortization    |  |              | (1,853 | )         |  |   | (1,708 | )
|                            |  |              |        |           |  |   |        |  
|                            |  | $            | 301    |           |  | $ | 108    |  
|                            |  |              |        |           |  |   |        |  
|Pharmaceuticals:            |  |              |        |           |  |   |        |  
|Goodwill                    |  | $            | 995    |           |  | $ | 995    |  
|                            |  |              |        |           |  |   |        |  
|Total consolidated goodwill |  | $            | 5,946  |           |  | $ | 5,946  |  
|                            |  |              |        |           |  |   |        |  

In the quarter ended December 31, 2003, we purchased substantially all of
the assets, consisting primarily of patient names and inventory, of a small
diabetes supply company for approximately $126,000. In the nine months ended
December 31, 2003, we had spent $338,000 on such acquisitions. We completed
these acquisitions in an effort to expand our customer base through means other
than direct-response advertising. We will amortize the cost of the intangible
asset purchases 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 $32,000 and
$157,000 for the three months ended

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December 31, 2003 and 2002, respectively, and approximately $145,000 and
$525,000 for the nine months ended December 31, 2003 and 2002, respectively. As
of December 31, 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  |  | $ | 26  | 
|2005  |  |   | 89  | 
|2006  |  |   | 75  | 
|2007  |  |   | 75  | 
|2008  |  |   | 36  | 
|      |  |   |     | 
|Total |  | $ | 301 | 
|      |  |   |     | 



|5. |  | Direct-Response Advertising
|-- |  | ---------------------------

In accordance with Statement of Position 93-7 (SOP 93-7),
direct-response advertising and associated costs for our diabetes supplies and
related products included in the Liberty Diabetes segment for the periods
presented are capitalized and amortized to selling, general and administrative
expenses on an accelerated basis during the first two years of a four-year
period. The amortization rate is such that 55% of such costs are expensed after
two years from the date they are incurred, and the remaining 45% is expensed on
a straight-line basis over the next two years. Management assesses the
realizability of the amounts of direct-response advertising costs reported as
assets at each balance sheet date by comparing the carrying amounts of such
assets to the probable remaining future net cash flows expected to result
directly from such advertising. 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.

On December 8, 2003, the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003 (the Medicare Act) was signed into law. The
Medicare Act reduces reimbursement rates for inhalation drugs, which we provide
through our Liberty Respiratory segment. In calendar year 2004, reimbursement
for these drugs will be reduced from 95% of the average wholesale price (AWP)
to 80% of AWP. Beginning in the 2005 calendar year, reimbursement for
inhalation drugs will be reduced to 106% of the average sales price (ASP), a
new benchmark that will be determined by sales data submitted by the drug
manufacturers. The Medicare Act also directs the General Accounting Office to
assess the adequacy of current reimbursement rates for inhalation drugs under
the Medicare program and report its findings to Congress no later than December
8, 2004. If the Secretary of Health and Human Services determines that the ASP
methodology does not reflect the widely available market price or is inherently
unreasonable, the Secretary has the authority to adjust payments to providers
either up or down, although the degree of any potential adjustment is unknown
at this time.

Due to the reduction in reimbursement rates for inhalation drugs
contemplated by the Medicare Act, we expect that our Liberty Respiratory
segment will generate less revenue, earnings and cash flow than it has
historically. As a result, we suspended all Liberty Respiratory direct-response
advertising in December 2003 and recorded a $14.44 million impairment charge of
Liberty Respiratorys direct-response advertising asset, or approximately $0.34
per diluted share, to adjust the assets carrying value down to its net
realizable value. Net realizable value is determined by comparing the carrying
amounts of direct-response advertising costs capitalized as assets at each
balance sheet date to the probable remaining future net cash flows expected to
result directly from such advertising. If the carrying amount of the assets
exceeds the probable remaining future net cash flows expected to result
directly from such assets, an impairment loss is

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recognized in an amount equal to that excess. We perform net realizable value
tests of our direct-response advertising asset at each reporting period and
whenever events or changes in circumstance suggest that the carrying value may
not be recoverable and record any impairment as a cost of continuing
operations.

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 |         | Nine months ended
|                                                  |  | December 31,       |         | December 31,      |  | December 31, |        | December 31,
|(in thousands)                                    |  | 2003               |         | 2002              |  | 2003         |        | 2002        
|                                                  |  |                    |         |                   |  |              |        |             
|Capitalized
direct-response
advertising           |  | $                  | 13,466  |                   |  | $            | 10,561 |              |  | $ | 42,431 |   |  | $ | 34,059 | 
|Direct-response
advertising
amortization          |  |                    | 11,374  |                   |  |              | 9,271  |              |  |   | 32,628 |   |  |   | 26,630 | 
|Impairment of
direct-response
advertising asset   |  |                    | 14,443  |                   |  |              |       |              |  |   | 14,443 |   |  |   |       | 
|                                                  |  |                    |         |                   |  |              |        |              |  |   |        |   |  |   |        | 
|Change in
direct-response
advertising asset,
net  |  | $                  | (12,351 | )                 |  | $            | 1,290  |              |  | $ | (4,640 | ) |  | $ | 7,429  | 
|Beginning

direct-response
advertising asset,
net |  |                    | 71,772  |                   |  |              | 58,251 |              |  |   | 64,061 |   |  |   | 52,112 | 
|                                                  |  |                    |         |                   |  |              |        |              |  |   |        |   |  |   |        | 
|Ending
direct-response
advertising asset,
net     |  | $                  | 59,421  |                   |  | $            | 59,541 |              |  | $ | 59,421 |   |  | $ | 59,541 | 
|                                                  |  |                    |         |                   |  |              |        |              |  |   |        |   |  |   |        | 



|6. |  | New Accounting Pronouncements
|-- |  | -----------------------------

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.

In December 2003, the FASB announced that certain proposed modifications
to FIN 46 would be incorporated into a revised FIN 46 (FIN 46-R), including a
deferral of the Interpretations effective date. FIN 46-R will require public
entities that are not small business issuers and those that are small business
issuers to apply Interpretation 46-R to all entities subject to it no later
than the end of the first reporting period that ends after March 15, 2004 (as
of March 31, 2004) and the end of the first reporting period that ends after
December 15, 2004 (as of December 31, 2004), respectively.

The adoption of this statement is not expected to have a material impact
on our financial position or results of operations.

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

Accrued expenses consist of the following:

|                                                         |  |              |        |           |  |   |        |  
|-------------------------------------------------------- |  | ------------ | ------ | --------- |  | - | ------ | -
|                                                         |  | December 31, |        | March 31,
|(in thousands)                                           |  | 2003         |        | 2003     
|                                                         |  |              |        |          
|Salaries and benefits                                    |  | $            | 7,955  |           |  | $ | 8,641  |  
|Income tax payable                                       |  |              | 5,431  |           |  |   | (1,181 | )
|Amounts reserved for overpayments by Medicare and others |  |              | 8,113  |           |  |   | 4,941  |  
|Other                                                    |  |              | 2,801  |           |  |   | 4,602  |  
|                                                         |  |              |        |           |  |   |        |  
|                                                         |  | $            | 24,300 |           |  | $ | 17,003 |  
|                                                         |  |              |        |           |  |   |        |  

As part of the internal review that we are conducting in parallel with the
Department of Justice (DOJ) investigation, we identified a category of
Medicare claims where the documentation for the claim supported a portion, but
not the full quantity, of the products shipped and billed. We engaged an
outside consulting firm to perform a statistical analysis of all the Medicare
claims we filed over a six-year period in order to develop an estimate of
overpayments by Medicare related to this category of claims. We recently
received the preliminary results of that analysis which indicate an aggregate
overpayment of approximately $5.71 million, of which $2.57 million was
previously accrued and $3.14 million was recorded as a reduction of net
revenues and an increase to the accrual in the three months ended December 31,
2003, bringing the total amount reserved for this category of claims to $5.71
million as of December 31, 2003. Of the total $3.14 million reduction in net
revenues in the three months ended December 31, 2003, $2.69 million and
$451,000 was recorded in the Liberty Diabetes and Liberty Respiratory segments,
respectively.

