10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2006

OR

o 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 incorporation or organization)	(I.R.S. Employer Identification No.)
701 Edgewater Drive, Suite 360, Wakefield, Massachusetts	01880
(Address of Principal Executive Offices)	(Zip Code)
(781) 486-8111 (Registrant’s Telephone Number, Including Area Code)

     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 þ No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ           Accelerated filer o           Non-accelerated filer o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     As of February 6, 2007, there were 22,605,178 shares of the registrant’s Common Stock outstanding.

POLYMEDICA CORPORATION

TABLE OF CONTENTS

		Page
PART I
Item 1.	Financial Statements (unaudited):
	Consolidated Balance Sheets as of December 31 and March 31, 2006		3
	Consolidated Statements of Income for the three and nine months ended December 31, 2006 and 2005		5
	Consolidated Statements of Cash Flows for the nine months ended December 31, 2006 and 2005		6
	Notes to Consolidated Financial Statements		8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		33
Item 4.	Controls and Procedures		33
PART II
Item 1.	Legal Proceedings		34
Item 1A.	Risk Factors		34
Item 6.	Exhibits		41
Signatures			42
Exhibit Index			43
EX-3.1 First Amendment to the Restated By-Laws
Ex-31.1 Section 302 Certification of CEO
Ex-31.2 Section 302 Certification of CFO
Ex-32.1 Section 906 Certification of CEO & CFO

2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

PolyMedica Corporation

Consolidated Balance Sheets

(Unaudited)

(In thousands, except share and per share amounts)

	December 31,		March 31,
	2006		2006
ASSETS
Current assets:
Cash and cash equivalents	$	1,327	$	9,101
Accounts receivable (net of allowances of $29,483 and $28,169 as of December 31 and March 31, 2006, respectively)		104,597		104,013
Inventories		44,638		34,467
Deferred income taxes		4,334		4,334
Income tax receivable		—		6,662
Prepaid expenses and other current assets		17,896		9,896
Total current assets		172,792		168,473
Property, plant and equipment, net		61,900		64,678
Goodwill		64,598		64,488
Intangible assets, net		43,593		27,228
Direct-response advertising, net		99,488		91,653
Notes receivable		9,641		9,548
Other assets		8,850		3,249
Total assets	$	460,862	$	429,317

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

3

PolyMedica Corporation

Consolidated Balance Sheets

(Unaudited)

(In thousands, except share and per share amounts)

	December 31,		March 31,
	2006		2006
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	28,493	$	26,363
Accrued expenses		32,678		20,652
Current portion, capital lease obligations		652		596
Total current liabilities		61,823		47,611
Capital lease and other obligations		1,756		1,144
Credit facility		57,600		190,000
Convertible subordinated notes		180,000		—
Deferred income taxes		11,035		31,411
Total liabilities		312,214		270,166
Commitments and contingencies
Shareholders’ equity:
Preferred stock, $0.01 par value; 2,000,000 shares authorized, none issued or outstanding		—		—
Common stock, $0.01 par value; 50,000,000 shares authorized; 22,559,900 and 23,050,924 shares issued as of December 31 and March 31, 2006		226		230
Additional paid-in capital		143,793		142,468
Retained earnings		4,629		16,453
Total shareholders’ equity		148,648		159,151
Total liabilities and shareholders’ equity	$	460,862	$	429,317

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

4

PolyMedica Corporation

Consolidated Statements of Income

(Unaudited)

(In thousands, except per share amounts)

	Three Months Ended						Nine Months Ended
										Dec. 31,
	Dec. 31,			Dec. 31,			Dec. 31,			2005
	2006			2005			2006			As Restated
Net revenues	$	177,215		$	131,931		$	497,214		$	350,886
Cost of sales		98,934			62,999			270,642			161,526
Gross margin		78,281			68,932			226,572			189,360
Selling, general and administrative expenses		61,040			52,328			181,519			140,650
Income from operations		17,241			16,604			45,053			48,710
Other income and expense:
Investment income		351			232			737			931
Interest and other expense		(2,097	)		(1,696	)		(8,454	)		(2,970	)
		(1,746	)		(1,464	)		(7,717	)		(2,039	)
Income from continuing operations before income taxes		15,495			15,140			37,336			46,671
Income tax provision		5,656			5,526			13,628			17,042
Income from continuing operations, net of income taxes		9,839			9,614			23,708			29,629
Discontinued operations, net of income taxes		—			264			—			23,904
Net income	$	9,839		$	9,878		$	23,708		$	53,533
Income from continuing operations per weighted average share, basic	$	0.44		$	0.40		$	1.04		$	1.16
Income from discontinued operations per weighted average share, basic		—			0.01			—			0.95
Net income per weighted average share, basic	$	0.44		$	0.41		$	1.04		$	2.11
Income from continuing operations per weighted average share, diluted	$	0.43		$	0.40		$	1.01		$	1.14
Income from discontinued operations per weighted average share, diluted		—			0.01			—			0.93
Net income per weighted average share, diluted	$	0.43		$	0.41		$	1.01		$	2.07
Cash dividend per share	$	0.15		$	0.15		$	0.45		$	0.45
Weighted average shares, basic		22,546			23,787			22,895			25,412
Weighted average shares, diluted		23,151			24,270			23,419			25,922

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

5

PolyMedica Corporation

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

	Nine Months Ended
	December 31,
				2005
	2006			As Restated
Operating activities:
Net income		23,708		$	53,533
Income from discontinued operations		—			(23,904	)
Adjustments to reconcile net income to net cash flows:
Depreciation and amortization		17,766			11,010
Amortization of direct-response advertising		36,235			31,246
Direct-response advertising expenditures		(44,145	)		(40,560	)
Provision for bad debts		15,824			14,477
Provision for sales allowances/returns		9,770			12,113
Stock-based compensation expense		8,954			1,144
Tax benefit from exercise of stock options		921			—
Deferred income taxes		(3,268	)		—
(Gain)/loss on sale of property and equipment		(532	)		(126	)
Loss on impairment of direct-response advertising		75			382
Imputed interest on note payable		—			101
Changes in assets and liabilities excluding effects of acquisitions and dispositions:
Accounts receivable		(26,178	)		(52,308	)
Income tax receivable		6,662			1,085
Inventories		(10,171	)		(10,308	)
Prepaid expenses and other assets		(7,464	)		(2,037	)
Accounts payable		2,130			10,388
Accrued expenses and other liabilities		12,027			(3,812	)
Net cash flows provided by continuing operations		42,314			2,424
Net cash flows provided by discontinued operations		—			9,295
Net cash flows provided by operating activities		42,314			11,719
Investing activities:
Purchase of marketable securities		—			(2,288	)
Proceeds from maturing marketable securities		—			9,092
Proceeds from sale of businesses		—			42,098
Purchase of business		—			(75,373	)
Issuance of note receivable		—			(5,000	)
Purchase of property, plant and equipment		(8,143	)		(7,943	)
Purchase of intangible assets		(26,598	)		(7,051	)
Proceeds from sale of equipment		3,885			545
Net cash flows used for continuing operations		(30,856	)		(45,920	)
Net cash flows used for discontinued operations		—			(101	)
Net cash flows used for investing activities		(30,856	)		(46,021	)
Financing activities:
Proceeds from issuance of common and restricted stock		4,583			5,902
Proceeds from issuance of convertible subordinated notes		180,000			—
Proceeds from issuance of warrants		20,736			—
Purchase of convertible note hedge, net of fees		(47,004	)		—
Net cash (paid for)/received from line of credit		(132,400	)		167,500
Repurchase of common stock		(29,624	)		(190,977	)

