POLYMEDICA CORP - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

(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, 2002

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the transition period from ___________ to __________

Commission File No. 0-19842

POLYMEDICA CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)

MASSACHUSETTS 04-3033368
- ---------------------------------------- -----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

11 STATE STREET, WOBURN, MASSACHUSETTS 01801
- ---------------------------------------- -----------------------------
(Address of principal executive offices) (Zip Code)

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

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. [X]

The aggregate market value of voting Common Stock held by
nonaffiliates of the registrant was $205,715,000 based on the closing price of
the Common Stock as reported by The Nasdaq Stock Market on June 27, 2002.

As of June 27, 2002, there were 12,154,107 shares of the registrant's
Common Stock outstanding and an additional 1,160,875 shares held in treasury.

Documents incorporated by reference: The Registrant intends to file a
definitive proxy statement pursuant to Regulation 14A, promulgated under the
Securities Exchange Act of 1934, as amended, to be used in connection with the
Registrant's Annual Meeting of Stockholders to be held on September 12, 2002.
The information required in response to Items 10 - 13 of Part III of this Form
10-K is hereby incorporated by reference to such proxy statement.

PART I

ITEM 1. BUSINESS

THE COMPANY

General

PolyMedica Corporation ("PolyMedica") is a leading provider of
direct-to-consumer medical products and services, conducting business through
its Chronic Care, Professional Products and Consumer Healthcare segments. We
sell diabetes supplies and related products and provide services to
Medicare-eligible seniors suffering from diabetes and related chronic diseases
through our Chronic Care segment. Through our Professional Products segment we
provide direct-to-consumer prescription respiratory supplies and services to
Medicare-eligible seniors suffering from chronic obstructive pulmonary disease
("COPD"). We also market, manufacture and distribute a broad line of
prescription urological and suppository products. In addition, during fiscal
2002, we began selling prescription oral medications not covered by Medicare to
our existing customers through our Professional Products segment. Our AZO brand
holds a leading position in the over-the-counter ("OTC") urinary health market.
Our AZO products are distributed primarily to food and drug retailers and mass
merchandisers nationwide through our Consumer Healthcare segment. For selected
financial information about our operating segments, see Note V to the
consolidated financial statements.

Chronic Care

Through our Chronic Care segment, we are a national, direct-mail
provider of diabetes supplies and related products and services to
Medicare-eligible seniors suffering from diabetes and related chronic diseases.
We had a database of over 440,000 active Medicare-eligible diabetes customers as
of March 31, 2002, as compared with over 355,000 as of March 31, 2001, many of
whom suffer from other chronic diseases, to whom we sell name-brand products. We
now define a person as an active customer if that person places orders and we
ship supplies to that person one or more times per year. We deliver products to
customers' homes and, as a service to our customers, bill Medicare (if
applicable) and private insurance directly for those supplies that are
reimbursable. We meet the needs of seniors suffering from diabetes by:

- providing mail order delivery of supplies direct to our
customers' homes;

- billing Medicare and/or private insurance companies directly;

- providing 24-hour telephone support to customers; and

- using sophisticated software and advanced order fulfillment
systems to provide products and support quickly and
efficiently.

In the United States, there are approximately 17.0 million people with
diabetes, including at least 7.0 million seniors. There are approximately 16.0
million additional people with pre-diabetes, an increasingly common condition in
which blood glucose levels are higher than normal but not yet diabetic. With our
database of over 440,000 active Medicare-eligible diabetes customers, we serve
approximately 6.3% of the senior diabetic marketplace. While many of the 7.0
million seniors with diabetes are covered by managed care or reside in extended
care facilities, we believe that the balance are potential customers of ours.

Professional Products

Through our Professional Products segment we provide direct-to-consumer
prescription respiratory supplies and services to Medicare-eligible seniors
suffering from COPD. We also market, manufacture and distribute a broad line of
prescription urological and suppository products. Similar to the service we
provide in our Chronic Care segment, we deliver products to customers' homes and
bill Medicare and private insurance directly for those prescription respiratory
supplies that are reimbursable. As a participating Medicare provider and
third-party insurance biller, we provide a simple, reliable way for seniors to
obtain their supplies for respiratory disease treatment. As of March 31, 2002,
we had a database of over 46,000 active Medicare-eligible customers for our
prescription respiratory supplies, as compared with over 34,000 as of March 31,
2001. We now define a person as an active customer if that person places orders
and we ship supplies to that person one or more times per year. In addition,
during fiscal 2002, we began selling prescription oral medications not covered
by Medicare to our existing customers through our Professional Products segment.
Our broad line of prescription urology products includes urinary analgesics,
antispasmodics, local anesthetics and analgesic suppositories. Our primary
customers for these urology products are large drug wholesalers in the United
States.

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Consumer Healthcare

Our Consumer Healthcare segment primarily sells over-the-counter female
urinary discomfort products. We sell these products under the AZO brand name
through an extensive network of large drug store chains, major supermarkets,
mass merchandisers and drug wholesalers in the United States.

Business Strategies

Our principal strategy is to leverage our technology-based operating
platform and compliance management protocol to expand our business while
maintaining strict adherence to all applicable regulations. This strategy
includes the following elements:

Continue growth in our Chronic Care and Professional Products
businesses by expanding our customer base. Since the August 1996 acquisition of
Liberty Medical Supply, Inc. ("Liberty Medical"), we have invested in an ongoing
program of television advertising to reach a larger portion of the
Medicare-eligible patient market. This campaign has resulted in a significant
increase in sales as we have increased our active Medicare-eligible diabetes
customers from approximately 17,000 at the time of Liberty Medical's acquisition
to more than 440,000 customers. In addition, we now have over 46,000 active
Medicare-eligible customers for our prescription respiratory supplies. We also
utilize radio and print advertising to further broaden our customer base. We
continue to seek opportunities to deliver new products to a broader customer
base by leveraging our efficient mail-order distribution system and software for
billing and customer monitoring. To manage our growth effectively, we are
continually expanding and upgrading our operations, information systems, and
regulatory compliance to maintain our high level of customer service.

Continue adding complementary products and businesses. New business
initiatives commenced this fiscal year, in various stages of development,
include offering prescription oral medications not covered by Medicare, offering
therapeutic footwear for diabetics deemed at risk for developing lower extremity
complications, and the creation of a new clinical laboratory that will offer a
glycohemoglobin ("HbA1c") test, the results of which tell the patient or
physician what the patient's blood glucose level has averaged over the previous
two or three months. In order to take advantage of economies of scale in
production and marketing, we continue to evaluate opportunities for the
acquisition of businesses and products to complement our existing product lines
or new business initiatives underway. In selecting and evaluating acquisition
candidates, we examine the potential market opportunities for products that can
be distributed through our existing marketing infrastructure by utilizing our
strengths in sales, marketing and distribution. We will consider adding
businesses, manufacturing capabilities and new products that capitalize upon our
established brand franchises.

Expand non-Medicare initiatives. During fiscal year 2002 we took a
major step in our strategy of leveraging our core business expertise and
technology base with the launch of Liberty Medical's non-Medicare operation,
Liberty Medical Supply Pharmacy, Inc. ("LMSP"). LMSP offers prescription oral
medications not covered by Medicare to our existing customers through our
Professional Products segment.

Major Customers

For the fiscal years ended March 31, 2002, 2001, and 2000, no customer
represented more than 10% of our consolidated revenues. As of March 31, 2002 and
2001, the amounts included in billed accounts receivable due from Medicare were
$19.40 million and $14.17 million, respectively.

Major Products

For the fiscal years ended March 31, 2002, 2001, and 2000, sales of
diabetes test strips and related products represented more than 10% of our
consolidated net revenues, amounting to $201.01 million, $165.50 million, and
$125.97 million, respectively, or 71.9%, 75.2%, and 80.3%, respectively, of our
consolidated net revenues.

Sale of Certain Assets of Thermometry Business

In September 2000, we sold certain assets of our thermometry business
which were included in the Consumer Healthcare segment. Under the terms of the
sale, the purchaser paid us $300,000 in cash and issued a promissory note in the
face amount of $1.12 million at a 7% annual interest rate, maturing September
20, 2003. In March 2001, we accepted $900,000 as final settlement of this note
in consideration of the financial position of the borrower.

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Trade Secrets

We have proprietary manufacturing processes and trade secrets related
to our in-house pharmaceutical production.

Manufacturing

We manufacture in-house several established products, including AZO
CRANBERRY(R), AQUACHLORAL(R), B&O(R), CYSTOSPAZ(R), AZO MENOPAUSE(R), AZO
PMS(R), AZO YEAST(R), and URISED(R). Our state-of-the-art automated suppository
machine forms, fills and seals suppositories automatically and the
computer-controlled, hands-off equipment provides improved manufacturing
efficiency. We purchase certain of our Consumer Healthcare and Professional
products from other manufacturers.

Government Regulation

Medicare

Medicare is a federally funded program that provides health insurance
coverage for persons age 65 or older and for some disabled persons. Medicare
provides reimbursement for the majority of the products that we sell. This
portion of our business is therefore subject to extensive regulation. Medicare
reimbursement payments are sometimes lower than the reimbursement payments of
other third-party payers, such as traditional indemnity insurance companies.
Current Medicare reimbursement guidelines stipulate among other things, that
quarterly orders of diabetes supplies to existing customers be verified with the
customers before shipment and that all doctor's orders for supplies be
re-validated every six months prior to billing. In addition, the regulations
require that individuals with Type I diabetes who test more frequently than
three times per day and individuals with Type II diabetes who test more
frequently than one time per day visit their physician every six months and
maintain a thirty-day log book to verify frequency of testing.

We accept assignment of Medicare claims, as well as claims with respect
to other third-party payers, on behalf of our customers. We process claims,
accept payments and assume the risks of delay or nonpayment. We also employ the
administrative personnel necessary to transmit claims for product reimbursement
directly to Medicare and private health insurance carriers. Medicare reimburses
at 80% of the government-distributed list containing reimbursement prices for
Medicare-covered products (the "Medicare Fee Schedule") for approved diabetes
testing and prescription respiratory supplies, and we bill the remaining 20% of
the Medicare Fee Schedule to either third-party payers or directly to customers.
In the year ended March 31, 2002, we provided 7.5% of net revenues as an
allowance for doubtful accounts. We exclude from revenue all amounts in excess
of the Medicare Fee Schedule.

The processing of third-party reimbursements is a labor-intensive
effort, and delays in processing claims for reimbursement may increase working
capital requirements. The regulations that govern Medicare reimbursement are
complex and our compliance with those regulations may be reviewed by federal
agencies, including the United States Department of Health and Human Services,
the Department of Justice ("DOJ"), and the Food and Drug Administration ("FDA").
The U.S. Attorney's Office for the Southern District of Florida, with the
assistance of the Federal Bureau of Investigation ("FBI") and Department of
Health & Human Services' Office of Inspector General ("OIG"), is conducting
investigations of alleged healthcare fraud by Liberty Medical and Liberty Home
Pharmacy Corporation ("Liberty Home Pharmacy"). Both civil and criminal
investigations are being conducted. We are cooperating fully with these
investigations. If these investigations result in a determination that we have
failed to comply with the regulations governing Medicare reimbursement or
financial reporting or have otherwise committed healthcare fraud or securities
law violations, we could be subject to delays or loss of reimbursement,
substantial fines or penalties, and other sanctions that could, either
individually or in the aggregate, materially and adversely affect our financial
position and results of operations.

In June 2002, Liberty Medical received an administrative subpoena from
the U.S. Attorney's Office for the Southern District of Illinois seeking
documents relevant to an ongoing investigation of Medicare reimbursement of
"depth shoes and inserts". Liberty Medical has been informed that it is not a
target of that investigation.

Internal Regulatory Affairs

Liberty Medical, Liberty Home Pharmacy, and related companies have a
Regulatory Affairs Department that is comprised of five separate areas within
the department: corporate compliance, monitoring, compliance/external responses,
compliance/internal reviews and contracts and licensing. Although each area
within the department is distinct, activities are coordinated within the
department under the direction of the Vice President of Regulatory Affairs to
promote the common goal of ensuring compliance with all federal, state and local
laws and regulations applicable to the businesses of these companies.

In the area of corporate compliance, there is a formal healthcare
compliance program to assist all personnel in meeting their compliance
obligations. The compliance program is designed to prevent violations of
applicable fraud and abuse laws and, if such violations occur, to promote early
and accurate detection and prompt resolution. This objective is achieved through
education, monitoring, disciplinary action and other appropriate remedial
measures. All

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personnel, as a condition of employment, are required to attend corporate
compliance certification classes annually. In addition, each employee receives a
compliance manual that has been developed to communicate standards of conduct
and compliance policies and procedures.

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

The compliance/external communications group monitors communications
with external sources, such as payers, state and federal agencies and other
third parties, to ensure the timely response to document and other requests and
the receipt and dissemination of supplier bulletin information.

The compliance/internal reviews group is responsible for conducting a
variety of internal reviews of operations to ensure compliance with healthcare
program requirements and applicable laws.

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

In August 2001, our Board of Directors appointed an Oversight Committee
(the "Committee") for the purpose of establishing an independent committee to
act for the Board with respect to the investigations and related litigation
described in Item 3 of Part I, Legal Proceedings. The Committee is advised on
legal matters by our legal counsel and other appropriate independent advisors.
The Committee will continue to play an active role as these investigations
proceed. The Committee's authority includes monitoring the Regulatory Affairs
Department and its compliance program to ensure compliance with Medicare and
internal Company policies. The Committee currently consists of three
non-management members of the Board of Directors.

Pharmacy Licensing

In general, our pharmacy operations are regulated by the State of
Florida Board of Pharmacy and the statutes of the State of Florida where we are
licensed to do business as a pharmacy. Many of the states into which we deliver
prescription pharmaceuticals have laws and regulations governing our activities,
although they generally permit our pharmaceutical activities so long as they are
permitted under the laws and regulations of Florida. Nevertheless, as of May 31,
2002 we had applied for pharmacy licenses in 42 states and had been granted
licenses in all of them for our prescription respiratory supplies pharmacy. For
our pharmacy that distributes prescription oral medications not covered by
Medicare, we had applied for pharmacy licenses in 42 states, had been granted
pharmacy licenses in 40 of them, and were awaiting decision in the remaining 2
states as of May 31, 2002. An additional 8 states do not require non-resident
pharmacy licenses. We believe that we are in material compliance with the laws
and regulations governing pharmaceutical activities in every state in which we
deliver prescription pharmaceuticals.

General

Numerous federal, state and local laws relating to controlled drug
substances, safe working conditions, manufacturing practices, environmental
protection, fire hazard control and disposal of hazardous or potentially
hazardous substances apply to portions of our operations. 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,
record keeping and reporting requirements. In addition, labeling and promotional
activities relating to medical devices and drugs are, in certain instances,
subject to regulation by the Federal Trade Commission. To the extent we engage
in new activities or expand current activities into new states, the cost of
compliance with applicable regulations and licensing requirements could be
significant. In addition, our manufacturing facility is subject to the Good
Manufacturing Practices regulations of the FDA. The FDA enforces these
regulations through its plant inspection program. In addition, our drug products
are subject to the requirements of the Food, Drug and Cosmetics Act and related
regulations.

