POLYMEDICA CORP, 10-K, 1999-06-28

POLYMEDICA CORP
10-K, 1999-06-28
PHARMACEUTICAL PREPARATIONS

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<PAGE> 1

FORM 10-K

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1999

[ ] 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
--------------

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.01 par value per share
--------------------------------------
(Title of class)

Preferred Stock Purchase Rights
-------------------------------
(Title of class)

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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. [ ]

The aggregate market value of voting Common Stock held by nonaffiliates of
the registrant was $82,316,000 based on the closing price of the Common Stock as
reported by The Nasdaq Stock Market(R) on June 24, 1999.

The number of shares issued of the registrant's class of Common Stock as of
June 24, 1999 was 9,319,913 which includes 90,971 shares held in treasury.

Documents incorporated by reference: Proxy Statement for the 1999 Annual
Meeting of Shareholders--Part III.

<PAGE> 2

PART I

ITEM 1. BUSINESS

THE COMPANY

General

PolyMedica Corporation ("the Company") is a leading provider of
direct-to-consumer specialty medical products and services, primarily focused in
the diabetes supplies and consumer healthcare markets. The Company holds a
leading position in several expanding markets. The Company's products and
services are grouped within the following businesses: Diabetes Supplies;
Consumer Healthcare, which includes OTC ("over-the-counter") medical devices and
urinary discomfort products; and Professional Products, which include
prescription urologicals.

I. Diabetes Supplies

The Company entered the Diabetes Supplies business with its August 1996
acquisition of Liberty Medical Supply, Inc. ("Liberty Medical"). Liberty Medical
has grown to be the leading direct mail distributor of diabetes testing supplies
for senior citizens covered by Medicare. Liberty Medical's patient-focused
services serve active customers throughout the United States.

Liberty Medical is headquartered in Palm City, Florida and was founded in
1989. Liberty Medical is a participating Medicare provider which directly bills
and is paid primarily by Medicare and/or the patient's medi-gap insurer, rather
than the patient. This procedure benefits the patient by assuring timely
delivery of supplies, while avoiding the need for the patient to prepare
paperwork and pay the cost of the supplies while awaiting subsequent
reimbursement.

Liberty Medical pioneered the development of sophisticated media
advertising to reach an untapped portion of the Medicare-eligible diabetes
patient market. Approximately $23 million has been spent since acquisition to
build the Liberty Medical trade name through a wide variety of media,
principally television, but also including print, direct mail, and radio.

Approximately 16 million people, or roughly 6% of the total United States
population, are afflicted with diabetes, with about half of them having actually
been diagnosed. This patient population is growing rapidly, with more than
650,000 new cases diagnosed each year. Approximately 3.2 million of these
patients fall within Liberty Medical's target market of senior citizens.
Diabetes is a chronic disease in which the body's metabolism of glucose is
ineffective due to inadequate production of insulin. Frequent monitoring of
blood glucose has been documented as an important part of managing diabetes to
help avoid serious medical complications, such as coronary artery disease,
glaucoma, and circulatory problems which can lead to limb amputation.

Medicare currently reimburses up to 80% of the cost of testing supplies for
eligible diabetics, but does not reimburse for insulin or syringes. The 1997
Balanced Budget Act expanded Medicare coverage to include diabetics who do not
use insulin. As a result, on July 1, 1998, the market for Liberty Medical's
services grew by approximately 2 million patients. Effective October 1, 1998,
new Medicare reimbursement guidelines generally provide that quarterly orders of
diabetes supplies to existing customers must be administratively verified before
shipment and that all doctors orders for diabetic supplies are valid for a
reduced period of six months. According to statistics from the American Diabetes
Association (ADA), this change to cover non-insulin using patients increased the
number of Medicare-eligible seniors with diabetes to approximately 3.2 million.

II. Consumer Healthcare

The Consumer Healthcare Group, operating out of the Company's subsidiary,
PolyMedica Healthcare, Inc. or "PMH", focuses on female urinary discomfort
products, digital thermometry, medication compliance products, and home health
aid products. PMH holds the number one private label market position in digital
thermometry and the number two overall market position. These products are sold
through an extensive network to major retailers, including most of the largest
drug store chains and mass merchandisers. Sales of the Company's digital
thermometry products continue to grow through customer expansion and new product
introduction. The Company's urinary discomfort products for women include AZO
STANDARD(R), which is currently the number one selling product in a growing
market segment; AZO CRANBERRY(R), a dietary supplement which helps maintain a
healthy urinary tract; and AZO TEST STRIPS(TM), a home diagnostic test kit for
urinary tract infections. In April 1999, PMH began shipping two new homeopathic
botanical products; AZO MENOPAUSE(TM) and AZO CONFIDENCE(TM). AZO MENOPAUSE(TM)
offers relief from hot flashes and related symptoms and AZO CONFIDENCE(TM) is
used for the relief of symptoms of incontinence.

<PAGE> 3

III. Professional Products

PolyMedica's Professional Products Group, operating out of the Company's
subsidiary, PolyMedica Pharmaceuticals (U.S.A.), Inc. or "PMP", represents one
of the broadest lines of prescription urology products available (excluding
anti-infectives), including urinary analgesics, antispasmodics, topical
anesthetics and suppositories. The Company's URISED(R), ANESTACON(R),
CYSTOSPAZ(R) and CYSTOSPAZ-M(R) analgesics and antispasmodics provide effective
symptomatic relief for urinary pain, burning and spasms. B&O(R) and
AQUACHLORAL(R) suppositories are used by patients unable to tolerate oral
dosages of systemic analgesics and sedatives.

Sale of Wound Care Business

In July 1997, the Company sold certain assets of its U.S. and U.K. wound
care operations. Under the terms of the sale, the purchaser, Innovative
Technologies Group Plc ("IT"), paid the Company $9.00 million in cash and issued
to the Company an unsecured promissory note in the face amount of $4.00 million.
In July 1998, the Company received $1.60 million as final settlement of this
note. The Company's fiscal year ended March 31, 1999 and 1998 statements of
operations includes $1.60 million and $4.13 million, respectively, of pretax
gains on the sale of the wound care business as other income.

Business Strategies

The Company's strategy includes:

Expand leadership position in providing diabetes supplies to senior
citizens. Since the August 1996 acquisition of Liberty Medical, the Company has
invested in an ongoing program of television advertising to reach a much larger
portion of the Medicare-eligible diabetes patient market. This campaign has
resulted in a significant increase in sales as Liberty Medical has increased its
active customers from 17,000 to more than 190,000. The Company continues to seek
opportunities to deliver new products to a broader customer base by leveraging
its efficient, mail-order distribution system and software for billing and
customer monitoring. To manage its growth effectively, Liberty Medical is
expanding, upgrading and developing its operations and information systems to
continue its high level of customer service.

The July 1, 1998 expansion of Medicare reimbursement included, for the
first time, non-insulin using patients; these patients represent a major
opportunity for the Company to leverage its leading position in direct-mail
distribution to insulin using seniors. In addition, in May and June 1998, the
Company re-contacted its existing database of more than 40,000 non-insulin using
seniors with diabetes in order to generate new business and has produced new
television advertising targeted to both insulin and non-insulin using customers.

The Company is also exploring other expansion opportunities such as the
trend in managed care towards outsourcing diabetes care services to other payors
and providers. Liberty Medical recently hired a Senior Vice President, Business
Development and Marketing to direct this expansion.

Grow the consumer healthcare business. Fueled by the growth in demand for
the Company's urinary discomfort products, as well as by the strength of sales
of the Company's digital thermometers, the consumer healthcare group achieved a
record level of sales in fiscal 1999. Continued growth in the consumer
healthcare market is a strategic objective as the Company seeks to leverage
leading positions in its core markets of urinary discomfort, digital thermometry
and medication compliance products. One example of this expansion is the recent
introduction of AZO MENOPAUSE and AZO CONFIDENCE.

Acquire complementary businesses. In order to take advantage of economies
of scale in production and marketing, the Company continues to evaluate
opportunities for the acquisition of businesses and products which complement
the Company's existing product lines. In selecting and evaluating acquisition
candidates, the Company examines the potential market opportunities for products
that can be distributed through the Company's existing marketing infrastructure
by utilizing its strengths in sales, marketing and distribution.

Existing Products

Diabetes Supplies. Liberty Medical ships to more than 190,000 customers in
the U.S., making it the largest direct-mail provider of diabetes testing
products in the country to Medicare-eligible seniors. Liberty Medical sells more
than 200 name-brand products supplied by Lifescan, Roche, Bayer, Home
Diagnostics and others. These products include glucose test strips and monitors,

<PAGE> 4

lancets, insulin, syringes, and other products. Sales of glucose test strips
represented 60.8% and 51.9% of the Company's consolidated revenues for the
fiscal years ended March 31, 1999 and 1998, respectively.

Consumer Healthcare Products. PMH focuses on female urinary tract
discomfort, digital thermometry, and medication compliance products.

The Company's three principal non-prescription pharmaceutical products are
AZO STANDARD, which provides relief from urinary tract discomfort; AZO
CRANBERRY, a dietary supplement which helps maintain a healthy urinary tract;
and AZO TEST STRIPS, a home diagnostic test kit for urinary tract infections.
During the quarter ended December 31, 1998, the AZO line of products held the
dominant share of the OTC female urinary tract discomfort market of over 48%,
despite a competitive entry with a large promotional budget.

The Company markets a line of thermometers which includes products with
digital and traditional mercury displays. Sales of the Company's glass and
digital thermometers, both branded and private label represented 12.2% of the
Company's consolidated revenues for the fiscal year ended March 31, 1997. The
Company has the number one private-label thermometer position and number two
overall market position. The Company custom manufactures and/or distributes its
other consumer healthcare products under the brand names of BASIS(R),
MEDI-AID(R), PolyMedica and PeeDee Dose(TM).

Items in the Company's consumer healthcare product line are either
manufactured by the Company or by others to the Company's specifications, or are
purchased by the Company for resale. In addition, the Company provides private
label products for many national retailers. The Company's major customers in the
United States include most of the top pharmacy chains, major supermarkets and
mass merchandisers, including CVS, Eckerd, Rite-Aid and Walgreen Co. as well as
the four largest drug wholesalers. The Company's consumer products are sold in
retail pharmacies in the beauty aid, cough and cold, baby, incontinence and skin
care sections.

Professional Products. The Company's strategy is to generate substantial
cash flow and to achieve significant margins on its prescription pharmaceutical
products without extensive advertising and promotion. Professional products
represents one of the broadest lines of prescription urology products available
(excluding anti-infectives), including urinary analgesics, antispasmodics,
topical anesthetics and suppositories. URISED, CYSTOSPAZ and CYSTOSPAZ-M
analgesics and antispasmodics provide effective symptomatic relief for urinary
pain, burning and spasms.

Products Under Development

The Company is currently developing new thermometry products and is
considering new feminine care products in its AZO family.

Major Customers

For the fiscal years ended March 31, 1999, 1998 and 1997, no customer
represented more than 10% of the Company's consolidated revenues.

Patents and Trade Secrets

The Company has proprietary manufacturing processes and trade secrets
related to its in-house pharmaceutical production. The Company owns one patent
for the Flexible Tip Digital Thermometer with Fever Alarm(TM).

Manufacturing

The Company manufactures in-house several established products, including
AZO CRANBERRY, AQUACHLORAL, B&O and URISED. The Company's state-of-the-art
automated suppository machine forms, fills and seals automatically and the
computer-controlled, hands-off equipment provides improved manufacturing
efficiency. The Company purchases certain of its consumer healthcare products
from other manufacturers.

<PAGE> 5

Government Regulation

Political, economic and regulatory influences are resulting in fundamental
changes in the healthcare industry in the United States. The Company anticipates
that Congress and state legislatures will continue to review and assess
alternative healthcare delivery systems and payment methods. Sales of a large
portion of the Company's products depend to a significant extent on the
availability of reimbursement to the Company's customers by government and
private insurance plans. Any further reduction in the reimbursement provisions
currently in effect for the Company's diabetes supplies products which are
reimbursable under Medicare could materially reduce the Company's revenues and
earnings.

The production and marketing of the Company's products and its ongoing
research and development activities are subject to regulation by numerous
governmental authorities in the United States. The Company cannot predict the
extent to which government regulations or changes thereto might have an adverse
effect on the production and marketing of the Company's existing or future
products. Products that the Company may develop in the future may require
clearance by the Food and Drug Administration ("FDA") in the United States.
Although the Company believes each of these products, if successfully developed,
will obtain FDA clearance, no assurance can be made that each will obtain such
clearance, or that the process of clearance will be without undue delay or
expense.

The Company is subject to numerous federal, state and local laws relating
to such matters as controlled drug substances, safe working conditions,
manufacturing practices, environmental protection, fire hazard control and
disposal of hazardous or potentially hazardous substances. For example, the Drug
Enforcement Administration ("DEA") regulates controlled drug substances, such as
narcotics, under the Controlled Substances Act and the Controlled Substances
Import and Export Act. Manufacturers, distributors and dispensers of controlled
substances must be registered and inspected by the DEA, and are subject to
inspection, labeling and packaging, export, import, security, production quota
and record keeping, and reporting requirements. The Company currently markets
two prescription drug products containing controlled drug subjects, and
therefore is subject to the DEA regulatory requirements. In addition, labeling
and promotional activities relating to medical devices and drugs are, in certain
instances, subject to regulations by the Federal Trade Commission. There can be
no assurance that the Company will not be required to incur significant costs to
comply with such laws and regulations in the future or that such laws or
regulations will not have a material adverse effect upon the Company's ability
to do business.

Competition

The Company is engaged in rapidly evolving and highly competitive fields.
Many major pharmaceutical, medical product and personal care companies in the
United States and abroad seek to develop competitive products. Competition from
medical device manufacturers, pharmaceutical companies and others is intense and
expected to increase. Many of these companies have substantially greater capital
resources, research and development staffs and facilities and experience in
obtaining regulatory approvals in the marketing and distribution of products,
than the Company.

In the diabetes supply market, Transworld Home Healthcare, Inc., a
publicly-held company, competes with Liberty Medical in the direct-to-consumer
supply business. There are several smaller privately-held companies which also
compete in this market.

In the consumer healthcare products market, the Company competes with
various other suppliers for retail shelf space and consumer purchase. While
there are numerous companies that manufacture and market consumer healthcare
products, the Company believes that no single company is readily identifiable by
consumers as a maker of products which attempt to detect or monitor medical
problems in the home. The Company believes that it offers consumers practical,
easy-to-use products at reasonable prices. In the urinary discomfort category,
the Company's AZO STANDARD urinary analgesic is one of the category leaders.
Competitors include Numark Laboratories, Inc. (Cystex(TM)), Breckenridge
Pharmaceutical, Inc. (Prodium(TM)) and Johnson & Johnson (Uristat(TM)).

In the professional market, numerous pharmaceutical companies develop and
market prescription products which compete with the Company's products on a
branded and generic basis. The Company's principal branded competitors include:
Astra USA, Inc. (Xylocaine(R) vs. ANESTACON); G & W Labs, Inc. (chloral hydrate
vs. AQUACHLORAL); Parke-Davis, a division of Warner- Lambert., (Pyridium(R) vs.
URISED); Schwarz-Pharma (Levsin(TM) line vs. CYSTOSPAZ line); and Wyeth-Ayerst
Laboratories, a division of American Home Products Corp. (belladonna and opium
vs. B&O SUPPRETTES(R)).

<PAGE> 6

Employees

As of March 31, 1999, the Company had 624 full-time employees. The Company
expects to employ additional personnel as it expands its operations. The Company
believes that its relations with its employees are good.

ITEM 2. PROPERTIES

The Company's facilities are located in Woburn, Massachusetts; Palm City
and Stuart, Florida and Golden, Colorado. The Company's corporate headquarters
are located in Woburn in a 60,000 square foot facility which the Company owns.
The Company also leases approximately 50,000 square feet at its facilities in
Palm City and Stuart, Florida and approximately 12,000 square feet at its
Golden, Colorado facility. In May 1999, the Company purchased a 66,000 square
foot facility in St. Lucie County, Florida, which is currently being configured
to support the Company's growth.