6

	Nine Months Ended
	December 31,
				2005
	2006			As Restated
Payment of costs for stock repurchase		—			(1,233	)
Payment of dividends declared on common stock		(10,408	)		(11,490	)
Payment of debt issuance costs		(5,812	)		(1,155	)
Proceeds from equipment line of credit		678			—
Excess tax benefit from exercise of stock options		523			—
Payment of capital lease obligations		(504	)		(420	)
Net cash flows provided by (used for) financing activities		(19,232	)		(31,873	)
Net change in cash and cash equivalents		(7,774	)		(66,175	)
Cash and cash equivalents at beginning of period		9,101			72,246
Cash and cash equivalents at end of period	$	1,327		$	6,071
Supplemental disclosure of cash flow information:
Disposal of equipment	$	4,078		$	1,954

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

7

PolyMedica Corporation

Notes to Consolidated Financial Statements

1. Basis of Presentation

     Company

     PolyMedica Corporation (“us,” “PolyMedica” or the “Company”) was organized in 1988. Today, through our largest segment, Diabetes, we are a leading provider of direct-to-consumer diabetes testing supplies and related products, primarily to seniors. We provide a simple and reliable way for our patients to obtain their supplies and medications. We communicate directly with our patients and their physicians regarding patients’ prescriptions and testing regimens on a regular basis and we bill Medicare and third-party insurers on behalf of our patients. Through our Pharmacy segment, we sell prescription medications primarily to existing Diabetes patients and their spouses. We additionally provide healthcare communication services and technology that enhance patient care communications by offering medical call and contact center services and technology solutions focused on electronic patient relationship management. In September 2005, we sold the Women’s Health Products Division of our Pharmacy segment, which manufactured and sold prescription and over-the-counter urology products to distributors and retailers, and in March 2006 we sold our Liberty Respiratory segment, which provided direct-to-consumer respiratory medications. Accordingly, the operating results and applicable cash flows, assets and liabilities for these businesses have been reclassified into discontinued operations for historical periods.

     We market our diabetes products directly to consumers and healthcare professionals primarily through targeted media, direct-response television advertising and to managed care organizations and physicians through an internal sales force. Our patient service representatives are specifically trained to communicate with patients suffering from diabetes, in particular, seniors, helping them to follow their doctors’ orders, obtain their medications and diabetes testing supplies and manage their chronic disease. Our operating platforms enable us to efficiently collect and process required documents from physicians and patients, and bill and collect amounts due from Medicare, other third party payers and directly from patients. We believe that our proactive approach to diabetes management helps reduce the long-term complications and cost of the disease. Our innovative and effective means of servicing these patients through our patient-centric model has generated a loyal patient base and resulted in strong brand recognition of the Liberty name and significant revenue growth since our acquisition of Liberty Medical Supply, Inc. (“Liberty”) in 1996.

     Accounting

     The accompanying interim consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. These consolidated financial statements include the accounts of PolyMedica and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in our annual consolidated financial statements have been condensed or omitted. The interim consolidated financial statements, in the opinion of management, reflect all adjustments (consisting only of normal recurring accruals) necessary to fairly present the results as of and for the periods ended December 31, 2006 and 2005. Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation.

     The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for any future period or the entire fiscal year. Accordingly, these interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the fiscal year ended March 31, 2006 which are contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on June 9, 2006 and our unaudited consolidated financial statements included in our Quarterly Report on Form 10-Q for the periods ended June 30 and September 30, 2006 filed with the SEC on August 4 and November 8, 2006, respectively. Consequently, the interim consolidated financial statements do not include all disclosures normally required by accounting principles generally accepted in the United States of America for annual audited financial statements.

     In the process of preparing our financial statements for the period ended March 31, 2006, the Company identified an error in the calculation of the gain on the sale of the Women’s Health Products Division as disclosed in discontinued operations in the Company’s 10-Q for the periods ended September 30, 2005 and December 31, 2005. The adjustment related to the elimination of the Women’s Health Products Division’s equity accounts that had not been

8

PolyMedica Corporation
Notes to Consolidated Financial Statements

properly reflected in the calculation as of September 30, 2005, for which we have adjusted quarterly results for that period by $2.44 million. This adjustment did not impact revenues, income from continuing operations, or earnings per share from continuing operations. The following table presents as reported and restated amounts related to the $2.44 million adjustment to the gain recognized on the sale of the Women’s Health Products Division.

	Nine Months Ended
	Dec. 31, 2005
	As Reported		As Restated
Income from discontinued operations, net of income taxes	$	26,344	$	23,904
Net income	$	55,973	$	53,533
Income from discontinued operations per weighted average share, basic	$	1.04	$	0.95
Net income per weighted average share, basic	$	2.20	$	2.11
Income from discontinued operations per weighted average share, diluted	$	1.02	$	0.93
Net income per weighted average share, diluted	$	2.16	$	2.07

2. Accounts receivable and revenue

     Approximately $75.03 million and $69.53 million, or 42.3% and 52.7% of consolidated net revenues from continuing operations for the three months ended December 31, 2006 and 2005, respectively, were reimbursable under Medicare programs for products provided to Medicare beneficiaries. Approximately $226.67 million and $200.20 million, or 45.6% and 57.1% of consolidated net revenues from continuing operations for the nine months ended December 31, 2006 and 2005, respectively, were reimbursable under Medicare programs for products provided to Medicare beneficiaries. In the three and nine months ended December 31, 2006 approximately $38.27 million and $94.07 million, or 21.6% and 18.9% of consolidated net revenues from continuing operations, respectively, were reimbursable under the Medicare Prescription Drug program (“Part D”). In the three and nine months ended December 31, 2005, net revenues reimbursable under Part D represented less than 1% of net revenues from continuing operations.

     Accounts receivable allowances consist of an allowance for doubtful accounts, an allowance for product returns, and other sales allowances. As of December 31 and March 31, 2006, accounts receivable allowances were $29.48 million and $28.17 million, respectively, or 22.0% and 21.3% of gross accounts receivable, respectively.