Competition

We participate in highly competitive markets and have numerous
competitors. Many of our competitors and potential competitors have
substantially greater capital resources, purchasing power and advertising
budgets, as well as more experience in marketing and distributing products. Our
competitors include:

- retail pharmacies;

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- healthcare product distributors;

- disease management companies; and

- pharmacy benefit management companies.

In the urinary discomfort category, our AZO STANDARD(R) urinary
analgesic holds a leading position. Competitors include a number of major
pharmaceutical companies. In the Professional Products market, numerous
pharmaceutical companies develop and market prescription products that compete
with our products on a branded and generic basis.

We believe that the principal competitive factors in the Chronic Care,
Professional Products and Consumer Healthcare markets include attracting new
customers, identifying and responding to customer needs, the quality and breadth
of service and product offerings, and expertise with respect to the
reimbursement process. We believe that we compete effectively in all of these
areas because of:

- Liberty Medical's brand recognition, supported by a national
television advertising campaign;

- Our expertise in the Medicare reimbursement and compliance
process; and

- Our significant investment in employee training, computer
systems and order processing systems to assure high quality
customer service, cost-effective order processing, and
regulatory compliance.

Employees

As of March 31, 2002, we had 1,497 full-time employees. We expect to
employ additional personnel as we expand our operations. We believe that
employee relations are good.

ITEM 2. PROPERTIES

Our facilities are located in Woburn, Massachusetts and Port St. Lucie,
Palm City and Stuart, Florida. Our corporate headquarters are located in Woburn
in a 60,000 square foot facility which we own. We also own a 72,000 square foot
facility in Port St. Lucie, Florida, which was purchased in May 1999 and expect
to complete construction of a new warehouse and respiratory supplies facility in
Port St. Lucie in the second quarter of fiscal year 2003, resulting in an
additional 123,000 square feet of owned property. These new facilities will
place all of our Florida-based businesses in close proximity and minimize our
need for leasing space.

We believe that our existing facilities and those either currently
under construction or lease are adequate for our current and anticipated needs.

ITEM 3. LEGAL PROCEEDINGS

The U.S. Attorney's Office for the Southern District of Florida, with
the assistance of the FBI and OIG, is conducting investigations of alleged
healthcare fraud by Liberty Medical and Liberty Home Pharmacy. Both civil and
criminal investigations are being conducted. We are cooperating fully with the
investigations. We cannot accurately predict the outcome of these proceedings at
this time, and have therefore not recorded any charges relating to the outcome
of these uncertainties.

On December 4, 2001, we received notice that the Securities and
Exchange Commission ("SEC") was conducting a formal investigation of PolyMedica.
On April 8, 2002, the SEC notified us that it had terminated its investigation
of PolyMedica and that no enforcement action had been recommended to the
Commission.

On November 27, 2000, Richard Bowe SEP-IRA filed a purported class
action lawsuit in the United States District Court for the District of
Massachusetts (the "Bowe Complaint") against PolyMedica and one of its officers.
The Bowe Complaint claims violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated
thereunder and seeks unspecified damages, attorneys' fees and costs. On December
19, 2000, Trust Advisors Equity Plus LLC filed a purported class action lawsuit
in the United States District Court for the District of Massachusetts (the
"Trust Advisors Complaint") against PolyMedica and one of its officers. The
Trust Advisors Complaint asserts the same claims, makes the same allegations and
seeks the same relief as the Bowe

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Complaint. On January 26, 2001, the plaintiffs in the Bowe and Trust Advisors
Complaints moved to consolidate the Bowe and Trust Advisors Complaints and to be
appointed as lead plaintiffs in the consolidated action pursuant to Section
21D(a)(3)(B) of the Exchange Act. On July 30, 2001 the Court granted these
motions and consolidated the Bowe and Trust Advisor Complaints under the caption
In re: PolyMedica Corp. Securities Litigation, Civ. Act. No. 00-12426-REK.

Plaintiffs filed a consolidated amended complaint on October 9, 2001.
The consolidated amended complaint extended the class period (the amended class
period is October 26, 1998 through August 21, 2001), and named an additional two
officers as defendants. We moved to dismiss the consolidated amended complaint
on December 10, 2001. The plaintiffs filed their opposition to this motion on
February 11, 2002 and defendants filed a reply memorandum on March 11, 2002. The
Court denied the motion without a hearing on May 10, 2002. We will file answers
to the consolidated amended complaint shortly. We believe that we have
meritorious defenses to the claims made in the consolidated amended complaint
and intend to contest the claims vigorously. We are unable to express an
opinion as to the likely outcome of this litigation.

Between August 9, 2001 to August 24, 2001, four derivative actions were
filed in Massachusetts Superior Court for Middlesex County against PolyMedica's
Board of Directors: Casden v. Bernstein et al., Civ. Act. No. 01-3446; Vezmar v.
Logerfo et al., Civ. Act. No. 01-3612; Sullivan v. Bernstein et al., Civ. Act.
No. 01-3656; and Messner v. Lee et al. , Civ. Act. No. 01-3697. On August 31,
2001, plaintiff filed a motion to consolidate the first three actions and to
file an amended consolidated complaint within 60 days. The fourth derivative
action was added to the motion to consolidate on October 3, 2001. On October 11,
2001, the Court granted plaintiffs' motion to consolidate all four derivative
actions under the caption In re: PolyMedica Corp. Shareholder Derivative
Litigation, Civ. Act. No. 01-3446.

On December 17, 2001, plaintiffs filed a consolidated derivative
complaint. The consolidated complaint named two additional officer defendants.
The Complaint alleges that the directors and officers breached their fiduciary
duties by, among other things, failing to exercise reasonable care in the
oversight of corporate affairs and management with respect to the operations of
Liberty Medical and by acquiescing in alleged misconduct by Liberty Medical. The
Complaint seeks unspecified damages, the return of compensation, and other
relief, including injunctive relief. The defendants filed a motion to dismiss
the consolidated complaint on January 31, 2002. Plaintiffs filed an opposition
to the motion on March 22, 2002 and defendants filed a reply memorandum on April
19, 2002. The Court heard arguments on the motion to dismiss on April 30, 2002
but has not yet rendered any decision with regard thereto. The directors and
named officers believe they have meritorious defenses to the claims made in the
consolidated complaint and intend to contest the claims vigorously. We are
unable to express an opinion as to the likely outcome of this litigation.

A shareholder derivative complaint, Minasian v. Bernstein et. al., Civ.
Act. No. 01-11485REK, was filed against PolyMedica's Board of Directors in
United States District Court for the District of Massachusetts on August 17,
2001. The Complaint alleged that the directors breached their fiduciary duties
by, among other things, failing to exercise reasonable care in the oversight of
corporate affairs and management with respect to the operations of Liberty
Medical and by acquiescing in alleged misconduct by Liberty Medical, and sought
unspecified damages, the return of director compensation, and other injunctive
relief. On November 16, 2001, plaintiff filed an assented-to motion to dismiss
the complaint without prejudice, and the case was closed on November 21, 2001.

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

No matters were submitted to a vote of our security holders during the
last quarter of the fiscal year ended March 31, 2002.

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EXECUTIVE OFFICERS OF THE REGISTRANT

Our current executive officers are as follows:

NAME AGE POSITION
---- --- --------

Steven J. Lee.................................... 55 Chairman and Chief Executive Officer
Arthur A. Siciliano, Ph.D........................ 59 President; President, PolyMedica Pharmaceuticals
(U.S.A.), Inc.
John K.P. Stone, III............................. 69 Vice Chairman, General Counsel, and Senior Vice President
Eric G. Walters.................................. 50 Executive Vice President and Clerk
Warren K. Trowbridge............................. 50 Senior Vice President; President, Liberty Medical Supply, Inc.
Stephen C. Farrell............................... 37 Chief Financial Officer

Mr. Lee has been Chairman of PolyMedica since June 1996 and Chief
Executive Officer and a director of PolyMedica since May 1990. Mr. Lee served as
President of PolyMedica 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 LLP. 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 ICN
Pharmaceuticals, Inc., Kensey Nash Corporation, and Fibersense Technology
Corporation and as a trustee of The Wang Center for the Performing Arts. Mr. Lee
is a graduate of the Fordham University School of Law and the Wharton School of
Finance of the University of Pennsylvania.

Dr. Siciliano has been President of PolyMedica since June 1996.
Formerly, he served as Executive Vice President from July 1994 to June 1996, as
Senior Vice President from January 1993 to July 1994, as Vice President,
Pharmaceuticals from July 1991 to January 1993, and as Vice President,
Manufacturing from June 1990 to July 1991. From PolyMedica'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. Stone joined PolyMedica in March 2002 and was appointed a Director,
Vice Chairman, General Counsel, and Senior Vice President of PolyMedica in June
2002. Prior to joining PolyMedica, Mr. Stone was a senior partner at Hale and
Dorr, LLP, a leading Boston based law firm. His corporate law practice focused
on emerging companies primarily in the high technology and medical fields and
the private and public financing, mergers, acquisitions and strategic
relationships of such companies. In his practice, he also assisted U.S.
companies in structuring, establishing and financing their U.S. operations. Mr.
Stone has lectured and written on numerous tax, corporate, and international
subjects, and is a member of the American and Massachusetts Bar Associations. He
is a former director of Essex County Community Foundation, Inc., and formerly
served as a member of the Board of Governors and the Executive Committee of the
New England Aquarium, and as a member of the Corporate Advisory Executive
Committee of the Museum of Fine Arts. He is a past President of the American Bar
Retirement Association, and a former member and Chairman of the Planning Board
of the Marblehead, Massachusetts School Committee. Mr. Stone is a graduate of
Harvard Law School and Princeton University.

Mr. Walters who had served as PolyMedica's Chief Financial Officer
since 1990, was promoted to Executive Vice President effective May 2001. He is
responsible for managing PolyMedica's finance, investor communications and
compliance functions. 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
LLP, most recently as an Audit Supervisor. Mr. Walters is a Certified Public
Accountant.

Mr. Trowbridge joined PolyMedica in February 1999 as Chief Operating
Officer of Liberty Medical. On May 1, 1999, he was appointed President of
Liberty Medical and was also elected Vice President of PolyMedica. Effective May
15, 2002, he was promoted to Senior Vice President of PolyMedica. 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. an international healthcare 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 Chief Executive Officer of

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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.

Mr. Farrell joined PolyMedica in August 1999 as Treasurer. Effective
May 2001, he was promoted to Chief Financial Officer. From 1994 to 1999, Mr.
Farrell served in various positions at PricewaterhouseCoopers, LLP, most
recently as a Senior Manager of the high technology team. A graduate of Harvard
University, Mr. Farrell holds an MBA from the University of Virginia and is a
Certified Public Accountant.

9

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS

As of March 31, 2002, our Common Stock was held by 688 holders of
record. We believe that the actual number of beneficial owners of our Common
Stock is significantly greater than the stated number of holders of record
because a substantial portion of the Common Stock outstanding is held in "street
name". Our Common Stock is traded on the Nasdaq National Market under the symbol
"PLMD".

The following table sets forth the high and low closing sales price per
share of Common Stock on the Nasdaq National Market:

FISCAL YEAR 2002
--------------------------
HIGH LOW
------ ------
1st Quarter $40.80 $23.31

2nd Quarter 48.43 11.25

3rd Quarter 24.36 14.81

4th Quarter 25.95 17.16

FISCAL YEAR 2001
--------------------------
HIGH LOW
------ ------
1st Quarter $57.69 $25.94

2nd Quarter 47.88 33.63

3rd Quarter 58.25 22.81

4th Quarter 44.00 17.00

We have never declared or paid any cash dividends on our common stock.
For the foreseeable future, we expect to retain our earnings to finance the
growth of our business.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and notes thereto and
management's discussion and analysis of financial condition and results of
operations included elsewhere in this Form 10-K. The balance sheet data as of
March 31, 2002 and 2001 and the statements of operations data for the three
years ended March 31, 2002 have been derived from the audited consolidated
financial statements for such years, included elsewhere in this Form 10-K. The
balance sheet data as of March 31, 2000, 1999, and 1998 and the statements of
operations data for the two years ended March 31, 1999 have been derived from
the audited consolidated financial statements for such years, not included in
this Form 10-K.

(In thousands, except share and per share data)

YEAR ENDED MARCH 31, 2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------

Statements of Operations Data:
Net revenues $279,661 $220,046 $156,920 $104,825 $73,825
Net income 30,411 22,734 15,119 7,644 7,619
Net income per weighted average share, basic 2.43 1.73 1.37 .86 .88
Net income per weighted average share, diluted 2.38 1.67 1.27 .78 .79
Weighted average shares, basic 12,506 13,176 11,049 8,898 8,652
Weighted average shares, diluted 12,780 13,596 11,876 9,786 9,691

10

Pro forma amounts assuming retroactive application
of SAB 101(before cumulative effect of change in
accounting principle):
Net income $ 30,411 $ 29,660 $ 13,371 $ 6,185 $ 4,957
Net income per weighted average share, basic 2.43 2.26 1.21 .70 .57
Net income per weighted average share, diluted 2.38 2.18 1.13 .63 .51

Balance Sheet Data:
Cash and cash equivalents $ 27,884 $ 39,571 $ 40,687 $10,191 $ 6,440
Total assets 224,392 201,564 175,596 112,939 92,401
Total liabilities and minority interest 50,809 42,914 39,446 49,894 39,473
Total debt and obligations 2,227 3,164 3,332 24,666 22,906
Shareholders' equity 173,583 158,650 136,150 63,045 52,928

During the fiscal year ended March 31, 2002, net income included $3.19
million, net of related taxes, or $0.25 per diluted weighted average share,
attributable to unusual legal and related expenses as a result of the previously
reported investigations of Liberty Medical and Liberty Home Pharmacy and $3.60
million, net of related taxes, or $0.28 per diluted weighted average share, for
an adjustment to earnings for probable amounts due to Medicare and others. See
Note K to the consolidated financial statements. Excluding the effect of these
unusual charges, earnings per diluted weighted average share would have been
$2.91 for the fiscal year ended March 31, 2002.

During the fourth quarter of fiscal year 2001, we implemented Staff
Accounting Bulletin 101 ("SAB 101"), "Revenue Recognition in Financial
Statements" retroactive to April 1, 2000. Effective April 1, 2000, we recorded
the cumulative effect of the change in accounting principle. During the fiscal
year ended March 31, 2001, net income included a $6.93 million charge, net of
related taxes, or $0.51 per diluted weighted average share, related to the
cumulative effect of a change in accounting principle for the adoption of SAB
101. See Note C to the consolidated financial statements.

In the fiscal year ended March 31, 2000, net income included a $1.34
million loss, net of related taxes, or $0.12 per diluted weighted average share,
related to the extraordinary loss on retirement of debt.

During the fiscal year ended March 31, 1998, net income included $2.74
million, net of related taxes, or $0.29 per diluted weighted average share,
related to the gain on the July 1997 sale of our wound care business. During the
fiscal year ended March 31, 1999, net income included $976,000, net of related
taxes, or $0.10 per diluted weighted average share, related to this sale.