Amounts reserved for overpayments by Medicare and others include amounts
due to Medicare and related amounts due to insurers and Medicare beneficiaries
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. From September 2001 through November 2001, we received
administrative overpayment notices from one of the four Medicare carriers
resulting in $1.06 million of refunds or credits to the Medicare carrier, but
have received no administrative overpayment notices since that time. 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. Since that time, we have
reduced the reserve by an additional $175,000 due primarily to the passage of
time. Medicare carriers must refute claims within four years from the billing
date.

As of December 31, 2003, $2.40 million of the total $8.11 million reserved
for overpayments by Medicare and others, relates to the change in
interpretation of the reimbursement formula for albuterol and ipratropium
combinations and $5.71 million is our estimated exposure as calculated by an
outside consulting firm as discussed above.

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, 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

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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 in excess of $10.00 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.

As part of the internal review described in Note 7, we identified certain
other claims that largely occurred during 1999 and 2000 where our documentation
was consistent with the full quantity shipped and billed, but was not strictly
in accordance with Medicare rules. We are contending the adequacy of our
documentation for these claims to the government investigators. Accordingly, we
have not recorded any reserves for this category of claims, as to which the
analysis indicates that the amount potentially at issue is approximately $12
million, and anticipates that the issue will be addressed in the context of the
overall resolution of the investigation. While the governments investigation
could identify other issues, we are not aware of any information that would
result in payments to the government by PolyMedica which in the aggregate would
substantially impair our ability to carry out our current business plan.

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, former President of Liberty
Healthcare Group, Inc. and 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. A
settlement agreement has been filed with the Superior Court, and 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 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, and a hearing on the settlement has been scheduled for March 8,
2004.

If any of the 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

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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 net revenues. 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 $39.03 million and $17.40
million of cash, cash equivalents and marketable securities as of December 31
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 allocate Florida shared service costs, is as follows:

|                                       |  |                    |         |                   |  |              |        |              |  |   |         |  |  |   |         | 
|-------------------------------------- |  | ------------------ | ------- | ----------------- |  | ------------ | ------ | ------------ |  | - | ------- |  |  | - | ------- | 
|                                       |  | Three months ended |         | Nine months ended
|                                       |  | December 31,       |         | December 31,      |  | December 31, |        | December 31,
|(in thousands)                         |  | 2003               |         | 2002              |  | 2003         |        | 2002        
|                                       |  |                    |         |                   |  |              |        |             
|Net revenues:                          |  |                    |         |                   |  |              |        |              |  |   |         |  |  |   |         | 
|Liberty Diabetes                       |  | $                  | 68,891  |                   |  | $            | 60,119 |              |  | $ | 207,184 |  |  | $ | 179,595 | 
|Liberty Respiratory                    |  |                    | 20,349  |                   |  |              | 19,765 |              |  |   | 60,284  |  |  |   | 54,954  | 
|Pharmaceuticals                        |  |                    | 17,223  |                   |  |              | 10,033 |              |  |   | 43,154  |  |  |   | 24,981  | 
|                                       |  |                    |         |                   |  |              |        |              |  |   |         |  |  |   |         | 
|Total                                  |  | $                  | 106,463 |                   |  | $            | 89,917 |              |  | $ | 310,622 |  |  | $ | 259,530 | 
|                                       |  |                    |         |                   |  |              |        |              |  |   |         |  |  |   |         | 
|Depreciation and amortization expense: |  |                    |         |                   |  |              |        |              |  |   |         |  |  |   |         | 
|Liberty Diabetes                       |  | $                  | 8,114   |                   |  | $            | 6,296  |              |  | $ | 23,001  |  |  | $ | 17,722  | 
|Liberty Respiratory                    |  |                    | 5,159   |                   |  |              | 4,457  |              |  |   | 15,097  |  |  |   | 12,620  | 
|Pharmaceuticals                        |  |                    | 181     |                   |  |              | 225    |              |  |   | 519     |  |  |   | 785     | 
|                                       |  |                    |         |                   |  |              |        |              |  |   |         |  |  |   |         | 
|Total                                  |  | $                  | 13,454  |                   |  | $            | 10,978 |              |  | $ | 38,617  |  |  | $ | 31,127  | 
|                                       |  |                    |         |                   |  |              |        |              |  |   |         |  |  |   |         | 
|Income before income taxes:            |  |                    |         |                   |  |              |        |              |  |   |         |  |  |   |         | 
|Liberty Diabetes                       |  | $                  | 8,718   |                   |  | $            | 9,008  |              |  | $ | 31,777  |  |  | $ | 27,594  | 
|Liberty Respiratory                    |  |                    | (8,909  | )                 |  |              | 5,843  |              |  |   | 1,850   |  |  |   | 16,608  | 
|Pharmaceuticals                        |  |                    | 3,676   |                   |  |              | 2,489  |              |  |   | 7,154   |  |  |   | 3,631   | 
|                                       |  |                    |         |                   |  |              |        |              |  |   |         |  |  |   |         | 
|Total                                  |  | $                  | 3,485   |                   |  | $            | 17,340 |              |  | $ | 40,781  |  |  | $ | 47,833  | 
|                                       |  |                    |         |                   |  |              |        |              |  |   |         |  |  |   |         | 

|                       |  |              |         |           |  |   |         |  |  |  |  |  |  |  |  | 
|---------------------- |  | ------------ | ------- | --------- |  | - | ------- |  |  |  |  |  |  |  |  | 
|                       |  | December 31, |         | March 31,
|                       |  | 2003         |         | 2003     
|                       |  |              |         |          
|Segment assets:        |  |              |         |           |  |   |         | 
|Liberty Diabetes       |  | $            | 169,038 |           |  | $ | 152,457 | 
|Liberty Respiratory    |  |              | 27,995  |           |  |   | 46,928  | 
|Pharmaceuticals        |  |              | 22,512  |           |  |   | 17,961  | 
|Corporate Headquarters |  |              | 55,362  |           |  |   | 33,623  | 
|                       |  |              |         |           |  |   |         | 
|Total                  |  | $            | 274,907 |           |  | $ | 250,969 | 
|                       |  |              |         |           |  |   |         | 

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See Note 5 and Note 7 for more information on the direct-response
advertising impairment charge and changes in amounts reserved for overpayments
by Medicare and others, respectively.