The Company believes that its current and new facilities will be adequate
for its current and anticipated needs.

ITEM 3. LEGAL PROCEEDINGS

The Company is not a party to any material legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders of the Company
during the last quarter of the fiscal year ended March 31, 1999.

<PAGE> 7

EXECUTIVE OFFICERS OF THE REGISTRANT

The current executive officers of the Company are as follows:

Name Age Position
---- --- --------
<S> <C> <C>
Steven J. Lee.................................... 52 Chairman and Chief Executive Officer
Arthur A. Siciliano, Ph.D........................ 56 President; President, PolyMedica Pharmaceuticals
(U.S.A.), Inc.
Eric G. Walters.................................. 47 Chief Financial Officer, Treasurer and Clerk
W. Keith Trowbridge.............................. 47 Vice President; President, Liberty Medical Supply, Inc.
</TABLE>

Mr. Lee has been Chairman of the Company since June 1996 and Chief
Executive Officer and a director of the Company since May 1990. Mr. Lee served
as President of the Company from May 1990 through June 1996. From March 1990 to
May 1990, Mr. Lee was a Manager in the Mergers and Acquisitions practice at
Coopers & Lybrand. From November 1987 to March 1990, Mr. Lee was President and a
director of Shawmut National Ventures, the venture capital division of Shawmut
Bank, N.A. From 1984 to 1986, he was President, Chief Executive Officer and a
director of RepliGen Corporation, a biotechnology company. Mr. Lee also spent
eleven years in venture capital as President of Venture Management Advisors and
at Bankers Trust Company. Mr. Lee currently serves as a director of Commonwealth
BioVentures, Inc. and Fibersense Technology Company.

Dr. Siciliano has been President of the Company since June 1996, Executive
Vice President since July 1994, Senior Vice President since January 1993, Vice
President, Pharmaceutics since July 1991 and served as Vice President,
Manufacturing from June 1990 to July 1991. From the Company's inception until
June 1990, he served as Chief Operating Officer. From 1984 to 1986, Dr.
Siciliano served as President of Microfluidics Corporation, a high technology
equipment manufacturer and a subsidiary of the Biotechnology Development
Corporation and then helped found a subsidiary, MediControl Corporation, and
served as its President from 1986 to 1989. He served as President of the Heico
Chemicals Division of the Whittaker Corporation from 1982 to 1984, as General
Manager of Reheis Chemicals (Ireland), Ltd. during 1981 and as Technical
Director for Reheis Chemical Co., a division of Revlon Inc., from 1975 to 1982.
Dr. Siciliano also served as Director of Corporate Research for Kolmar
Laboratories, Inc. from 1973 to 1975 and as Senior Scientist for The Gillette
Company from 1969 to 1973.

Mr. Walters joined the Company in August 1990 as Chief Financial Officer
and Treasurer. From 1987 to 1990, Mr. Walters served in various positions at
John Hancock Capital Growth Management, Inc., most recently as Assistant
Treasurer. From 1983 to 1987, Mr. Walters served as Controller of Venture
Founders Corporation and from 1979 to 1983, he was employed at Coopers &
Lybrand, most recently as an Audit Supervisor. Mr. Walters is a Certified Public
Accountant.

Mr. Trowbridge joined the Company in February 1999 as Chief Operating
Officer of Liberty Medical Supply, Inc. On May 1, 1999, he was appointed
President of Liberty Medical and was also elected Vice President of PolyMedica
Corporation. From December 1997 to February 1999, he served as President; and
from November 1994 to December 1997 he served as Executive Vice President of U.
S. Operations for Transworld Healthcare, Inc., a $300 million international
company, where he was responsible for three domestic operating units including
MK Diabetes Support Services. From August 1991 to October 1994, Mr. Trowbridge
served as Chairman and CEO of Medical Associates of America, a national
integrated network of physician owned pharmacies. Mr. Trowbridge also served as
Executive Vice President of T2 Medical from January 1988 to August 1991.

<PAGE> 8

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
SELECTED FINANCIAL DATA

At March 31, 1999, the Company's Common Stock was held by 541 holders of
record. The Company believes that the actual number of beneficial owners of the
Company's Common Stock is substantially greater than the stated number of
holders of record because a substantial portion of the Common Stock outstanding
is held in "street name."

On January 11, 1999, the Company's Common Stock began trading on The Nasdaq
Stock Market(R) under the symbol "PLMD." Trading of the Company's Common Stock
was discontinued on the American Stock Exchange. Its symbol on that exchange was
"PM."

THE FOLLOWING TABLE SETS FORTH THE HIGH AND LOW SALES PRICE PER SHARE OF
COMMON STOCK ON THE AMERICAN STOCK EXCHANGE AND THE NASDAQ STOCK MARKET(R):

Fiscal Year 1998
--------------------------
High Low
---- ---
<S> <C> <C>
1st Quarter 8 7/8 4 1/4
2nd Quarter 14 1/4 7 3/4
3rd Quarter 14 15/16 9 1/16
4th Quarter 13 1/2 9 3/4

Fiscal Year 1999
--------------------------
High Low
---- ---
<S> <C> <C>
1st Quarter 12 3/8 8 1/2
2nd Quarter 11 1/4 7 1/4
3rd Quarter 11 1/2 7 5/8
4th Quarter 11 3/16 5
</TABLE>

The Company has never declared or paid any cash dividends on its common
stock. For the foreseeable future, the Company expects to retain its earnings to
finance the growth of its business.

ITEM 6. SELECTED FINANCIAL DATA

Year Ended March 31, 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Total revenues $104,825 $73,825 $30,453 $24,763 $26,609
Income from continuing operations 7,644 7,619 2,322 3,075 2,394
Net income 7,644 7,619 2,322 274 1,789
Net income per common share, diluted .78 .79 .27 .04 .26
Weighted average shares, diluted 9,786 9,691 8,618 7,492 6,790

Balance Sheet Data
Cash and cash equivalents $ 10,191 $ 6,440 $11,028 $23,302 $14,006
Total assets 112,939 92,401 75,233 72,573 65,753
Total liabilities 49,894 39,473 31,861 29,293 29,027
Total debt 24,666 22,906 25,476 24,400 24,433
Shareholders' equity 63,045 52,928 43,372 43,280 36,726
</TABLE>

<PAGE> 9

In 1997, the Company determined that it is more likely than not that
certain deferred tax assets will be realized and accordingly eliminated the
related valuation allowance. Realization of the net deferred tax assets is
dependent on generating sufficient taxable income prior to the expiration of
loss carryforwards. Although realization is not assured, management believes
that it is more likely than not that such net deferred tax assets will be
realized. As a result, the Company recorded a tax benefit of $367,000 in 1997.

In 1998, net income included $2.74 million, or $0.29 per common share,
diluted, related to the gain on the July 1997 sale of the Company's wound care
business. In 1999, net income included $976,000, or $0.10 per common share,
diluted, related to this sale.

<PAGE> 10

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

FUTURE OPERATING RESULTS

This Annual Report contains forward-looking statements. For this purpose,
any statements contained herein that are not statements of historical fact may
be deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes", "anticipates", "plans", "expects", and similar expressions are
intended to identify forward-looking statements. There are a number of important
factors that could cause the Company's actual results to differ materially from
those indicated or suggested by such forward-looking statements. These factors
include, without limitation, those set forth below in the section titled
"Factors Affecting Future Operating Results" in this Annual Report.

OVERVIEW

Business

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

Diabetes Supplies

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

Consumer Healthcare

The Company's consumer healthcare products are focused on three areas:
female urinary tract discomfort, digital thermometers and medication compliance
products. In the urinary tract discomfort area, the Company's three products
include AZO-STANDARD, which provides relief from urinary tract discomfort,
AZO-CRANBERRY, a dietary supplement which helps maintain a healthy urinary tract
and AZO TEST STRIPS, an in-home urinary tract infection testing kit which allows
patients to call their doctors with testing results. In April 1999, the Company
began shipping two new homeopathic botanical products. AZO MENOPAUSE offers
relief from hot flashes and related symptoms. AZO CONFIDENCE is used for the
relief of symptoms of incontinence.

The Company's consumer healthcare products also include digital, digital
flexible tip, basal and glass thermometers, as well as approximately 40 other
home-use diagnostic and compliance products. PolyMedica has patented and
introduced a flexible tip thermometer. The Company custom manufacturers and/or
distributes its other consumer healthcare products under private label and under
the brand names of BASIS, MEDI-AID, PolyMedica and PeeDee Dose.

Professional Products

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

<PAGE> 11

Recent Transactions

In July 1997, the Company sold certain assets of its U.S. and U.K. wound
care operations. Under the terms of the sale, the purchaser, Innovative
Technologies Group Plc ("IT"), paid the Company $9.00 million in cash and issued
to the Company an unsecured promissory note in the face amount of $4.00 million.
In July 1998, the Company received $1.60 million as final settlement for the
face amount of this note. The Company's fiscal year ended March 31, 1999 and
1998 statement of operations include $1.60 million and $4.13 million,
respectively, pretax gains on the sale of the wound care business as other
income.

In August 1996, the Company acquired all of the outstanding stock of
Liberty Medical in a transaction accounted for under the purchase method of
accounting. Accordingly, the net assets and operations of Liberty Medical have
been included in the Company's financial statements since the date of
acquisition.

Other

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

In accordance with Statement of Position 93-7, direct-response advertising
and related costs for all periods presented are capitalized and amortized to
selling, general and administrative 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.
Revenues generated from new customers as a result of direct-response advertising
have historically resulted in a revenue stream lasting at least seven years.
Management has selected a more conservative four-year amortization period, in
consideration of the "Factors Affecting Future Operating Results" described
herein. Management assesses the realizability of the amounts of direct-response
advertising costs reported as assets at each balance sheet date by comparing the
carrying amounts of such assets to the probable remaining future net benefits
expected to result directly from such advertising.

Other advertising, promotional, and marketing costs are charged to earnings
in the period in which they are incurred. Promotional and sample costs whose
benefit is expected to assist future sales are expensed as the related materials
are used.

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

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

RESULTS OF OPERATIONS

Year Ended March 31, 1999 Compared to Year Ended March 31, 1998

Total revenues increased by 42.0% to $104.83 million in the fiscal year
ended March 31, 1999 as compared with $73.83 million in the fiscal year ended
March 31, 1998. This increase is primarily the result of the growth in Liberty
Medical revenues during the fiscal year ended March 31, 1999.

Pretax income was $12.51 million in the fiscal year ended March 31, 1999.
Excluding the $1.60 million pretax gain related to the sale of the wound care
business, pretax income from ongoing businesses was $10.91 million, a 48.2%
increase as compared with $7.36 million in the fiscal year ended March 31, 1998.
See Note S for segment information. The Company's net income was $7.64 million,
or $0.78 per diluted common share, in the fiscal year ended March 31, 1999. Net
income, excluding the $976,000 after tax gain from the sale of the wound care
business, or $0.10 per diluted common share, was $6.67 million, or $0.68 per
diluted common share. This performance compares to net income, excluding the
gain on the sale of the Company's wound care business, of $4.88 million, or
$0.50 per diluted common share, in the fiscal year ended March 31, 1998.

Net product sales of diabetes supplies increased by 65.5% to $80.60 million
in the fiscal year ended March 31, 1999 as compared with $48.71 million in the
fiscal year ended March 31, 1998. This growth is largely a result of the
Company's direct-response advertising spending, as well as recurring shipments
to existing customers. In addition, the Company shipped product to non-insulin
dependent diabetics for the first time beginning on July 1, 1998. The Company
currently expects its promotional and direct-response advertising spending to
continue in order to further the expansion of Liberty Medical's customer base.

<PAGE> 12

Net product sales of consumer healthcare products increased by 28.1% to
$14.28 million in the fiscal year ended March 31, 1999 as compared with $11.15
million in the fiscal year ended March 31, 1998. Sales of both advanced
thermometry and the AZO line of products increased during the fiscal year ended
March 31, 1999. The Company has added to its product line by introducing its
Flexible-Tip Digital Thermometer with Fever Alarm(TM) which began shipping in
August 1997. In addition, the Company introduced AZO TEST STRIPS, an in-home
urinary tract infection testing kit which allows patients to call their doctors
with testing results. Shipments of AZO TEST STRIPS began during the three months
ended March 31, 1998.

In the professional products group, there were $1.02 million of
nonrecurring net product sales of the Company's institutional wound care
products in the fiscal year ended March 31, 1998. Excluding these wound care
product sales, recurring net product sales decreased by 23.1% to $9.95 million
in the fiscal year ended March 31, 1999 as compared with $12.95 million in the
fiscal year ended March 31, 1998. Professional product sales returned to more
normalized levels in the fiscal year ended March 31, 1999, as a result of the
re-entry into the marketplace of a generic competitor.

As a percentage of net product sales, overall gross margins were 52.7% in
the fiscal year ended March 31, 1999 and 51.8% in the fiscal year ended March
31, 1998. Gross margins in the fiscal year ended March 31, 1999 increased due to
improved gross margins at Liberty Medical, resulting from product mix and higher
volume purchasing from suppliers, as well as improving margins of professional
products.

As a percentage of total revenues, selling, general and administrative
expenses were 40.2% for the fiscal year ended March 31, 1999 as compared with
39.0% for the fiscal year ended March 31, 1998. Selling, general and
administrative expenses increased by 46.3% in the fiscal year ended March 31,
1999 to $42.19 million as compared with $28.83 million in the fiscal year ended
March 31, 1998. This increase is primarily attributable to general and
administrative expenses related to the expansion of Liberty Medical.

Investment income decreased by 31.0% to $434,000 in the fiscal year ended
March 31, 1999 as compared with $629,000 in the fiscal year ended March 31, 1998
as the Company earned interest on lower average cash balances in the fiscal year
ended March 31, 1999. Interest expense was $2.56 million in the fiscal year
ended March 31, 1999 as compared with $2.69 million in the fiscal year ended
March 31, 1998, as the Company accrued interest expense in both periods on
Guaranteed Senior Secured Notes due January 31, 2003 (the "Hancock Notes") to
the John Hancock Mutual Life Insurance Company ("Hancock").

Year Ended March 31, 1998 Compared to Year Ended March 31, 1997

Total revenues increased by 142.5% to $73.83 million in the fiscal year
ended March 31, 1998 as compared with $30.45 million in the fiscal year ended
March 31, 1997. This increase is primarily the result of the growth in Liberty
Medical revenues which were generated for twelve months during the fiscal year
ended March 31, 1998.

Pretax income was $11.49 million in the fiscal year ended March 31, 1998.
Excluding the $4.13 million pretax gain described above, pretax income from
ongoing businesses was $7.36 million, an increase of 275.5% as compared with
$1.96 million in the fiscal year ended March 31, 1997. The Company's net income
was $7.62 million, or $0.79 per diluted common share, in the fiscal year ended
March 31, 1998. Net income, excluding the $2.74 million after tax gain from the
sale of the wound care business, or $0.29 per diluted common share, was $4.88
million, or $0.50 per diluted common share. This performance compares to net
income, excluding the gain on the sale of the Company's wound care business, of
$2.32 million, or $0.27 per diluted common share, in the fiscal year ended March
31, 1997.

Net product sales of diabetes supplies were $48.71 million in the fiscal
year ended March 31, 1998. This performance compares with $8.65 million in the
fiscal year ended March 31, 1997 for the seven month period beginning with the
August 1996 acquisition of Liberty Medical by the Company. This growth is
largely a result of the Company's increased direct-response advertising
spending, including its initiation of television advertising at the end of the
fiscal year ended March 31, 1997.