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

FUTURE OPERATING RESULTS

This Annual Report on Form 10-K 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 our 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 on
Form 10-K.

OVERVIEW

Business

PolyMedica is a leading provider of direct-to-consumer medical products
and services, conducting business through our Chronic Care, Professional
Products and Consumer Healthcare segments. Through our Chronic Care segment, we
sell diabetes supplies and related products and provide services to
Medicare-eligible seniors suffering from diabetes and related chronic diseases.
Through our Professional Products segment we provide direct-to-consumer
prescription respiratory supplies and services to Medicare-eligible seniors
suffering from COPD. We also market, manufacture and distribute a broad line of
prescription urological and suppository products. In addition, during fiscal
2002, we began selling prescription oral medications not covered by Medicare to
our existing customers through our Professional Products segment. Our AZO
products are distributed primarily to food and drug retailers

11

and mass merchandisers nationwide through our Consumer Healthcare segment. Our
AZO brand holds a leading position in the over-the-counter ("OTC") urinary
health market.

Critical Accounting Policies

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

PolyMedica's significant accounting policies are presented within Note
B to our consolidated financial statements, and the following summaries should
be read in conjunction with our consolidated financial statements and the
related notes included in this Form 10-K. While all of our accounting policies
impact the consolidated financial statements, certain policies may be viewed to
be critical. Critical accounting policies are those that are both most important
to the portrayal of our financial condition and results of operations and that
require management's most subjective or complex judgments and estimates.
Management believes the policies that fall within this category are the policies
on revenue recognition and sales allowances, accounts receivable and the
allowance for doubtful accounts, inventories, direct-response advertising,
amounts due to Medicare and others, and uncertainties.

Revenue Recognition

We recognize revenue related to product sales to customers who have
placed orders upon shipment, provided that risk of loss has passed to the
customer and we have received and verified the required written forms to bill
Medicare (if applicable), other third-party payers, and customers. We record
revenue at the amounts expected to be collected from Medicare, other third-party
payers, and directly from customers. We analyze various factors in determining
revenue recognition, including a review of specific transactions, current
Medicare regulations and reimbursement rates, historical experience, and the
credit-worthiness of customers. The determination of appropriate Medicare rates
for billing and revenue recognition are subjective and complex and therefore
require management's interpretation. Sales allowances are recorded for estimated
product returns as a reduction of revenue. We analyze sales allowances using
historical data adjusted for significant changes in volume, customer
demographics, and business conditions. These allowances are adjusted to reflect
actual returns. Changes in these factors could effect the timing and amount of
revenue and costs recognized.

Accounts Receivable and Allowance for Doubtful Accounts

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

Inventories

The carrying value of inventories is based upon the types and levels of
inventory held, forecasted demand, and pricing. Due to the medical nature of the
products we provide, customers sometimes request supplies before we have
received the required written forms to bill Medicare (if applicable), other
third-party payers, and customers. As a result, included in inventories are
items shipped to customers for which we have received an order but have not yet
received the required written documents and therefore have not recognized
revenue. The carrying value of inventory shipped to customers is based upon
historical experience of collection of documents required to bill Medicare (if
applicable), other third-party payers, and customers. Changes in judgment
regarding the recoverability of inventories, including the carrying value of
inventory shipped to customers, could result in the recording of additional
income or expense.

Direct-Response Advertising

In accordance with Statement of Position 93-7("SOP 93-7") we capitalize
and amortize direct-response advertising and related costs when we can
demonstrate that customers have directly responded to our advertisements. We
assess the realizability of the amounts of direct-response advertising costs
reported as assets at each balance sheet date by comparing the carrying amounts
of such assets to the probable remaining future net cash flows expected to
result directly from such advertising. A business change that impacts expected
net

12

cash flows or that shortens the period over which such net cash flows are
estimated to be realized could result in accelerated charges against our
earnings.

Amounts due to Medicare and others

The determination of appropriate Medicare rates for billing are
subjective and complex. Amounts due to Medicare and others are recorded when,
based upon our assessment of the facts and circumstances, we believe that the
amounts due are probable and estimable. Changes in judgment regarding amounts
due to Medicare and others could result in income or expenses that are different
from our estimates.

Uncertainties

The regulations that govern Medicare reimbursement are complex and our
compliance with those regulations may be reviewed by federal agencies, including
the Department of Health and Human Services, the DOJ, and the FDA. The U.S.
Attorney's Office for the Southern District of Florida, with the assistance of
the FBI and OIG, is conducting investigations of alleged healthcare fraud by
Liberty Medical and Liberty Home Pharmacy. Both civil and criminal
investigations are being conducted. We are cooperating fully with the
investigations. We cannot accurately predict the outcome of these proceedings at
this time, and have not recorded any charges related to the outcome of these
uncertainties in our March 31, 2002 consolidated financial statements. If any of
these investigations results in a determination that we have failed to comply
with the regulations governing Medicare reimbursement or financial reporting or
have otherwise committed healthcare fraud or securities law violations, we could
be subject to delays or loss of reimbursement, substantial fines or penalties,
and other sanctions that could, either individually or in the aggregate,
materially and adversely affect our financial position and results of
operations.

PolyMedica and three of its officers are defendants in a lawsuit
alleging violations of certain sections and rules of the Securities Exchange Act
of 1934 (the "Exchange Act"). In addition, there is a derivative action against
the directors and two officers of PolyMedica in Massachusetts state court
alleging certain breaches of fiduciary duty. PolyMedica, the named officers, and
the Board of Directors believe that they have meritorious defenses to the claims
made against them in the actions in which they are defendants and intend to
contest the claims vigorously. Although we do not consider an unfavorable
outcome to the various claims probable, we cannot accurately predict their
ultimate disposition, and have therefore not recorded any charges related to the
outcome of these uncertainties. An unfavorable outcome could have a material
effect on our financial position and results of operations.

Recent Transactions

On February 12, 2002, all outstanding minority interests in our
subsidiaries previously held by certain Company executives, having a recorded
book value of $1.37 million as of February 12, 2002, were reacquired by the
respective subsidiaries at no cost and are classified as additional paid in
capital in the shareholders' equity section of our consolidated balance sheets
as of March 31, 2002. As a result of these transactions, there were no
outstanding minority interests in PolyMedica or any of its subsidiaries as of
March 31, 2002.

Other

We do not believe our net product sales, in the aggregate, are subject
to material seasonal fluctuations.

Other non-direct response 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.

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

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

- Cost of sales consists primarily of purchased finished goods
for sale in our markets and, to a lesser extent, materials,
direct labor, and overhead costs for products that we
manufacture in our facility and shipping and handling fees.

- Selling, general and administrative expenses consist primarily
of expenditures for personnel and benefits, as well as legal
and related expenses, allowances for bad debts, rent,
amortization of capitalized direct-response advertising costs
and other amortization and depreciation.

13

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

RESULTS OF OPERATIONS

Year Ended March 31, 2002 Compared to Year Ended March 31, 2001

Total net revenues increased by 27.1% to $279.66 million in the fiscal
year ended March 31, 2002, as compared with $220.05 million in the fiscal year
ended March 31, 2001. This increase was primarily the result of the growth in
revenues from our Chronic Care and Professional Products segments which
increased 24.3% and 48.5%, respectively, in the fiscal year ended March 31,
2002, as compared with the fiscal year ended March 31, 2001. See Note V to the
consolidated financial statements for segment information.

Net revenues in the Chronic Care segment increased by 24.3% to $207.26
million in the fiscal year ended March 31, 2002, as compared with $166.77
million in the fiscal year ended March 31, 2001. This growth was due primarily
to the growth in our customer base as a result of our direct-response
advertising spending. We currently expect our promotional and direct-response
advertising spending to increase in order to further the expansion of our
Chronic Care segment. Revenue growth was aided by a cost of living adjustment
implemented by the government for certain durable medical equipment products and
services, including diabetes test strips, under the Medicare, Medicaid and SCHIP
Benefits Improvement and Protection Act of 2000, which added 3.7% to the revenue
of many of our Chronic Care segment products beginning July 1, 2001. In
addition, due to the late implementation by the government of the January 1,
2001 cost of living adjustment, which went into effect July 1, 2001, an
incremental 3.28% cost of living adjustment was recorded from July 1, 2001 to
December 31, 2001. This incremental 3.28% cost of living adjustment ended on
December 31, 2001.

Net revenues from Professional Products increased 48.5% to $64.86
million in the fiscal year ended March 31, 2002, as compared with $43.67 million
in the fiscal year ended March 31, 2001. This increase was due primarily to the
growth in our customer base as a result of our direct-response advertising
spending. As with our Chronic Care segment, we currently expect our promotional
and direct-response advertising spending to continue in order to further the
expansion of our Professional Products segment.

Net revenues from Consumer Healthcare products decreased 21.5% to $7.54
million in the fiscal year ended March 31, 2002, as compared with $9.61 million
in the fiscal year ended March 31, 2001, due primarily to the sale of certain
assets of our thermometry business in September 2000.

As a percentage of total net revenues, overall gross margins were 65.1%
in the fiscal year ended March 31, 2002 and 65.0% in the fiscal year ended March
31, 2001. Gross margins in the fiscal year ended March 31, 2002 increased
slightly due primarily to a cost of living adjustment described above, and
increased sales in our higher margin Professional Products segment, partially
offset by a change in the interpretation of the reimbursement formula for
albuterol and ipratropium combinations (see Note K to the consolidated financial
statements for more details), increasing sales from new business initiatives
that have lower margins than our average and a change in the product mix for our
Chronic Care and Professional Products segments.

As a percentage of total net revenues, selling, general and
administrative expenses were 47.8% for the fiscal year ended March 31, 2002, as
compared with 44.3% for the fiscal year ended March 31, 2001. Selling, general
and administrative expenses increased by 37.0% in the fiscal year ended March
31, 2002 to $133.61 million, as compared with $97.55 million in the fiscal year
ended March 31, 2001. This increase in selling, general and administrative
expenses as a percentage of net revenues was primarily attributable to unusual
legal and related expenses of $5.06 million and a charge of $5.03 million for
probable amounts due to Medicare and others which relates to a change in
interpretation of the reimbursement formula for albuterol and ipratropium
combinations used in our Professional Products segment, in the fiscal year ended
March 31, 2002. We do not expect any further charges to income as a result of
this change in interpretation. See Note K to the consolidated financial
statements for more information. The unusual legal and related expenses incurred
in the fiscal year ended March 31, 2002 of approximately $5.06 million were
primarily attributable to previously reported investigations of Liberty Medical
and Liberty Home Pharmacy. We expect that we will continue to incur unusual
legal and related expenses in the fiscal year ending March 31, 2003. Selling,
general and administrative expenses further increased due to an increase in
direct-response advertising amortization of $10.70 million to $30.31 million in
the fiscal year ended March 31, 2002, from $19.60 million in the fiscal year
ended March 31, 2001. Amortization increased as a result of the growth in the
direct-response advertising asset value. See Note B to the consolidated
financial statements for more information.

Investment income, net decreased 61.5% to $1.11 million in the fiscal
year ended March 31, 2002, as compared with $2.87 million in the fiscal year
ended March 31, 2001, due to a lower average cash balance and lower interest
rates. Interest expense decreased 41.3% to $166,000 in the fiscal year ended
March 31, 2002, as compared with $282,000 in the fiscal year ended March 31,
2001, due

14

primarily to the elimination of interest expense on Liberty Medical's Port St.
Lucie facility mortgage as a result of the $1.36 million repayment in December
2000.

Pretax income before the cumulative effect of a change in accounting
principle was $48.89 million in the fiscal year ended March 31, 2002, a 3.4%
increase as compared with $47.30 million in the fiscal year ended March 31,
2001. The marginal increase was primarily attributable to approximately $5.06
million of unusual legal and related expenses and a $5.85 million adjustment to
earnings for probable amounts due to Medicare and others, recorded in the fiscal
year ended March 31, 2002, without which the increase in pretax income would
have been greater.

The provision for income taxes was $18.48 million and $17.65 million in
the fiscal years ended March 31, 2002 and 2001, respectively, which resulted in
an effective tax rate of 37.8% and 37.3% in fiscal years 2002 and 2001,
respectively. The effective tax rates in fiscal years 2002 and 2001 were higher
than the Federal U.S. statutory rates due primarily to state taxes and other
permanent differences. We anticipate that the effective tax rate for fiscal year
2003 will be at or near the fiscal 2002 effective tax rate. Our effective tax
rate may vary from period to period based on changes in estimated taxable income
or loss, changes to federal or state tax laws, future expansion into areas with
varying country, state, or local income tax rates, and the deductibility of
certain costs and expenses by jurisdiction.

Our income before the cumulative effect of a change in accounting
principle, net of taxes, was $30.41 million, or $2.38 per diluted weighted
average share, for the fiscal year ended March 31, 2002, as compared with $29.66
million, or $2.18 per diluted weighted average share, for the fiscal year ended
March 31, 2001. Excluding $3.19 million of unusual legal and related expenses,
net of related taxes, and a $3.60 million adjustment to earnings for probable
amounts due to Medicare and others, net of related taxes, earnings per diluted
weighted average share were $2.91 in the fiscal year ended March 31, 2002. Net
income was $30.41 million, or $2.38 per diluted weighted average share, for the
fiscal year ended March 31, 2002, as compared with $22.73 million, or $1.67 per
diluted weighted average share, for the fiscal year ended March 31, 2001.

Year Ended March 31, 2001 Compared to Year Ended March 31, 2000

Total net revenues increased by 40.2% to $220.05 million in the fiscal
year ended March 31, 2001, as compared with $156.92 million in the fiscal year
ended March 31, 2000. This increase was primarily the result of the growth in
revenues from our Chronic Care and Professional Products segments which
increased 32.4% and 164.6%, respectively, in the fiscal year ended March 31,
2001, as compared with the fiscal year ended March 31, 2000. See Note V to the
consolidated financial statements for segment information.

Net revenues in the Chronic Care segment increased by 32.4% to $166.77
million in the fiscal year ended March 31, 2001, as compared with $126.00
million in the fiscal year ended March 31, 2000. This growth was due primarily
to the growth in our customer base as a result of our direct-response
advertising spending. We currently expect our promotional and direct-response
advertising spending to increase in order to further the expansion of our
Chronic Care segment.

Net revenues from Professional Products increased 164.6% to $43.67
million in the fiscal year ended March 31, 2001, as compared with $16.50 million
in the fiscal year ended March 31, 2000. This increase was mainly attributable
to the growth in our customer base as a result of our direct-response
advertising spending. As with our Chronic Care segment, we currently expect our
promotional and direct-response advertising spending to increase in order to
further the expansion of our Professional Products segment.

Net revenues from Consumer Healthcare products decreased 33.3% to $9.61
million in the fiscal year ended March 31, 2001, as compared with $14.42 million
in the fiscal year ended March 31, 2000, due in large part to the sale of
certain assets of our thermometry business in September 2000.