|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 or greater than 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 |        | Nine months ended
|                                                                                                 |  | December 31,       |        | December 31,      |  | December 31, |        | December 31,
|(in thousands, except per share data)                                                            |  | 2003               |        | 2002              |  | 2003         |        | 2002        
|                                                                                                 |  |                    |        |                   |  |              |        |             
|Net income                                                                                       |  | $                  | 2,168  |                   |  | $            | 10,403 |              |  | $ | 25,366 |   |  | $ | 14,755 |  
|Add back: Stock compensation costs,
net of tax, on options granted below
fair market value       |  |                    | 32     |                   |  |              | 59     |              |  |   | 154    |   |  |   | 94     |  
|Less: Stock compensation costs, net
of tax, had all employee options
been recorded at fair value |  |                    | (691   | )                 |  |              | (992   | )            |  |   | (3,204 | ) |  |   | (3,733 | )
|                                                                                                 |  |                    |        |                   |  |              |        |              |  |   |        |   |  |   |        |  
|Adjusted net income                                                                              |  | $                  | 1,509  |                   |  | $            | 9,470  |              |  | $ | 22,316 |   |  | $ | 11,116 |  
|                                                                                                 |  |                    |        |                   |  |              |        |              |  |   |        |   |  |   |        |  
|Weighted average shares, basic                                                                   |  |                    | 25,645 |                   |  |              | 24,595 |              |  |   | 25,062 |   |  |   | 24,424 |  
|Weighted average shares, diluted                                                                 |  |                    | 26,636 |                   |  |              | 25,160 |              |  |   | 25,930 |   |  |   | 25,065 |  
|Net income per weighted average
share, basic, as reported                                        |  | $                  | 0.08   |                   |  | $            | 0.42   |              |  | $ | 1.01   |   |  | $ | 0.60   |  
|Net income per weighted average
share, diluted, as reported                                      |  | $                  | 0.08   |                   |  | $            | 0.41   |              |  | $ | 0.98   |   |  | $ | 0.59   |  
|Adjusted net income per weighted
average share, basic                                            |  | $                  | 0.06   |                   |  | $            | 0.39   |              |  | $ | 0.89   |   |  | $ | 0.46   |  
|Adjusted net income per weighted
average share, diluted                                          |  | $                  | 0.06   |                   |  | $            | 0.38   |              |  | $ | 0.86   |   |  | $ | 0.44   |  

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|                                               |  |                    |       |                   |  |              |     |              |  |   |       |  |  |   |      | 
|---------------------------------------------- |  | ------------------ | ----- | ----------------- |  | ------------ | --- | ------------ |  | - | ----- |  |  | - | ---- | 
|                                               |  | Three months ended |       | Nine months ended
|                                               |  | December 31,       |       | December 31,      |  | December 31, |     | December 31,
|                                               |  | 2003               |       | 2002              |  | 2003         |     | 2002        
|                                               |  |                    |       |                   |  |              |     |             
|Weighted-average
fair value of
options granted |  | $                  | 16.48 |                   |  |              | N/A |              |  | $ | 15.51 |  |  | $ | 7.00 | 

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 |       | Nine months ended
|                        |  | December 31,       |       | December 31,      |  | December 31, |     | December 31,
|                        |  | 2003               |       | 2002              |  | 2003         |     | 2002        
|                        |  |                    |       |                   |  |              |     |             
|Dividend yield          |  |                    | 2.28  | %                 |  |              | N/A |              |  |  | 2.19  | % |  |  | 2.91  | %
|Expected volatility     |  |                    | 91.70 | %                 |  |              | N/A |              |  |  | 92.74 | % |  |  | 89.73 | %
|Risk-free interest rate |  |                    | 3.25  | %                 |  |              | N/A |              |  |  | 2.80  | % |  |  | 2.55  | %
|Expected
life           |  |                    | 5.0   |                   |  |              | N/A |              |  |  | 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 |        | Nine months ended
|                                                                                                       |  | Dec. 31,           |        | Dec. 31,          |  | Dec. 31, |        | Dec. 31,
|(In thousands, except per share data)                                                                  |  | 2003               |        | 2002              |  | 2003     |        | 2002    
|                                                                                                       |  |                    |        |                   |  |          |        |         
|Income before cumulative effect of change in accounting principle                                      |  | $                  | 2,168  |                   |  | $        | 10,403 |          |  | $ | 25,366 |  |  | $ | 29,370 | 
|BASIC:                                                                                                 |  |                    |        |                   |  |          |        |          |  |   |        |  |  |   |        | 
|Weighted average common stock outstanding, net of treasury
stock, end of period                        |  |                    | 25,645 |                   |  |          | 24,595 |          |  |   | 25,062 |  |  |   | 24,424 | 
|Income before cumulative effect of change in accounting
principle per weighted average share, basic    |  | $                  | 0.08   |                   |  | $        | 0.42   |          |  | $ | 1.01   |  |  | $ | 1.20   | 
|                                                                                                       |  |                    |        |                   |  |          |        |          |  |   |        |  |  |   |        | 
|DILUTED:                                                                                               |  |                    |        |                   |  |          |        |          |  |   |        |  |  |   |        | 
|Weighted average common stock outstanding, net of treasury
stock, end of period                        |  |                    | 25,645 |                   |  |          | 24,595 |          |  |   | 25,062 |  |  |   | 24,424 | 
|Weighted average dilutive common stock equivalents                                                     |  |                    | 991    |                   |  |          | 565    |          |  |   | 868    |  |  |   | 641    | 
|                                                                                                       |  |                    |        |                   |  |          |        |          |  |   |        |  |  |   |        | 
|Weighted average common stock and dilutive common stock
equivalents outstanding, net of treasury stock |  |                    | 26,636 |                   |  |          | 25,160 |          |  |   | 25,930 |  |  |   | 25,065 | 
|Income before cumulative effect of change in accounting
principle per weighted average share, diluted  |  | $                  | 0.08   |                   |  | $        | 0.41   |          |  | $ | 0.98   |  |  | $ | 1.17   | 
|                                                                                                       |  |                    |        |                   |  |          |        |          |  |   |        |  |  |   |        | 

Potentially Dilutive Stock Options

Options to purchase 0 and 657,245 shares of common stock were outstanding
as of December 31, 2003 and 2002, respectively, but were not included in the
computation of diluted earnings per share for the three months ended December
31, 2003, because the options exercise prices were greater than the average
market price of the common shares. During the nine months ended December 31,
2003 and 2002, options to purchase 361,750 and 657,245 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.

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

Our total comprehensive income is equal to our net income for the three
and nine months ended December 31, 2003 and 2002.



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

On November 17, 2003, we paid a $0.15 per share cash dividend on
25,575,878 common shares outstanding for a total payment of $3.84 million to
our common shareholders of record as of the close of business on November 5,
2003. For the nine months ended December 31, 2003, we paid a total of $10.01
million in cash dividends to our common shareholders of record. In January 2004
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 February 5,
2004, payable on February 16, 2004.



|14. |  | Executive Management Changes and Subsequent Events
|--- |  | --------------------------------------------------

On November 6, 2003, PolyMedica announced the retirement of its President,
Arthur Siciliano, Ph.D., effective March 31, 2004 and the relinquishment of his
responsibilities as President effective immediately. Dr. Siciliano will remain
with PolyMedica through March as a Senior Advisor. Effective January 13, 2004,
Samuel L. Shanaman, Lead Director and Interim Chief Executive Officer, assumed
the positions of Chairman of the Board and Chief Executive Officer on a
permanent basis. Also effective January 13, 2004, Stephen C. Farrell, Senior
Vice President and Chief Financial Officer of PolyMedica, was named the new
President of Liberty Healthcare Group, Inc., replacing Warren K. Trowbridge,
who resigned to pursue other opportunities. Effective January 27, 2004, Fred H.
Croninger III, Vice President, Capital Markets, was named Chief Financial
Officer, replacing Stephen C. Farrell. On February 10, 2004, we announced that
William B. Eck had been named to the new position of Senior Vice President,
Chief of Healthcare Affairs and Deputy General Counsel, effective March 1,
2004.