Net product sales of consumer healthcare products increased by 8.3% to
$11.15 million in the fiscal year ended March 31, 1998 as compared with $10.30
million in the fiscal year ended March 31, 1997. Sales of advanced thermometry
products increased during the fiscal year ended March 31, 1998, offset by a
decline in sales of AZO STANDARD(R). The Company introduced AZO TEST STRIPS(TM),
an in-home urinary tract infection testing kit which allows patients to call
their doctors with testing results. Shipments of AZO TEST STRIPS(TM) began
during the three months ended March 31, 1998.

Net product sales of the Company's professional products increased by 21.4%
to $13.97 million in the fiscal year ended March 31, 1998 as compared with
$11.51 million in the fiscal year ended March 31, 1997. Professional products
include a full year of wound care product sales in the fiscal year ended March
31, 1997. The 21.4% increase in professional products sales is primarily

<PAGE> 13

due to additional shipments of URISED in the fiscal year ended March 31, 1998,
which the Company believes is the result of a reduction in the supply of generic
products in the marketplace, partially offset by a lower level of wound care
related sales in the fiscal year ended March 31, 1998 due to the sale of certain
assets of the wound care division in July 1997.

As a percentage of net product sales, overall gross margins were 51.8% in
the fiscal year ended March 31, 1998 and 54.5% in the fiscal year ended March
31, 1997. Gross margins in the fiscal year ended March 31, 1998 decreased due to
the inclusion of significant sales of diabetes-related products, whose gross
margins are lower than the Company average for products sold in the fiscal year
ended March 31, 1997, partially offset by improving margins and higher revenues
of professional products.

As a percentage of total revenues, selling, general and administrative
expenses were 39.0% for the fiscal year ended March 31, 1998 as compared with
42.6% for the fiscal year ended March 31, 1997. Selling, general and
administrative expenses increased by 122.0% in the fiscal year ended March 31,
1998 to $28.83 million as compared with $12.99 million in the fiscal year ended
March 31, 1997. This increase is primarily attributable to general and
administrative expenses related to the expansion of Liberty Medical, and
marketing and advertising costs related to its consumer healthcare products.

Investment income decreased by 27.2% to $629,000 in the fiscal year ended
March 31, 1998 as compared with $864,000 in the fiscal year ended March 31, 1997
as the Company earned interest on lower average cash balances in the fiscal year
ended March 31, 1998. Interest expense was $2.69 million in the fiscal year
ended March 31, 1998 as compared with $2.77 million in the fiscal year ended
March 31, 1997, as the Company accrued interest expense in both periods on
Guaranteed Senior Secured Notes due January 31, 2003 (the "Hancock Notes") to
the John Hancock Mutual Life Insurance Company ("Hancock").

LIQUIDITY AND CAPITAL RESOURCES

Since its inception, the Company has raised $53.46 million in gross equity
capital, of which $7.16 million was from venture capital financing before the
Company's initial public offering, $39.00 million from its March 1992 initial
public offering, $4.55 million from a November 1995 public offering of common
stock and $2.75 million from a March 1996 private placement of common stock. In
January 1993, the Company sold to Hancock $25.00 million of Hancock Notes.

As of March 31, 1999, the Company had working capital of $32.39 million,
including cash and cash equivalents of $10.19 million, which compares with
working capital of $21.07 million , including cash and cash equivalents of $6.44
million, as of March 31, 1998. The primary reason for the increase in working
capital as of March 31, 1999, when compared to March 31, 1998, was the increase
in accounts receivable due to the growth of the Company's diabetes supply
business during the fiscal year ended March 31, 1999.

Net accounts receivable were $32.25 million and $21.21 million as of March
31, 1999 and 1998, respectively. As of March 31, 1999, Liberty Medical's gross
unbilled receivables included in accounts receivable were $15.35 million as
compared with $10.82 million as of March 31, 1998. The increase is primarily a
result of the overall growth of Liberty Medical's sales in the fiscal year ended
March 31, 1999.

In May 1999, the Health Care Financing Administration revised the document
requirements for claims to allow for faxed doctor's order authorizations for
diabetes supplies which relieves Liberty Medical of the expensive responsibility
of obtaining a mailed, original written doctor's order. (See "Factors Affecting
Future Operating Results")

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

YEAR 2000 COMPLIANCE

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

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

<PAGE> 14

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

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

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

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

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

FACTORS AFFECTING FUTURE OPERATING RESULTS

The statements contained in this Report that are not purely historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including,
but not limited to, statements regarding the Company's expectations, hopes,
intentions or strategies regarding the future. Forward-looking statements
include, among others: statements regarding future benefits from the Company's
advertising and promotional expenditures; statements regarding future product
revenue levels; statements regarding product development, introduction and
marketing; and statements regarding future acquisitions; and statements
regarding Year 2000 compliance. All forward-looking statements included in this
Report are based on information available to the Company on the date hereof, and
the Company assumes no obligation to update any such forward-looking statements.
It is important to note that the Company's actual results could differ
materially from those in such forward-looking statements.

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

Healthcare Reimbursement

Any change in health care delivery systems or payment methods, including
any further reduction in the reimbursement provisions currently in effect for
the Company's diabetes supplies products which are reimbursable under Medicare,
could reduce the Company's revenues and earnings.

The processing of third-party reimbursements is a labor-intensive effort,
and delays in processing claims for reimbursement may increase working capital
requirements. Final determination of reimbursements are subject to audit by
Medicare. Medicare audits

<PAGE> 15

of the Company to date have not resulted in any significant adjustments. Future
audits may, however, result in retroactive adjustments for past charges for
products and services, and such adjustments could affect the future operations
and earnings of the Company.

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

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

Ability to Manage Growth

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

Direct-Response Advertising

In accordance with Statement of Position 93-7, direct-response advertising
and related costs for all periods presented are capitalized and amortized to
operating 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. Revenues generated
from new customers as a result of direct-response advertising have historically
resulted in a revenue stream lasting at least seven years. Management has
selected a more conservative four-year amortization period. Management assesses
the realizability of the amounts of direct-response advertising costs reported
as assets at each balance sheet date by comparing the carrying amounts of such
assets to the probable remaining future net benefits expected to result directly
from such advertising. The Company can expect fluctuations in its advertising
costs to attract and retain new customers. The Company expects that it will
continue to incur substantial direct-response advertising and related costs in
connection with the further expansion of its diabetes supplies business.

Medical Advances

There are medical technology and device companies which are conducting
research and development on alternate methods for the monitoring of blood
glucose levels as well as finding more effective treatment or even a cure for
diabetes. The commercial success of new products could materially affect the
growth of Liberty Medical's diabetes supply business.

Competition

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

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

Dependence on Reorders - Change in Demand for Diabetes Supplies

The Company generally incurs negative cash flow with respect to the first
order for its diabetes supplies from a customer due primarily to customer
acquisition costs, including advertising and Medicare and secondary insurance
compliance costs.

<PAGE> 16

Accordingly, the profitability of the Company's diabetes supplies business
depends on recurring orders. Reorder rates are inherently uncertain and are
subject to several factors, many of which are outside of the Company's control,
including customer shifts to nursing homes or other forms of managed care,
customer mortality, changing customer preferences, customer approvals of
quarterly orders, general economic conditions and customer satisfaction.

Dependence on Suppliers

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

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

Dependence on Single Manufacturing Facility for Professional Products

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

Product Liability

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

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

The Company has a limited direct marketing and sales organization, and
relies on its current distributors, for the sale of consumer healthcare and
professional products. The Company's ability to sell its consumer healthcare and
professional products will depend in part on its ability to enter into marketing
and distribution agreements with pharmaceutical, medical device, personal care
and other distributors in the United States and other countries. If the Company
enters into any such agreements, there can be no assurance that the Company's
third-party distributors will be able to market the Company's products
effectively.

Integration of Other Businesses, Products and Technologies

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

<PAGE> 17

Government Regulation

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company does not believe that it has any material market risk exposure
with respect to derivative or other financial instruments that would require
disclosure under this item.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

(a) The following documents are filed as part of this Annual Report
on Form 10-K.

1. INDEX TO FINANCIAL STATEMENTS Page
----
Report of Independent Accountants 18

Consolidated Balance Sheets as of March 31,
1999 and 1998 19

Consolidated Statements of Operations for
the years ended March 31, 1999, 1998, and 1997 20

Consolidated Statements of Shareholders'
Equity for the years ended March 31, 1999,
1998, and 1997 21

Consolidated Statements of Cash Flows for
the years ended March 31, 1999, 1998, and 1997 22

Notes to Consolidated Financial Statements 23

2. All schedules are omitted because the
required information is either inapplicable
or is presented in the consolidated
financial statements or related notes thereto.

3. The Exhibit Index immediately preceding
the Exhibits filed as part of this Annual
Report on Form 10-K is incorporated herein
by reference.

<PAGE> 18

REPORT OF INDEPENDENT ACCOUNTANTS

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF POLYMEDICA CORPORATION:

In our opinion, the accompanying consolidated balance sheets, and the
related statements of operations, shareholders' equity and cash flows present
fairly, in all material respects, the financial position of PolyMedica
Corporation and its subsidiaries (the "Company") at March 31, 1999 and 1998, and
the results of their operations and their cash flows for each of the three years
in the period ended March 31, 1999, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Boston, Massachusetts
May 6, 1999

<PAGE> 19

<TABLE>
<CAPTION>
POLYMEDICA CORPORATION
(Dollars in thousands, except share and per share amounts)

CONSOLIDATED BALANCE SHEETS
MARCH 31, MARCH 31,
ASSETS 1999 1998
--------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 10,191 $ 6,440
Accounts receivable (net of allowances
of $7,330 and $3,914 in 1999 and 1998, respectively) 32,251 21,207
Inventories 6,909 4,857
Deferred tax asset 2,708 2,075
Prepaid expenses and other current assets 721 845
--------- --------
Total current assets 52,780 35,424

Property, plant, and equipment, net 6,856 6,285
Intangible assets, net 37,278 39,555
Direct response advertising, net 15,678 10,899
Other assets, net 347 238
--------- --------
Total assets $ 112,939 $ 92,401
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable -- trade $ 12,527 $ 8,221
Accrued expenses 4,781 3,805
Long-term debt and notes payable 3,083 2,329
--------- --------
Total current liabilities 20,391 14,355

Long-term debt and notes payable, net 21,583 20,577
Deferred income taxes 7,920 4,541
--------- --------
Total liabilities 49,894 39,473
--------- --------
Commitments (Note K)
Shareholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares
authorized, none issued or outstanding -- --
Common stock, $.01 par value; 20,000,000 shares
authorized; 9,197,075 and 8,909,718 shares
issued in 1999 and 1998, respectively 92 89
Treasury stock, at cost (78,003 and 129,560 shares
in 1999 and 1998, respectively) (458) (706)
Additional paid-in capital 56,557 54,498
Retained earnings (deficit) 7,480 (164)
Notes receivable from officers (626) (789)
--------- --------
Total shareholders' equity 63,045 52,928
--------- --------
Total liabilities and shareholders' equity $ 112,939 $ 92,401
========= ========
</TABLE>

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

<PAGE> 20

POLYMEDICA CORPORATION
(In thousands, except per share amounts)

CONSOLIDATED STATEMENTS OF OPERATIONS

YEAR ENDED MARCH 31, 1999 1998 1997
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues $ 104,825 $ 73,825 $ 30,453
Cost of product sales 49,605 35,575 13,603
--------- -------- --------
Gross margin 55,220 38,250 16,850
Selling, general and administrative expenses 42,185 28,826 12,985
--------- -------- --------
Income from operations 13,035 9,424 3,865
Other income and expense:
Gain on sale of wound care business 1,597 4,126 --
Investment income 434 629 864
Interest expense (2,555) (2,688) (2,774)
--------- -------- --------
(524) 2,067 (1,910)
Income before income taxes 12,511 11,491 1,955
Income tax provision (benefit) 4,867 3,872 (367)
--------- -------- --------
Net income $ 7,644 $ 7,619 $ 2,322
========= ======== ========
Net income per weighted average share, basic $ .86 $ .88 $ .28
========= ======== ========
Net income per weighted average share, diluted $ .78 $ .79 $ .27
========= ======== ========
Weighted average shares, basic 8,898 8,652 8,259

Weighted average shares, diluted 9,786 9,691 8,618
</TABLE>

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

<PAGE> 21

<TABLE>
<CAPTION>
POLYMEDICA CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1997, 1998, AND 1999
(DOLLARS IN THOUSANDS)

COMMON STOCK TREASURY STOCK NOTES
--------------- ----------------- ADDITIONAL RECEIVABLE CURRENCY TOTAL
NUMBER OF NUMBER OF PAID-IN ACCUMULATED FROM TRANSLATION SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT OFFICERS ADJUSTMENT EQUITY
-------- ------ --------- ------ --------- ----------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT MARCH 31, 1996 8,112,635 $81 (159,905) $(1,036) $54,917 $(10,105) $(415) $(162) $43,280
EXERCISE OF STOCK OPTIONS 245,966 3 (11,880) (110) 924 817
ISSUANCE OF COMMON STOCK 224,400 2 1,115 1,117
PURCHASE OF COMMON STOCK (8,900) (38) (38)
OFFICER NOTES RECEIVABLE (607) (607)
PAYMENT OF OFFICER NOTE RECEIVABLE (9,832) (93) 93
ISSUANCE OF TREASURY STOCK UNDER THE
1992 EMPLOYEE STOCK PURCHASE PLAN 17,958 162 (70) 92
DISTRIBUTION OF CARDIOTECH STOCK TO
POLYMEDICA SHAREHOLDERS (3,548) (3,548)
CURRENCY TRANSLATION ADJUSTMENT (63) (63)
NET INCOME 2,322 _ 2,322
--------- --- ------- ----- ------- ------- ----- -- -------
BALANCE AT MARCH 31, 1997 8,583,001 86 (172,559) (1,115) 53,338 (7,783) (929) (225) 43,372
EXERCISE OF STOCK OPTIONS AND WARRANTS 326,717 3 11,471 125 1,325 1,453
PAYMENT OF OFFICER NOTES RECEIVABLE (3,282) (30) 140 110
ISSUANCE OF TREASURY STOCK UNDER THE
1992 EMPLOYEE STOCK PURCHASE PLAN 34,810 314 (165) 149
CURRENCY TRANSLATION ADJUSTMENT 225 225
NET INCOME 7,619 7,619
--------- --- ------- ----- ------- ------- ----- -- -------
BALANCE AT MARCH 31, 1998 8,909,718 89 (129,560) (706) 54,498 (164) (789) 0 52,928
EXERCISE OF STOCK OPTIONS AND WARRANTS 287,357 3 34,608 134 987 1,124
PAYMENTS OF OFFICER NOTES RECEIVABLE 163 163
TAX BENEFIT FROM STOCK OPTIONS EXERCISED 1,046 1,046
ISSUANCE OF TREASURY STOCK UNDER THE
1992 EMPLOYEE STOCK PURCHASE PLAN 16,949 114 26 140
NET INCOME 7,644 _ 7,644
--------- --- ------- ----- ------- ------- ----- -- -------
BALANCE AT MARCH 31, 1999 9,197,075 $92 (78,003) $(458) $56,557 $ 7,480 $(626) $0 $63,045
========= === ======= ===== ======= ======= ===== == =======
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.