As a percentage of total net revenues, overall gross margins were 65.0%
in the fiscal year ended March 31, 2001, and 58.9% in the fiscal year ended
March 31, 2000. Gross margins in the fiscal year ended March 31, 2001 increased
due primarily to improved gross margins in the Chronic Care segment, resulting
from favorable product mix, increased sales volume and ongoing price reductions
from suppliers, as well as increased sales volume and improving margins in the
Professional Products segment.

As a percentage of total net revenues, selling, general and
administrative expenses were 44.3% for the fiscal year ended March 31, 2001, as
compared with 41.8% for the fiscal year ended March 31, 2000. Selling, general
and administrative expenses increased by 48.8% in the fiscal year ended March
31, 2001 to $97.55 million, as compared with $65.56 million in the fiscal year
ended March 31, 2000. This increase was primarily attributable to increased
amortization of direct-response advertising of $10.57 million and increased bad
debt provisions of $4.24 million.

Investment income, net increased by 113.0% to $2.87 million in the
fiscal year ended March 31, 2001, as compared with $1.35 million in the fiscal
year ended March 31, 2000, as we earned interest on higher average cash balances
primarily as a result of a full year of interest earned in fiscal 2001 on
proceeds from our October 1999 secondary public offering. Interest expense
decreased by 80.0% to

15

$282,000 in the fiscal year ended March 31, 2001, as compared with $1.41 million
in the fiscal year ended March 31, 2000, due to the October 1999 retirement of
the Guaranteed Senior Secured Notes due January 31, 2003 (the "Hancock Notes")
to the John Hancock Mutual Life Insurance Company ("Hancock").

Pretax income was $47.30 million in the fiscal year ended March 31,
2001, as compared with $26.67 million in the fiscal year ended March 31, 2000.
This 77.4% increase in pretax income was primarily the result of increased sales
volume and improved gross margins partially offset by increased selling, general
and administrative expenses.

The provision for income taxes was $17.65 million and $10.22 million in
the fiscal years ended March 31, 2001 and 2000, respectively, which resulted in
an effective tax rate of 37.3% and 38.3% in fiscal years 2001 and 2000,
respectively. The effective tax rates in fiscal years 2001 and 2000 were higher
than the Federal U.S. statutory rates due primarily to state taxes and other
permanent differences.

Our net income was $22.73 million, or $1.67 per diluted weighted
average share, in the fiscal year ended March 31, 2001, as compared with $15.12
million, or $1.27 per diluted weighted average share in the fiscal year ended
March 31, 2000. Net income, excluding the $6.93 million cumulative effect of a
change in accounting principle, net of related taxes, was $29.66 million, or
$2.18 per diluted weighted average share, for the fiscal year ended March 31,
2001, as compared with net income, excluding the $1.34 million extraordinary
loss on retirement of debt, net of related taxes, of $16.46 million, or $1.39
per diluted weighted average share, for the fiscal year ended March 31, 2000.

LIQUIDITY AND CAPITAL RESOURCES

Our business is currently funded through cash flow from operations. We
have generated positive cash flow from operations in each of the last thirteen
quarters and have reported positive annual cash flows from operations in each of
the last 4 fiscal years, with $22.90 million, $14.62 million, $10.08 million,
and $539,000 generated in the fiscal years ended March 31, 2002, 2001, 2000, and
1999, respectively. Our cash and cash equivalents balance decreased $11.69
million to $27.88 million as of March 31, 2002, due primarily to $18.00 million
of cash used for the repurchase of shares of our common stock plus cash used for
capital expenditures for new facilities, offset by cash flows generated from
operations. Cash flows from operations of $22.90 million for the fiscal year
ended March 31, 2002, were generated by net income of $30.41 million, offset by
cash used to fund certain areas of our operations, such as increased spending
for direct-response advertising of $11.01 million to $42.48 million in the
fiscal year ended March 31, 2002, as compared with $31.47 million in the fiscal
year ended March 31, 2001, to further expand our customer base, both for
diabetes testing and prescription respiratory supplies.

The following table summarizes our contractual obligations for future
annual minimum lease and rental commitments as of March 31, 2002, under all of
our leases, capital and operating:

CAPITAL OPERATING
(In thousands) LEASES LEASES
------- ---------
2003 $ 855 $ 1,339
2004 416 688
2005 177 433
2006 78 38
2007 and thereafter 42 18
------ -------
Total minimum payments $1,568 $ 2,516
====== =======

In the fiscal years ended March 31, 2002 and 2001, we used $15.23
million and $7.74 million of cash for investing activities, respectively. The
$7.49 million increase in total cash used for investing activities was primarily
due to a $6.34 million increase in property, plant and equipment purchases in
the fiscal year ended March 31, 2002, as compared with the fiscal year ended
March 31, 2001. Higher spending in the current fiscal year for property, plant
and equipment is primarily related to the ongoing construction of two new
facilities in Port St. Lucie, Florida included in the construction in process
category of property, plant and equipment. The cumulative amount spent through
March 31, 2002 related to this construction was $8.60 million, which will not be
depreciated until the construction is completed. In fiscal 2003, we estimate
that we will spend an additional $5.00 million on the construction of these two
new facilities, for which no liability has been recorded as of March 31, 2002,
because we have no contractual obligation to complete the construction.

In the fiscal year ended March 31, 2002, we used $19.36 million of cash
for financing activities, $18.00 million of which was used to repurchase
1,009,000 shares of our common stock. In June 2000, the Board of Directors
authorized the repurchase of up to 1,000,000 shares of our common stock on the
open market, with any shares repurchased to be held in treasury. In August 2001,
the Board of Directors authorized the repurchase of an additional 1,000,000
shares. As of March 31, 2002, 1,246,000 shares had been repurchased under these
programs for an aggregate of $24.64 million or an average price of $19.78 per
share. As of March 31, 2002, 754,000 shares remained authorized for repurchase
under the August 2001 authorized share repurchase program. Other financing
activities included the receipt of proceeds from the issuance of common stock,
payments of capital lease obligations and the setting aside of amounts for
executive deferred compensation plans.

16

In November 2000, we filed an amendment to a shelf registration
statement originally filed in April 2000, to enable us to offer from time to
time, shares of our common stock having an aggregate value of up to $100
million. The SEC declared the shelf registration statement effective during the
quarter ended December 31, 2000. It will be in effect until November 2002. No
shares of common stock had been sold under this shelf registration statement as
of March 31, 2002.

We believe that our cash and cash equivalents balance as of March 31,
2002 of $27.88 million, including cash flows generated from operations, will be
sufficient to meet working capital, capital expenditure and financing needs for
future business operations for the foreseeable future. In the event that we
undertake to make acquisitions of complementary businesses, products or
technologies, we may require substantial additional funding beyond currently
available working capital and funds generated from operations. We are conducting
an active search for the strategic acquisition of complementary businesses,
products or technologies which leverage our marketing, sales and distribution
infrastructure. We currently have no commitments or agreements with respect to
any such acquisition. Other factors which could negatively impact our liquidity
include a reduction in the demand for our products or a reduction in Medicare
reimbursement for our products.

We hold certain investments related to executive deferred compensation
plans, see Note B to the consolidated financial statements, which are accounted
for pursuant to Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" ("SFAS 115"). Investments
related to the executive deferred compensation plans, which have been classified
as trading, are included in other assets and are recorded at fair value. As of
March 31, 2002, the fair value of these investments was not materially different
from cost.

ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 141, "Business Combinations" ("SFAS 141") and SFAS No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 supercedes
Accounting Principles Bulletin No. 16, "Business Combinations" and SFAS No. 38,
"Accounting for Preacquisition Contingencies of Purchased Enterprises." SFAS 142
supercedes Accounting Principles Bulletin No. 17, "Intangible Assets." These new
statements require use of the purchase method of accounting for all business
combinations initiated after June 30, 2001, thereby eliminating use of the
pooling-of-interests method. Goodwill will no longer be amortized but will be
tested for impairment under a two-step process. Under the first step, an
entity's net assets are broken down into reporting units and compared to their
fair value. If the carrying amount of a reporting unit exceeds its fair value,
the second step of the goodwill impairment test is performed to measure the
amount of impairment loss, if any. The second step compares the implied fair
value of a reporting unit's goodwill with the carrying amount of that goodwill.
If the carrying amount of a reporting unit's goodwill exceeds the implied fair
value of that goodwill, an impairment loss is recognized in an amount equal to
that excess. In addition, within six months of adopting the accounting standard,
a transitional impairment test must be completed, and any impairments identified
must be treated as a cumulative effect of a change in accounting principle.
Additionally, new criteria have been established that determine whether an
acquired intangible asset should be recognized separately from goodwill. The
provisions of SFAS 142 will be effective for fiscal years beginning after
December 15, 2001, and will thus be adopted, as required, on April 1, 2002. The
adoption of SFAS 142 could have a material impact on our consolidated financial
statements, as we will replace ratable amortization of goodwill with periodic
impairment tests. Impairment tests performed under SFAS 142 could indicate an
impairment loss that would need to be recorded as a cumulative effect of a
change in accounting principle in fiscal 2003. We have not yet determined what
effect these impairment tests will have on our consolidated financial statements
in the future. As a result of adopting SFAS 142 effective April 1, 2002,
approximately $1.54 million of goodwill amortization will not be recognized in
fiscal 2003.

In August 2001, the FASB issued SFAS No. 143 "Accounting for
Obligations Associated with the Retirement of Long-Lived Assets" ("SFAS 143").
The provisions of SFAS 143 apply to all entities that incur obligations
associated with the retirement of tangible long-lived assets. SFAS 143 is
effective for financial statements issued for fiscal years beginning after June
15, 2002 and thus will be adopted, as required, on April 1, 2003. This
accounting pronouncement is not expected to have a significant impact on our
financial position or results of operations.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 provides
guidance on the accounting for the impairment or disposal of long-lived assets.
The objectives of SFAS 144 are to address significant issues relating to the
implementation of SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of", and to develop a single
model (based on the framework established in SFAS No. 121) for long-lived assets
to be disposed of by sale, whether previously held and used or newly acquired.
SFAS 144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001 and thus will be adopted, as required, on April 1, 2002.
Generally, its provisions

17

are to be applied prospectively. This accounting pronouncement could have a
significant impact on our financial position or results of operations should
there be future asset impairments or disposals.

FACTORS AFFECTING FUTURE OPERATING RESULTS

The statements contained in this Annual Report on Form 10-K 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 our
expectations, hopes, intentions or strategies regarding the future.
Forward-looking statements include, among others: statements regarding future
benefits from our advertising and promotional expenditures; statements regarding
future net revenue levels; statements regarding product development,
introduction and marketing; and statements regarding future acquisitions. All
forward-looking statements included in this Annual Report on Form 10-K are based
on information available to us on the date hereof, and we assume no obligation
to update any such forward-looking statements. It is important to note that our
actual results could differ materially from those in such forward-looking
statements.

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

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

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

Litigation may materially adversely affect us

PolyMedica and three of its officers are defendants in a lawsuit
alleging violations of certain sections and rules of the Securities Exchange Act
of 1934 (the "Exchange Act"). In addition, there is a derivative action against
the directors and two officers of PolyMedica in Massachusetts state court
alleging certain breaches of fiduciary duty. PolyMedica, the named officers, and
the Board of Directors believe that they have meritorious defenses to the claims
made against them in the actions in which they are defendants and intend to
contest the claims vigorously. Although we do not consider an unfavorable
outcome to the various claims probable, we cannot accurately predict their
ultimate disposition, and have therefore not recorded any charges related to the
outcome of these uncertainties. An unfavorable outcome could have a material
effect on our financial position and results of operations.

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

The regulations that govern Medicare reimbursement are complex and our
compliance with those regulations may be reviewed by federal agencies, including
the Department of Health and Human Services, the DOJ, and the FDA. The U.S.
Attorney's Office for the Southern District of Florida, with the assistance of
the FBI and OIG, is conducting investigations of alleged healthcare fraud by
Liberty Medical and Liberty Home Pharmacy. Both civil and criminal
investigations are being conducted. We are cooperating fully with the
investigations. We cannot accurately predict the outcome of these proceedings at
this time, and have therefore not recorded any charges relating to the outcome
of these uncertainties. If any of these investigations results in a
determination that we have failed to comply with the regulations governing
Medicare reimbursement or financial reporting or have otherwise committed
healthcare fraud or securities law violations, we could be subject to delays or
loss of reimbursement, substantial fines or penalties, and other sanctions. An
adverse determination could have a material effect on our financial position and
results of operations.

Our stock price could be volatile, which could result in substantial changes in
share price

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

18

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

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

The profitability of our Chronic Care and Professional Products segments will
decrease if we do not receive recurring orders from customers

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

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

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

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

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

We could lose customers and revenues to new or existing competitors who have
greater financial or operating resources

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

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

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

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

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

We could have difficulty selling our Consumer Healthcare and Professional
Products if we cannot maintain and expand our sales to distributors

We rely on third party distributors to market and sell our Consumer
Healthcare and prescription urology and suppository products. Our sales of these
products will therefore depend in part on our maintaining and expanding
marketing and distribution relationships with pharmaceutical, medical device,
personal care and other distributors and on the success of those distributors in
marketing and selling our products.

19

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

Any change in existing accounting rules or a business change that
impacts expected net cash flows or that shortens the period over which such net
cash flows are estimated to be realized, currently four years for our diabetes
products and two years for our prescription respiratory supplies, could result
in accelerated charges against our earnings.

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

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

- changes in reimbursement guidelines and amounts;

- changes in regulations affecting the healthcare industry;

- changes in the mix or cost of our products;

- the timing of customer orders;

- the timing and cost of our advertising campaigns; and

- the timing of the introduction or acceptance of new products
and services offered by us or our competitors.

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

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

- diversion of the attention of senior management from important
business matters;

- amortization of substantial intangible assets;

- difficulty in retaining key personnel of an acquired business;

- failure to assimilate operations of an acquired business;

- failure to retain the customers of an acquired business;

- possible operating losses and expenses of an acquired
business;

- exposure to legal claims for activities of an acquired
business prior to acquisition; and

- incurrence of debt and related interest expense.

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

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

20

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We own certain money market funds and mutual funds that are sensitive
to market risks as part of our investment portfolio. The investment portfolio is
used to preserve our capital until it is required to fund operations. None of
these market-risk sensitive instruments are held for trading purposes. We do not
own derivative financial instruments in our investment portfolio. We do not
believe that the exposure to market risks in our investment portfolio is
material.

21

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

1. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
----

Report of Independent Accountants 23

Consolidated Balance Sheets as of March 31, 2002 and 2001 24

Consolidated Statements of Operations for the years ended
March 31, 2002, 2001, and 2000 25

Consolidated Statements of Shareholders' Equity for the years ended
March 31, 2002, 2001, and 2000 26

Consolidated Statements of Cash Flows for the years ended
March 31, 2002, 2001, and 2000 27

Notes to Consolidated Financial Statements 28

2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULE

The following consolidated financial statement
schedule is included in Item 14(d):

Schedule II - Valuation and Qualifying Accounts

22

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of PolyMedica Corporation:

In our opinion, the accompanying consolidated financial statements
listed in the index appearing under Item 8(a)(1) present fairly, in all material
respects, the financial position of PolyMedica Corporation and its subsidiaries
at March 31, 2002 and 2001, and the results of their operations and their cash
flows for each of the three years in the period ended March 31, 2002, in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the consolidated financial statement
schedule listed in the index appearing under Item 8(a)(2) presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These
consolidated financial statements and consolidated financial statement schedule
are the responsibility of the Company's management; our responsibility is to
express an opinion on these consolidated financial statements and consolidated
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

As discussed in Note C to the consolidated financial statements, during
the year ended March 31, 2001 the Company changed its method of recognizing
revenue.