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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, potential business strategies and the effect of
government regulations. 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 and
in our Annual Report on Form 10-K for the year ended March 31, 2003. 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.

Overview

We are a leading provider of direct-to-consumer medical products,
conducting business through our 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 healthcare supplies and medications described below.

Liberty Diabetes

Through our Liberty Diabetes segment we provide diabetes testing supplies
and related products primarily to Medicare-eligible customers suffering from
diabetes. As of December 31, 2003, our Liberty Diabetes segment had
approximately 601,000 active diabetes customers, compared to approximately
522,000 active customers as of December 31, 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
directly 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 .             

Liberty Respiratory

Through our Liberty Respiratory segment we provide prescription
respiratory medications and supplies primarily to Medicare-eligible customers
suffering from chronic obstructive pulmonary disease (COPD). As of December
31, 2003, our Liberty Respiratory segment had approximately 68,000 active
customers for our COPD prescription medications and supplies, as compared to
approximately 59,000 active customers as of December 31, 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.

Our Liberty Respiratory segment operates similarly to our Liberty Diabetes
segment, as we deliver products directly to consumers homes and bill Medicare
and private insurance companies (if applicable) directly for those prescription
respiratory medications and supplies that are reimbursable.

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Pharmaceuticals

Through our Pharmaceuticals segment we provide prescription oral
medications not covered by Medicare through Liberty Pharmacy directly to
consumers 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. 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.

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 Massachusetts 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,
depreciation of facilities, amortization of capitalized
direct-response advertising costs and other amortization and
depreciation.

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

Critical Accounting Policies

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

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

Revenue Recognition

We recognize revenue related to product sales to customers who have placed
orders upon shipment of such orders, provided that risk of loss has passed to
the customer and we have received and verified any written documentation
required to bill Medicare, other third-party payers, and customers. We record
revenue at the amounts expected to be

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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 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 our 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.

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 18 months 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 written documentation required 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 $2.48 million
and $2.57 million as of December 31 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

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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 our
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.

Amounts reserved for overpayments by Medicare and others

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

As part of the internal review that we are conducting in parallel with the
DOJ investigation, we identified a category of Medicare claims where the
documentation for the claim supported a portion, but not the full quantity, of
the products shipped and billed. We engaged an outside consulting firm to
perform a statistical analysis of all Medicare claims filed by PolyMedica over
a six-year period in order to develop an estimate of overpayments by Medicare
related to this category of claims. We recently received the preliminary
results of that analysis which indicate an aggregate overpayment of
approximately $5.71 million, of which $2.57 million was previously accrued and
$3.14 million was recorded as a reduction of net revenues and an increase to
the accrual in the three months ended December 31, 2003, bringing the total
amount reserved for this category of claims to $5.71 million as of December 31,
2003.

That analysis also identified certain other claims that largely occurred
during 1999 and 2000 where PolyMedicas documentation was consistent with the
full quantity shipped and billed, but was not strictly in accordance with
Medicare rules. We are contending the adequacy of our documentation for these
claims to the government investigators. Accordingly, we have not recorded any
reserves for this category of claims, as to which the analysis indicates that
the amount potentially at issue is approximately $12 million, and anticipates
that the issue will be addressed in the context of the overall resolution of
the investigation. While the governments investigation could identify other
issues, we are not aware of any information that would result in payments to
the government by PolyMedica which in the aggregate would substantially impair
our ability to carry out our current business plan.

Recent Developments

Medicare Act

On December 8, 2003, the Medicare Act was signed into law. The Medicare
Act contains provisions affecting the coverage and reimbursement levels of
products provided through our Liberty Diabetes, Liberty Respiratory and
Pharmaceuticals segments.

Liberty Diabetes segment

In accordance with the Medicare Act, reimbursement rates for diabetes
testing supplies will be frozen for the 2004 calendar year at the rates in
effect for the 2003 calendar year. Commencing January 1, 2005, reimbursement
rates for diabetes test strips and lancets will be reduced by the percentage
difference between the median amounts paid by the Federal Employees Health
Benefit Program in the 2002 calendar year and the amount reimbursed by the
Medicare program in the 2002 calendar year. The maximum adjustment for test
strips and lancets for calendar years 2004 and 2005 appears to be 4.1% and
5.36%, respectively, but the actual percentage decrease in payment amounts for
any particular provider will depend on the geographic distribution of its
customers. Based on a preliminary interpretation of the Medicare Act, we
currently expect an overall reduction in reimbursement rates for test strips
and lancets of approximately 3.0% in calendar year 2005.

The Medicare Act also contains provisions that may have a positive
influence on our Liberty Diabetes segment. Beginning January 1, 2005, Medicare
coverage will be provided for an initial physical examination and for regular
diabetes screening tests, which should increase the incidence of diagnosis of
diabetes and potentially expand the Medicare market for testing supplies and
other diabetes products. The Medicare Act also provides up to $100.00 million
over the next three years for chronic care improvement programs to improve
clinical quality while potentially reducing

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the long-term cost of chronic diseases such as diabetes.

Liberty Respiratory segment

The Medicare Act reduces reimbursement rates for inhalation drugs, which
we provide through our Liberty Respiratory segment. In calendar year 2004,
reimbursement for these drugs will be reduced from 95% of the average wholesale
price (AWP) to 80% of AWP. Beginning in the 2005 calendar year, reimbursement
for inhalation drugs will be reduced to 106% of the average sales price
(ASP), a new benchmark that will be determined by sales data submitted by the
drug manufacturers. The Medicare Act also directs the General Accounting Office
to assess the adequacy of current reimbursement rates for inhalation drugs
under the Medicare program and report its findings to Congress no later than
December 8, 2004. If the Secretary of Health and Human Services determines that
the ASP methodology does not reflect the widely available market price or is
inherently unreasonable, the Secretary has the authority to adjust payments to
providers either up or down, although the degree of any potential adjustment is
unknown at this time.

Due to the reduction in reimbursement rates for inhalation drugs
contemplated by the Medicare Act, we expect that our Liberty Respiratory
segment will generate less revenue, earnings and cash flow than it has
historically. As a result, we suspended all Liberty Respiratory direct-response
advertising in December 2003 and recorded a $14.44 million impairment charge of
Liberty Respiratorys direct-response advertising asset, or approximately $0.34
per diluted share, to adjust the assets carrying value down to its net
realizable value. We expect that if the Secretary determines that the ASP
methodology reflects the widely available market price of inhalation drugs, the
revenues in our Liberty Respiratory segment will account for less than 10% of
our consolidated net revenues beginning in the 2005 calendar year. While we
have discontinued advertising specifically targeted to Liberty Respiratory
customers, we have expanded our efforts to acquire customers through internal
cross-referrals and other avenues which are more cost effective and expanded
our marketing efforts to doctors offices through an internal healthcare
professional calling force.