<PAGE> 22

POLYMEDICA CORPORATION
(In thousands)

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEAR ENDED MARCH 31, 1999 1998 1997
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from continuing operating activities:
Net income $ 7,644 $ 7,619 $ 2,322
Adjustments to reconcile net income
to net cash flows from operating activities:
Depreciation and amortization 3,290 3,243 3,045
Amortization of direct-response advertising 5,383 2,423 120
Direct-response advertising (10,162) (11,702) (1,740)
Deferred income taxes 2,746 3,604 (1,138)
Tax benefit from stock options exercised 1,046 -- --
(Gain) loss on disposal of fixed assets -- (60) 4
Provision for bad debts 7,119 3,138 237
Provision for sales allowances 3,702 4,846 1,369
Provision for inventory obsolescence 10 12 71
Gain on sale of wound care business (1,597) (4,126) --
Changes in assets and liabilities:
Accounts receivable -- trade (21,866) (22,988) (3,650)
Inventories (2,062) (1,390) (1,051)
Prepaid expenses and other assets 3 141 (389)
Accounts payable -- trade 4,306 5,240 589
Accrued expenses 977 125 459
-------- -------- --------
Total adjustments (7,105) (17,494) (2,074)
-------- -------- --------
Net cash flows from continuing operations 539 (9,875) 248

Net cash flows used for discontinued operations -- -- (389)
-------- -------- --------
Net cash flows from operating activities 539 (9,875) (141)
-------- -------- --------
Cash flows from investing activities:
Proceeds from sale of wound care business 1,597 8,428 --
Spinoff of CardioTech International, Inc. -- -- (3,830)
Acquisition, net of cash acquired -- -- (7,375)
Purchase of property, plant, and equipment (1,474) (2,303) (913)
Proceeds from sale of equipment -- 100 --
-------- -------- --------
Net cash flows from investing activities 123 6,225 (12,118)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 1,262 1,606 905
Purchase of common stock -- -- (38)
Proceeds from long-term debt 4,000 -- --
Repayment (issuance) of officer notes receivable 163 110 (607)
Repayment of senior debt and notes payable (2,329) (2,658) (312)
-------- -------- --------
Net cash flows from financing activities 3,096 (942) (52)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 3,758 (4,592) (12,311)
-------- -------- --------
Effect of exchange rate changes on cash (7) 4 37

Cash and cash equivalents at beginning of period 6,440 11,028 23,302
-------- -------- --------
Cash and cash equivalents at end of period $ 10,191 $ 6,440 $ 11,028
======== ======== ========

Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 2,554 $ 2,728 $ 2,769
Income taxes paid 1,086 25 10

</TABLE>

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

<PAGE> 23

POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A. Nature of Business:

PolyMedica Corporation (the "Company") was incorporated as Emerging
Sciences, Inc. in Massachusetts on November 16, 1988, and commenced commercial
operations in October 1989. In July 1990, the Company changed its name to
PolyMedica Industries, Inc. In June 1996, the Company distributed to its
shareholders all of its shares of CardioTech International, Inc. ("CardioTech")
in a transaction that qualified as a tax free spinoff. In August 1996, the
Company purchased Liberty Medical Supply, Inc., a diabetes supply company. In
July 1997, the Company sold certain assets of its U.S. and U.K. professional
wound care operations. In September 1997, the Company changed its name to
PolyMedica Corporation. The Company and its subsidiaries operate from
manufacturing, distribution, and laboratory facilities located in Massachusetts,
Florida, and Colorado.

The Company generates sales from Diabetic Supplies; Consumer Healthcare,
which includes OTC medical devices and urinary discomfort products; and
Professional Products, which include prescription urologicals.

B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

BASIS OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company
and its wholly-and majority-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.

USE OF ESTIMATES

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

EARNINGS PER COMMON SHARE

In its fiscal quarter ended December 31, 1997, the Company adopted
Statement of Financial Accounting Standards No. 128, "Earnings per Share," which
modifies the calculation of earnings per share ("EPS"). The Standard replaced
the previous presentation of primary and fully diluted EPS to basic and diluted
EPS. Basic EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted EPS includes the dilution of common stock equivalents,
and is computed similarly to fully diluted EPS pursuant to APB Opinion 15. All
prior periods presented have been restated to reflect this adoption. See Note L.

UNCERTAINTIES

The Company is subject to risks common to companies in the healthcare
industry, including but not limited to, development by the Company or its
competitors of new technological innovations, dependence on key personnel,
protection of proprietary technology, receipt of third party healthcare
reimbursement, and compliance with FDA government regulations.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid short-term investments purchased
with an initial maturity of three months or less to be cash equivalents. The
Company places its cash and cash equivalents with high credit quality financial
institutions.

INVESTMENTS

In 1999 and 1998, the Company invested primarily in commercial paper with
initial maturities of 90 days or less and classifies all investments as
held-to-maturity. All investments held as of March 31, 1999 and 1998 have been
classified as cash equivalents and are carried at amortized cost which
approximates market value.

<PAGE> 24

POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

INVENTORIES

Inventories are valued at the lower of cost (first-in, first-out method) or
market.

RESEARCH AND DEVELOPMENT

Research and development costs are charged to expense as incurred.

INTANGIBLE ASSETS

The Company capitalizes and includes in intangible assets the costs of
acquiring patents on its products, a customer list, a covenant-not-to-compete,
and goodwill, which is the cost in excess of the fair value of the net assets of
acquired companies and product lines. All amortization is computed on the
straight-line basis over the shorter of the economic life of the asset or the
term of the underlying agreement. A customer list, a covenant-not-to-compete,
and goodwill are amortized over seven, ten, and seven to thirty years,
respectively.

LONG-LIVED ASSETS

Management's policy is to evaluate the recoverability of its long-lived
assets when the facts and circumstances suggest that these assets may be
impaired. The test of such recoverability is a comparison of the book value of
the asset to expected cumulative (undiscounted) operating cash flows resulting
from the underlying asset over its remaining life. If the book value of the
long-lived asset exceeds undiscounted cumulative operating cash flows, the
write-down is computed as the excess of the asset over the present value of the
operating cash flow discounted at the Company's weighted average cost of capital
over the remaining amortization period.

MARKETING AND PROMOTIONAL COSTS

Advertising, promotional, and other marketing costs are charged to earnings
in the period in which they are incurred. Promotional and sample costs whose
benefit is expected to assist future sales are expensed as the related materials
are used.

DIRECT-RESPONSE ADVERTISING

In accordance with Statement of Position 93-7, direct-response advertising
and related costs for all periods presented are capitalized and amortized to
selling, general and administrative 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.
Revenues generated from new customers as a result of direct-response advertising
have historically resulted in a revenue stream lasting seven years. Management
has selected a more conservative four-year amortization period, in consideration
of the "Factors Affecting Future Operating Results" in Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
this Annual Report. Management assesses the realizability of the amounts of
direct-response advertising costs reported as assets at each balance sheet date
by comparing the carrying amounts of such assets to the probable remaining
future net benefits expected to result directly from such advertising.

The Company incurred and capitalized direct-response advertising of $10.16
million, $11.70 million and $1.74 million in 1999, 1998 and 1997, respectively.
As of March 31, 1999 and 1998, accumulated amortization was $7.92 million and
$2.54 million, which resulted in a net capitalized direct-response advertising
asset of $15.68 million and $10.90 million, respectively. A total of $5.38
million, $2.42 million and $120,000 in direct-response advertising was amortized
and charged to selling, general and administrative expenses in 1999, 1998 and
1997, respectively.

OTHER ASSETS

Other assets consist principally of senior debt issuance costs and deposits
for equipment yet to be placed in service. Senior debt issuance costs are being
amortized over ten years.

<PAGE> 25

POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOREIGN CURRENCY TRANSLATION

In accordance with Statement of Financial Accounting Standards No. 52,
"Foreign Currency Translation", assets and liabilities of the Company's foreign
subsidiaries are translated into U.S. dollars using current exchange rates at
the balance sheet date, and revenues and expenses are translated at average
exchange rates prevailing during the period. The resulting translation
adjustments are recorded in a separate component of Shareholders' Equity. As
result of the inactivity of foreign subsidiaries caused by the sale of the U.S.
and U.K. wound care business in July 1997, all foreign currency translation
adjustments were expensed.

PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment are recorded at cost. Depreciation is
computed using the straight-line method based on the estimated useful lives of
the various assets which range from five to twelve years. Amortization of
leasehold improvements is computed using the straight-line method based on
estimated useful lives or terms of the lease, whichever is shorter. Upon
retirement or disposal of fixed assets, the costs and accumulated depreciation
are removed from the accounts, and any gain or loss is reflected in income.
Expenditures for repairs and maintenance are charged to expense as incurred.
Construction in progress is not depreciated until placed in service.

INCOME TAXES

The Company recognizes deferred tax assets and liabilities based on
temporary differences between the financial statements and tax basis of assets
and liabilities using enacted tax rates expected to be in effect when they are
realized.

REVENUE RECOGNITION

The Company recognizes revenue upon shipment. Included as reductions to
gross accounts receivable are a sales allowance for returned goods and an
allowance for bad debts.

ACCOUNTING PRONOUNCEMENTS

In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components (revenue, expenses, gains and losses) in a full set of
general-purpose financial statements. This statement requires the classification
of items of comprehensive income by their nature in a financial statement and
the accumulated balance of other comprehensive income separately from retained
earnings, additional paid-in capital and the equity section of the balance
sheet. The Company adopted SFAS No. 130 for its fiscal year ended March 31,
1999.

In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information," which supercedes FASB Statement No. 14,
"Financial Reporting for Segments of a Business Enterprise" and changes the way
public companies report information about operating segments. SFAS No. 131,
which is based on the management approach to segment reporting, establishes
requirements to report selected segment information quarterly and to report
entity-wide disclosures about products and services, major customers and the
material countries in which the entity holds assets and reports revenue. The
Company adopted SFAS No. 131 for its fiscal year ended March 31, 1999.

RECLASSIFICATIONS

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

C. SALE OF WOUND CARE BUSINESS:

In July 1997, the Company sold certain assets of its U.S. and U.K.
wound care operations. Under the terms of the sale, the purchaser, Innovative
Technologies Group Plc ("IT"), paid the Company $9 million in cash and issued to
the Company an unsecured promissory note in the face amount of $4 million. In
July 1998, the Company received $1.6 million as final settlement of this note.
The net book value of assets sold and pretax gain as a result of this
transaction were $4.9 million and $5.7 million, respectively. Gains on the sale
for the years ended March 31, 1999 and 1998 were as follows:

<PAGE> 26

POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1999 1998
---- ----
<S> <C> <C>
Gain on sale of wound care business $1,597 $4,126
Provision for income taxes related to gain 621 1,390
------ ------
Gain on sale, net of income taxes $ 976 $2,736
====== ======
Net income per common share, diluted, related to gain $ .10 $ .29
====== ======
Net income per common share, diluted $ .78 $ .79
====== ======
</TABLE>

D. PURCHASE OF LIBERTY MEDICAL SUPPLY, INC.:

On August 30, 1996, the Company acquired all of the outstanding stock of
Liberty Medical Supply, Inc. in a transaction accounted for under the purchase
method of accounting. Accordingly, the net assets and operations of Liberty
Medical have been included in the Company's financial statements since the date
of acquisition. The acquisition, as amended on March 26, 1997, was for an
aggregate purchase price of $10.26 million (including $490,000 of related
expenses), which was comprised of (i) $7.35 million in cash, (ii) two-year 7%
subordinated promissory notes in the aggregate amount of $1.30 million and (iii)
224,400 shares of the Company's common stock.

The purchase price was allocated to net assets acquired based on their fair
value at the date of acquisition, and the excess of the purchase price over the
fair value of the assets acquired was recorded as attributable to a customer
list ($1.82 million, to be amortized over seven years) and goodwill ($6.82
million, to be amortized over twenty years).

If the acquisition had taken place at the beginning of the year ending
March 31, 1997, giving effect to adjustments for amortization of intangible
assets, interest income and interest expense for twelve months, the Company's
pro forma (unaudited) revenues, net income and net income per share for the
twelve months ended March 31, 1997 would have been $35.63 million, $2.50 million
and $.29, respectively.

E. DISCONTINUED OPERATIONS:

On March 1, 1996, the Company announced its strategic decision to
distribute to its shareholders all of its shares of CardioTech under a plan
which was approved by the Company's board of directors. In May 1996, the
Company's board of directors declared a stock dividend for the purpose of making
a distribution to the Company's shareholders of all of the outstanding shares it
owned in CardioTech. The Company believes that the distribution of CardioTech
Common Stock in the Distribution qualified as a "tax-free" spinoff under Section
355 of the Internal Revenue Code of 1986, as amended. CardioTech develops,
manufactures and markets its polymer technologies with particular emphasis on
the development of implantable synthetic grafts for a broad variety of
applications, including vascular access grafts, peripheral grafts and coronary
artery bypass grafts.

F. ACCOUNTS RECEIVABLE:

As of March 31, 1999, Liberty Medical's gross unbilled receivables included
in accounts receivable were $15.35 million as compared with $10.82 million as of
March 31, 1998. The increase is primarily a result of the overall growth of
Liberty Medical's sales in the fiscal year ended March 31, 1999. The Company
recorded sales returns and bad debt write-offs of $7.41 million and $5.13
million in the fiscal years ended March 31, 1999 and 1998, respectively.

<PAGE> 27

POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

G. INVENTORIES:
(In thousands)

Inventories consist of the following:

March 31, March 31,
1999 1998
--------- ---------
<S> <C> <C>
Raw materials $ 739 $1,058
Work in process 594 296
Finished goods 5,576 3,503
------ ------
$6,909 $4,857
====== ======
</TABLE>

H. PROPERTY, PLANT, AND EQUIPMENT:
(In thousands)

Property, plant, and equipment consist of the following:

<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
--------- ---------
<S> <C> <C>
Manufacturing equipment $1,937 $1,841
Laboratory equipment 222 188
Land 663 663
Building 2,364 2,345
Leasehold improvements 343 343
Furniture, fixtures, and office
equipment 3,485 2,638
Construction in progress 403 --
------ ------
9,417 8,018
Less accumulated depreciation and
amortization (2,561) (1,733)
------ ------
$6,856 $6,285
====== ======
</TABLE>

Depreciation and amortization expense from continuing operations for
property, plant, and equipment for the years ended March 31, 1999, 1998, and
1997, was approximately $903,000, $838,000, and $899,000, respectively. In May
1999, the Company purchased a 66,000 square foot building in Port St. Lucie,
Florida to support the Company's growth.

<PAGE> 28

POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

I. INTANGIBLE ASSETS:
(In thousands)

Intangible assets consist of the following:

<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
--------- ---------
<S> <C> <C>
Goodwill $42,816 $42,816
Covenant-not-to-Compete 6,800 6,800
Customer list 1,816 1,816
------- -------
51,432 51,432
Less accumulated amortization (14,154) (11,877)
------- -------
$37,278 $39,555
======= =======
</TABLE>

Amortization expense from continuing operations associated with intangible
assets for the years ended March 31, 1999, 1998, and 1997, was $2,277,000,
$2,279,000, and $2,117,000, respectively.

J. LONG-TERM DEBT AND NOTES PAYABLE:

Senior Debt:

In connection with the purchase of the WEBCON product line, in January
1993, the Company and its wholly-owned subsidiary, PolyMedica Pharmaceuticals
(U.S.A.), Inc. ("PMP USA") sold to the John Hancock Mutual Life Insurance
Company ("Hancock"), $25 million 10.65% Guaranteed Senior Secured Notes due
January 31, 2003, and a warrant for the purchase of up to 500,000 shares of
common stock of the Company at $13.50 each (the "Hancock Notes"). The effective
interest rate of the Hancock Notes was 10.97%. Interest is payable
semi-annually. At that time, the warrant was valued at $725,000 and was recorded
as a discount to the Hancock Notes, to be amortized to expense over the life of
the Hancock Notes. The warrant was exercisable beginning in January 1994. The
Company recorded $89,000 of amortization expense each for the years ended March
31, 1999 and 1998. As of March 31, 1999 and 1998 the balance due to Hancock was
$21.0 million and $23.0 million, respectively. As of March 31, 1999 and 1998,
there was $334,000 and $423,000, respectively, of unamortized discount, netted
against senior debt.