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts
May 15, 2002

23

POLYMEDICA CORPORATION
(In thousands, except share and per share amounts)

CONSOLIDATED BALANCE SHEETS

MARCH 31, MARCH 31,
2002 2001
--------- ---------

ASSETS
Current assets:
Cash and cash equivalents $27,884 $39,571
Accounts receivable (net of allowances of $15,539
and $13,729 as of March 31, 2002 and 2001, respectively) 44,059 31,969
Inventories 21,663 22,791
Deferred tax asset 10,622 9,558
Prepaid expenses and other current assets 1,727 1,073
-------- -------
Total current assets 105,955 104,962

Property, plant, and equipment, net 34,603 22,199
Intangible assets, net 30,446 32,723
Direct response advertising, net 52,112 39,940
Other assets 1,276 1,740
--------- --------

Total assets $224,392 $201,564
======== ========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $10,270 $13,118
Amounts due to Medicare and others 4,798 --
Accrued expenses 12,990 8,277
Current portion, capital lease obligations 742 587
-------- -------

Total current liabilities 28,800 21,982

Long-term note payable, capital lease and other obligations 1,485 2,576
Deferred income taxes 20,524 17,551
-------- --------

Total liabilities 50,809 42,109

Minority interest -- 805
Commitments and contingencies (Note M)
Shareholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares
authorized, none issued or outstanding -- --
Common stock, $.01 par value; 50,000,000 shares
authorized; 13,300,477 and 13,275,993 shares
issued as of March 31, 2002 and 2001, respectively 133 133
Treasury stock, at cost (1,143,158 and 205,325 shares
as of March 31, 2002 and 2001, respectively) (22,185) (5,526)
Additional paid-in capital 119,891 118,710
Retained earnings 75,744 45,333
-------- --------

Total shareholders' equity 173,583 158,650
-------- --------

Total liabilities and shareholders' equity $224,392 $201,564
======== ========

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

24

POLYMEDICA CORPORATION
(In thousands, except per share amounts)

CONSOLIDATED STATEMENTS OF OPERATIONS

YEAR ENDED MARCH 31, 2002 2001 2000
-----------------------------------------------------------------------------------------------------------

Net revenues $279,661 $220,046 $156,920

Cost of sales 97,519 76,973 64,487
-------- -------- --------

Gross margin 182,142 143,073 92,433

Selling, general and administrative expenses 133,609 97,554 65,557
-------- -------- --------

Income from operations 48,533 45,519 26,876

Other income and expense:
Investment income, net 1,105 2,867 1,346
Interest and other expense (180) (348) (1,411)
Minority interest (564) (733) (141)
-------- -------- --------
361 1,786 (206)

Income before income taxes 48,894 47,305 26,670

Income tax provision 18,483 17,645 10,215
-------- -------- --------

Income before cumulative effect of change in accounting
principle and extraordinary loss 30,411 29,660 16,455

Extraordinary loss on retirement of debt, net of taxes of
$829 -- -- (1,336)

Cumulative effect of change in accounting principle,
net of taxes of $4,121 -- (6,926) --
-------- -------- --------

Net income $ 30,411 $ 22,734 $ 15,119
======== ======== ========

Net income per weighted average share before cumulative
effect of change in accounting principle and
extraordinary loss on retirement of debt:

Basic $ 2.43 $ 2.26 $ 1.49
Diluted $ 2.38 $ 2.18 $ 1.39

Cumulative effect of change in accounting principle:

Basic $ -- $ (.53) $ --
Diluted $ -- $ (.51) $ --

Extraordinary loss on retirement of debt:

Basic $ -- $ -- $ (.12)
Diluted $ -- $ -- $ (.12)
-------- -------- --------

Net income per weighted average share:

Basic $ 2.43 $ 1.73 $ 1.37
======== ======== ========
Diluted $ 2.38 $ 1.67 $ 1.27
======== ======== ========

Weighted average shares, basic 12,506 13,176 11,049

Weighted average shares, diluted 12,780 13,596 11,876

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

25

POLYMEDICA CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
for the years ended March 31, 2000, 2001, and 2002
(Dollars in thousands)

Common stock Treasury stock Notes Total
----------------- -------------------- Additional receivable share-
Number of Number of paid - in Retained from holders'
shares Amount shares Amount capital earnings officers equity
---------- ------ ----------- --------- ---------- -------- ------- --------

Balance at March 31, 1999 9,197,075 $ 92 (78,003) $ (458) $ 56,557 $ 7,480 $(626) $ 63,045
Exercise of stock options and
warrants 615,718 6 3,002 3,008
Receipt of treasury stock in
connection with stock option
and warrant exercises 822,882 8 (80,725) (1,780) 1,772 --
Payments of officer notes
receivable (19,400) (560) 626 66
Tax benefit from stock options
exercised 2,571 2,571
Issuance of treasury stock
under the 1992 Employee Stock
Purchase Plan 12,684 6,634 27 109 136
Issuance of common and treasury
stock in the October 1999
secondary offering 2,460,308 25 169,291 2,703 50,077 52,805
Offering expenses (600) (600)
Net income 15,119 15,119
---------- ---- ----------- --------- --------- ------ ------- --------
Balance at March 31, 2000 13,108,667 131 (2,203) (68) 113,488 22,599 136,150
Exercise of stock options and
warrants 155,476 2 33,878 1,183 808 1,993
Repurchase of common stock (237,000) (6,641) (6,641)
Tax benefit from stock options
exercised 4,087 4,087
Issuance of common stock under
the 1992 Employee Stock
Purchase Plan 11,850 327 327
Net income 22,734 22,734
---------- ---- ----------- --------- --------- ------ ------- --------
Balance at March 31, 2001 13,275,993 133 (205,325) (5,526) 118,710 45,333 158,650
Exercise of stock options and
warrants, net of receipt of
19,242 shares for exercises 71,167 1,343 (1,231) 112
Repurchase of common stock (1,009,000) (18,002) (18,002)
Tax benefit from stock options
exercised 620 620
Issuance of common stock under
the 1992 Employee Stock
Purchase Plan 24,484 423 423
Contribution of minority
interests 1,369 1,369
Net income 30,411 30,411
---------- ---- ----------- --------- --------- ------ ------- --------
Balance at March 31, 2002 13,300,477 $133 (1,143,158) $(22,185) $ 119,891 $ 75,744 $ -- $173,583
========== ==== ========== ========= ========== ======== ======= ========

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

26

POLYMEDICA CORPORATION
(In thousands)

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEAR ENDED MARCH 31, 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------

Cash flows from operating activities:
Net income $ 30,411 $ 22,734 $ 15,119
Adjustments to reconcile net income to net cash flows:
Depreciation and amortization 5,733 5,214 4,004
Amortization of direct-response advertising 30,306 19,604 9,036
Direct-response advertising (42,478) (31,467) (21,436)
Minority interest 564 662 141
Deferred income taxes 1,909 (1,533) 4,314
Tax benefit from stock options exercised 620 4,087 2,571
Provision for bad debts 21,000 15,530 11,292
Provision for sales allowances 12,525 11,899 9,822
Provision for inventory obsolescence 948 1,788 253
Provision for amounts due to Medicare and others 5,848 -- --
Extraordinary loss on retirement of debt -- -- 2,165
Other 32 674 220
Changes in assets and liabilities:
Accounts receivable (45,615) (19,635) (28,626)
Inventories 180 (16,997) (2,323)
Prepaid expenses and other assets (997) 604 (998)
Accounts payable (2,848) (969) 1,555
Amounts due to Medicare and others (1,050) -- --
Accrued expenses and other liabilities 5,811 2,429 2,970
-------- -------- --------
Total adjustments (7,512) (8,110) (5,040)
-------- -------- --------
Net cash flows from operating activities 22,899 14,624 10,079
-------- -------- --------
Cash flows from investing activities:
Purchase of marketable securities (5,499) (20,300) --
Proceeds from the sale of marketable securities 5,499 20,300 --
Proceeds from sale of certain assets -- 1,300 --
Investment in other assets -- (200) (157)
Purchase of property, plant, and equipment (15,251) (8,912) (9,077)
Proceeds from sale of equipment 22 72 8
-------- -------- --------
Net cash flows from investing activities (15,229) (7,740) (9,226)
-------- -------- --------

Cash flows from financing activities:
Proceeds from issuance of common stock 532 2,320 3,145
Net proceeds from secondary offering -- -- 52,205
Repurchase of common stock (18,002) (6,641) --
Contributions to deferred compensation plans (1,125) (1,768) --
Payment of obligations under capital leases (762) (529) (350)
Repayment of line of credit -- -- (4,000)
Repayment of officer notes receivable -- -- 66
Premium paid on retirement of debt -- -- (1,806)
Repayment of senior debt and note payable -- (1,382) (19,617)
-------- -------- --------
Net cash flows from financing activities (19,357) (8,000) 29,643
-------- -------- --------
Net increase/(decrease) in cash and cash
equivalents (11,687) (1,116) 30,496

Cash and cash equivalents at beginning of period 39,571 40,687 10,191
-------- -------- --------
Cash and cash equivalents at end of period $ 27,884 $ 39,571 $ 40,687
======== ======== ========
Supplemental disclosure of cash flow information:

Cash paid during the period for interest $ 166 $ 293 $ 1,889
Income taxes paid 17,677 9,617 2,725
Assets purchased under capital lease or note
payable 642 116 2,302
Disposal of equipment 135 523 236

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

27

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. ("Liberty Medical"), 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. In September 2000, the Company sold certain
assets of its thermometry business. The Company and its subsidiaries operate
from manufacturing, distribution, and laboratory facilities located in
Massachusetts and Florida.

The Company generates sales of diabetes supplies and related products
through its Chronic Care segment, prescription respiratory supplies,
prescription oral medications and prescription urologicals through its
Professional Products segment and over-the-counter ("OTC") urinary discomfort
products through its Consumer Healthcare segment.

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. As
of March 31, 2002, all of the Company's subsidiaries were wholly-owned.

USE OF ESTIMATES

The preparation of consolidated 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 consolidated financial statements and the reported amounts of revenue and
expenses during the reported period. Estimates and judgments are used for,
including, but not limited to, determination of appropriate Medicare
reimbursement rates, the allowance for doubtful accounts and sales returns,
valuation of inventory, accrued expenses, amounts due to Medicare and others,
uncertainties that management determines are estimable and probable, and
depreciation and amortization. Actual results could differ from those estimates.

UNCERTAINTIES

The Company is subject to risks and uncertainties 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, litigation, and compliance with government
regulations. The regulations that govern Medicare reimbursement are complex and
our compliance with those regulations may be reviewed by federal agencies,
including the Department of Health and Human Services, the Department of Justice
("DOJ"), and the Food and Drug Administration ("FDA"). The U.S. Attorney's
Office for the Southern District of Florida, with the assistance of the Federal
Bureau of Investigation ("FBI") and Department of Health & Human Services'
Office of Inspector General ("OIG"), is conducting investigations of alleged
healthcare fraud by Liberty Medical and Liberty Home Pharmacy Corporation
("Liberty Home Pharmacy"). Both civil and criminal investigations are being
conducted. The Company is cooperating fully with the investigations. It cannot
accurately predict the outcome of these proceedings at this time, and has
therefore not recorded any charges relating to the outcome of these
uncertainties. If any of these investigations results in a determination that we
have failed to comply with the regulations governing Medicare reimbursement or
financial reporting or have otherwise committed healthcare fraud or securities
law violations, we could be subject to delays or loss of reimbursement,
substantial fines or penalties, and other sanctions. An adverse determination
could have a material effect on the Company's financial position and results of
operations.

PolyMedica and three of its officers are defendants in a lawsuit
alleging violations of certain sections and rules of the Securities Exchange Act
of 1934 (the "Exchange Act"). In addition, there is a derivative action against
the directors and two officers of PolyMedica in Massachusetts state court
alleging certain breaches of fiduciary duty. PolyMedica, the named officers, and
the Board of Directors believe that they have meritorious defenses to the claims
made against them in the actions in which they are defendants and intend to
contest the claims vigorously. Although the Company does not consider an
unfavorable outcome to the various claims probable, it cannot accurately predict
their ultimate disposition, and has therefore not recorded any charges related
to the outcome of these uncertainties. An unfavorable outcome could have a
material effect on the Company's financial position and results of operations.

28

POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CASH AND CASH EQUIVALENTS AND INVESTMENTS

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 and investments
with high-credit-quality financial institutions. In fiscal years 2002 and 2001,
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, 2002 and 2001, excluding investments held in the Company's
executive deferred compensation plans ("the Plans"), have been classified as
cash equivalents and are carried at amortized cost which approximates market
value. The investments held in the Plans, which are accounted for pursuant to
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115") have been classified as
trading, are included in other assets, and are recorded at fair value.

ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

The valuation of accounts receivable is based upon the
credit-worthiness of customers and third-party payers and the Company's
historical collection experience. The Company maintains allowances for doubtful
accounts for estimated amounts expected to be uncollectible from third-party
payers and customers. Estimates are based on historical collection and write-off
experience, current trends, credit policy, and on the Company's analysis of
accounts receivable by aging category.

INVENTORIES

Inventories gross value is based on the lower of cost (first-in,
first-out method) or market. The carrying value of inventories is based on the
types and levels of inventory held, forecasted demand, and pricing. Due to the
medical nature of the products the Company provides, customers sometimes request
supplies before the Company has received the required written forms to bill
Medicare (if applicable), other third-party payers, and customers. As a result,
included in inventories are items shipped to customers for which the Company has
received an order but has not yet received the required written documents and
therefore has not recognized revenue. The carrying value of inventory shipped to
customers is based upon historical experience of collection of documents
required to bill Medicare (if applicable), other third-party payers, and
customers.

OTHER ASSETS

Included in other assets are restricted investments of $868,000 and
$1.63 million as of March 31, 2002 and 2001, respectively, which represent
amounts set aside by the Company under executive deferred compensation plans
(the "Plans"). The related liability is included in long-term liabilities
("long-term note payable, capital lease and other obligations" as captioned on
the balance sheet). Changes in the fair value of investments held in the Plans
are recorded as investment income or loss ("investment income, net" as captioned
on the statements of operations) with a corresponding adjustment to compensation
expense and to other assets and long-term liabilities ("long-term note payable,
capital lease and other obligations" as captioned on the balance sheet). As of
March 31, 2002, the fair value of these investments was not materially different
from cost. In the fiscal year ended March 31, 2002, $1.88 million was paid
directly to certain beneficiaries from the Plans. Amounts set aside for the
Plans in the fiscal years ended March 31, 2002 and 2001 totaled $1.13 million
and $1.77 million, respectively.

The investments held in the Plans, which are accounted for pursuant to
SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities"
have been classified as trading, are included in other assets, and are recorded
at fair value.