Pharmaceuticals segment

The Medicare Act establishes a voluntary prescription drug benefit under
the Medicare program. Beginning in calendar year 2006, coverage will be
available through both prescription drug plans and Medicare Advantage
prescription plans. This new benefit will include coverage for insulin and
syringes, as well as other prescription drugs. We have applied to become an
issuer of a Medicare-approved card.

The Medicare Act also creates a Medicare-approved prescription drug
discount card program that will go into effect in the spring of 2004. This
benefit may be voluntarily elected by certain Medicare beneficiaries who do not
have an existing outpatient prescription drug benefit. Sponsors of these cards
will offer Medicare beneficiaries access to outpatient prescription drugs at
discounted prices. Liberty Pharmacy began distributing its own non-Medicare
endorsed drug discount card to customers and their spouses in December 2003.
The Liberty Drug Card will allow Liberty customers to obtain discounts for cash
purchases at over 50,000 participating pharmacies, and potentially greater
discounts through the mail from Liberty Pharmacy.

Federal Employee Program Reimbursement Changes

In December 2003, the service benefit administrator of the Federal
Employee Program (FEP) notified Liberty Pharmacy and other durable medical
equipment suppliers that as of February 1, 2004 certain supplies and
medications would only be reimbursable through FEPs pharmacy benefit
administrator. Processing these supplies and medications as a pharmacy benefit
will result in increased costs to some of our FEP customers as well as lower
reimbursement rates to us. We are currently evaluating the impact of this
change, but anticipate some level of decrease to Liberty Pharmacys net
revenues, a substantial portion of which is derived from the FEP program.

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Results of Operations

Overview



| | - |  | Fiscal year 2004 third quarter net revenues, up 18.4% from the prior year comparative period                                                                                                                                                                                                                  
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | - |  | Fiscal year 2004 nine month net revenues, up 19.7% from the prior year comparative period                                                                                                                                                                                                                     
|
| | - |  | $3.14 million charge, or $0.07 per diluted share, recorded as
a reduction of net revenues in the fiscal year 2004 third quarter to
increase the accrual for amounts reserved for overpayments by
Medicare and others (see Note 7 to our consolidated financial
statements)                                    
|
| | - |  | $14.44 million impairment charge, or $0.34 per diluted share,
recorded as a selling, general and administrative expense in the
fiscal year 2004 third quarter to write down the value of Liberty
Respiratorys direct-response advertising asset                                                              
|
| | - |  | Fiscal year 2004 third quarter net income of $2.17 million,
down 79.2% from the prior year third quarter, due primarily to the
$14.44 million direct-response advertising impairment charge and
$3.14 million increase in amounts reserved for overpayments by
Medicare and others                            
|
| | - |  | Fiscal year 2004 third quarter diluted EPS of $0.08, down
80.5% from the prior year third quarter, due primarily to the $0.34
diluted EPS effect of the direct-response advertising impairment
charge and $0.07 diluted EPS effect of the increase in amounts
reserved for overpayments by Medicare and others
|
| | - |  | Year to date net cash flow from operations of $38.89 million,
up 90.7% from the prior year comparative period                                                                                                                                                                                                 

Three Months Ended December 31, 2003 Compared to Three Months Ended December 31, 2002

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

|                                             |                     |                    |      |                    |       |              |      |      |       | 
|-------------------------------------------- | ------------------- | ------------------ | ---- | ------------------ | ----- | ------------ | ---- | ---- | ----- | 
|                                             |                     |                    |      | Three months ended
|                                             |                     |                    |      | December 31,       |       | December 31,
|                                             |                     |                    |      | 2003               |       | 2002        
|                                             |                     |                    |      |                    |       |             
|Net revenues:                                |                     |                    |      |                    |       |              |      |     
|                                             | Liberty Diabetes    |                    |      | 64.7               | %     |              |      | 66.9 | %    
|                                             | Liberty Respiratory |                    |      | 19.1               |       |              |      | 22.0 |      
|                                             | Pharmaceuticals     |                    |      | 16.2               |       |              |      | 11.1 |      
|                                             |                     |                    |      |                    |       |              |      |     
|                                             |                     | Total net revenues |      |                    | 100.0 |              |      |      | 100.0 | 
|Cost of sales                                |                     |                    | 37.9 |                    |       |              | 35.2 |     
|                                             |                     |                    |      |                    |       |              |      |     
|Gross margin                                 |                     |                    | 62.1 |                    |       |              | 64.8 |     
|Selling, general and
administrative expenses |                     |                    | 58.8 |                    |       |              | 45.6 |     
|                                             |                     |                    |      |                    |       |              |      |     
|Income from operations                       |                     |                    | 3.3  | %                  |       |              | 19.2 | %   
|                                             |                     |                    |      |                    |       |              |      |     

Net Revenues

Total net revenues increased 18.4% to $106.46 million in the three months
ended December 31, 2003, as compared with $89.92 million in the three months
ended December 31, 2002, primarily due to increased revenues generated from our
Liberty Diabetes and Pharmaceuticals segments.

Net revenues from our Liberty Diabetes segment increased 14.6% to $68.89
million in the three months ended December 31, 2003, as compared with $60.12
million in the three months ended December 31, 2002. This increase was due
primarily to the growth in our customer base, which grew 15.1% to approximately
601,000 active customers as of December 31, 2003, from approximately 522,000
active customers as of December 31, 2002, primarily as a result of our
advertising. An increase of approximately 12.8% in the volume of shipments made
to new and recurring customers and an increase of approximately 2.5% in average
net revenues generated per shipment in the quarter ended December 31, 2003, as
compared with the quarter ended December 31, 2002, also contributed to the
increase in Liberty Diabetes net revenues.

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Net revenues from our Liberty Respiratory segment increased 3.0% to $20.35
million in the three months ended December 31, 2003, as compared with $19.77
million in the three months ended December 31, 2002. This increase was due
primarily to the growth in our customer base, which grew 15.3% to approximately
68,000 active customers as of December 31, 2003, from approximately 59,000
active customers as of December 31, 2002, primarily as a result of our
advertising. An increase of approximately 11.8% in the volume of shipments made
to new and recurring customers offset by a decrease of approximately 5.9% in
average net revenues generated per shipment in the quarter ended December 31,
2003, as compared with the quarter ended December 31, 2002, also contributed to
the increase in Liberty Respiratory net revenues. Net revenue growth in our
Liberty Respiratory segment has slowed recently as a result of several factors,
including our suspension of direct-response advertising to respiratory patients
in December 2003 in response to new Medicare legislation, lower than expected
response rate to the advertisements that we ran earlier in the quarter, increased
competition and lower product utilization by our customers.

Net revenues from our Pharmaceuticals segment increased 71.7% to $17.22
million in the three months ended December 31, 2003, as compared with $10.03
million in the three months ended December 31, 2002, due primarily to the
growth in our Liberty Pharmacy sales of prescription oral medications, not
covered by Medicare. Sales of these products represented 66.8% and 55.8% of
total Pharmaceuticals segment net revenues in the three months ended December
31, 2003 and 2002, respectively. The current customer base for these products
consists primarily of existing Liberty Diabetes and Liberty Respiratory
customers and their spouses. We expect the business to help position us for the
prescription drug benefit under the Medicare Act beginning in calendar year
2006.