     Our accounts receivable are generally due from Medicare, private insurance companies, Medicaid, healthcare providers and payers, and our patients. The collection process is time consuming, complex and typically involves the submission of claims to multiple payers whose payment of claims may be contingent upon the payment of another payer. As a result, our collection efforts may be active up to 18 months from the initial billing date. Balances that are determined to be uncollectible prior to the passage of 18 months from the last billing date are written off as soon as administratively possible after that determination has been made. In accordance with applicable regulatory requirements, we make reasonable and appropriate efforts to collect our accounts receivable, including deductible and co-payment amounts, in a consistent manner for all payer classes. During the three months ended December 31, 2006 and 2005, we provided for allowances for doubtful accounts at a rate of approximately 2.5% and 3.8% of net revenues, respectively. The decrease in the provision for doubtful accounts as a percentage of net revenues this quarter was primarily attributable to the increase in Pharmacy revenue generated directly from commercial parties from whom we experience higher collection rates. During the nine months ended December 31, 2006 and 2005, we provided for allowances for doubtful accounts at a rate of approximately 3.2% and 4.1% of net revenues, respectively.

     Sales allowances are recorded for estimated product returns, as well as estimated claim denials, as a reduction of revenue. We analyze sales allowances using historical data adjusted for significant changes in volume, patient demographics, business conditions and changes in our product return policy. The reserve for sales allowances and the rate at which we provide for such allowances are periodically adjusted to reflect actual returns and claim denials. During

9

PolyMedica Corporation
Notes to Consolidated Financial Statements

the three months ended December 31, 2006 and 2005, we provided for sales allowances at a rate of approximately 1.6% and 3.1% of gross revenues, respectively. During the nine months ended December 31, 2006 and 2005, we provided for sales allowances at a rate of approximately 1.9% and 3.3% of gross revenues. The decrease in sales returns and allowances as a percentage of gross revenues is primarily attributable to increased revenue generated directly from commercial parties and revenue growth from our Pharmacy segment, which generate lower rates of sales returns and allowances as well as revenue attributable to IntelliCare, Inc (“IntelliCare”), acquired in the third quarter of fiscal 2006 which does not have sales returns. Also contributing to the decline in sales returns and allowances as a percentage of gross revenues was the change to our return policy, effective December 2005, stipulating that diabetes supplies could only be returned within three months from the date of sale, as compared to six months from the date of sale previously.

3. Inventories

     Inventories totaling $44.64 million and $34.47 million as of December 31 and March 31, 2006, respectively, consisted solely of finished goods. Due to the medical nature of the products we provide, patients frequently request supplies before we have received all required written documents to bill Medicare, other third-party payers and patients. Because we do not recognize revenue until we have received and verified such documents, included in inventories as of December 31 and March 31, 2006, is $3.39 million and $4.77 million, respectively, of inventory shipped to patients for which we have received an order, but have not yet received and verified the required documentation to recognize revenue and bill Medicare, other government agencies, third-party payers or patients.

4. Direct-Response Advertising

     We recorded the following activity related to our direct-response advertising asset for the periods presented:

	Three Months Ended						Nine Months Ended
	December 31,			December 31,			December 31,			December 31,
(in thousands)	2006			2005			2006			2005
Capitalized direct-response advertising additions	$	14,833		$	10,948		$	44,145		$	40,560
Direct-response advertising amortization		(12,540	)		(10,828	)		(36,235	)		(31,246	)
Impairment of direct-response advertising		(75	)		—			(75	)		(382	)
Increase in direct-response advertising asset, net		2,218			120			7,835			8,932
Beginning direct-response advertising asset, net		97,270			87,311			91,653			78,499
Ending direct-response advertising asset, net	$	99,488		$	87,431		$	99,488		$	87,431

10

PolyMedica Corporation
Notes to Consolidated Financial Statements

5. Goodwill and Other Intangible Assets

     The carrying amounts of goodwill and intangible assets, excluding direct-response advertising, as of December 31 and March 31, 2006, by reportable segment, were as follows:

	December 31,			March 31,
(in thousands)	2006			2006
Goodwill:
Diabetes	$	64,598		$	64,488
Intangible assets:
Diabetes patient lists	$	56,782		$	30,436
Diabetes managed care and other contracts		8,558			8,341
Accumulated amortization		(21,747	)		(11,549	)
Total consolidated intangible assets, net	$	43,593		$	27,228

We purchased $26.60 million of intangible assets, largely customer lists, in the nine months ended December 31, 2006. Intangible assets, all of which are subject to amortization, consist of the following:

			December 31, 2006							March 31, 2006
	Average		Gross					Net		Gross					Net
	Life in		Carrying		Accumulated			Book		Carrying		Accumulated			Book
(in thousands)	Years		Amount		Amortization			Value		Amount		Amortization			Value
Patient lists		4	$	56,782	$	(19,979	)	$	36,803	$	30,436		(10,847	)	$	19,589
Other contracts		2-9		8,133		(1,542	)		6,591		8,133		(649	)		7,484
Covenants not to compete		< 1		425		(226	)		199		208		(53	)		155
Total			$	65,340	$	(21,747	)	$	43,593	$	38,777	$	(11,549	)	$	27,228

     Amortization expense for intangible assets was approximately $4.06 million and $2.38 million for the three months ended December 31, 2006 and 2005, respectively and approximately $10.20 million and $5.25 million for the nine months ended December 31, 2006 and 2005, respectively. As of December 31, 2006, amortization expense on existing intangible assets for the next five fiscal years and beyond is as follows (table in thousands):

Remainder of fiscal year 2007	$	4,093
Fiscal year 2008		14,469
Fiscal year 2009		12,164
Fiscal year 2010		8,367
2011 and thereafter		4,500
Total	$	43,593

11

PolyMedica Corporation
Notes to Consolidated Financial Statements

6. Accrued Expenses

     Accrued expenses consist of the following:

	December 31,		March 31,
(In thousands)	2006		2006
Compensation and Benefits	$	5,900	$	8,270
Proposed Settlement of Class Action Lawsuit		5,500		—
Income Tax		5,494		—
Inventory Receipts		7,956		2,791
Other		7,828		9,591
	$	32,678	$	20,652

     On or about October 24, 2006, PolyMedica reached an agreement in principle to settle the Class Action Lawsuit. The proposed settlement amount would be covered by insurance and is included in Prepaid expenses and other current assets. The settlement has not been finalized and is subject to approval by the District Court. Please also see Note 8, Commitments and Contingencies, for a detailed description of the Class Action Lawsuit.

     As of December 31 and March 31, 2006, amounts accrued for compensation and benefits consisted primarily of earned, but unpaid employee compensation and severance accruals.