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 is 30 years for buildings and ranges from five to
twelve years for office equipment, furniture and fixtures, laboratory equipment,
commercial vehicles, and manufacturing equipment. 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.

29

POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DIRECT-RESPONSE ADVERTISING

In accordance with Statement of Position 93-7 ("SOP 93-7"),
direct-response advertising and associated costs for the Company's diabetes
supplies and related products, included in the Chronic Care segment, 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. Management
assesses the realizability of the amounts of direct-response advertising costs
reported as assets at each balance sheet date by comparing the carrying amounts
of such assets to the probable remaining future net cash flows expected to
result directly from such advertising.

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

The Company incurred and capitalized direct-response advertising of
$42.48 million, $31.47 million and $21.44 million in fiscal years 2002, 2001 and
2000, respectively. As of March 31, 2002 and 2001, accumulated amortization was
$66.87 million and $36.57 million, respectively, which resulted in a net
capitalized direct-response advertising asset of $52.11 million and $39.94
million, respectively. A total of $30.31 million, $19.60 million and $9.04
million in direct-response advertising was amortized and charged to selling,
general and administrative expenses in fiscal years 2002, 2001 and 2000,
respectively. The Company expenses in the period all other advertising that does
not meet the capitalization requirements of SOP 93-7.

INTANGIBLE ASSETS

The Company capitalizes and includes in intangible assets the costs of
acquiring patents on its products, customer lists, covenants-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 a
straight-line basis over the shorter of the economic life of the asset or the
term of the underlying agreement. Customer lists, covenants-not-to-compete, and
goodwill are amortized over seven, ten, and seven to thirty years, respectively.
Upon adoption of Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" ("SFAS 142") on April 1, 2002, ratable amortization
of goodwill will be replaced with tests of the goodwill's impairment at various
periods, specifically upon adoption of SFAS 142, annually, and as a result of a
specific event or activity, and that intangible assets other than goodwill be
amortized over their useful lives.

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.

REVENUE RECOGNITION

In conjunction with the Company's change in accounting principle for
revenue recognition, as described in Note C, revenue related to product sales to
customers who have placed orders is recognized upon shipment, provided that risk
of loss has passed to the customer and the Company has received and verified the
required written forms to bill Medicare (if applicable), other third-party
payers, and customers. The Company records revenue at the amounts expected to be
collected from Medicare, other third-party payers, and directly from customers.
Revenue recognition is delayed for shipments for which the Company has not yet
received a written Authorization of Benefits and Doctor's Order (if applicable),
until the period in which those documents are collected and verified.

Sales allowances are recorded for estimated product returns using
historical return trends and are recorded as a reduction of revenue. These
allowances are adjusted to reflect actual returns and collection history. During
the years ended March 31, 2002 and 2001, the Company provided for sales
allowances at a rate of approximately 4.3% and 5.4% of gross sales,
respectively. The Company analyzes sales allowances using historical data
adjusted for significant changes in volume, customer demographics, and business
conditions. At the time of revenue recognition, the Company follows the
government-distributed list containing reimbursement prices for Medicare-covered
products (the "Medicare Fee Schedule") and excludes from revenue amounts billed
in excess of the Medicare Fee Schedule. As a result, the Company's contractual
allowances are immaterial. The reimbursements that Medicare pays to the Company
are subject to review by

30

POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

appropriate government regulators. Medicare reimburses at 80% of the Medicare
Fee Schedule for reimbursable supplies and the Company bills the remaining
balance to either third-party payers or directly to customers.

Approximately $196.80 million, $151.42 million and $99.77 million of
revenues for the years ended March 31, 2002, 2001 and 2000, respectively, were
reimbursable by Medicare for products and services provided to Medicare
beneficiaries.

RESEARCH AND DEVELOPMENT

Research and development costs are charged to expense as incurred.

MARKETING AND PROMOTIONAL COSTS

Advertising (other than direct-response), 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.

INCOME TAXES

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

EARNINGS PER WEIGHTED AVERAGE SHARE

Basic earnings per share ("EPS") is calculated by dividing net income
by the weighted average number of shares outstanding during the period. Diluted
EPS is calculated by dividing net income by the weighted average number of
shares outstanding plus the dilutive effect of outstanding stock options using
the "treasury stock" method. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity.

ACCOUNTING FOR STOCK-BASED COMPENSATION

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. As provided for in SFAS 123, the Company elected to
continue to apply Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its employee stock-based compensation plans.
The required disclosures under SFAS 123 are included in Note T.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 141, "Business Combinations" ("SFAS 141") and SFAS No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 supercedes
Accounting Principles Bulletin No. 16, "Business Combinations" and SFAS No. 38,
"Accounting for Preacquisition Contingencies of Purchased Enterprises." SFAS 142
supercedes Accounting Principles Bulletin No. 17, "Intangible Assets." These new
statements require use of the purchase method of accounting for all business
combinations initiated after June 30, 2001, thereby eliminating use of the
pooling-of-interests method. Goodwill will no longer be amortized but will be
tested for impairment under a two-step process. Under the first step, an
entity's net assets are broken down into reporting units and compared to their
fair value. If the carrying amount of a reporting unit exceeds its fair value,
the second step of the goodwill impairment test is performed to measure the
amount of impairment loss, if any. The second step compares the implied fair
value of a reporting unit's goodwill with the carrying amount of that goodwill.
If the carrying amount of a reporting unit's goodwill exceeds the implied fair
value of that goodwill, an impairment loss is recognized in an amount equal to
that excess. In addition, within six months of adopting the accounting standard,
a transitional impairment test must be completed, and any impairments identified
must be treated as a cumulative effect of a change in accounting principle.
Additionally, new criteria have been established that determine whether an
acquired intangible asset should be recognized separately from goodwill. The
provisions of SFAS 142 will be effective for fiscal years beginning after
December 15, 2001, and will thus be adopted, as required, on April 1, 2002. The
adoption of SFAS 142 could have a material impact on our consolidated financial
statements, as we will replace ratable amortization of goodwill with periodic

31

POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

impairment tests. Impairment tests performed under SFAS 142 could indicate an
impairment loss that would need to be recorded as a cumulative effect of a
change in accounting principle in fiscal 2003. We have not yet determined what
effect these impairment tests will have on our consolidated financial
statements. As a result of adopting SFAS 142 effective April 1, 2002,
approximately $1.54 million of goodwill amortization will not be recognized in
fiscal 2003.

In August 2001, the FASB issued SFAS No. 143 "Accounting for
Obligations Associated with the Retirement of Long-Lived Assets" ("SFAS 143").
The provisions of SFAS 143 apply to all entities that incur obligations
associated with the retirement of tangible long-lived assets. SFAS 143 is
effective for financial statements issued for fiscal years beginning after June
15, 2002 and thus will be adopted, as required, on April 1, 2003. This
accounting pronouncement is not expected to have a significant impact on our
financial position or results of operations.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 provides
guidance on the accounting for the impairment or disposal of long-lived assets.
The objectives of SFAS 144 are to address issues relating to the implementation
of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", and to develop a model for long-lived
assets to be disposed of by sale, whether previously held and used or newly
acquired. SFAS 144 is effective for financial statements issued for fiscal years
beginning after December 15, 2001 and thus will be adopted, as required, on
April 1, 2002. Generally, its provisions are to be applied prospectively. This
accounting pronouncement could have a significant impact on our financial
position or results of operations should there be future asset impairments or
disposals.

RECLASSIFICATIONS

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

C. CHANGE IN ACCOUNTING PRINCIPLE:

In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements", subsequently updated by SAB 101A and SAB 101B ("SAB 101"). SAB 101
summarizes certain areas of the SEC's views in applying generally accepted
accounting principles to revenue recognition in financial statements.
Historically, the Company recognized revenue upon receipt of a customer order
and shipment of the related product, provided that the required verbal
authorizations had been received. Under the new accounting method adopted
retroactive to April 1, 2000, revenue related to product shipments to customers
who have placed orders is recognized upon shipment, provided that risk of loss
has passed to the customer and the Company has received and verified the written
Authorization of Benefits and Doctor's Order required to bill Medicare (if
applicable), other third-party payers, and customers.

The Company delays revenue recognition for product shipments for which
the Company has not yet received a written Authorization of Benefits and
Doctor's Order, until the period in which those documents are collected and
verified. During the fourth quarter ended March 31, 2001, the Company
implemented the SEC's SAB 101 guidelines, retroactive to the beginning of the
fiscal year. The cumulative effect of the change in accounting principle on
prior years resulted in a charge to income of $6.93 million (net of income taxes
of $4.12 million), or $0.51 per diluted weighted average share, which was
applied retroactively as of April 1, 2000 and is included in income for the
fiscal year ended March 31, 2001. The results for the first three quarters of
the fiscal year ended March 31, 2001 were adjusted in accordance with SAB 101.
See Note W.

Due to the medical nature of the products the Company provides,
customers sometimes request supplies before the Company has received the
required written forms to bill Medicare (if applicable), other third-party
payers, and customers and recognize revenue. As a result, included in
inventories as of March 31, 2002 and 2001, is $3.77 million and $6.07 million,
respectively, of inventory shipped to customers for which the Company has
received an order but has not yet received the required written documents.

The following table represents management's estimate of the unaudited
pro forma results of operations, giving effect to the adoption of SAB 101 as if
the change in accounting principle had been retroactively applied.

Unaudited pro forma
results (in thousands, except Year ended Three months ended
per share amounts) March 31, 2000 March 31, 2000
----------------------------- -------------- ------------------
Net income $13,371 $5,077
Net income per weighted
average share, basic $1.21 $0.39
Net income per weighted
average share, diluted $1.13 $0.38

32

POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

D. SALE OF CERTAIN ASSETS OF THE THERMOMETRY BUSINESS:

In September 2000, the Company sold certain assets of its thermometry
business which were included in the Consumer Healthcare segment. Under the terms
of the sale, the purchaser paid the Company $300,000 in cash and issued to the
Company a promissory note in the face amount of $1.12 million at a 7% interest
rate, maturing September 20, 2003. In March 2001, we accepted $900,000 as final
settlement of this note in consideration of the financial position of the
borrower.

E. EXTRAORDINARY LOSS ON RETIREMENT OF DEBT:

In October 1999, the Company repaid all amounts due to the John Hancock
Mutual Life Insurance Company ("Hancock"). See Note L. In connection with this
repayment, an extraordinary loss on retirement of debt of $2.17 million was
recognized, consisting of an early payment penalty fee, unamortized debt
issuance costs and the unamortized Hancock warrant valuation. The extraordinary
loss for the year ended March 31, 2000 was as follows (in thousands):

2000
------
Extraordinary loss on retirement of debt $2,165

Income tax benefit related to loss 829
------
Extraordinary loss, net of income taxes $1,336
======
Net income per diluted weighted average share before loss $ 1.39

Net income per diluted weighted average share related to loss .12
------
Net income per diluted weighted average share $ 1.27
======

F. SHELF REGISTRATION:

In November 2000, the Company filed an amendment to a shelf
registration statement it had originally filed in April 2000, to enable it to
offer from time to time, shares of its common stock having an aggregate value of
up to $100 million. The SEC declared the shelf registration statement effective
during the quarter ended December 31, 2000. It will be in effect until November
2002. No shares of common stock had been sold under this shelf registration
statement as of March 31, 2002.

G. INVENTORIES:
(In thousands)

Inventories consist of the following:

March 31, March 31,
2002 2001
--------- ---------
Raw materials $ 616 $ 685

Work in process 832 783

Finished goods 20,215 21,323
------- -------
$21,663 $22,791
======= =======

33

POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Due to the medical nature of the products the Company provides,
customers sometimes request supplies before the Company has received the
required written forms to bill Medicare (if applicable), other third-party
payers, and customers. As a result, included in inventories as of March 31, 2002
and 2001 is $3.77 million and $6.07 million, respectively, of inventory shipped
to customers for which the Company has received an order but has not yet
received the required written documents to bill Medicare (if applicable), other
third-party payers, and customers and recognize revenue.

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

Property, plant, and equipment consists of the following:

March 31, March 31,
2002 2001
--------- ---------
Furniture, fixtures, and office
equipment $18,234 $12,086

Building 9,330 8,936

Land 3,588 3,952

Manufacturing equipment 1,871 1,711

Leasehold improvements 1,426 1,249

Laboratory equipment 222 222

Commercial vehicles 55 --

Construction in process 9,603 415
------- -------

44,329 28,571
Less accumulated depreciation and
amortization (9,726) (6,372)
------- -------
$34,603 $22,199
======= =======

Depreciation and amortization expense for property, plant, and
equipment for the years ended March 31, 2002, 2001 and 2000 was approximately
$3.46 million, $2.94 million, and $1.67 million, respectively. In January 2001,
the Company acquired land in Port St. Lucie, Florida for $1.69 million for the
construction of a new warehouse and respiratory supplies facility. In the fiscal
years ended March 31, 2002 and 2001, $642,000 and $116,000, respectively, of
assets classified in furniture, fixtures and office equipment were acquired
through capital lease obligations.

I. INTANGIBLE ASSETS:
(In thousands)

Intangible assets consist of the following:

March 31, March 31,
2002 2001
--------- ---------

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 (20,986) (18,709)
------- -------
$30,446 $32,723
======= =======

34

POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Amortization expense associated with intangible assets was $2.28
million for each of the three years ended March 31, 2002, 2001 and 2000.

J. ACCRUED EXPENSES:
(In thousands)

Accrued expenses consist of the following:

March 31, March 31,
2002 2001
--------- ---------

Salaries and benefits $7,224 $2,201

Income tax payable 695 2,215

Inventory receipts 1,745 562

Property and equipment purchases 1,539 --

Refunds owed regulatory agencies -- 1,187

Other 1,787 2,112
------- ------

$12,990 $8,277
======= ======

K. AMOUNTS DUE TO MEDICARE AND OTHERS:

Amounts due to Medicare and others of $4.80 million as of March 31,
2002, represent probable amounts due to Medicare and related amounts due to
insurers and Medicare beneficiaries, related to a change in interpretation of
the reimbursement formula for albuterol and ipratropium combinations used in the
Company's Professional Products segment. Beginning September 6, 2001 through
November 8, 2001, the Company received administrative overpayment notices from
one Durable Medical Equipment Regional Carrier ("DMERC") relating to this
reimbursement formula that has resulted in $1.06 million of refunds or credits
to the DMERC and others. No administrative overpayment notices have been
received from November 8, 2001 to June 26, 2002. DMERCs are private insurance
companies used by Medicare to administer reimbursement payments. The liability
of $4.80 million is the remaining difference between reimbursement under the two
interpretations of the reimbursement formula for all relevant transactions and
assumes that the other three DMERCs issue similar administrative overpayment
notices. The Company is processing administrative overpayment notices as
received and refunds are being issued. When the Company established the
liability in the quarter ended September 30, 2001, $5.03 million was charged to
selling, general and administrative expenses for billing adjustments prior to
July 1, 2001 and $823,000 represented billing adjustments related to the quarter
ended September 30, 2001.