Gross Margins

As a percentage of total net revenues, overall gross margins were 62.1% in
the three months ended December 31, 2003, as compared with 64.8% in the three
months ended December 31, 2002. Gross margins in the three months ended
December 31, 2003 decreased primarily as a result of a $3.14
million increase in
amounts reserved for overpayments by Medicare and others, recorded as a
reduction of net revenues in the quarter ended December 31, 2003, combined with
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. In the three
months ended December 31, 2003, Liberty Pharmacy reported gross margins of
31.1%, as compared with consolidated gross margins from our other businesses of
65.8%. In the three months ended December 31, 2002, Liberty Pharmacy reported
gross margins of 35.7%, as compared with consolidated gross margins from our
other businesses of 66.7%. We expect this trend to continue.

Selling, General and Administrative Expenses

|                                                      |  |                    |         |          |  |              |      |          |  |   |        |  |  |  |      |  
|----------------------------------------------------- |  | ------------------ | ------- | -------- |  | ------------ | ---- | -------- |  | - | ------ |  |  |  | ---- | -
|                                                      |  | Three months ended
|                                                      |  | December 31,       |         | % Net    |  | December 31, |      | % Net   
|(in thousands)                                        |  | 2003               |         | Revenues |  | 2002         |      | Revenues
|                                                      |  |                    |         |          |  |              |      |         
|Net revenues                                          |  | $                  | 106,463 |          |  |              |      |          |  | $ | 89,917 |  |  |  |      |  
|Reported selling, general and administrative expenses |  |                    | 62,539  |          |  |              | 58.8 | %        |  |   | 41,000 |  |  |  | 45.6 | %
|Direct-response advertising impairment charge         |  |                    | (14,443 | )        |  |              | 13.6 | %        |  |   |       |  |  |  |     |  
|                                                      |  |                    |         |          |  |              |      |          |  |   |        |  |  |  |      |  
|                                                      |  | $                  | 48,096  |          |  |              | 45.2 | %        |  | $ | 41,000 |  |  |  | 45.6 | %

As a percentage of total net revenues, selling, general and administrative
expenses were 58.8% in the three months ended December 31, 2003, as compared
with 45.6% in the three months ended December 31, 2002. Selling, general and
administrative expenses increased by 52.5% in the three months ended December
31, 2003 to $62.54 million, as compared with $41.00 million in the three months
ended December 31, 2002. The increase in selling, general and administrative
expenses as a percentage of net revenues was primarily attributable to a $14.44
million impairment charge recorded to adjust the carrying value of Liberty
Respiratorys direct-response advertising asset down to its net realizable
value for the reasons discussed under the caption Recent
Developments above.

Income Tax Provision

The provision for income taxes was $1.32 million and $6.94 million in the
three months ended December 31, 2003 and 2002, respectively, which resulted in
an effective tax rate of 37.8% in each of the three months ended

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December 31, 2003 and 2002. The effective tax rates in the three months
ended December 31, 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.

Nine Months Ended December 31, 2003 Compared to Nine Months Ended December 31, 2002

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

|                                             |                     |                    |      |                   |       |              |      |      |       | 
|-------------------------------------------- | ------------------- | ------------------ | ---- | ----------------- | ----- | ------------ | ---- | ---- | ----- | 
|                                             |                     |                    |      | Nine months ended
|                                             |                     |                    |      | December 31,      |       | December 31,
|                                             |                     |                    |      | 2003              |       | 2002        
|                                             |                     |                    |      |                   |       |             
|Net revenues:                                |                     |                    |      |                   |       |              |      |     
|                                             | Liberty Diabetes    |                    |      | 66.7              | %     |              |      | 69.2 | %    
|                                             | Liberty Respiratory |                    |      | 19.4              |       |              |      | 21.2 |      
|                                             | Pharmaceuticals     |                    |      | 13.9              |       |              |      | 9.6  |      
|                                             |                     |                    |      |                   |       |              |      |     
|                                             |                     | Total net revenues |      |                   | 100.0 |              |      |      | 100.0 | 
|Cost of sales                                |                     |                    | 36.8 |                   |       |              | 35.4 |     
|                                             |                     |                    |      |                   |       |              |      |     
|Gross margin                                 |                     |                    | 63.2 |                   |       |              | 64.6 |     
|Selling, general and
administrative expenses |                     |                    | 50.1 |                   |       |              | 46.2 |     
|                                             |                     |                    |      |                   |       |              |      |     
|Income from operations                       |                     |                    | 13.1 | %                 |       |              | 18.4 | %   
|                                             |                     |                    |      |                   |       |              |      |     

Net Revenues

Total net revenues increased 19.7% to $310.62 million in the nine months
ended December 31, 2003, as compared with $259.53 million in the nine months
ended December 31, 2002. This increase was the result of the growth in sales in
each of our Liberty Diabetes, Liberty Respiratory and Pharmaceuticals segments.

Net revenues from our Liberty Diabetes segment increased 15.4% to $207.18
million in the nine months ended December 31, 2003, as compared with $179.60
million in the nine months ended December 31, 2002. This increase was due
primarily to the growth in our customer base, which grew 15.1% to approximately
601,000 active customers as of December 31, 2003, from approximately 522,000
active customers as of December 31, 2002, primarily as a result of our
advertising. An increase of approximately 12.7% in the volume of shipments made
to new and recurring customers and an increase of approximately 2.7% in average
net revenues generated per shipment in the nine months ended December 31, 2003,
as compared with the nine months ended December 31, 2002, also contributed to
the increase in Liberty Diabetes net revenues.

Net revenues from our Liberty Respiratory segment increased 9.7% to $60.28
million in the nine months ended December 31, 2003, as compared with $54.95
million in the nine months ended December 31, 2002. This increase was due
primarily to the growth in our customer base, which grew 15.3% to approximately
68,000 active customers as of December 31, 2003, from approximately 59,000
active customers as of December 31, 2002, primarily as a result of our
advertising. An increase of approximately 18.2% in the volume of shipments made
to new and recurring customers offset by a decrease of approximately 6.5% in
average net revenues generated per shipment in the nine months ended December
31, 2003, as compared with the nine months ended December 31, 2002, also
contributed to the increase in Liberty Respiratory net revenues. Net revenue
growth in our Liberty Respiratory segment has slowed the past few quarters as a
result of several factors, including our suspension of direct-response
advertising to respiratory patients in December 2003 in response to new
Medicare legislation, lower than expected response rate to the advertisements
that we ran in the period, increased competition and lower product utilization
by our customers.

Net revenues from our Pharmaceuticals segment increased 72.7% to $43.15
million in the nine months ended December 31, 2003, as compared with $24.98
million in the nine months ended December 31, 2002, due primarily to the growth
in our Liberty Pharmacy sales of prescription oral medications, not covered by
Medicare. Sales of these products represented 69.1% and 52.8% of total
Pharmaceuticals segment net revenues in the nine months ended December 31,

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2003 and 2002, respectively. The current customer base for these products
consists primarily of existing Liberty Diabetes and Liberty Respiratory
customers and their spouses. We expect the business to help position us for the
prescription drug benefit under the Medicare Act beginning in calendar year
2006.