In January 1996, the Company and Hancock signed an amendment to the Hancock
Notes. Under the terms of the amendment, scheduled semi-annual repayments of
principal commence at $1.00 million each in fiscal 1998, increase to $2.08
million each beginning in January 2000 and are completed with a $7.50 million
payment at January 31, 2003. Pursuant to the amendment, the exercise price for
the Hancock warrant, exercisable for 536,993 shares of common stock of the
Company, was reduced from $8.38 to $7.00 per share and the interest rate of the
Hancock Notes was increased from 10.65% to 10.9%. In addition, the Company
obtained less restrictive dividend terms and revised financial covenants. This
amendment resulted in a revaluation of the warrant to $623,000, which compared
with a $513,000 unamortized value on January 1, 1996. The difference of $110,000
was recorded to additional paid-in capital.

As a result of a private placement of the Company's Common Stock in March
1996 and the acquisition of Liberty Medical in August 1996, the exercise price
of the Hancock warrant was adjusted to $5.18 per share of common stock for a
total of 543,464 shares exercisable under the warrant.

Under the terms of the Hancock Notes, Hancock has a security interest in
all of the assets of PMP USA and its subsidiary PolyMedica Pharmaceuticals
(Puerto Rico), Inc. ("PMP PR").

<PAGE> 29

POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Hancock Notes are collateralized by all of the assets of PMP USA and
PMP PR, which amounted to approximately $40.9 million as of March 31, 1999.

Interest expense recorded for the Hancock Notes was $2,416,000, $2,634,000,
and $2,725,000 in the years ended March 31, 1999, 1998, and 1997, respectively.

Revolving Credit Facility:

In March 1999, the Company increased its existing revolving credit facility
from $7.5 million to $10 million. As of March 31, 1999, the Company had an
outstanding balance of $4 million. Under the terms of this facility, the Company
is required to repay all principal balances on March 31, 2001. The facility is
collateralized by certain assets of the Company. Under this facility, the
Company is required to maintain certain financial covenants. The interest rate
is tied to the Company's funded debt to EBITDA ratio and was 7.75% as of March
31, 1999.

K. COMMITMENTS:

The Company leases its facilities and certain equipment under operating
leases expiring through 2004. The annual future minimum lease and rental
commitments as of March 31, 1999, under all the Company's leases are:

<TABLE>

<S> <C>
(In thousands)
2000............................................... $ 945
2001............................................... 705
2002............................................... 523
2003............................................... 364
2004............................................... 168
------
Total minimum lease payments $2,705
======
</TABLE>

Rental expense under these leases amounted to approximately $500,000,
$418,000, and $368,000, for the years ended March 31, 1999, 1998, and 1997,
respectively.

<PAGE> 30

POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

L. EARNINGS PER SHARE:

Calculation of per share earnings is as follows:

(In thousands except per share data) Fiscal Year Ended March 31,
----------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income $7,644 $7,619 $2,322
BASIC:
Weighted average common stock outstanding, net of treasury
stock, end of period 8,898 8,652 8,259
Net income per common share, basic $ 0.86 $ 0.88 $ 0.28
====== ====== ======
DILUTED:
Weighted average common stock outstanding, net of treasury
stock, end of period 8,898 8,652 8,259
Weighted average common stock equivalents 888 1,039 359
Weighted average common stock outstanding, net of treasury
stock, end of period 9,786 9,691 8,618
Net income per common share, diluted $ 0.78 $ 0.79 $ 0.27
====== ====== ======
</TABLE>

M. COMPREHENSIVE INCOME:

The Company's total comprehensive income was as follows:

(In thousands) 1999 1998 1997
----- ----- ----
<S> <C> <C> <C>
Net income $7,644 $7,619 $2,322
Other comprehensive expense, net of tax:
Currency translation adjustment -- 225 (63)
------ ------ ------
Total comprehensive income $7,644 $7,844 $2,259
====== ====== ======
</TABLE>

N. SHAREHOLDERS' EQUITY:

Each holder of outstanding common stock has a preferred stock purchase
right (a "Right") for each share of common stock. Each Right entitles the holder
to purchase from the Company one one-hundredth of a share of Series A junior
participating preferred stock at a cash exercise price to be determined by the
board of directors. Initially, the Rights will be attached to all common stock
certificates and will not be exercisable. The Rights will become exercisable
upon the earlier of certain events, including an acquisition by a person or
group of 15% or more of the outstanding common stock (an "Acquiring Person"), or
the commencement of a tender offer or exchange offer that would result in an
Acquiring Person beneficially owning 15% or more of the outstanding common
stock.

The Company will generally be entitled to redeem the Rights at $.01 per
share at any time until the tenth day following public announcement that a 15%
stock position has been acquired. The Rights will expire on January 23, 2002,
unless earlier redeemed or exchanged.

Between June 1992 and May 1994, the Company's board of directors authorized
the future purchase of up to an aggregate of 1,750,000 shares of the Company's
common stock on the open market, with any shares to be held in treasury. As of
March 31, 1999, cumulative purchases of common stock totalled 239,193 for an
aggregate of $1.69 million. The purpose of this purchase program

<PAGE> 31

POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

is, in part, to provide shares of common stock for issuance pursuant to the 1992
Employee Stock Purchase Plan and upon the exercise of the warrant issued to
Hancock.

O. INCOME TAXES:

Income (loss) before income taxes was generated as follows in the years
ended March 31:

(In thousands) 1999 1998 1997
------ ------ -----
<S> <C> <C> <C>
United States $12,463 $10,291 $1,994
Foreign 48 1,200 (39)
------- ------- ------
$12,511 $11,491 $1,955
======= ======= ======
</TABLE>

The provision (benefit) for income taxes consists of the following for the
years ended March 31:

(In thousands) 1999 1998 1997
------ ------ -----
<S> <C> <C> <C>
Federal - current $1,381 $ 216 $(275)
- deferred 2,749 2,495 --
------ ------ -----
- total 4,130 2,711 (275)
State - current 740 52 65
- deferred (3) 1,109 (157)
------ ------ -----
- total 737 1,161 (92)
------ ------ -----
Total Federal and State $4,867 $3,872 $(367)
====== ====== =====
</TABLE>

A reconciliation between the Company's effective tax rate for operations and the
U.S. statutory rate is as follows:

<TABLE>
<CAPTION>
1999 1998 1997
------ ------ -----
<S> <C> <C> <C>
U.S. statutory rate 34.0% 34.0% 34.0%
Change in valuation allowance -- (5.5%) (60.5%)
State income taxes, net of U.S.
Federal Income Tax effect 4.7% 6.6% 6.5%
Other .2% (1.9%) 1.2%
---- ---- -----
Effective tax rate 38.9% 33.2% (18.8%)
==== ==== =====
</TABLE>

The Company determined that it is more likely than not that tax assets
remaining on March 31, 1999 will be realized. Realization of the net deferred
tax assets is dependent on generating sufficient taxable income prior to the
expiration of loss carryforwards. Although realization is not assured,
management believes that it is more likely than not that such net deferred tax
assets will be realized. The following is a summary of the significant
components of the Company's deferred tax assets and liabilities as of March 31,
1999 and 1998:

<PAGE> 32

POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands) 1999 1998
------ -----
<S> <C> <C>
Deferred tax assets (liabilities) - current:
Reserves $ 2,708 $ 2,075
======= =======
Deferred tax assets (liabilities) - long term:
Federal and state net operating loss
carryforwards $ 79 $ 1,558
Foreign net operating loss carryforwards -- --
Other assets -- --
Intangible assets (1,579) (1,291)
Property, plant and equipment (520) (419)
Direct-response advertising (5,900) (4,389)
------- -------
Net deferred tax liability - long term $(7,920) $(4,541)
======= =======
</TABLE>

As of March 31, 1999, the Company has utilized all net operating loss
carryforward amounts for federal income tax purposes. As of March 31, 1998,
accrued expenses included $1.04 million of accrued taxes.

P. MAJOR CUSTOMERS:

For the fiscal years ended March 31, 1999, 1998 and 1997, no customer
represented more than 10% of the Company's consolidated net revenues. As of
March 31, 1999 and 1998, the amounts due from Health Care Financing
Administration of the United States government related to Liberty Medical
revenues was $8.77 million and $4.64 million, respectively.

Q. STOCK OPTIONS:

Effective September 1998, the Company's shareholders approved the 1998
Stock Incentive Plan (the "1998 Plan"), which replaced the 1990 Stock Option
Plan (the "1990 Plan") and the 1992 Directors Stock Option Plan (the "1992
Plan") (collectively, the "Plans").

The 1998 Plan provides for the grant to certain individuals of stock
options to purchase up to 315,000 shares of the Company's common stock.

Generally, when shares acquired pursuant to the exercise of incentive stock
options are sold within one year of exercise or within two years from the date
of grant, the Company derives a tax deduction measured by the amount that the
fair market value exceeds the option price at the date the options are
exercised. When non-qualified stock options are exercised, the Company derives a
tax deduction measured by the amount that the fair market value exceeds the
option price at the date the options are exercised. The tax benefit from these
deductions are recognized as additional paid-in capital.

<PAGE> 33

POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Option activity under the Plans is as follows:

<TABLE>
<CAPTION>
Option Option
Shares Prices
---------- -------------------
<S> <C> <C> <C>
Outstanding, March 31, 1996 1,674,559 $ .95 - $13.33

Granted 1,983,212 .71 - 6.38
Exercised (245,966) 2.06 - 7.86
Cancelled (1,435,197) .95 - 13.33
---------

Outstanding, March 31, 1997 1,976,608 $ .71 - $ 6.38
---------

Granted 271,360 4.87 - 13.75
Exercised (326,717) .71 - 5.38
Cancelled (46,736) 4.31 - 5.38
---------

Outstanding, March 31, 1998 1,874,515 $ .71 - $13.75
---------

Granted 267,250 7.56 - 11.44
Exercised (287,357) 0.71 - 7.75
Cancelled (97,645) 4.31 - 13.75
---------

Outstanding, March 31, 1999 1,756,763 $2.14 - $13.75
=========
</TABLE>

At March 31, 1999, 1,482,659 shares were exercisable and 274,104 will vest
principally over three years under the Plans. There were 73,000 shares remaining
that are authorized for future option grants under the 1998 Plan. The weighted
average exercise price of shares exercisable as of March 31, 1999 was $5.33.

In October 1996, the board of directors approved the cancellation of prior
grants of 1,172,355 options whose exercise prices ranged from $.95 to $13.33 per
common share. A total of 1,172,355 new options were granted whose exercise
prices ranged from $.71 to $5.38 per common share.

Supplemental Disclosures for Stock-Based Compensation

The Company applies APB Opinion No. 25 and related Interpretations in
accounting for the Plans. Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," ("SFAS 123") issued in 1995, defined
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. The Company elected to
continue to apply the accounting provisions of APB Opinion No. 25 for stock
options. The required disclosures under SFAS 123 as if the Company had applied
the new method of accounting are made below.

<PAGE> 34

POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Summarized information about stock options outstanding as of March 31,
1999, is as follows:

<TABLE>
<CAPTION>
Number of
Number of Weighted Avg. Options Weighted-Avg.
Range of Exercise Options Remaining Weighted Avg. Outstanding- Exercise-Price
Prices Outstanding Contractual Life Exercise Price Exercisable Exercisable
----------------- ----------- ----------------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
$ 2.14 - 2.14 39,663 7.51 $ 2.15 39,663 $ 2.14
$ 3.30 - 4.64 897,980 7.63 $ 4.01 860,202 $ 4.00
$ 5.38 - 7.75 551,252 8.28 $ 6.22 426,738 $ 5.81
$ 8.63 - 11.88 229,119 8.76 $11.14 117,307 $11.69
$13.50 - 13.75 38,749 8.50 $13.51 38,749 $13.51
</TABLE>

The fair value of each option granted during 1999 and 1998 is estimated on
the date of grant using the Black-Scholes option pricing model with the
following assumptions:

<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Dividend yield............................................ none none
Expected volatility ...................................... 55.0 % 55.0 %
Risk-free interest rate................................... 4.89% 6.18%
Expected life............................................. 4 4
</TABLE>

Weighted average fair value of options granted at fair value during:
1999 $3.79
1998 $5.80
Employee Stock Purchase Plan weighted-average fair value of options:
1999 $2.82
1998 $2.06

Had compensation cost for the Company's 1999 and 1998 stock option grants
been determined consistent with SFAS 123, the Company's net income and net
income per share would approximate the pro forma amounts below:

<TABLE>
<CAPTION>
Net income per
Net income fully diluted share
---------- -------------------
<S> <C> <C>
As reported:
1999 $7,644,000 $ .78
1998 $7,619,000 $ .79
Pro forma:
1999 $7,035,000 $ .72
1998 $7,003,000 $ .72
</TABLE>

The effect of applying SFAS 123 in this pro forma disclosure is not
indicative of future amounts. SFAS 123 does not apply to awards made prior to
1995. Additional awards in future years are anticipated.

<PAGE> 35

POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

R. 401(K) PLAN:

The PolyMedica Corporation 401(k) Plan and Trust (the "401(k) Plan") is a
voluntary savings plan for all eligible employees which is intended to qualify
under Section 401(k) of the Internal Revenue Code. Each eligible employee may
elect to contribute to the 401(k) Plan, through payroll deductions, up to 15% of
his or her salary, subject to statutory limitations. The Company may make
matching contributions on behalf of participating employees of half of the
dollar amount of each participating employee's contribution, up to a maximum of
3% of an employee's total cash compensation, subject to certain limitations.

For the years ended March 31, 1999, 1998, and 1997, the Company paid and
accrued matching contributions of $190,000, $108,000, and $69,000, respectively,
for the 401(k) Plan participants.

S. SEGMENT INFORMATION:

The Company adopted Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information ("SFAS No.
131") during the year ended March 31, 1999. SFAS No. 131 established standards
for reporting information about operating segments in annual financial
statements and requires selected information about operating segments. It also
establishes standards for related disclosures about products, services and
geographic areas. The Company's reportable segments are strategic business units
or divisions that offer different products or services. These units have
separate financial information that is evaluated by senior management. The
Company has three reportable segments:

Diabetes Supplies - Liberty Medical Supply, Inc. is a direct -to-consumer
provider of diabetes testing supplies to seniors who have Medicare coverage.

Consumer Healthcare - PolyMedica Healthcare, Inc. offers the AZO line of
products which includes OTC ("over-the-counter") female urinary tract discomfort
products and home medical diagnostic kits; and is a manufacturer and distributor
of private-label and branded digital thermometers.

Professional Products - PolyMedica Pharmaceuticals (U.S.A.), Inc. develops,
manufactures and distributes prescription urology products.

All Other consists of operations associated with the Company's corporate
headquarters. Assets and depreciation and amortization expense are not allocated
to the operating segments for management evaluation purposes. However, when
evaluating Income before Income Taxes, management allocates all profit and loss
activities related to the Company's corporate headquarters to the operating
segments, except for gains related to the sale of the Company's wound care
business. As a result, the segment information may not be indicative of the
financial position of results of operations that would have been achieved had
these segments operated as unaffiliated entities. The Company does not organize
its units geographically, as its products and services are sold throughout the
United States only. The following segment information has been prepared in
accordance with the internal accounting policies of the Company, as described
above. There are no intersegment sales for the periods presented. Information
concerning the operations in these reportable segments is as follows:

<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
-------------------------------------------------
(In thousands) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Diabetes Supplies $ 80,597 $48,708 $ 8,652
Consumer Healthcare 14,275 11,149 10,296
Professional Products 9,953 13,968 11,505
All Other -- -- --
-------- ------- -------
Total $104,825 $73,825 $30,453
======== ======= =======
</TABLE>

<PAGE> 36

POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
----------------------------------------------
(In thousands) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
DEPRECIATION and AMORTIZATION EXPENSE:
Diabetes Supplies 6,507 3,331 506
Consumer Healthcare 65 62 51
Professional Products 2,048 2,218 2,561
All Other 53 55 47
-------- ------- -------
Total $ 8,673 $ 5,666 $ 3,165
======== ======= =======
INCOME before INCOME TAXES:
Diabetes Supplies 5,300 1,140 716
Consumer Healthcare 2,868 1,253 2,120
Professional Products 2,746 4,972 (881)
All Other(1) 1,597 4,126 0
-------- ------- -------
Total $ 12,511 $11,491 $ 1,955
======== ======= =======
SEGMENT ASSETS:
Diabetes Supplies 62,922 40,795 15,417
Consumer Healthcare 6,263 5,217 4,229
Professional Products 39,337 43,540 48,429
All Other 4,417 2,849 7,158
-------- ------- -------
Total $112,939 $92,401 $75,233
======== ======= =======
</TABLE>

(1) Represents pretax gains related to the sale of the Company's wound care
business.