L. LONG-TERM DEBT:

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 Hancock $25.0 million of 10.65% Guaranteed
Senior Secured Notes due January 31, 2003 (the "Hancock Notes"), and a warrant
for the purchase of up to 500,000 shares of common stock of the Company.

In October 1999, the Company repaid all amounts, including $20.0
million in principal and a prepayment penalty of $1.8 million, due to Hancock
under the Hancock Notes. Concurrently, Hancock exercised its warrants in a
cashless exercise in which Hancock received 410,987 shares of common stock.

There was no interest expense recorded for the Hancock Notes in the
fiscal years ended March 31, 2002 and 2001. In the fiscal year ended March 31,
2000, $1.22 million was recorded as interest expense for the Hancock Notes.

35

POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Mortgage

To support the growth of Liberty Medical, in May 1999 the Company
purchased a 72,000 square foot building in Port St. Lucie, Florida for $2.0
million, financed by a $1.4 million mortgage. In December 2000, the Company
repaid all amounts owed under the mortgage, consisting of $1.34 million of
principal and $15,000 of interest including the settlement of an interest rate
swap.

M. COMMITMENTS AND CONTINGENCIES:

Operating leases

The Company leases its facilities and certain equipment under operating
leases expiring through fiscal year 2007. Rental expense under these leases
amounted to approximately $1.40 million, $1.41 million, and $1.08 million for
the fiscal years ended March 31, 2002, 2001 and 2000, respectively.

Capital leases

The Company has various capital lease agreements for furniture,
fixtures and office equipment. These obligations extend through fiscal year
2007. Most leases contain renewal options or options to purchase at fair market
value and 3 contain bargain purchase options. No leases contain restrictions on
the Company's activities concerning dividends, additional debt or further
leasing. Property, plant, and equipment as included in the consolidated balance
sheets include the following amounts for capitalized leases:

(in thousands) March 31, March 31,
2002 2001
--------- ---------
Furniture, fixtures, and office equipment $ 3,009 $2,418
Less accumulated depreciation (1,370) (811)
------- ------

Net assets $ 1,639 $1,607
======= ======

Future annual minimum lease and rental commitments as of March 31,
2002, under all of the Company's leases, capital and operating, are:

Capital Operating
(In thousands) Leases Leases
------- ---------
2003 $ 855 $ 1,339
2004 416 688
2005 177 433
2006 78 38
2007 and thereafter 42 18
------ -------
Total minimum payments 1,568 $ 2,516
=======
Less amounts representing interest (195)
------
Present value of net payments $1,373
Less current portion capital lease
obligation (742)
------
Long-term capital lease obligation $ 631
======

Contingencies

The U.S. Attorney's Office for the Southern District of Florida, with
the assistance of the FBI and OIG, is conducting investigations of alleged
healthcare fraud by Liberty Medical and Liberty Home Pharmacy Corporation. Both
civil and criminal investigations are being conducted. The Company is
cooperating fully with the investigations. It cannot accurately predict the
outcome of these proceedings at this time, and has therefore not recorded any
charges relating to the outcome of these uncertainties.

On December 4, 2001, the Company received notice that the SEC was
conducting a formal investigation of PolyMedica. On April 8, 2002, the SEC
notified the Company that it had terminated its investigation of PolyMedica and
that no enforcement action had been recommended to the Commission.

36

POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company and three of its officers are defendants in a lawsuit
alleging violations of certain sections and rules of the Securities Exchange
Act of 1934 (the "Exchange Act"). In addition, there is a derivative action
against the directors and two officers of the Company in Massachusetts state
court alleging certain breaches of fiduciary duty. The Company, the named
officers, and the Board of Directors believe that they have meritorious
defenses to the claims made against them in the actions in which they are
defendants and intend to contest the claims vigorously. Although the Company
does not consider an unfavorable outcome to the various claims probable, it
cannot accurately predict their ultimate disposition, and has therefore not
recorded any charges relating to the outcome of these uncertainties. An
unfavorable outcome could have a material effect on the Company's financial
position and results of operations.

N. MINORITY INTEREST:

Minority interest in the consolidated balance sheets of $805,000 as of
March 31, 2001, represents the ownership interests in certain subsidiaries of
the Company purchased and held by certain Company executives. The minority
interest amounts in the consolidated statements of operations of $564,000 and
$733,000 for the fiscal years ended March 31, 2002 and 2001, respectively,
represent the percentage of these subsidiaries' results allocated to these
minority interests. All outstanding minority interests in the Company's
subsidiaries previously held by certain Company executives, having a recorded
book value of $1.37 million as of February 12, 2002, were reacquired by the
respective subsidiaries at no cost on February 12, 2002 and are classified as
additional paid in capital in the shareholders' equity section of the Company's
consolidated balance sheets as of March 31, 2002. As a result of these
transactions, there were no outstanding minority interests in any of the
Company's subsidiaries as of March 31, 2002.

37

POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

O. COMPREHENSIVE INCOME:

The Company's total net income and comprehensive income were $30.41
million, $22.73 million and $15.12 million for the fiscal years ended March 31,
2002, 2001, and 2000, respectively.

P. EARNINGS PER SHARE:

Calculation of per share earnings is as follows:

(In thousands except per share data) Fiscal Year Ended March 31,
-------------------------------
2002 2001 2000
------- ------- -------

Net income $30,411 $22,734 $15,119

BASIC:

Weighted average common stock outstanding, net of treasury
stock, end of period 12,506 13,176 11,049

Net income per weighted average share, basic $ 2.43 $ 1.73 $ 1.37
======= ======= =======

DILUTED:

Weighted average common stock outstanding, net of treasury
stock, end of period 12,506 13,176 11,049

Weighted average common stock equivalents 274 420 827
------- ------- -------

Weighted average common stock and dilutive common stock
equivalents outstanding, net of treasury stock, end of period 12,780 13,596 11,876

Net income per weighted average share, diluted $ 2.38 $ 1.67 $ 1.27
======= ======= =======

Options to purchase 1,055,207, 649,255, and 90,001 shares of common
stock were outstanding as of March 31, 2002, 2001, and 2000, respectively, but
were not included in the computation of diluted earnings per share because the
options' exercise prices were greater than the average market price of the
common shares.

Q. SHAREHOLDERS' EQUITY:

Prior to January 23, 2002, each holder of outstanding common stock had
a preferred stock purchase right (a "Right") for each share of common stock.
Each Right entitled 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 would
have been attached to all common stock certificates and would not have been
exercisable. The Rights would have 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 would generally have been entitled to redeem the Rights at
$.01 per share at any time until the tenth day following public announcement
that a 15% stock position had been acquired. The Rights expired on January 23,
2002.

In June 2000, the Company's Board of Directors authorized the
repurchase of up to 1,000,000 shares of the Company's common stock on the open
market, with any shares repurchased to be held in treasury. In August 2001, the
Board of Directors authorized the repurchase of an additional 1,000,000 shares.
In the fiscal years ended March 31, 2002 and 2001, 1,009,000 shares and 237,000
shares, respectively, were repurchased under this program for $18.00 million and
$6.64 million, respectively. The average price per share for these repurchases
was $17.84 and $28.02 for the fiscal years ended March 31, 2002 and 2001,
respectively. The purpose of this repurchase program is, in part, to provide
shares of common stock for issuance pursuant to the 1992 Employee Stock Purchase
Plan.

38

POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

R. INCOME TAXES:

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

(In thousands) 2002 2001 2000
------- ------- -------
United States $48,894 $47,313 $26,677

Foreign -- (8) (7)
------- ------- -------
$48,894 $47,305 $26,670

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

(In thousands) 2002 2001 2000
------- ------- -------

Federal - current $13,639 $16,753 $ 5,276
- deferred 3,246 (1,056) 3,584
------- ------- -------
16,885 15,697 8,860

State - current 1,552 2,425 625
- deferred 46 (477) 730
------- ------- -------
1,598 1,948 1,355
------- ------- -------
Total Federal and State $18,483 $17,645 $10,215
======= ======= =======

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

2002 2001 2000
------ ------ ------

U. S. statutory rate 35.0% 35.0% 34.0%

State income taxes, net
of U.S. Federal Income
Tax effect 2.1% 2.7% 3.7%

Other .7% (.4)% .6%
----- ----- -----
Effective tax rate 37.8% 37.3% 38.3%
===== ===== =====

Realization of the net deferred tax assets is dependent on generating
sufficient taxable income. 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, 2002 and 2001:

(In thousands) 2002 2001
------- --------

Deferred tax assets (liabilities) - current:

Reserves $ 10,622 $ 9,558
======== ========

Deferred tax assets (liabilities) - long term:

Intangible assets (2,938) (2,550)

Property, plant and equipment (1,079) (735)

Direct-response advertising (19,245) (14,965)

Amounts due to Medicare and others 1,772 --

Other 966 699
-------- --------
Net deferred tax liability - long term $(20,524) $(17,551)
======== ========

39

POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

S. MAJOR CUSTOMERS:

For the fiscal years ended March 31, 2002, 2001, and 2000, no customer
represented more than 10% of our consolidated revenues. As of March 31, 2002 and
2001, the amounts included in billed accounts receivable due from Medicare were
$19.40 million and $14.17 million, respectively.

T. STOCK OPTIONS:

Effective September 2000, the Company's shareholders approved the 2000
Stock Incentive Plan (the "2000 Plan"), which replaced the 1998 Stock Incentive
Plan (the "1998 Plan"). The 2000 Plan provides for the grant to certain
individuals of stock options to purchase up to 1,800,000 shares of the Company's
common stock. At the Annual Meeting of Stockholders held on September 13, 2001,
an amendment was approved to increase the number of authorized shares of common
stock available under the 2000 Plan to 1,800,000 shares from 1,200,000.

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 is recognized as additional paid-in capital. Options are typically
granted with ten year lives subject to Board approval and vest over periods
ranging from one to three years.

Option activity under the Plans is as follows:

Weighted Average
Option Shares Option Price
------------- ----------------

Outstanding, March 31, 1999 1,756,763 $ 5.80
----------

Granted 250,000 22.62
Exercised (1,027,613) 4.66
Cancelled (30,699) 11.12
----------

Outstanding, March 31, 2000 948,451 $11.29
----------

Granted 667,700 41.38
Exercised (189,354) 10.54
Cancelled (15,484) 14.83
----------

Outstanding, March 31, 2001 1,411,313 $25.59
==========

Granted 620,750 23.54
Exercised (90,409) 6.10
Cancelled (10,903) 17.13
----------

Outstanding, March 31, 2002 1,930,751 $25.89
==========

40

POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of March 31, 2002, 1,416,609 shares were exercisable and 514,142
will vest principally over three years under the Plans. There were 519,750
shares remaining as of March 31, 2002 that were authorized for future option
grants under the 2000 Plan.

Employee Stock Purchase Plan

Under the Company's 1992 Employee Stock Purchase Plan (the "plan"), an
aggregate of 261,972 shares of common stock were made available for purchase by
employees upon exercise of options granted semi-annually. Those who have been
employed by the Company for six months prior to the beginning of an option
period are eligible to enroll in the plan. The options are exercisable
immediately after grant, at the lower of 85% of the fair market value of the
common stock at the beginning or the end of the six-month accumulation period.
Amounts are accumulated through payroll deductions ranging from 1% to 10% of
each participating employee's compensation, as defined in the plan, but in no
event more than $12,500 during any six-month option period.

Supplemental Disclosures for Stock-Based Compensation

The Company applies APB Opinion No. 25 ("APB 25") 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 adopted the disclosure only provisions
of SFAS 123, accordingly no compensation expense is recognized from the stock
option plans. The required disclosures under SFAS 123 are as follows:

Summarized information about stock options outstanding as of March 31,
2002, is as follows:

Number of Weighted Avg. Number of Options Weighted Avg.
Range of Exercise Options Remaining Weighted Avg. Outstanding - Exercise - Price
Prices Outstanding Contractual Life Exercise Price Exercisable Exercisable
----------------- ----------- ---------------- -------------- ----------------- ----------------

$3.30 - 4.64 53,622 4.57 $ 4.15 53,622 $ 4.15

$5.38 - 7.75 252,061 5.75 $ 6.66 252,061 $ 6.66

$8.63 - 11.88 122,179 5.66 $11.36 122,179 $ 11.36

$13.50 - 20.06 317,174 4.38 $18.33 184,643 $ 17.17

$21.44 - 27.53 524,844 8.56 $25.79 343,348 $ 25.20

$35.50 - 41.50 660,871 8.46 $41.39 460,756 $ 41.43
--------- ---------

1,930,751 1,416,609

The fair value of each option granted during fiscal years 2002, 2001,
and 2000 is estimated on the date of grant using the Black-Scholes option
pricing model with the following assumptions:

2002 2001 2000
---- ---- ----

Dividend yield......................... None None None

Expected volatility.................... 85.0% 85.0% 65.0%

Risk-free interest rate................ 4.30% 5.90% 6.05%

Expected life.......................... 3.6 4.0 4.0

Weighted-average fair value of options granted at fair value during:

2002 $14.05
2001 26.86
2000 12.31

41

POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Employee Stock Purchase Plan weighted-average fair value of options:

2002 $ 6.46
2001 13.85
2000 2.63

Had compensation cost for the Company's fiscal 2002, 2001, and 2000
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:

Net income per diluted
Net income weighted average share
----------- ----------------------
As reported:
2002 $30,411,000 $2.38
2001 $22,734,000 $1.67
2000 $15,119,000 $1.27

Pro forma:
2002 $24,301,000 $1.90
2001 $17,327,000 $1.27
2000 $14,083,000 $1.19

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

U. 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 60% 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 fiscal years ended March 31, 2002, 2001 and 2000, the Company
accrued and paid matching contributions of $502,000, $394,000 and $232,000,
respectively, for the 401(k) Plan participants.

V. SEGMENT INFORMATION:

The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131") during the year ended March 31,
1999. SFAS 131 established standards for reporting information about operating
segments in annual financial statements and requires selected information about
operating segments. It also established 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:

Chronic Care - The Company sells diabetes supplies and related products
and provides services to Medicare-eligible seniors suffering from diabetes and
related chronic diseases through its Chronic Care segment. It offers a wide
array of diabetes 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 chronic disease-related upfront expenses and offers the
convenience of free home delivery of supplies.

Professional Products - The Company sells prescription respiratory
supplies to Medicare-eligible seniors, prescription oral medications not covered
by Medicare to its existing customers, and develops, manufactures, and
distributes prescription urology products.

Consumer Healthcare - The Company offers the AZO line of products which
includes over-the-counter female urinary tract discomfort products and home
medical diagnostic kits; and, until September 2000, was a distributor of
private-label and branded digital thermometers. In September 2000, the Company
sold certain assets of its Consumer Healthcare segment. See Note D for
information on the sale.