Gross Margins

As a percentage of total net revenues, overall gross margins were 63.2% in
the nine months ended December 31, 2003, as compared with 64.6% in the nine
months ended December 31, 2002. Gross margins in the nine months ended December
31, 2003 decreased primarily as a result of a $3.14 million increase in amounts
reserved for overpayments by Medicare and others, recorded as a reduction of
net revenues in the nine months ended December 31, 2003, combined with 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. In the nine
months ended December 31, 2003, Liberty Pharmacy reported gross margins of
32.3%, as compared with consolidated gross margins from our other businesses of
66.4%. In the nine months ended December 31, 2002, Liberty Pharmacy reported
gross margins of 33.9%, as compared with consolidated gross margins from our
other businesses of 66.3%. We expect this trend to continue.

Selling, General and Administrative Expenses

|                                                                                  |  |                    |         |          |  |              |      |          |  |   |         |  |  |  |      |  
|--------------------------------------------------------------------------------- |  | ------------------ | ------- | -------- |  | ------------ | ---- | -------- |  | - | ------- |  |  |  | ---- | -
|                                                                                  |  | Three months ended
|                                                                                  |  | December 31,       |         | % Net    |  | December 31, |      | % Net   
|(in thousands)                                                                    |  | 2003               |         | Revenues |  | 2002         |      | Revenues
|                                                                                  |  |                    |         |          |  |              |      |         
|Net revenues                                                                      |  | $                  | 310,622 |          |  |              |      |          |  | $ | 259,530 |  |  |  |      |  
|Reported selling, general and administrative expenses                             |  |                    | 155,610 |          |  |              | 50.1 | %        |  |   | 120,005 |  |  |  | 46.2 | %
|Direct-response advertising impairment charge                                     |  |                    | (14,443 | )        |  |              | 4.7  | %        |  |   |        |  |  |  |     |  
|Benefit for reduction of amounts reserved for
overpayments by Medicare and others |  |                    |        |          |  |              |     |          |  |   | 2,222   |  |  |  | .9   | %
|                                                                                  |  |                    |         |          |  |              |      |          |  |   |         |  |  |  |      |  
|                                                                                  |  | $                  | 141,167 |          |  |              | 45.4 | %        |  | $ | 122,227 |  |  |  | 47.1 | %

As a percentage of total net revenues, selling, general and administrative
expenses were 50.1% in the nine months ended December 31, 2003, as compared
with 46.2% in the nine months ended December 31, 2002. Selling, general and
administrative expenses increased by 29.7% in the nine months ended December
31, 2003 to $155.61 million, as compared with $120.00 million in the nine
months ended December 31, 2002. The increase in selling, general and
administrative expenses as a percentage of net revenues was primarily
attributable to a $14.44 million impairment charge recorded to adjust the
carrying value of Liberty Respiratorys direct-response advertising asset down
to its net realizable value for the reasons discussed under the
caption Recent Developments above. A
$2.22 million benefit for the reduction of accrued amounts for overpayments by
Medicare and others, recorded in the year-earlier period, also accounted for a
portion of the increase in selling, general and administrative expenses as a
percentage of net revenues. The effects of the above reasons for the increase
in selling, general and administrative expenses as a percentage of net revenues
in the current year, as compared with the prior year, were partially offset by
realized economies of scale resulting from our growing business, together with
reduced legal and related expenses and charges related to the termination of
certain executive officers.

Income Tax Provision

The provision for income taxes was $15.42 million and $18.46 million in
the nine months ended December 31, 2003 and 2002, respectively, which resulted
in an effective tax rate of 37.8% in each of the nine months ended December 30,
2003 and 2002. The effective tax rates in the nine months ended December 31,
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 flows from
operations. Our cash and cash equivalents balance increased $22.71 million to
$49.87 million as of December 31, 2003, as compared with $27.16 million as of
March 31, 2003. Net cash provided by operations of $38.89 million for the nine
months ended December 31, 2003, was

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generated primarily by net income of $25.37 million, a decrease in net
accounts receivable of $10.73 million, and an increase in accrued expenses and
other liabilities of $7.66 million, offset by cash used to fund certain areas
of our operations, such as accounts payable which decreased $9.30 million in
the nine months ended December 31, 2003.

In the nine months ended December 31, 2003 and 2002, we used $20.85
million and $15.71 million of cash for investing activities, respectively. The
$5.14 million increase in total cash used for investing activities was
primarily due to a net cash outflow of $5.65 million to purchase marketable
securities net of a decrease in capital expenditures of $853,000 in the nine
months ended December 31, 2003, as compared with the nine months ended December
31, 2002. Property, plant and equipment purchases totaled $14.86 million and
$15.71 million for the nine months ended December 31, 2003 and 2002,
respectively. Higher spending in the prior year period for capital expenditures
was related to the construction of a 64,000 square foot respiratory supplies
facility and a 59,000 square foot diabetes 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 nine month period.

In the nine months ended December 31, 2003, we generated $4.67 million of
cash from financing activities, which consisted primarily of $17.32 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 $10.01 million of cash dividends paid to PolyMedica shareholders.

On November 17, 2003, we paid a $0.15 per share cash dividend on
25,575,878 common shares outstanding for a total payment of $3.84 million to
our common shareholders of record as of the close of business on November 5,
2003. For the nine months ended December 31, 2003, we paid a total of $10.01
million in cash dividends to our common shareholders of record. In January 2004
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 February 5,
2004, payable on February 16, 2004. While a significant decline in our cash
balances or another business change, such as the Medicare legislation passed in
December 2003 which affects future reimbursement levels for some of the
products that we provide, 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.

Commitments

Leases

As of December 31, 2003, future annual minimum lease and rental
commitments were not materially different from the amounts we disclosed in our
Annual Report on Form 10-K for the fiscal year ended March 31, 2003.

Note Payable

As of December 31, 2003, we had fully paid off the note payable of $1.89
million reported in our Annual Report on Form 10-K for the fiscal year ended
March 31, 2003 and had not entered into any new note commitments.

Advertising

As of December 31, 2003, future commitments to purchase advertising spots
from various television networks in the fiscal year ending March 31, 2005, were
not materially different from the amounts we disclosed in our Annual Report on
Form 10-K for the fiscal year ended March 31, 2003.

Contingencies

We are subject to government investigations and related litigation, which,
if decided against us, could materially affect our liquidity. Please see Item
1 of Part II, Legal Proceedings of this Form 10-Q and our Annual Report on Form
10-K for the year ended March 31, 2003 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.

As part of the internal review that we are conducting in parallel with the
DOJ investigation, we identified a category of Medicare claims where the
documentation for the claim supported a portion, but not the full quantity, of
the

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products shipped and billed. We engaged an outside consulting firm to
perform a statistical analysis of all Medicare claims filed by PolyMedica over
a six-year period in order to develop an estimate of overpayments by Medicare
related to this category of claims. We recently received the preliminary
results of that analysis which indicate an aggregate overpayment of
approximately $5.71 million, of which $2.57 million was previously accrued and
$3.14 million was recorded as a reduction of net revenues and an increase to
the accrual in the three months ended December 31, 2003, bringing the total
amount reserved for this category of claims to $5.71 million as of December 31,
2003.

That analysis also identified certain other claims that largely occurred
during 1999 and 2000 where PolyMedicas documentation was consistent with the
full quantity shipped and billed, but was not strictly in accordance with
Medicare rules. We are contending the adequacy of our documentation for these
claims to the government investigators. Accordingly, we have not recorded any
reserves for this category of claims, as to which the analysis indicates that
the amount potentially at issue is approximately $12 million, and anticipates
that the issue will be addressed in the context of the overall resolution of
the investigation. While the governments investigation could identify other
issues, we are not aware of any information that would result in payments to
the government by PolyMedica which in the aggregate would substantially impair
our ability to carry out our current business plan.