T. INTERIM INFORMATION (UNAUDITED):

The following consolidated interim financial information is unaudited. Such
information reflects all adjustments, consisting solely of normal recurring
adjustments, which are in the opinion of management necessary for a fair
presentation.

(In thousands, except per share data) Year Ended March 31, 1999
---------------------------------------------------
Qtr. 1 Qtr. 2* Qtr. 3 Qtr. 4
------- --------- -------- -------
<S> <C> <C> <C> <C>
Total revenues $20,661 $24,823 $28,791 $30,550
Gross margin 10,740 12,945 14,826 16,709
Net income 1,293 2,484 1,746 2,121
Net income per weighted average share, basic $ 0.15 $ 0.28 $ 0.20 $ 0.23
Net income per weighted average share, diluted $ 0.13 $ 0.26 $ 0.18 $ 0.22
</TABLE>

*includes after tax gain of $976,000 or $0.10 per diluted share related to the
sale of the Company's wound care business.

<PAGE> 37

(In thousands, except per share data) Year Ended March 31, 1998
----------------------------------------------------------
Qtr. 1 Qtr. 2* Qtr. 3 Qtr. 4
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Total revenues $13,958 $17,643 $20,668 $21,556
Gross margin 7,230 9,664 10,448 10,908
Net income 831 3,915 1,383 1,490
Net income per weighted average share, basic $ 0.10 $ 0.45 $ 0.16 $ 0.17
Net income per weighted average share, diluted $ 0.09 $ 0.39 $ 0.14 $ 0.15
</TABLE>

*includes after tax gain of $2.74 million or $0.29 per diluted share related to
the sale of the Company's wound care business

U. RELATED PARTY TRANSACTIONS:

In December 1994 and January 1997, certain executive officers of the
Company purchased in the aggregate 100,000 and 100,000 shares, respectively, of
the Company's common stock on the open market. The purchases, valued at $415,000
and $607,000, respectively, were funded by a note issued by the Company to each
officer. The terms of the notes provide for each executive to repay the Company
with Company shares within five years from the date of the note at a market
value equal to the original principal of the note. The principal balance due is
shown as notes receivable from officers in Shareholders' Equity on the
Consolidated Balance Sheet. As of March 31, 1999 the balance of notes receivable
was $626,000.

V. SUBSEQUENT EVENT:

To support Liberty Medical's growth, in May 1999 the Company purchased a
66,000 square foot building in Port St. Lucie, Florida for $2.0 million,
financed by a $1.4 million mortgage. Under the terms of this mortgage, the
Company is required to repay all principal balances by May 2006 using a 15-year
amortization period. The mortgage is collateralized by the land, building,
future improvements and permanent fixtures. Under this mortgage, the Company is
required to maintain certain financial covenants. The interest rate is 8.07%.

<PAGE> 38

(b) There were no Current Reports on Form 8-K filed by the Company during the
last quarter of the period covered by this report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

There have been no disagreements on accounting and financial disclosure
matters.

<PAGE> 39

PART III

ITEMS 10-13.

The information required for Part III in the Annual Report on Form 10-K
is incorporated by reference from the Company's definitive proxy statement for
the Company's 1999 Annual Meeting of Shareholders. Such information will be
contained in the sections of such proxy statement captioned "Election of
Directors," "Board and Committee Meetings," "Compensation of Executive
Officers," "Directors' Compensation," "Report of the Compensation Committee,"
"Compensation Committee Interlocks and Insider Participation," "Comparative
Stock Performance," "SEC Reporting," "Security Ownership of Certain Beneficial
Owners and Management," and "Certain Transactions." Information regarding
executive officers of the Company is also furnished in Part I of this Annual
Report on Form 10-K under the heading "Executive Officers of the Registrant."

<PAGE> 40
The following trademarks are used in this Annual Report on Form 10-K:

BASIS, MEDI-AID, URISED, CYSTOSPAZ, ANESTACON, CYSTOSPAZ-M, AZO STANDARD, AZO
CRANBERRY, B&O SUPPRETTES, and AQUACHLORAL are registered trademarks of
PolyMedica Corporation. AZO CONFIDENCE, AZO MENOPAUSE, AZO TEST STRIPS, PeeDee
Dose and Fever Alarm are trademarks of PolyMedica Corporation. Uristat is a
trademark of Ortho Pharmaceutical Corp., a division of Johnson & Johnson.
Xylocaine is a registered trademark of Astra USA, Inc. Pyridium is a registered
trademark of Parke-Davis, a division of Warner-Lambert Co. Levsin is a trademark
of Schwarz-Pharma, Inc. Cystex is a trademark of Numark Laboratories, Inc.
Prodium is a trademark of Breckenridge Pharmaceutical, Inc.

<PAGE> 41

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: June 25, 1999 PolyMedica Corporation

By: /s/ Steven J. Lee
------------------------------------
Steven J. Lee
Chairman and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

Dated: June 25, 1999 /s/ Steven J. Lee
----------------------------------------
Steven J. Lee
Chairman, Chief Executive Officer and
Director (Principal Executive Officer)

Dated: June 25, 1999 /s/ Eric G. Walters
----------------------------------------
Eric G. Walters
Chief Financial Officer, Treasurer
and Clerk (Principal Financial and
Accounting Officer)

Dated: June 25, 1999 /s/ Frank W. LoGerfo
----------------------------------------
Frank W. LoGerfo
Director

Dated: June 25, 1999 /s/ Daniel S. Bernstein
----------------------------------------
Daniel S. Bernstein
Director

Dated: June 25, 1999 /s/ Marcia J. Hooper
----------------------------------------
Marcia J. Hooper
Director

Dated: June 25, 1999 /s/ Thomas S. Soltys
----------------------------------------
Thomas S. Soltys
Director

Dated: June 25, 1999 /s/ Peter K. Hoffman
----------------------------------------
Peter K. Hoffman
Director

<PAGE> 42
EXHIBIT INDEX

The following exhibits are filed as part of this Annual Report on Form 10-K.

Exhibit
Number Description
- ------ -----------

2.1 - Stock Purchase Agreement, dated as of August 30, 1996, among the
Registrant, Liberty Medical Supply, Inc., and the Shareholders of
Liberty Medical Supply, Inc. (19)

2.2 - Amendments dated March 26, 1997, to the Stock Purchase Agreement dated
as of August 30, 1996, among the Registrant, Liberty Medical Supply,
Inc. and the Shareholders' of Liberty Medical Supply, Inc.(22)

2.3 - Asset Purchase Agreement dated as of June 23, 1997 by and among the
Registrant, PolyMedica Industries UK, Ltd., Innovative Technologies
Limited, Innovative Technologies (US) Inc., and Innovative
Technologies Group Plc.(22)

3.1 - Restated Articles of Organization of the Company. (1)

3.2 - Amended and Restated By-Laws of the Company. (14)

4.1 - Specimen certificate for shares of Common Stock, $.01 par value, of
the Company. (1)

4.2 - Note and Warrant Agreement dated January 26, 1993 and $25,000,000
10.65% Guaranteed Senior Secured Notes due January 31, 2003 of
PolyMedica Pharmaceuticals (U.S.A.), Inc. and PolyMedica
Pharmaceuticals (Puerto Rico), Inc. and Warrant for 500,000 (subject
to adjustment) shares of Common Stock, $0.01 per value, of the
Registrant. (6)

4.3 - Letter Agreement, Note Guarantee and Security Agreement, all dated
April 27, 1993, by and among the Registrant, PolyMedica
Pharmaceuticals (U.S.A.), Inc., PolyMedica Pharmaceuticals (Puerto
Rico), Inc., PolyMedica Securities, Inc., PolyMedica Pharmaceuticals
Securities, Inc. and the John Hancock Mutual Life Insurance Company.
(9)

4.4 - Letter Agreement amending the Note and Warrant Agreement, dated June
15, 1993. (9)

4.5 - Letter Agreement amending the Note and Warrant Agreement dated March
29, 1994. (10)

4.6 - Letter Agreement amending the Note and Warrant Agreement dated June
17, 1994. (10)

4.7 - Letter Agreement amending the Note and Warrant Agreement dated June
30, 1994. (11)

4.8 - Letter Agreement amending the Note and Warrant Agreement dated October
27, 1994. (12)

4.9 - Letter Agreement amending the Note and Warrant Agreement dated June
27, 1995. (14)

4.10 - Letter Agreement amending the Note and Warrant Agreement dated October
18, 1995 (15)

4.11 - Letter Agreement amending the Note and Warrant Agreement dated June
19, 1996. (18)

4.12 - Letter Agreement amending the Note and Warrant Agreement dated August
2, 1996. (20)

4.13 - Letter Agreement amending the Note and Warrant Agreement dated October
30, 1996 (20)

4.14 - Letter Agreement amending the Note and Warrant Agreement dated January
23, 1997 (21)

10.01 - 1990 Stock Option Plan, as amended. (14)

10.02 - 1992 Employee Stock Purchase Plan, as amended. (14)

10.03 - 1992 Directors' Stock Option Plan, as amended. (10)

10.04 - Rights Agreement dated as of January 23, 1992 by and between the
Company and the First National Bank of Boston. (3)

10.05 - Employment Agreement by and between the Registrant and Steven J. Lee
dated May 16, 1990, as amended by letter agreements dated June 1, 1991
and December 5, 1991. (1)(30)

10.06 - Letter Agreement amendment by and between the Registrant and Steven J.
Lee dated April 3, 1996. (17)(30)

10.07 - Employment Agreement by and between the Registrant and Dr. Arthur A.
Siciliano dated September 1, 1990, as amended by letter agreements
dated June 1, 1991 and December 5, 1991. (1)(30)

10.08 - Employee Stock Purchase Agreement by and between the Registrant and
Steven J. Lee dated May 16, 1990, as amended. (1)(30)

10.09 - Letter Agreement amendment by and between the Registrant and Dr.
Arthur A. Siciliano dated April 3, 1996. (17)(30)

10.10 - Stock Restriction Agreement by and between the Registrant and Dr.
Arthur A. Siciliano dated September 1, 1990, as amended. (1)

10.11 - Sublease dated February 10, 1992 by and between Ampex Corporation and
the Registrant.(1)

10.12 - Supply Agreement, dated as of May 27, 1992, by and between Medtronic,
Inc. and the Company. (2)(22)

<PAGE> 43
Exhibit
Number Description
- ------ -----------

10.13 - Employment Agreement by and between the Registrant and Eric G. Walters
dated June 1, 1991 as amended by letter agreement dated December 5,
1991. (9)(30)

10.14 - Letter Agreement amendment by and between the Registrant and Steven J.
Lee dated March 18, 1993. (9)(30)

10.15 - Letter Agreement amendment by and between the Registrant and Eric G.
Walters dated April 3, 1996. (17)(30)

10.16 - Letter Agreement amendment by and between the Registrant and Dr.
Arthur A. Siciliano dated March 18, 1993. (9)(30)

10.17 - Letter Agreement amendment by and between the Registrant and Eric G.
Walters dated March 18, 1993. (9)(30)

10.18 - Letter Agreement dated July 15, 1993 between Alcon Laboratories Inc.
and the Registrant. (7)

10.19 - Purchase and Sale Agreement between Allstate Life Insurance Company as
Seller and PolyMedica Corporation as Buyer as of August 13, 1993. (8)

10.20 - Letter Agreement amendment by and between the Registrant and Steven J.
Lee dated March 31, 1994. (10)(30)

10.21 - Letter Agreement amendment by and between the Registrant and Dr.
Arthur A. Siciliano dated March 31, 1994.(10)(30)

10.22 - Letter Agreement amendment by and between the Registrant and Eric G.
Walters dated March 31, 1994. (10)(30)

10.23 - Mortgage, Assignment of Leases and Rents and Security Agreement
between PolyMedica Pharmaceuticals (U.S.A.), Inc. and John Hancock
Mutual Life Insurance Company dated May 31, 1994. (10)

10.24 - Processing Agreement dated December 11, 1992, by and between the
Registrant and Alcon (Puerto Rico) Inc. (10)(22)

10.25 - Processing Agreement dated December 11, 1992, by and between the
Registrant and Alcon Laboratories, Inc. (10)(22)

10.26 - Letter Agreement dated March 25, 1994 between Alcon (Puerto Rico) Inc.
and the Registrant. (10)

10.27 - Letter Agreement amendment by and between the Registrant and Steven J.
Lee dated April 11, 1995. (14) (30)

10.28 - Amended and Restated License Agreement between the Registrant and
CardioTech dated May 13, 1996. (17)

10.29 - Letter Agreement amendment by and between the Registrant and Dr.
Arthur A. Siciliano dated April 11, 1995. (14) (30)

10.30 - Letter Agreement amendment by and between the Registrant and Eric G.
Walters dated April 11, 1995. (14) (30)

10.31 - Letter Agreement to the Lease Agreement, dated February 16, 1995, by
and between Robert W. Murray, Trustee of Constitution Park Trust Three
and the Registrant for offices and laboratory space in Woburn,
Massachusetts. (14)

10.32 - Letter Agreement dated February 2, 1995, amending the Processing
Agreement dated December 11, 1992, by and between the Registrant and
Alcon (Puerto Rico), Inc. (14) (22)

10.33 - Letter Agreement dated May 3, 1995, amending the Processing Agreement
dated December 11, 1992, by and between the Registrant and Alcon
(Puerto Rico), Inc. (14) (22)

10.34 - Letter Agreement, dated March 20, 1995, by and between the Registrant
and Alcon Laboratories, Inc. (15)

10.35 - Form of Warrant issued by the Registrant to the John Hancock Mutual
Life Insurance Company (17)

10.36 - Form of Promissory Note, dated December 13, 1994, executed by certain
officers and delivered to the Registrant (15)

10.37 - Form of Jefferies & Company, Inc. and Rodman & Renshaw, Inc. Warrant
(15)

10.38 - Form of Promissory Note made in favor of the Company by certain
officers of the Company (21)

10.39 - 1998 Executive Incentive Compensation Plan (23)(29)(30)

<PAGE> 44

10.40 - Letter Agreement amendment by and between the Registrant and Steven J.
Lee dated July 1, 1997. (23)(30)

10.41 - Letter Agreement amendment by and between the Registrant and Dr.
Arthur A. Siciliano dated July 1, 1997. (23)(30)

10.42 - Letter Agreement amendment by and between the Registrant and Eric G.
Walters dated July 1, 1997. (23)(30)

10.43 - Agented Loan and Security Agreement dated April 30, 1998 by and
between the Registrant and BankBoston, N.A.(25)

10.44 - Master Note dated April 30, 1998 by and between the Registrant and
BankBoston, N.A.(25)

10.45 - Letter Agreement amendment to Employment Agreement by and between the
Registrant and Steven J. Lee dated July 1, 1998.(26)(30)

10.46 - Letter Agreement amendment to Employment Agreement by and between the
Registrant and Dr. Arthur A. Siciliano dated July 1, 1998.(26)(30)

10.47 - Letter Agreement amendment to Employment Agreement by and between the
Registrant and Eric G. Walters dated July 1, 1998.(26)(30)

10.48 - Prepayment Agreement between Innovative Technologies Group plc and the
Registrant dated June 30, 1998.(26)

10.49 - Letter Agreement amendment to Employment Agreement by and between the
Registrant and Steven J. Lee dated September 22, 1998.(27)(30)

10.50 - Letter Agreement amendment to Employment Agreement by and between the
Registrant and Dr. Arthur A. Siciliano dated September 22,
1998.(27)(30)

10.51 - Letter Agreement amendment to Employment Agreement by and between the
Registrant and Eric G. Walters dated September 22, 1998.(27)(30)

10.52 - Letter Agreement dated November 2, 1998 between the Registrant and
John Hancock Mutual Life Insurance Company.(28)

10.53 - Second Amendment to Agented Loan and Security Agreement between the
Registrant and BankBoston, N.A. dated March 12, 1999.