     Other accrued expenses consisted primarily of amounts due for audit and tax services, legal services, advertising and marketing, outside consulting, and interest owed on outstanding borrowings from our Credit Facility.

7. Credit Facility and Convertible Subordinated Notes

Credit facility

     On April 12, 2005, PolyMedica entered into an agreement with Bank of America, N.A. (“Bank of America”), as administrative agent, and several lenders, as subsequently amended in May and November 2005 and then again in March and September 2006 (“Credit Facility”). The Credit Facility currently permits PolyMedica to borrow up to $250 million under a five-year revolving credit facility maturing on March 30, 2011. As of December 31 and March 31, 2006, we had $57.60 million and $190 million, respectively, in borrowings outstanding under the Credit Facility. Interest on swing line commitment borrowings is based on the greater of Bank of America’s prime rate or the Federal Funds Rate plus .50% and at an adjusted LIBOR rate option for other borrowings under the facility. The weighted average interest rate for the three and nine months ended December 31, 2006 was 6.3% and 6.6%, respectively. The Credit Facility contains several financial and other covenants and is secured by a pledge of the stock of PolyMedica’s wholly-owned subsidiaries. Commitment fees on the unused portion of the facility range from .15% to .25% and are based on PolyMedica’s consolidated leverage ratio for the most recent four fiscal quarters. The Credit Facility limits the amount of indebtedness we may incur, requires us to maintain certain levels of net worth, leverage ratio and fixed charge ratio, and restricts our ability to materially alter the character of the business. We continue to be in compliance with all of the covenants required by the Credit Facility.

     During fiscal 2007, PolyMedica entered into a master equipment financing agreement with Citizens Asset Finance allowing us to borrow up to $5 million, secured by equipment owned by PolyMedica. The initial borrowing under the agreement was $678,000, effective October 1, 2006. The imputed interest rate on the borrowing is approximately 6.7% for a term of 36 months.

Convertible subordinated notes

     During September 2006, the Company issued in a private placement $180 million aggregate principal amount of convertible subordinated notes due September 15, 2011 (“Notes”). The Notes bear interest at 1.0% per annum, payable semi-annually in arrears in cash on March 15 and September 15 of each year. The Notes are general, unsecured subordinated obligations of the Company and are subordinated in right of payment to all of our existing and future senior debt, including debt under the Credit Facility. The Notes are also effectively subordinated in right of payment to all of our subsidiaries’ obligations (including secured and unsecured obligations) and are subordinated in right of payment to our secured obligations to the extent of the assets securing such obligation.

12

PolyMedica Corporation
Notes to Consolidated Financial Statements

     The Notes are convertible into cash and, if applicable, shares of Common Stock, based on an initial conversion rate of 20.8756 shares of Common Stock per $1,000 principal amount of Notes (which is equal to a conversion price of approximately $47.9028 per share and is subject to adjustment). Holders may surrender their Notes for conversion prior to the close of business on April 15, 2011 under the following circumstances: (1) during any calendar quarter commencing after September 19, 2006 (and only during such calendar quarter), if the closing sale price of the Common Stock for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the calendar quarter preceding the quarter in which the conversion occurs is more than 120% of the conversion price of the Notes on that last trading day (2) during the ten consecutive trading day period following any five consecutive trading day period in which the trading price for the Notes for each such trading day was less than 98% of the closing sale price of the Common Stock on such date multiplied by the then current conversion rate, or (3) if we make certain significant distributions to holders of the Common Stock, we enter into specified corporate transactions or the Common Stock ceases to be approved for listing on the NASDAQ Global Select Market and is not listed for trading on a U.S. national or regional securities exchange or any similar U.S. system of automated securities price dissemination or traded in the over-the-counter market. Holders may also surrender their Notes for conversion after April 15, 2011 and prior to maturity regardless of whether any of the foregoing conditions have been satisfied.

     Upon conversion of the Notes, holders will receive cash and shares of Common Stock, if any, based on a daily conversion value (as described in the indenture governing the Notes) calculated for each of the 25 trading days beginning on the third trading day immediately following the conversion date, except that for Notes surrendered for conversion after the thirtieth scheduled trading day prior to the maturity date and on or prior to the close of business on the business day immediately preceding maturity, holders will receive a cash payment equal to $1,000 on the maturity date and shares of our common stock, if any, calculated based on the 25 trading days beginning on the trading day following the maturity date. If a fundamental change (as defined in the indenture governing the Notes) occurs prior to maturity, holders may require us to repurchase for cash all or part of their Notes at a price equal to 100% of the principal amount of the Notes repurchased plus accrued and unpaid interest.

     In connection with the issuance of the Notes, the Company entered into separate convertible note hedge transactions with Bank of America, N.A. and Deutsche Bank AG London with respect to its obligation to deliver shares of Common Stock upon conversion of the Notes, which are expected to reduce the potential dilution to our Common Stock upon any conversion of the Notes. The convertible note hedges give the Company the right to receive, for no additional consideration, the number of shares of Common Stock that it is obligated to deliver upon conversion of the Notes (subject to customary antidilution adjustments). The aggregate cost of these convertible note hedges was $47.0 million.

     Concurrently with the issuance of the Notes and entering into the convertible note hedge transactions, the Company also entered into separate warrant transactions whereby the Company sold warrants to acquire approximately 3.75 million shares of Common Stock (the “Warrants”), subject to customary anti-dilution adjustments, at a strike price of approximately $67.23 per share of Common Stock. The Company received aggregate proceeds of approximately $20.74 million from the sale of the Warrants.

     In accordance with Emerging Issues Task Force Issue (“EITF”) No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” (“EITF No. 00-19”), SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” the Company recorded both the purchase of the convertible note hedges and the sale of the Warrants as adjustments to additional paid in capital, and will not recognize subsequent changes in fair value.

13

PolyMedica Corporation
Notes to Consolidated Financial Statements

8. Commitments and Contingencies

Contingencies

     Class Action Lawsuit

     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 against PolyMedica and Steven J. Lee, PolyMedica’s former Chief Executive Officer and Chairman of the Board, on behalf of himself and purchasers of common stock. The lawsuit seeks an unspecified amount of damages, attorneys’ fees and costs and claims violations of Sections 10(b), 10b-5, and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”), alleging various statements were misleading with respect to our revenue and earnings based on an alleged scheme to produce fictitious sales. Several virtually identical lawsuits were subsequently filed in the United States District Court for the District of Massachusetts against PolyMedica. On July 30, 2001, the Court granted the plaintiffs’ motion to consolidate the complaints under the caption In re: PolyMedica Corp. Securities Litigation, Civ. Action No. 00-12426-REK.