We believe that our cash, cash equivalents and marketable securities
balance as of December 31, 2003 of $56.96 million and cash flow 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. Please see Factors Affecting our Future
Results for further factors that could materially and adversely affect our
business.

Accounting Pronouncements

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.

In December 2003, the FASB announced that certain proposed modifications
to FIN 46 would be incorporated into a revised FIN 46 (FIN 46-R), including a
deferral of the Interpretations effective date. FIN 46-R will require public
entities that are not small business issuers and those that are small business
issuers, to apply Interpretation 46-R to all entities subject to it no later
than the end of the first reporting period that ends after March 15, 2004 (as
of March 31, 2004) and the end of the first reporting period that ends after
December 15, 2004 (as of December 31, 2004), respectively.

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 or other
government programs change, delay or deny reimbursement

Sales of a significant portion of our Liberty Diabetes, Liberty
Respiratory and Pharmaceuticals segments depend on the continued availability
of reimbursement by government and private insurance plans. Any reduction in
Medicare or other government program reimbursements 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

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margin. Similarly, any increase in the cost of such products would reduce our
overall profit margin unless there was a corresponding increase in Medicare or
other government program reimbursement. Our profits could also be affected by
the imposition of more stringent regulatory requirements for Medicare or other
government program reimbursement or adjustments to previously reimbursed
amounts.

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 of this Form 10-Q
and our Annual Report on Form 10-K for the year ended March 31, 2003, 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 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

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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

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

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.

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

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

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

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

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

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

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

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



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

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

We regularly review potential acquisitions of businesses products and
assets. 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.




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.




Item 4. Controls and Procedures

(a)        Evaluation of disclosure controls and procedures.PolyMedicas
management, with the participation of PolyMedicas chief executive officer and
chief financial officer, evaluated the effectiveness of PolyMedicas disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act) as of December 31, 2003. Based on this evaluation, PolyMedicas
chief executive officer and chief financial officer concluded that, as of
December 31, 2003, PolyMedicas disclosure controls and procedures were (1)
designed to ensure that material information relating to PolyMedica, including
its consolidated subsidiaries, is made known to PolyMedicas chief executive
officer and chief financial officer by others within those entities,
particularly during the period in which this report was being prepared and (2)
effective, in that they provide reasonable assurance that information required
to be disclosed by PolyMedica in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms.

(b)        Changes in internal controls.No change in PolyMedicas internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) occurred during the fiscal quarter ended December 31,
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 nine months
ended December 31, 2003 are set forth below.

U.S. Attorneys Office

As part of the internal review that we are conducting in parallel with the
Department of Justice (DOJ) investigation, we identified a category of
Medicare claims where the documentation for the claim supported a portion, but
not the full quantity, of the products shipped and billed. We engaged an
outside consulting firm to perform a statistical analysis of all the Medicare
claims we filed over a six-year period in order to develop an estimate of
overpayments by Medicare related to this category of claims. We recently
received the preliminary results of that analysis which indicate an aggregate
overpayment of approximately $5.71 million, of which $2.57 million was
previously accrued and $3.14 million was recorded as a reduction of net
revenues and an increase to the accrual in the three months ended December 31,
2003, bringing the total amount reserved for this category of claims to $5.71
million as of December 31, 2003. Of the total $3.14 million reduction in net
revenues in the three months ended December 31, 2003, $2.69 million and
$451,000 was recorded in the Liberty Diabetes and Liberty Respiratory segments,
respectively.

That analysis also identified certain other claims that largely occurred
during 1999 and 2000 where our documentation was consistent with the full
quantity shipped and billed, but was not strictly in accordance with Medicare
rules. We are contending the adequacy of our documentation for these claims to
the government investigators. Accordingly, we have not recorded any reserves
for this category of claims, as to which the analysis indicates that the amount
potentially at issue is approximately $12 million, and anticipates that the
issue will be addressed in the context of the overall resolution of the
investigation. While the governments investigation could identify other
issues, we are not aware of any information that would result in payments to
the government by PolyMedica which in the aggregate would substantially impair
our ability to carry out our current business plan.

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
Reports on Form 10-Q for the three months ended June 30 and September 30, 2003.

On November 4, 2003, the Appeals Court extended the stay of the appellate
proceedings until February 6, 2004.

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 revised agreements were filed on October 3 and November 18, 2003. The
settlement agreements 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 expects to receive
reimbursement of such attorneys fees from its insurer. A hearing on the
settlement will be held on March 8, 2004. 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.

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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 October 28, 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 September 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                               
| |  | Chairman of the Board and Chief Executive Officer
| |  | (Principal Executive Officer)                    
| |  |                                                  
| |  | /s/ Fred H. Croninger III.                       
| |  |                                                  
| |  | Fred H. Croninger III.                           
| |  | Chief Financial Officer                          
| |  | (Principal Financial and Accounting Officer)     

Dated: February 13, 2004

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Exhibit Index

|        |  |   |  |                                                                                                                                       
|------- |  | - |  | --------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |   |  | Description                                                                                                                           
|        |  |   |  |                                                                                                                                       
|10.4    |  | - |  | Letter Agreement amendment to Retention Agreement by and
between the Registrant and Warren K. Trowbridge dated November
3, 2003.      
|        |  |   |  |                                                                                                                                       
|10.5    |  | - |  | Letter Agreement amendment to Employment Agreement by and
between the Registrant and Warren K. Trowbridge dated November
3, 2003.     
|        |  |   |  |                                                                                                                                       
|10.6    |  | - |  | Letter Agreement amendment to Retention Agreement by and
between the Registrant and John K.P. Stone III dated November
3, 2003.       
|        |  |   |  |                                                                                                                                       
|10.7    |  | - |  | Letter Agreement amendment to Employment Agreement by and
between the Registrant and John K.P. Stone III dated November
3, 2003.      
|        |  |   |  |                                                                                                                                       
|10.8    |  | - |  | Letter Agreement amendment to Retention Agreement by and
between the Registrant and Stephen C. Farrell dated November 3,
2003.        
|        |  |   |  |                                                                                                                                       
|10.9    |  | - |  | Letter Agreement amendment to Employment Agreement by and
between the Registrant and Stephen C. Farrell dated November 3,
2003.       
|        |  |   |  |                                                                                                                                       
|10.10   |  | - |  | Letter of Resignation from Arthur A. Siciliano, Ph.D.
dated November 5, 2003.                                                         
|        |  |   |  |                                                                                                                                       
|10.11   |  | - |  | Letter Agreement amendment to Retention Agreement by and
between the Registrant and Arthur A. Siciliano, Ph.D. dated
November 5, 2003.
|        |  |   |  |                                                                                                                                       
|10.12   |  | - |  | Employment Agreement by and between the Registrant and
Arthur A. Siciliano, Ph.D. dated November 5, 2003.                             
|        |  |   |  |                                                                                                                                       
|10.13   |  | - |  | Severance Agreement by and between the Registrant and
Arthur A. Siciliano, Ph.D. dated November 5, 2003.                              
|        |  |   |  |                                                                                                                                       
|10.14   |  | - |  | Severance Agreement by and between the Registrant and
Warren K. Trowbridge dated January 13, 2004.                                    
|        |  |   |  |                                                                                                                                       
|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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