10.54 - Amendment to the Master Note between the Registrant and BankBoston,
N.A. dated March 12, 1999.

10.55 - Consent and Waiver Agreement between the Registrant and BankBoston,
N.A. dated May 7, 1999.

10.56 - Letter Agreement amendment to the Form of Promissory Note, dated March
30, 1999 executed by certain officers and delivered to the Registrant.

10.57 - Letter Agreement amendment to Employment Agreement by and between the
Registrant and Steven J. Lee dated June 14, 1999. (30)

10.58 - Letter Agreement amendment to Employment Agreement by and between the
Registrant and Dr. Arthur A. Siciliano dated June 14, 1999. (30)

10.59 - Letter Agreement amendment to Employment Agreement by and between the
Registrant and Eric G. Walters dated June 14, 1999. (30)

10.60 - Bonus Pool and Criteria for Senior Management for the fiscal year
ending March 31, 2000. (29)(30)

21 - Subsidiaries of the Registrant

23.1 - Consent of PricewaterhouseCoopers LLP

27.1 - Financial Data Schedule - Fiscal Year Ended March 31, 1999

- -------

1 Incorporated herein by reference to the Company's Registration Statement on
Form S-1 (File No. 33-45425).

2 Incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended March 31, 1992 filed June 26, 1992.

3 Incorporated herein by reference to the Company's Current Report on Form
8-K filed March 13, 1992.

4 Incorporated herein by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1992 filed August 13, 1992

<PAGE> 45
5 Incorporated herein by reference to the Company's Current Report on Form
8-K filed December 26, 1992, as amended by Amendment No. 1 on Form 8 filed
February 24, 1993.

6 Incorporated herein by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1992 filed February 13, 1993.

7 Incorporated herein by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1993, filed August 13, 1993.

8 Incorporated herein by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1993, filed November 9, 1993

9 Incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended March 31, 1993, filed June 25, 1993.

10 Incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended March 31, 1994, filed June, 29, 1994.

11 Incorporated herein by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1994, filed August 12, 1994.

12 Incorporated herein by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1994, filed October 31, 1994.

13 Incorporated herein by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1994, filed February 2, 1995.

14 Incorporated herein by reference to the Company's Annual Report on Form
10-K for the fiscal year ended March 31, 1995, filed June 29, 1995.

15 Incorporated herein by reference to the Company's Registration Statement on
Form S-1 (File No. 33- 97872).

16 Incorporated herein by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1995, filed February 9, 1996.

17 Incorporated herein by reference to the Company's Annual Report on Form
10-K for the fiscal year ended March 31, 1996, filed June 26, 1996.

18 Incorporated herein by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996, filed August 14, 1996.

19 Incorporated herein by reference to the Company's Current Report on Form
8-K filed September 13, 1996.

20 Incorporated herein by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996, filed November 13, 1996.

21 Incorporated herein by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1996, filed February 13, 1997.

22 Incorporated herein by reference to the Company's Annual Report on Form
10-K for the fiscal year ended March 31, 1997, filed June 26, 1997.

23 Incorporated herein by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997, filed July 31, 1997.

24 Incorporated herein by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1997, filed October 31, 1997.

<PAGE> 46
25 Incorporated herein by reference to the Company's Annual Report on Form
10-K for the fiscal year ended March 31, 1998, filed June 29, 1998.

26 Incorporated herein by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998, filed July 20, 1998.

27 Incorporated herein by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1998, filed October 31, 1997.

28 Incorporated herein by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1998, filed January 29, 1998.

29 Confidential treatment granted as to certain portions.

30 Management contract or compensation plan or arrangement required to be
filed as an exhibit pursuant to Item 14(c) of Form 10-K.

<PAGE> 1

EXHIBIT 10.53

SECOND AMENDMENT TO AGENTED LOAN AND SECURITY AGREEMENT
DATED APRIL 30, 1998 BETWEEN
POLYMEDICA CORPORATION,
LIBERTY MEDICAL SUPPLY, INC.,
POLYMEDICA HEALTHCARE, INC.,
POLYMEDICA SECURITIES, INC.
AND
BANKBOSTON, N.A.

This Second Amendment to Agented Loan and Security Agreement
(hereinafter, the "Amendment") is made as of this 12th day of March, 1999 by and
among POLYMEDICA CORPORATION, LIBERTY MEDICAL SUPPLY, INC., POLYMEDICA
HEALTHCARE, INC., AND POLYMEDICA SECURITIES, INC., (hereinafter, individually
and collectively, the "Principal Borrowers") and BANKBOSTON, N.A., a national
banking association with its principal place of business at 100 Federal Street,
Boston, Massachusetts (hereinafter, the "Lender"), in consideration of the
mutual covenants contained herein and the benefits to be derived herefrom.
Unless otherwise specified herein, all capitalized terms shall have the same
meaning as set forth in the Loan Agreement (as defined hereinbelow).

W I T N E S S E T H:

WHEREAS, the Principal Borrowers executed and delivered to the Lender a
certain Agented Loan and Security Agreement dated April 30, 1998, as amended by
a certain Waiver of Default and Amendment dated as of November 30, 1998,
(hereinbefore and hereinafter, as amended, the "Loan Agreement") pursuant to
which, among other things, the Lender extended in favor of the Principal
Borrowers a Revolving Credit in the current maximum principal amount of
$7,500,000.00; and

WHEREAS, the Principal Borrowers have requested that the Lender amend
the Loan Agreement to increase the maximum availability under the Revolving
Credit from $7,500,000.00 to $10,000,000.00; and

WHEREAS, the Lender has indicated its willingness to do so, BUT ONLY on
the terms and conditions contained in this Amendment; and

WHEREAS, the Principal Borrowers have determined that this Amendment is
in each of the Principal Borrower's best interest.

NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:

14. The Principal Borrowers hereby certify to the Lender that, to
the best of each of the Principal Borrower's knowledge and belief after due
inquiry, the representations and warranties contained in the Loan Agreement, as
modified by this Amendment, are true as of the date hereof (except those of
which relate to a specific date, or to the extent such have become inaccurate
due to transactions permitted under the Loan Agreement)and that no Event of
Default under the Loan Agreement or any document executed in connection
therewith has occurred and is continuing.

<PAGE> 2
15. The Principal Borrowers acknowledge and agree that the none of
the Principal Borrowers have any offsets, defenses, claims or counterclaims
against the Lender with respect to the Loan Agreement, this Amendment or any
other document, instrument or agreement executed and delivered by the Principal
Borrowers to the Lender in connection therewith and, to the extent that any of
the Principal Borrowers have any such offsets, defenses, claims or
counterclaims, the Principal Borrowers hereby affirmatively WAIVE any such
offsets, defenses, claims or counterclaims and specifically RELEASE the Lender
for any such liability on account thereof.

16. The Principal Borrowers acknowledge and agree that all of
their obligations and liabilities to the Lender under the Amended and Restated
Master Note of even date executed in connection herewith, shall be included
within the definition of "Obligations" as used in the Loan Agreement, and the
payment and performance of such Amended and Restated Master Note, shall continue
to be secured by all assets of the Principal Borrowers, previously or hereafter,
granted to the Lender to secure the payment and performance of the Obligations.

17. Section 2-1(b) of the Loan Agreement is hereby deleted in its
entirety and the following substituted therefor:

As used herein, the term "AVAILABILITY" refers at any time to the
lesser of (i) or (ii) below:

(i) Up to the result of the following:

(A) Ten Million Dollars and No Cents ($10,000,000.00).

MINUS

(B) The then unpaid balance of the Loan Account.

MINUS

(C) The aggregate principal amounts then undrawn on all
outstanding L/C's issued or incurred, or caused to be
issued or incurred, by the Lender for the account
and/or benefit of any Principal Borrower.

(ii) Up to the result of the following:

(A) 75% of the face amount of each of the Principal
Borrower's Acceptable Accounts (as defined below).

PLUS

(B) 25% of the face amount of each of the Principal
Borrower's Acceptable Unbilled Accounts (as defined
below), which in the aggregate shall not exceed
$5,000,000.00.

<PAGE> 3

PLUS

(C) 50% of the value of the Acceptable Inventory of each
Principal Borrower, as defined below (Acceptable
Inventory being valued at the lower of cost or market
after deducting all transportation, processing,
handling charges, and all "soft" costs and expenses,
subject to such inventory reserves as the Lender may
establish from time to time).

MINUS

(D) The then unpaid principal balance of the Loan
Account.

MINUS

(E) The aggregate principal amounts then undrawn on all
outstanding L/C's issued or incurred, or caused to be
issued or incurred, by the Lender for the account
and/or the benefit of any Principal Borrower."

18. Article IV of the Loan Agreement is hereby amended by adding
the following definition of "Acceptable Unbilled Accounts" after the definition
of "Acceptable Accounts":

""ACCEPTABLE UNBILLED ACCOUNTS": Such of the Principal Borrowers'
rights to payment for goods sold, or services rendered, which have been earned
by performance and would otherwise be classified as Acceptable Accounts, but for
which an invoice has not yet been rendered."

19. Article IV of the Loan Agreement is hereby amended by deleting
the definition of "Master Note" in its entirety and substituting the following
therefor:

""MASTER NOTE": a certain Amended and Restated Master Note of even
date in the original face amount of $10,000,000.00 made by the
Agent Borrower and Principal Borrowers payable to the Lender, as
may be hereafter amended or replaced."

20. Article IV of the Loan Agreement is hereby amended by adding
the following definition of "Year 2000 Compliant" after the definition of
"Unused Line Fee":

""YEAR 2000 COMPLIANT": computer applications, imbedded microchips,
and other software systems and subsystems which properly
recognize and perform their intended function without any
material adverse effect on account of their respective inability
to recognize certain dates on and after December 31, 1999 or on
account of their treating any date prior to, on, or after
December 31, 1999 other than as the specific date in question."

21. Article VI of the Loan Agreement is hereby amended by adding
the following Section after Section 6-25:

"6-26. YEAR 2000 COMPLIANCE.

<PAGE> 4
(a) Based upon a diligent inquiry undertaken by the
Principal Borrowers, it appears that the Principal Borrowers'
operations are Year 2000 Compliant.

(b) The Principal Borrowers have developed a detailed
plan and timetable with respect to the Principal Borrowers' operations
becoming Year 2000 Compliant and it appears that the Principal
Borrowers have committed adequate resources to execute that plan and to
meet such timetable.

(c) The Principal Borrowers will not suffer or permit
their operations thereafter to cease to be Year 2000 Compliant in any
manner which might have a material adverse effect on their operations."

22. Exhibit 2-5 of the Loan Agreement is hereby amended by
deleting same in its entirety and substituting Exhibit 2-5 attached hereto and
specifically incorporated by reference herein therefor.

23. Exhibit 9-8 of the Loan Agreement is hereby amended by
deleting Section 5 thereof in its entirety effective as of December 31, 1998.

24. As a condition to precedent to the effectiveness of this
Amendment, the Principal Borrowers shall have paid to the Lender a closing fee
in the amount of $6,250.00, which fee shall be in addition to, and supplemental
of, all other fees required pursuant to the terms of the Loan Agreement.

25. This Amendment and all other documents, instruments or
agreements executed in connection herewith incorporate all discussions and
negotiations between the Principal Borrowers and the Lender, either expressed or
implied, concerning the matters included herein, any statute, custom, or usage
to the contrary notwithstanding. No such discussions or negotiations shall
limit, modify or otherwise affect the provisions hereof. No modification,
amendment, or waiver of any provision of this Amendment or the Loan Agreement or
any provision under any other agreement, document or instrument between the
Principal Borrowers and the Lender shall be effective unless executed in writing
by the party to be charged with such modification, amendment or waiver, and if
such party be the Lender, then by a duly authorized officer thereof.

26. Except as specifically modified herein, the Loan Agreement
shall remain in full force and effect as originally written and the Principal
Borrowers hereby ratify and confirm all terms and conditions contained therein
and further ratify and reaffirm all representations and warranties made therein
as of the date hereof.

27. This Amendment shall be construed in accordance with and
governed by the laws of the Commonwealth of Massachusetts and shall take effect
as a sealed instrument.

[The remainder of this page is intentionally blank]

<PAGE> 5

IN WITNESS WHEREOF, the parties have hereunto set their hands
and seals as of the date first written above.

POLYMEDICA CORPORATION

By: /s/ Eric G. Walters
------------------------------
Title: CFO and Treasurer

LIBERTY MEDICAL SUPPLY, INC.

By: /s/ Steven J. Lee
------------------------------
Title: Treasurer

POLYMEDICA HEALTHCARE, INC.

By: /s/ Eric G. Walters
------------------------------
Title: Treasurer and Secretary

POLYMEDICA SECURITIES, INC.

By: /s/ Eric G. Walters
------------------------------
Title: Treasurer and Clerk

BANKBOSTON, N.A.

By: /s/ Jeffrey G. Millman
--------------------------------
Name: Jeffrey G. Millman
Title: Vice President

<PAGE> 1
EXHIBIT 10.54

AMENDED AND RESTATED MASTER NOTE BANKBOSTON, N.A.
$10,000,000.00
- --------------------------------------------------------------------------------

Boston, Massachusetts March 12, 1999

This Amended and Restated Master Note amends and restates a certain Master Note
dated April 30, 1998 in the face amount of $7,500,000.00.

FOR VALUE RECEIVED, the undersigned, (individually and collectively,
jointly and severally, the "BORROWERS") promise to pay to the order of
BankBoston, N.A. a national banking association with offices at 100 Federal
Street, Boston, Massachusetts 02110 (with any subsequent holder, the "LENDER")
the aggregate unpaid principal balance of loans and advances made by the Lender
to the Borrowers pursuant to the Revolving Credit established pursuant to the
Agented Loan and Security Agreement dated April 30, 1998, as amended on November
30, 1998, and as further amended of even date (as such may be further amended
hereafter, the "LOAN AGREEMENT") between the Lender and the Borrowers, with
interest, at the rate and payable in the manner, stated therein.

This is the "Master Note" to which reference is made in the Loan
Agreement, and is subject to all terms and provisions thereof. The principal of,
and interest on, this Note shall be payable as provided in the Loan Agreement
and shall be subject to acceleration as provided therein.

The Lender's books and records concerning the Lender's loans and
advances pursuant to the Revolving Credit, the accrual of interest thereon, and
the repayment of such loans and advances, shall be prima facie evidence of the
indebtedness to the Lender hereunder.

No delay or omission by the Lender in exercising or enforcing any of
the Lender's powers, rights, privileges, remedies, or discretions hereunder
shall operate as a waiver thereof on that occasion nor on any other occasion. No
waiver of any default hereunder shall operate as a waiver of any other default
hereunder, nor as a continuing waiver.

Each of the Borrowers, and each endorser and guarantor of this Note,
respectively waives presentment, demand, notice, and protest, and also waives
any delay on the part of the holder hereof except as provided in the Loan
Agreement or any guaranty. Each assents to any extension or other indulgence
(including, without limitation, the release or substitution of collateral)
permitted by the Lender with respect to this Note and/or any collateral given to
secure this Note or any extension or other indulgence with respect to any other
liability or

<PAGE> 2
any collateral given to secure any other liability of any of the Borrowers or
any other person obligated on account of this note.