     Plaintiffs filed a consolidated amended complaint on October 9, 2001. The consolidated amended complaint extended the class period to October 26, 1998 through August 21, 2001, and named as defendants PolyMedica, Liberty, and certain former officers of PolyMedica. Defendants moved to dismiss the consolidated amended complaint on December 10, 2001. 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. On June 20, 2002, defendants filed answers to the consolidated amended complaint.

     On January 28, 2004, plaintiffs filed a motion for class certification to which defendants filed an opposition on February 27, 2004. Plaintiffs filed a reply memorandum on April 12, 2004 followed by additional briefing by the parties. The Court heard oral argument on the motion on June 2, 2004. On September 8, 2004, the court allowed the plaintiffs’ motion and certified the class. On September 21, 2004, the defendants filed a petition requesting that they be permitted to appeal the decision to the First Circuit Court of Appeals. The plaintiffs filed a response to the defendants’ petition on October 7, 2004 opposing defendants’ request to appeal the class certification. Also on October 7, 2004, the Court stayed sending notice of the class action pending a ruling on defendants’ appeal of class certification. On February 15, 2005, the First Circuit Court of Appeals granted defendants’ petition for leave to appeal the class certification decision. Defendants-appellants filed their brief on March 15, 2005, and plaintiffs-appellees filed an opposition on April 15, 2005. Defendants-appellants filed a reply brief on April 25, 2005. The First Circuit Court of Appeals heard oral argument on May 4, 2005 and took the matter under advisement. On December 13, 2005, the First Circuit Court of Appeals rendered a decision in defendants-appellants’ favor and entered an order vacating the District Court’s order certifying the class for the period from January 2001 through August 2001 and remanding the matter for further proceedings in the District Court consistent with its opinion.

     On February 23, 2006, plaintiffs filed a motion in the District Court to re-certify the class for the period from January 2001 through August 2001, which the defendants opposed. On March 23, 2006, the Court held an evidentiary hearing relating to class certification and on March 31, 2006 the Court heard oral argument regarding class certification. On September 28, 2006, the Court denied plaintiffs’ motion to re-certify the class for the period from January 2001 through August 2001. On October 5, 2006, plaintiffs filed a motion for partial reconsideration of the Court’s order as to the period January 1, 2001 through March 31, 2001.

     On October 13, 2006, plaintiffs filed a petition requesting that they be permitted to appeal the decision denying plaintiffs’ motion to re-certify the class for the period from January 2001 through August 2001 to the First Circuit Court of Appeals, which defendants opposed.

     On or about October 24, 2006, the parties reached an agreement in principle to settle the matter for $5.5 million. The proposed settlement amount would be covered by insurance and is included in Accrued expenses and Prepaid expenses and other current assets. The settlement has not been finalized and is subject to approval by the District Court. On October 25, 2006, the District Court issued an order for administrative closure of the case pending the parties’ submission of settlement documents for Court approval. Defendants have not yet filed an opposition to the motion for reconsideration because of the settlement and case closure. On or about October 31, 2006, the parties filed a joint motion to stay proceedings in the First Circuit Court of Appeals.

     We believe that we have meritorious defenses to the claims made in the consolidated amended complaint. We are unable to express an opinion as to the likely outcome of this litigation. An unfavorable outcome that exceeds amounts

14

PolyMedica Corporation
Notes to Consolidated Financial Statements

recoverable through our director and officer insurance coverage could have a materially adverse effect on our financial position and results of operations.

     Proposed Tax Deduction Disallowance

     In connection with an Internal Revenue Service (“IRS”) examination of our fiscal 2005 consolidated federal income tax return, we received a notice from the IRS which proposed to disallow half of the $35 million deduction we claimed in connection with the civil settlement with the Department of Justice (“DOJ”) and the Office of the Inspector General (“OIG”). We believe this deduction was properly recorded on our federal tax return in accordance with applicable tax laws and regulations in effect during the period involved. We are vigorously challenging this proposed disallowance and filed a protest with the appeals division of the IRS. We are unable to express an opinion as to the likely outcome of the proposed disallowance. An unfavorable outcome could have a materially adverse effect on our financial position and results of operations.

Commitments

     Please refer to our Annual Report on Form 10-K for the fiscal year ended March 31, 2006, filed with the SEC on June 9, 2006, for a description of our contractual obligations, specifically our operating leases, capital leases, and other commitments, and our off-balance sheet arrangements. There were no material developments during the nine months ended December 31, 2006.

9. Segment Information

     Our reportable segments, Diabetes and Pharmacy, are strategic business units or divisions that offer different products. These units have separate financial information that is evaluated by senior management. As of March 31, 2006, the assets of our Liberty Healthcare Group reporting unit, previously reported in our Diabetes segment have been reclassified to Corporate Headquarters, as these assets provide benefits to both reportable segments. The reporting units within each reporting segment have not changed, with the exception of National Diabetic Pharmacies, LLC (“NDP”) which was acquired by the Company on August 26, 2005 and IntelliCare acquired by the Company on October 28, 2005, which we added to our Diabetes segment. Our segments are as follows:

     Diabetes — Through our Diabetes segment, we primarily provide diabetes testing supplies and related products to patients suffering from diabetes and related chronic diseases. We offer a wide array of diabetes supplies from a broad range of manufacturers. We additionally provide healthcare communication services and technology that enhance patient care communications by offering medical call and contact center services and technology solutions focused on electronic patient relationship management.

     Pharmacy — Through our Pharmacy segment, we provide prescription medications primarily to existing Diabetes patients and their spouses.

     During the fiscal year ended March 31, 2006, the selling, general and administrative resources of the Diabetes and Pharmacy segments were combined to achieve economies across our businesses. Management evaluates the segments based on revenue and gross margin, separately evaluating the selling, general and administrative expenses in total. We no longer allocate the selling, general and administrative expenses incurred by PolyMedica’s corporate headquarters and Liberty Healthcare Group, Inc. to our reportable segments. Segment assets belonging to PolyMedica’s corporate headquarters and Liberty Healthcare Group, Inc., which included $1.33 million and $9.10 million of cash and cash equivalents as of December 31 and March 31, 2006, respectively, are considered separate from our reportable segments for management evaluation purposes.