42

POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Depreciation and amortization expense attributable to the Company's
corporate headquarters is allocated to the operating segments according to the
segment's relative percentage of total revenue. However, segment assets
belonging to the Company's corporate headquarters are not allocated, as they are
considered separately for management evaluation purposes. As a result of these
allocations, the segment information may not be indicative of the financial
position or results of operations that would have been achieved had these
segments operated as unaffiliated entities. The depreciation and amortization
amounts below include amortization of direct-response advertising. The Company
does not organize its units geographically, as its products and services are
sold throughout the United States only. There are no intersegment sales for the
periods presented. Information concerning the operations in these reportable
segments is as follows:

Fiscal Year Ended March 31,
-------------------------------------------
(In thousands) 2002 2001 2000
--------- --------- --------
NET REVENUES:

Chronic Care $207,262 $166,769 $125,999

Professional Products 64,856 43,666 16,501

Consumer Healthcare 7,543 9,611 14,420
-------- -------- --------

Total $279,661 $220,046 $156,920
======== ======== ========
DEPRECIATION AND AMORTIZATION EXPENSE:

Chronic Care $19,167 $14,897 $10,042

Professional Products 16,870 9,894 2,931

Consumer Healthcare 2 27 67
-------- -------- --------

Total $ 36,039 $ 24,818 $ 13,040
======== ======== ========

INCOME BEFORE INCOME TAXES:

Chronic Care $35,767 $33,762 $19,631

Professional Products 10,148 12,933 4,291

Consumer Healthcare 2,979 610 2,748

Cumulative effect of change in accounting principle -- (11,047) --

Extraordinary loss on retirement of debt -- -- (2,165)
-------- -------- --------

Total $ 48,894 $ 36,258 $ 24,505
======== ======== ========

March 31, March 31, March 31,
2002 2001 2000
--------- --------- --------

SEGMENT ASSETS:

Chronic Care $133,009 $97,559 $81,513

Professional Products 62,670 56,158 44,384

Consumer Healthcare 1,777 1,611 6,504

Corporate Headquarters 26,936 46,236 43,195
-------- -------- --------

Total $224,392 $201,564 $175,596
======== ======== ========

43

POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

W. 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. The results for the first three quarters of the year ended March
31, 2001 have been restated in accordance with SAB 101.

(In thousands, except per share data) YEAR ENDED MARCH 31, 2002
--------------------------------------------------------------

QTR. 1 QTR. 2 QTR. 3 QTR. 4
------- ------- -------- -------

Net revenues $63,021 $68,851 $72,696 $75,093

Gross margin 41,756 45,296 47,189 47,901

Net income 8,645 4,682 8,525 8,559

Net income per weighted average share, basic $0.67 $0.37 $0.69 $0.71

Net income per weighted average share, diluted $0.65 $0.36 $0.68 $0.69

(In thousands, except per share data) YEAR ENDED MARCH 31, 2001
--------------------------------------------------------------

QTR. 1 QTR. 2 QTR. 3 QTR. 4
------- ------- -------- -------

Net revenues $50,368 $54,241 $56,403 $59,034

Gross margin 31,378 34,754 37,283 39,658

Net income before the cumulative effect of a change in
accounting principle 6,017 7,350 8,027 8,266

Net income/(loss)* (909) 7,350 8,027 8,266

Net income per weighted average share, basic, before the
cumulative effect of a change in accounting principle $0.46 $0.56 $0.61 $0.63

Net income/(loss) per weighted average share, basic ($0.07) $0.56 $0.61 $0.63

Net income per weighted average share, diluted, before the
cumulative effect of a change in accounting principle $0.44 $0.54 $0.59 $0.61

Net income/(loss) per weighted average share, diluted* ($0.07) $0.54 $0.59 $0.61

* Includes $6,926,000 after-tax loss for the cumulative effect of a change in
accounting principle or $0.51 per diluted share in the quarter ended June 30,
2000.

X. RELATED PARTY TRANSACTIONS:

On February 12, 2002, all outstanding minority interests in our
subsidiaries previously held by certain Company executives, having a recorded
book value of $1.37 million as of February 12, 2002, were reacquired by the
respective subsidiaries at no cost and are classified as additional paid in
capital in the shareholders' equity section of the Company's consolidated
balance sheets as of March 31, 2002. As a result of these transactions, there
were no outstanding minority interests in the Company or any of our subsidiaries
as of March 31, 2002.

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,

44

POLYMEDICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 last repayment of $66,000 occurred in the year ended
March 31, 2000. As of March 31, 2002 and 2001, there was no remaining balance of
notes receivable.

Y. SUBSEQUENT EVENTS (UNAUDITED):

In June 2002, the Company repurchased 25,000 shares of common stock for
$659,000 or an average price of $26.37 per share. In total, 1,271,000 shares had
been repurchased for $25.30 million or an average price of $19.91 per share, as
of June 26, 2002. Of the 2,000,000 shares originally authorized by the Board of
Directors, 729,000 shares remained authorized for repurchase as of June 26,
2002.

45

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

There have been no changes in accountants or disagreements on
accounting and financial disclosure matters.

46

PART III

ITEMS 10-13.

The information required for Part III in this Annual Report on Form
10-K is incorporated by reference from the Company's definitive proxy statement
for the Company's 2002 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, "Equity Compensation Plan Information," 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."

The following trademarks are used in this Annual Report on Form 10-K:

URISED, CYSTOSPAZ, ANESTACON, AZO STANDARD, AZO CRANBERRY, AZO TEST
STRIPS, AZO PMS, AZO MENOPAUSE, AZO YEAST, B&O, and AQUACHLORAL are registered
trademarks of PolyMedica Corporation.

47

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K

(a) 1. CONSOLIDATED FINANCIAL STATEMENTS

The consolidated financial statements listed in the index to
consolidated financial statements on page 22 are filed as part
of this report.

2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULE

The following consolidated financial statement schedule is
included in Item 14(d):

Schedule II - Valuation and Qualifying Accounts

Schedules other than those listed above have been omitted
since they are either not required or information is otherwise
included.

3. LISTING OF EXHIBITS

The Exhibits which are filed with this report or which are
incorporated by reference herein are set forth in the Exhibit
Index on page 52 of this report.

REPORTS ON FORM 8-K

There were no current reports on Form 8-K filed by the Company
during the last quarter of the period covered by this report.

48

ITEM 14(d). FINANCIAL STATEMENT SCHEDULE

POLYMEDICA CORPORATION

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(in thousands)

ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COST AND TO OTHER AT END
DESCRIPTION OF PERIOD EXPENSES EXPENSES DEDUCTIONS OF PERIOD
----------- ---------- --------- -------- ---------- ---------

Valuation reserve deducted in
the balance sheet from asset to
which it applies:

Accounts receivable:
2002 Allowances for doubtful
accounts and sales returns $13,729 $33,525 $ -- ($31,715) $15,539
======= ======= ==== ========= =======
2001 Allowances for doubtful
accounts and sales returns $10,745 $27,429 $ -- ($24,445) $13,729
======= ======= ==== ========= =======
2000 Allowances for doubtful
accounts and sales returns $ 7,330 $21,114 $ -- ($17,699) $10,745
======= ======= ==== ========= =======

49

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 28, 2002 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 28, 2002 /s/ Steven J. Lee
-----------------------------------------
Steven J. Lee
Chairman, Chief Executive Officer
and Director
(Principal Executive Officer)

Dated: June 28, 2002 /s/ John K.P. Stone, III
-----------------------------------------
John K.P. Stone, III
Director, Vice Chairman, General Counsel
and Senior Vice President

Dated: June 28, 2002 /s/ Eric G. Walters
-----------------------------------------
Eric G. Walters
Executive Vice President and Clerk
(Principal Financial Officer)

Dated: June 28, 2002 /s/ Stephen C. Farrell
-----------------------------------------
Stephen C. Farrell
Chief Financial Officer
(Principal Accounting Officer)

Dated: June 28, 2002 /s/ Frank W. Logerfo
-----------------------------------------
Frank W. LoGerfo
Director

Dated: June 28, 2002 /s/ Daniel S. Bernstein
-----------------------------------------
Daniel S. Bernstein
Director

Dated: June 28, 2002 /s/ Marcia J. Hooper
-----------------------------------------
Marcia J. Hooper
Director

Dated: June 28, 2002 /s/ Thomas S. Soltys
-----------------------------------------
Thomas S. Soltys
Director

50

Dated: June 28, 2002 /s/ Herbert A. Denton
----------------------------------------
Herbert A. Denton
Director

Dated: June 28, 2002 /s/ Samuel L. Shanaman
----------------------------------------
Samuel L. Shanaman
Director

Dated: June 28, 2002 /s/ Edward A. Burkhardt
----------------------------------------
Edward A. Burkhardt
Director

Dated: June 28, 2002 /s/ Walter R. Maupay, Jr.
----------------------------------------
Walter R. Maupay, Jr.
Director

51

EXHIBIT INDEX

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

EXHIBIT
NUMBER DESCRIPTION
------- -----------

3.1 - Restated Articles of Organization of the Company, as amended.(13)
3.2 - Restated By-Laws of the Company.(13)
4.1 - Specimen certificate for shares of Common Stock, $.01 par value, of the Company.(1)
10.01 - 1990 Stock Option Plan, as amended.(2)
10.03 - 1992 Directors' Stock Option Plan, as amended.(3)
10.11 - Processing Agreement dated December 11, 1992, by and between the Registrant and Alcon (Puerto
Rico) Inc.(3)
10.12 - Processing Agreement dated December 11, 1992, by and between the Registrant and Alcon
Laboratories, Inc.(3)
10.13 - Letter Agreement dated March 25, 1994 between Alcon (Puerto Rico) Inc. and the Registrant.(3)
10.14 - Amended and Restated License Agreement between the Registrant and CardioTech dated May 13, 1996.(5)
10.15 - Letter Agreement dated February 2, 1995, amending the Processing Agreement dated December 11,
1992, by and between the Registrant and Alcon (Puerto Rico), Inc.(6)
10.16 - Letter Agreement dated May 3, 1995, amending the Processing Agreement dated December 11, 1992, by
and between the Registrant and Alcon (Puerto Rico), Inc.(6)
10.17 - Letter Agreement, dated March 20, 1995, by and between the Registrant and Alcon Laboratories, Inc.(7)
10.18 - Prepayment Agreement between Innovative Technologies Group plc and the Registrant dated June 30, 1998.(8)
10.20 - Employment Agreement by and between the Registrant and Steven J. Lee dated September 1, 2000.(10)(11)
10.21 - Employment Agreement by and between the Registrant and Dr. Arthur A. Siciliano dated September 1,
2000.(10)(11)
10.22 - Employment Agreement by and between the Registrant and Eric G. Walters dated September 1, 2000.(10)(11)
10.23 - Employment Agreement by and between the Registrant and Warren K. Trowbridge dated September 14,
2000.(10)(11)
10.24 - Retention Agreement by and between the Registrant and Steven J. Lee dated September 1, 2000.(10)(11)
10.25 - Retention Agreement by and between the Registrant and Dr. Arthur A. Siciliano dated September 1,
2000.(10)(11)
10.26 - Retention Agreement by and between the Registrant and Eric G. Walters dated September 1, 2000.(10)(11)
10.27 - Retention Agreement by and between the Registrant and Warren K. Trowbridge dated September 1,
2000.(10)(11)
10.28 - Amended Employment Agreement by and between the Registrant and Steven J. Lee dated April 1, 2001.(10)(12)
10.29 - Amended Employment Agreement by and between the Registrant and Dr. Arthur A. Siciliano dated April
1, 2001.(10)(12)
10.30 - Amended Employment Agreement by and between the Registrant and Eric G. Walters dated April 1,
2001.(10)(12)
10.31 - Letter Agreement amendment to Employment Agreement by and between the Registrant and Warren K.
Trowbridge dated December 14, 2000.(10)(12)
10.32 - Employment Agreement by and between the Registrant and Stephen C. Farrell dated September 1, 2000.(10)(12)
10.33 - Letter Agreement amendment to Employment Agreement by and between the Registrant and Stephen C.
Farrell dated April 16, 2001.(10)(12)
10.34 - Letter Agreement amendment to Employment Agreement by and between the Registrant and Steven J. Lee
dated April 2, 2001.(10)(12)
10.35 - Letter Agreement amendment to Employment Agreement by and between the Registrant and Arthur A.
Siciliano dated April 2, 2001.(10)(12)

52

10.36 - Letter Agreement amendment to Employment Agreement by and between the Registrant and Eric G.
Walters dated April 2, 2001.(10)(12)
10.37 - 2000 Stock Incentive Plan.(12)
10.38 - Letter Agreement amendment to Employment Agreement by and between the Registrant and Warren K.
Trowbridge dated September 24, 2001.(10)(13)
10.39 - Letter Agreement amendment to Employment Agreement by and between the Registrant and Stephen C.
Farrell dated September 24, 2001.(10)(13)
10.40 - Amendment to Employment Agreement by and between the Registrant and Steven J. Lee dated September
25, 2001.(10)(13)
10.41 - Amendment to Employment Agreement by and between the Registrant and Dr. Arthur A. Siciliano dated
September 25, 2001.(10)(13)
10.42 - Amendment to Employment Agreement by and between the Registrant and Eric G. Walters dated
September 25, 2001.(10)(13)
10.43 - Amendment to Employment Agreement by and between the Registrant and Warren K. Trowbridge dated
October 4, 2001.(10)(13)
10.44 - Letter Agreement amendment to Employment Agreement by and between the Registrant and Stephen C.
Farrell dated October 12, 2001.(10)(13)
10.45 - Letter Agreement amendment to Employment Agreement by and between the Registrant and Warren K.
Trowbridge dated January 31, 2002.(10)(14)
10.46 - Letter Agreement amendment to Employment Agreement by and between the Registrant and Mr. Steven J.
Lee dated May 31, 2002.(10)*
10.47 - Letter Agreement amendment to Employment Agreement by and between the Registrant and Dr. Arthur A.
Siciliano dated May 31, 2002.(10)*
10.48 - Employment Agreement by and between the Registrant and John K.P. Stone, III dated March 27, 2002.(10)*
10.49 - Retention Agreement by and between the Registrant and John K.P. Stone, III dated March 28, 2002.(10)*
10.50 - Letter Agreement amendment to Employment Agreement by and between the Registrant and Mr. Eric G.
Walters dated May 31, 2002.(10)*
10.51 - Letter Agreement amendment to Employment Agreement by and between the Registrant and Mr. Warren K.
Trowbridge dated May 31, 2002.(10)*
10.52 - Letter Agreement amendment to Employment Agreement by and between the Registrant and Mr. Stephen
C. Farrell dated May 31, 2002.(10)*
21 - Subsidiaries of the Registrant.*
23.1 - Consent of PricewaterhouseCoopers LLP.*

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

* Filed herewith.

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 fiscal year ended March 31, 1995, filed June 29, 1995
(Commission File No. 0-19842).

3 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.

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

5 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.

6 Incorporated herein by reference to the Company's Annual Report on Form
10-K for the fiscal year ended March 31, 1997, filed June 27, 1997.

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

8 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.

53

9 Incorporated herein by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1999, filed February 14,
2000.

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

11 Incorporated herein by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2000, filed November 14,
2000.

12 Incorporated herein by reference to the Company's Annual Report on Form
10-K for the fiscal year ended March 31, 2001, filed June 25, 2001.

13 Incorporated herein by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2001, filed November 14,
2001.

14 Incorporated herein by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended December 31, 2001, filed February 14,
2002.

54