This Note shall be binding upon each of the Borrowers, and each
endorser and guarantor hereof, and upon their respective heirs, successors,
assigns, and representatives, and shall inure to the benefit of the Lender and
its successors, endorsees, and assigns.

The liabilities of the Borrowers, and of any endorser or guarantor of
this Note, are joint and several; provided, however, the release by the Lender
of or any one or more such person, endorser or guarantor shall not release any
other person obligated on account of this Note. Each reference in this Note to
the Borrowers, any endorser, and any guarantor, is to such person individually
and also to all such persons jointly. No person obligated on account of this
Note may seek contribution from any other person also obligated unless and until
all liabilities, obligations and indebtedness to the Lender of the person from
whom contribution is sought have been satisfied in full.

Each of the Borrowers and each endorser and guarantor hereof each
authorizes the Lender to complete this Note if delivered incomplete in any
respect.

This Note shall be governed by the laws of The Commonwealth of
Massachusetts and shall take effect as a sealed instrument.

"PRINCIPAL BORROWERS"

POLYMEDICA CORPORATION POLYMEDICA HEALTHCARE, INC.

By: /s/ Eric G. Walters By: /s/ Eric G. Walters
------------------------------- --------------------------------
Title: CFO and Treasurer Title: Treasurer and Secretary

POLYMEDICA SECURITIES, INC. LIBERTY MEDICAL SUPPLY, INC.

By: /s/ Eric G. Walters By: /s/ Steven J. Lee
------------------------------- --------------------------------
Title: Treasurer and Clerk Title: Treasurer

"AGENT BORROWER"

POLYMEDICA CORPORATION

By: /s/ Eric G. Walters
-------------------------------
Title: CFO and Treasurer

<PAGE> 1
EXHIBIT 10.55

CONSENT AND WAIVER AGREEMENT

This Consent and Waiver Agreement is made as of this 7th day of May,
1999 by and between BANKBOSTON, N.A., a national banking association
(hereinafter, the "Bank") and POLYMEDICA CORPORATION, a Massachusetts
corporation, LIBERTY MEDICAL SUPPLY, INC., a Florida corporation, POLYMEDICA
HEALTHCARE, INC., a Delaware corporation and POLYMEDICA SECURITIES, INC., a
Massachusetts corporation (hereinafter, jointly and severally, individually and
collectively, the "Borrower"), in consideration of the mutual covenants
contained herein and the benefits to be derived herefrom. Unless otherwise
specified herein, all capitalized terms shall have the same meaning as set forth
in the Loan Agreement (as defined hereinbelow).

W I T N E S S E T H:

WHEREAS, the Borrower and the Bank entered into a certain Agented Loan
and Security Agreement dated April 30, 1998 (hereinabove and hereinafter, as
amended, the "Loan Agreement") pursuant to which, among other things, the Bank
established in favor of the Borrower a Revolving Credit in the maximum principal
amount of $7,500,000.00, as amended and increased to $10,000,000.00 pursuant to
certain Amendments dated November 30, 1998 and March 12, 1999; and

WHEREAS, PolyMedica Corporation has advised the Bank of its intentions
to enter into a certain mortgage loan arrangement with NationsBank, N.A.
(hereinafter, the "Mortgage Loan") in the original principal amount of
$1,425,000.00 evidenced by a certain Promissory Note dated on or about the date
hereof in the form of Exhibit "A" attached hereto and specifically incorporated
by reference herein, which Mortgage Loan is to be secured by a certain Real
Estate Mortgage, Assignment, and Security Agreement dated on or about the date
hereof in the form of Exhibit "B" attached hereto and specifically incorporated
by reference herein encumbering certain premises located at 10045 South U.S.
Highway 1, Port St. Lucie, Florida (hereinafter , the "Premises"); and

WHEREAS, Liberty Medical Supply, Inc. has advised the Bank of its
intentions to provide Nations Bank, N.A. with an unsecured guaranty of the
Mortgage Loan pursuant to a certain Guaranty Agreement dated on or about the
date hereof in the form of Exhibit "C" attached hereto and specifically
incorporated by reference herein; and

WHEREAS, the Bank has indicated its willingness to consent to the
Mortgage Loan contemplated above, BUT ONLY on the terms and conditions set forth
herein.

NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:

1. The Bank hereby consents to PolyMedica Corporation's entering
into the Mortgage Loan by the execution of the Promissory Note and Real Estate
Mortgage, Assignment, and Security Agreement referenced above and the execution
of the Guaranty Agreement referenced above by Liberty Medical Supply, Inc. and
the Indebtedness and Encumbrances incurred and granted in connection with the
Mortgage Loan are hereby permitted under the Loan Agreement. Exhibit 6-5 of the
Loan Agreement is hereby amended by adding the Premises thereto.

<PAGE> 2

2. The Borrower acknowledges and agrees that the consent to the
Mortgage Loan set forth herein shall not operate as a waiver of any restrictions
or other provisions under the Loan Agreement nor a waiver of any defaults under
the Loan Agreement, if any, now existing or hereafter arising.

3. The Borrower specifically acknowledges and agrees that any
default by the Borrower under the Mortgage Loan or any document executed in
connection therewith which is not waived or cured shall constitute an Event of
Default under the Loan Agreement and the Borrower shall immediately notify the
Bank of any such default upon becoming aware of same. In addition, the Borrower
specifically acknowledges and agrees that it will not amend the Mortgage Loan or
any document executed in connection therewith without the prior written consent
of the Bank, which consent shall not be unreasonably withheld or delayed.

4. The Borrower hereby represents, warrants and agrees that the
\Borrower has no offsets, defenses, or counterclaims against the Bank and to the
extent that the Borrower may claim that any such offsets, defenses, or
counterclaims exist, the Borrower hereby WAIVES and RELEASES the Bank from same.

5. The Borrower shall pay all expenses of the Bank in connection
with the agreement contemplated hereby and the preparation, execution, and
delivery of this Agreement and of all other documents, instruments and
agreements executed in connection therewith including, without limitation, all
attorneys' reasonable fees and disbursements of counsel and all reasonable fees
and expenses of counsel which the Bank may hereinafter incur in protecting or
enforcing any of the Bank's rights against the Borrower or any guarantor,
including, without limitation, all costs of collection.

6. This Agreement and all other instruments executed in
connection herewith incorporate all discussions and negotiations between the
Borrower and the Bank, either express or implied, concerning the matters
included herein, any statute, custom, or usage to the contrary notwithstanding.
No such discussions or negotiations shall limit, modify or otherwise affect the
provisions hereof. No modification, amendment, or waiver of any provision of
this Agreement or the Loan Agreement or any provisions under any other
agreement, document, or instrument between the Borrower and the Bank shall be
effective unless executed in writing by the party to be charged with such
modification, amendment, or waiver, and if such party be the Bank, then by a
duly authorized officer thereof.

7. Except as specifically modified herein, the Loan Agreement and
all documents executed in connection therewith shall remain in full force and
effect as originally written, and the Borrower hereby specifically ratifies and
confirms all terms and conditions contained in the Loan Agreement and in each
document, instrument and agreement executed in connection therewith.

8. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Massachusetts and shall take
effect as a sealed instrument.

<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed under seal as of this 7th day of May, 1999.

"Borrower"

POLYMEDICA CORPORATION

By: /s/ Eric G. Walters
------------------------------
Title: Chief Financial Officer

LIBERTY MEDICAL SUPPLY, INC.

By: /s/ Warren Trowbridge
------------------------------
Title: President

POLYMEDICA HEALTHCARE, INC.

By: /s/ Eric G. Walters
------------------------------
Title: Treasurer

POLYMEDICA SECURITIES, INC.

By: /s/ Eric G. Walters
------------------------------
Title: Treasurer

"Bank"

BANKBOSTON, N.A.

By: /s/ Jeffrey G. Millman
------------------------------
Title: Vice President

<PAGE> 1

EXHIBIT 10.56

AMENDMENT NO. 1 TO PROMISSORY NOTE

This Amendment No. 1 to that certain Promissory Note, dated December
13, 1994, in the original principal amount of $___________ (the "Note"), made by
_________________ ("Maker") in favor of PolyMedica Industries, Inc., now known
as PolyMedica Corporation ("PolyMedica"), is made as of this _____ day of
_________, 1999.

For good and valuable consideration, receipt and sufficiency of which
is hereby acknowledged, the Maker and PolyMedica hereby agree as follows:

1. The Note is hereby amended by deleting the date "December 31,
1999" set forth in the first sentence of the first paragraph thereof and
replacing it with the date "December 31, 2004".

2. In all other respects, the Note is hereby ratified and
confirmed and remains in full force and effect.

3. This Amendment may be executed in counterparts.

4. This Amendment shall be governed by the laws of the
Commonwealth of Massachusetts.

IN WITNESS WHEREOF, this Amendment has been executed as of the date
first above written and as an instrument under seal.

MAKER:

__________________________________
[Name]

POLYMEDICA:

POLYMEDICA CORPORATION

By:_______________________________

Print Name:_______________________

Title:____________________________

<PAGE> 1

EXHIBIT 10.57

June 14, 1999

Mr. Steven J. Lee
112 Farm Road
Sherborn, MA 01770

Re: Amendment of Employment Agreement
---------------------------------

Dear Steve,

This letter agreement serves to further amend the employment agreement dated as
of May 16, 1990, by and between you and PolyMedica Industries, Inc. (the
"Company"), as amended by certain letter agreements dated as of June 1, 1991;
December 5, 1991; March 18, 1993; March 31, 1994; April 11, 1995; April 3, 1996;
July 1, 1997; July 1, 1998; and September 22, 1998 (together, the "Employment
Agreement").

TERM OF EMPLOYMENT. The Employment Period, as defined in Section 2 of
the Employment Agreement, is extended to November 30, 2001.

SALARY. The Base Salary, as defined in Section 3.1. of the Employment
Agreement, shall be increased to $333,960 effective June 10, 1999.

If the foregoing is acceptable to you, please indicate your agreement by signing
a copy of this letter agreement and returning it to the undersigned.

Very truly yours,

/s/ Arthur A. Siciliano
------------------------------
Arthur A. Siciliano
President

ACCEPTED AND AGREED TO:

/s/ Steven J. Lee
- ---------------------------------
Steven J. Lee

<PAGE> 1

EXHIBIT 10.58

June 14, 1999

Arthur A. Siciliano, Ph.D.
3 Pavia Place
Framingham, MA 01701

Re: Amendment of Employment Agreement
---------------------------------

Dear Art,

TERM OF EMPLOYMENT. The Employment Period, as defined in Section 2 of
the Employment Agreement, is extended to May 31, 2001.

SALARY. The Base Salary, as defined in Section 3.1. of the Employment
Agreement, shall be increased to $284,350 effective June 10, 1999.

If the foregoing is acceptable to you, please indicate your agreement by signing
a copy of this letter agreement and returning it to the undersigned.

Very truly yours,

/s/ Steven J. Lee
------------------------------------
Steven J. Lee
Chairman and Chief Executive Officer

ACCEPTED AND AGREED TO:

/s/ Arthur A. Siciliano
- --------------------------------
Arthur A. Siciliano

<PAGE> 1

EXHIBIT 10.59

June 14, 1999

Mr. Eric G. Walters
167 Monument Street
Concord, MA 01742

Re: Amendment of Employment Agreement
---------------------------------

Dear Eric,

This letter agreement serves to further amend the employment agreement dated as
of June 1, 1991, by and between you and PolyMedica Industries, Inc. (the
"Company"), as amended by certain letter agreements dated as of December 5,
1991; March 18, 1993; March 31, 1994; April 11, 1995; April 3, 1996; July 1,
1997; July 1, 1998; and September 22, 1998 (together, the "Employment
Agreement").

TERM OF EMPLOYMENT. The Employment Period, as defined in Section 2 of
the Employment Agreement, is extended to May 31, 2001.

SALARY. The Base Salary, as defined in Section 3.1. of the Employment
Agreement, shall be increased to $179,388 effective June 10, 1999.

If the foregoing is acceptable to you, please indicate your agreement by signing
a copy of this letter agreement and returning it to the undersigned.

Very truly yours,

/s/ Steven J. Lee
------------------------------------
Steven J. Lee
Chairman and Chief Executive Officer

ACCEPTED AND AGREED TO:

/s/ Eric G. Walters
- --------------------------------
Eric G. Walters

<PAGE> 1
EXHIBIT 10.60
-------------

- --------------------------------------------------------------------------------

Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.

- --------------------------------------------------------------------------------

POLYMEDICA CORPORATION
BONUS POOL AND CRITERIA FOR SENIOR MANAGEMENT
---------------------------------------------
FOR FISCAL YEAR ENDING MARCH 31, 2000

Total FYE 1999 Bonus Pool [**]

Total FYE 2000 Bonus Pool [**]

The Bonus Criteria are based on an analyst consensus of revenues at $[**]
million and net income of $[**] million. EPS of [**]/share.

Criteria:

% INCREASE OVER FYE 1999 % BONUS PAID

Revenues 20 - 24.9% 25%
25 - 29.9% 40%
30% + 60%(1)

Operating Margins (FYE 1999 12.4%)

FYE 2000 OPERATING MARGINS % BONUS PAID

13.00 - 13.49% 25%
13.50 - 13.99% 35%
14.00 - 14.49% 45%
14.50 - 14.99% 55%
15.00 - 15.49% 65%
15.50% + 75% (1)

(1) Totals more than 100% to allow for extraordinary performance in either
category, but the maximum is capped at the total for FYE 2000 Bonus
Pool

<PAGE> 1

EXHIBIT 21

SUBSIDIARIES OF
POLYMEDICA CORPORATION

STATE OR OTHER JURISDICTION OF
NAME INCORPORATION OR ORGANIZATION
- ---- -----------------------------

PolyMedica Pharmaceuticals
(U.S.A.), Inc. Massachusetts

PolyMedica Healthcare, Inc. Delaware

Liberty Medical Supply, Inc. Florida

PolyMedica Securities, Inc. Massachusetts

PolyMedica Holdings, Inc. Delaware

PolyMedica Industries UK, Ltd. England and Wales

SUBSIDIARIES OF
POLYMEDICA PHARMACEUTICALS (U.S.A.), INC.

PolyMedica Pharmaceuticals
(Puerto Rico), Inc. Delaware

PolyMedica Pharmaceuticals
Securities, Inc. Massachusetts

<PAGE> 1

EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference into the previously filed
Registration Statement on Forms S-8 (File Nos. 333-17415, 333-17387, 33-48130,
33-48132, 33-48134, 33-59202, 33-70626 and 33-86836) of PolyMedica Corporation,
of our report dated May 6, 1999 on our audits of the consolidated financial
statements of PolyMedica Corporation as of March 31, 1999 and 1998, and for each
of the three years in the period ended March 31, 1999, which report is included
in the Company's 1999 Annual Report on Form 10-K.

/s/ PricewaterhouseCoopers LLP
----------------------------------
PricewaterhouseCoopers LLP

Boston, Massachusetts
June 28, 1999

<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 10,191
<SECURITIES> 0
<RECEIVABLES> 32,251
<ALLOWANCES> 6,383
<INVENTORY> 6,909
<CURRENT-ASSETS> 52,780
<PP&E> 9,417
<DEPRECIATION> (2,561)
<TOTAL-ASSETS> 112,139
<CURRENT-LIABILITIES> 20,391
<BONDS> 21,583
0
0
<COMMON> 92
<OTHER-SE> 62,953
<TOTAL-LIABILITY-AND-EQUITY> 112,939
<SALES> 104,825
<TOTAL-REVENUES> 104,825
<CGS> 49,605
<TOTAL-COSTS> 49,605
<OTHER-EXPENSES> 42,185
<LOSS-PROVISION> 7,119
<INTEREST-EXPENSE> 2,555
<INCOME-PRETAX> 12,511
<INCOME-TAX> 4,867
<INCOME-CONTINUING> 7,644
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,644
<EPS-BASIC> .86
<EPS-DILUTED> .78

</TABLE>