     As a result of the shared services reported separately, 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. We do not organize our units geographically, as our products are sold throughout the United States only. There are no intersegment sales for the periods presented. Information concerning the operations in these reportable segments is as follows:

15

PolyMedica Corporation
Notes to Consolidated Financial Statements

	Three Months Ended						Nine Months Ended
	December 31,						December 31,
(in thousands)	2006			2005			2006			2005
Net revenues:
Diabetes	$	122,047		$	110,481		$	352,527		$	288,997
Pharmacy		55,168			21,450			144,687			61,889
Total	$	177,215		$	131,931		$	497,214		$	350,886
Gross margin:
Diabetes	$	68,918		$	60,941		$	199,392		$	167,558
Pharmacy		9,363			7,991			27,180			21,802
Total	$	78,281		$	68,932		$	226,572		$	189,360
Reconciliation of segment gross margin to income from continuing operations before income taxes:
Diabetes gross margin	$	68,918		$	60,941		$	199,392		$	167,558
Pharmacy gross margin		9,363			7,991			27,180			21,802
Selling, general and administrative expenses		(61,040	)		(52,328	)		(181,519	)		(140,650	)
Other income and expense		(1,746	)		(1,464	)		(7,717	)		(2,039	)
Income from continuing operations before income taxes	$	15,495		$	15,140		$	37,336		$	46,671

	December 31,		March 31,
	2006		2006
Segment assets:
Diabetes	$	369,270	$	365,546
Pharmacy		36,572		18,279
Corporate Headquarters and Liberty Healthcare Group, Inc.		55,020		45,492
Total	$	460,862	$	429,317

10. Shareholders’ Equity

     Changes to stockholders’ equity consisted of the following activity:

Balance at March 31, 2006	$	159,151
Nine months ended December 31, 2006:
Net income		23,708
Proceeds from sale of warrants		20,736
Tax benefit of derivatives		17,108
Stock-based compensation		8,954
Proceeds from the exercise of stock options		4,583
Tax benefit from exercise of stock options		1,444
Dividends paid		(10,408	)
Repurchase of common stock		(29,624	)
Purchase of note hedge, net of fees		(47,004	)
Balance at December 31, 2006	$	148,648

     In the quarter ended December 31, 2006, we paid a $0.15 per share cash dividend on 22,726,806 common shares outstanding for a total payment of $3.41 million to our common shareholders of record as of the close of business on November 6, 2006.

16

PolyMedica Corporation
Notes to Consolidated Financial Statements

11. Stock-Based Compensation

     PolyMedica has stock-based compensation plans for its key employees, directors and others. These plans permit the grant of a variety of stock awards, including restricted stock and stock options, as determined by the Company’s Board of Directors or its Compensation Committee. Generally, restricted stock awards and stock options granted to employees are subject to four year vesting terms, assuming continued employment with the Company, with one year vesting terms for awards granted to members of our Board of Directors. Generally, stock options are awarded with an expiration period of ten years, and upon an optionee’s termination of service or employment, such expiration period may be reduced. For restricted stock awards granted, PolyMedica retains the right to repurchase any unvested shares at par value upon termination of employment or service. Upon a change in control of the Company, all options held by certain employees, regardless of grant date, become immediately exercisable and restricted stock awards granted to such employees cease to be subject to restrictions and the Company’s repurchase rights. Nonqualified and incentive options are granted at fair market value on the date of grant.

     We also allow employees who have been employed by PolyMedica for six months or more prior to the beginning of an option period, to enroll in our Employee Stock Purchase Plans (the “ESPP Plans”). 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 ESPP Plans, but in no event more than $12,500 during any six-month option period. The ESPP Plans, as currently structured, are considered compensatory under the requirements of SFAS No. 123(R), “Share-Based Payment.”

     Effective April 1, 2006, PolyMedica adopted the provisions of SFAS No. 123(R), “Share-Based Payment,” which establishes accounting for equity instruments exchanged for employee services. Under the provisions of SFAS No. 123(R), share-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee’s requisite service period, generally the vesting period of the equity grant. Prior to April 1, 2006, we accounted for share-based compensation to employees and directors in accordance with APB No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. We also followed the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” We elected to employ the modified prospective transition method as provided by SFAS No. 123(R).

     Under this transition method, the compensation cost recognized beginning April 1, 2006 includes compensation cost for (i) all share-based awards granted prior to, but not yet vested as of April 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123, and (ii) all share-based awards granted subsequent to March 31, 2006 based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). Compensation cost is recognized ratably over the requisite vesting period. Prior period amounts have not been restated for the adoption of SFAS No. 123(R).

     The total stock-based compensation of $3.00 million and $8.95 million, including restricted stock awards, recorded during the three and nine months ended December 31, 2006 upon the adoption of SFAS No. 123(R) on April 1, 2006, has been included in the statement of operations within selling, general and administrative expenses thereby reducing income from continuing operations by $3.00 million and $8.95 million and net income by $1.91 million and $5.69 million or $0.08 and $0.24 per diluted weighted average share. Stock-based compensation expense recognized in fiscal 2007 is based on awards ultimately expected to vest; therefore, it has been reduced for estimated forfeitures. SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In the pro forma information presented for the periods prior to April 1, 2006, we accounted for forfeitures as they occurred.

     Stock Options - The fair value of each stock option granted by PolyMedica is estimated using the Black-Scholes option pricing model. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs. Management estimates expected volatility based on the historical volatility of the Company’s stock. The decline in volatility in the nine months ended December 31, 2006 was due to a change in the market valuation of our stock, which in recent periods has been substantially less volatile. We arrived at our grant expected life estimate upon review of our historical exercise data and the continued use of a vesting schedule with quarterly increments after the first year for the majority of outstanding stock options. The risk-free interest rate is based on U.S. Treasury zero-coupon

17

PolyMedica Corporation
Notes to Consolidated Financial Statements

issues with a remaining term which approximates the expected life assumed at the date of grant. The compensation expense recognized for all equity-based awards is net of estimated forfeitures. Forfeitures are estimated based on an analysis of actual option forfeitures.

     The weighted average assumptions used in the Black-Scholes option pricing model are as follows:

	Three months ended						Nine months ended
	Dec. 31,			Dec. 31,			Dec. 31,			Dec. 31,
	2006			2005			2006			2005
Dividend yield		1.50	%		1.70	%		1.49	%		1.70	%
Expected volatility		31.72	%		36.11	%		33.26	%		40.47	%
Risk-free interest rate		4.62	%		4.37	%		4.77	%		3.92	%
Expected life		3.75			3.75			3.75			3.75

	Three months ended				Nine months ended
	Dec. 31,		Dec. 31,		Dec. 31,		Dec. 31,
	2006		2005		2006		2005
Weighted average fair value of options granted	$	10.85	$	10.31	$	9.06	$	11.42
Weighted average fair value of Employee Stock Purchase Plan rights granted below fair value	$	10.15	$	6.49	$	9.09	$	6.46

     A summary of stock option activity as of December 31, 2006 and changes during the three and nine months then ended is presented below:

								Weighted Average
				Weighted		Aggregate		Remaining
	Option			Average		Intrinsic Value		Contractual Term
	Shares			Option Price		(in thousands)		in Years
Outstanding as of March 31, 2006		3,188,358		$	29.36				8.17
Granted		30,000			41.19
Exercised		(58,202	)		27.17
Cancelled		(6,876	)		34.86
Outstanding as of June 30, 2006		3,153,280		$	29.50	$	20,370		7.94
Granted		5,000			36.26
Exercised		(87,278	)		21.61
Cancelled		(32,566	)		33.64
Outstanding as of September 30, 2006		3,038,436		$	29.70	$	39,847		7.62
Granted		34,000			40.00
Exercised		(10,000	)		24.80
Cancelled		(35,000	)		22.65
Outstanding as of December 31, 2006		3,027,436			29.91	$	31,823		7.49
Vested and exercisable as of December 31, 2006		1,857,993			27.18	$	24,574		6.96

18

PolyMedica Corporation
Notes to Consolidated Financial Statements

     The total intrinsic value of options exercised during the quarter ended December 31, 2006 and 2005 was approximately $150,000 and $1.40 million, respectively. The total intrinsic value of options exercised during the nine months ended December 31, 2006 and 2005 was approximately $2.83 million and $6.18 million, respectively. The intrinsic value is the difference between the market value of the shares on the exercise date and the exercise price of the option.

     As of December 31, 2006, there was $14.00 million of total unrecognized compensation cost related to non-vested stock options granted. The cost is expected to be recognized over a weighted average period of 2.32 years.

     Restricted Stock Awards — PolyMedica awards to a number of key employees and directors shares of restricted Company common stock. The vesting terms of the awards generally range from 1 to 4 years, assuming continued employment or service, with some exceptions. The fair market value of the award at the time of the grant is amortized to expense over the period of vesting. Recipients of restricted stock have the right to vote such shares and receive dividends. The fair value of restricted stock awards is generally determined based on the number of shares granted and the market value of the Company’s shares on the grant date. During the quarter ended December 31, 2006, we granted 23,850 restricted shares at a weighted average fair value of $41.93 on the grant date. During the nine months ended December 31, 2006, we granted 157,540 restricted shares at a weighted average fair value of $31.95 on the grant date.

     A summary of the status of our restricted stock as of December 31, 2006 and changes during the three and nine months then ended are presented below:

						Weighted Average
						Grant Date
	Shares			Par value		Fair Value
Non-vested as of March 31, 2006		206,313		$	0.01	$	34.51
Granted		690		$	0.01	$	36.21
Vested		(938	)	$	0.01	$	32.26
Cancelled		—			—		—
Non-vested as of June 30, 2006		206,065		$	0.01	$	34.53
Granted		133,000		$	0.01	$	30.14
Vested		(26,155	)	$	0.01	$	35.57
Cancelled		—			—		—
Non-vested as of September 30, 2006		312,910		$	0.01	$	32.57
Granted		23,850		$	0.01	$	41.93
Vested		(3,095	)	$	0.01	$	35.62
Cancelled		—			—
Non-vested as of December 31, 2006		333,665		$	0.01	$	33.21

     The total fair value of shares vested during the quarter ended December 31, 2006 and 2005 was $110,000 and $30,000, respectively. The total fair value of shares vested during the nine months ended December 31, 2006 and 2005 was $1.07 million and $181,000, respectively.

     Of the total $3.00 million stock-based compensation expense recorded in the quarter ended December 31, 2006, compensation expense related to restricted stock grants totaled $743,000. Of the total $8.95 million stock-based

19

PolyMedica Corporation
Notes to Consolidated Financial Statements

compensation expense recorded in the nine months ended December 31, 2006, compensation expense related to restricted stock grants totaled $2.05 million.

     As of December 31, 2006, there was $8.06 million of total unrecognized compensation cost related to non-vested restricted stock awards granted. The cost is expected to be recognized over a weighted average period of 3.72 years.

     The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation in the three and nine months ended December 31, 2005:

	Three Months			Nine Months
	Ended			Ended
	December 31,			December 31,
(in thousands, except per share data)	2005			2005
Income from continuing operations, net of income taxes	$	9,614		$	29,629
Add back: Stock compensation costs, net of tax, on options and restricted stock granted below fair market value		360			727
Less: Stock compensation costs, net of tax, had all employee options and restricted stock been recorded at fair value		(1,928	)		(5,854	)
Adjusted net income	$	8,046		$	24,502
Net income per weighted average share, basic, as reported	$	0.40		$	1.16
Net income per weighted average share, diluted, as reported	$	0.40		$	1.14
Adjusted net income per weighted average share, basic	$	0.34		$	0.96
Adjusted net income per weighted average share, diluted	$	0.33		$	0.95

     FAS 123(R) also requires the Company to report any tax benefits realized upon the exercise of stock options that are in excess of the expense recognized for reporting purposes as a financing activity in the Company’s consolidated statement of cash flows. Prior to the adoption of FAS 123(R), these tax benefits were presented as operating cash flows in the consolidated statements of cash flows.

20

PolyMedica Corporation
Notes to Consolidated Financial Statements

12. Calculations of Earnings Per Share

     Calculations of earnings per share are as follows:

	Three Months Ended				Nine Months Ended
	Dec. 31,		Dec. 31,		Dec. 31,		Dec. 31,
(In thousands, except per share data)	2006		2005		2006		2005
Income from continuing operations, net of income taxes	$	9,839	$	9,614	$	23,708	$	29,629
BASIC:
Weighted average common stock issued and outstanding, end of period		22,546		23,787		22,895		25,412
Income from continuing operations, net of income taxes, per weighted average share, basic	$	0.44	$	0.40	$	1.04	$	1.16
DILUTED:
Weighted average common stock issued and outstanding, end of period		22,546		23,787		22,895		25,412
Weighted average dilutive common stock equivalents		605		483		524		510
Weighted average common stock and dilutive common stock equivalents outstanding		23,151		24,270		23,419		25,922
Income from continuing operations, net of income taxes, per weighted average share, diluted	$	0.43	$	0.40	$	1.01	$	1.14

     Potentially Dilutive Common Stock Equivalents

     Options to purchase shares of common stock with exercise prices in excess of the average market price of common shares are not included in the computation of diluted earnings per share. There were 33,500 and 1.24 million outstanding options not included in the diluted earnings per share computation as of December 31, 2006 and 2005, respectively. During the nine months ended December 31, 2006 and 2005, options to purchase 107,500 and 1.24 million shares of common stock, respectively, were outstanding, but were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common shares.

     Incremental net shares for the Notes and the warrant transactions will be included in future diluted earnings per share calculations for those periods in which the Company’s average common stock price exceeds $47.90 per share in the case of the Notes and $67.23 per share in the case of the warrants. The Notes would be included in the calculation of diluted earnings per share whether or not the contingent requirements have been met for conversion using the treasury stock method if the conversion price of $47.90 is less than the average market price of the Company’s common stock for the period, because upon conversion, the principal amount is settled in cash and only the conversion premium is settled in shares of the Company’s common stock. During the period ended December 31, 2006, the average market price of the Company’s common stock was less than the conversion price of the Notes and the exercise price of the warrants and therefore both are anti-dilutive. The net shares issued upon conversion of the Notes or exercise of the warrants are excluded from the diluted earnings per share calculation. See Note 7 for more information with respect to the convertible note hedges and the warrant transactions.

13. Comprehensive Income

     Our total comprehensive income approximates net income for the three and nine months ended December 31, 2006 and 2005. Unrealized gains (losses) on investments were not material for any periods presented.

14. New Accounting Pronouncements

     In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainties in income taxes recognized in an enterprise’s financial statements. The Interpretation requires that we determine whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authority. If a tax position meets the more likely than not recognition criteria, FIN 48 requires the tax

21

PolyMedica Corporation
Notes to Consolidated Financial Statements

position be measured at the largest amount of benefit greater than 50 percent likely of being realized upon ultimate settlement. This accounting standard is effective for fiscal years beginning after December 15, 2006. The effect, if any, of adopting FIN 48 on our financial position and results of operations has not been finalized.

     In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and should be applied prospectively, except in the case of a limited number of financial instruments that require retrospective application. The Company is in the process of evaluating the effect that SFAS 157 will have on its financial statements, if any.

     In September 2006, The Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when quantifying Misstatements in Current Year Financial Statement (“SAB 108”) to provide guidance on how to assess the materiality of financial statement misstatements. SAB 108 is effective for fiscal years ending after November 15, 2006. The Company is currently evaluating the potential impact of SAB 108 on our results of operations and our financial position.

15. Subsequent Events

     On January 26, 2007, we announced that our Board declared a $0.15 per share cash dividend to PolyMedica common shareholders of record as of the close of business on February 5, 2007, payable on February 15, 2007.

     On January 18, 2006, upon request, we funded the third and final $5.0 million loan to AgaMatrix in accordance with the product supply agreement entered into between the Company and AgaMatrix on August 5, 2005.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Future Operating Results

     Forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, are made throughout this Quarterly Report on Form 10-Q. 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,” “seeks,” “estimates,” and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause our results to differ materially from those indicated by such forward-looking statements, including those detailed in Part II, Item 1A. – Risk Factors.

     In addition, any forward-looking statements represent our view only as of the day this Quarterly Report on Form 10-Q was first filed with the Securities and Exchange Commission (the “SEC”) and should not be relied upon as representing our view as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our views change.

Overview

     PolyMedica Corporation was organized in 1988. Today, through our largest segment, Diabetes, we are a leading provider of direct-to-consumer diabetes testing supplies and related products, primarily to seniors. We provide a simple and reliable way for our patients to obtain their supplies and medications. We communicate directly with our patients and their physicians regarding patients’ prescriptions and testing regimen and we bill Medicare and third-party insurers on behalf of our patients. Through our Pharmacy segment, we sell prescription medications primarily to existing Diabetes patients and their spouses. We additionally provide healthcare communication services and technology that enhance patient care communications by offering medical call and contact center services. In September 2005, we sold the Women’s Health Products Division of our Pharmacy segment, which manufactured and sold prescription and over-the-counter urology products to distributors and retailers and in March 2006, we sold our Liberty Respiratory segment, which provided direct-to-consumer respiratory medications. Accordingly, the operating results and applicable cash flows, assets and liabilities for these businesses have been reclassified into discontinued operations for historical periods.

     Diabetes

     Through our Diabetes segment we provide diabetes testing supplies and related products to our patients suffering from diabetes. As of December 31, 2006, we served approximately 925,000 active diabetes patients, compared to approximately 862,000 active patients as of December 31, 2005. We meet the needs of our diabetes patients by:

- providing delivery of supplies directly to our patients’ homes;

- billing Medicare, other government agencies and/or private insurance companies directly for those diabetes related supplies that are reimbursable;

- providing medical call and contact center services and 24-hour telephone support to patients;

- using sophisticated software and advanced order fulfillment systems to efficiently provide diabetes related products.

     Sales from this segment represented 68.9% and 83.7% of total net revenues for the three months ended December 31, 2006 and 2005, respectively. Sales from this segment represented 70.9% and 82.4% of total net revenues for the nine months ended December 31, 2006 and 2005, respectively, making it our largest operating segment.

     During the fiscal year ended March 31, 2006, we acquired National Diabetic Pharmacies, LLC (“NDP”) and IntelliCare. When acquired, NDP was a market-leading provider of diabetes products and disease management services to over 113,000 patients with more than half covered by programs NDP established with managed care organizations and employers. As part of our integration process, NDP merged into Liberty Medical Supply, Inc. in the quarter ended December 31, 2006. IntelliCare has a distributed network of healthcare professionals that provide

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medical call center services and technology that enhance patient care communications to beneficiaries and health plans. We believe that this acquisition provides us with a disease management platform that will enable us to provide enhanced services to our patient base.

     Approximately 89% of our Diabetes patients are covered by Medicare. As a result, changes to the Medicare program can impact our revenues and income. The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Medicare Modernization Act”), which was signed into law on December 8, 2003, froze for the 2004 calendar year the reimbursement rates for diabetes testing supplies at the rates that were in effect for the 2003 calendar year. As of January 1, 2005, reimbursement rates for diabetes test strips and lancets were reduced by the percentage difference between the median amounts paid by the Federal Employees Health Benefit Program in the 2002 calendar year and the amount reimbursed by the Medicare program in the 2002 calendar year. The maximum downward adjustment for test strips and lancets for calendar year 2005 was 4.1% for diabetes test strips and 5.36% for lancets, but the actual percentage decrease in payment amounts for any particular provider depends on the geographic distribution of its patients. No further adjustments in reimbursement rates for test strips and lancets were made through the end of calendar year 2006.

     The Medicare Modernization Act further established a program for competitive bidding for certain covered items of durable medical equipment, prosthetics, orthotics, and supplies (“DMEPOS”), which is currently expected to include certain diabetes testing supplies in certain areas of the United States referred to as Competitive Bid Areas (“CBAs”), beginning in calendar 2007. On May 1, 2006, the Centers for Medicare and Medicaid Services (“CMS”) published the proposed rule for the DMEPOS competitive bidding program. This proposed rule would implement DMEPOS competitive bidding programs throughout the United States in accordance with sections 1847(a) and (b) of the Social Security Act. This program would change the way that Medicare selects suppliers and pays for items in selected competitively bid product groups, under Part B of the Medicare program, by utilizing bids submitted by DMEPOS suppliers to establish applicable payment amounts and select suppliers that will exclusively furnish items included in competitively bid product groups in the CBAs. The competitively bid product groups will include those that CMS identifies as having the highest potential for Medicare program savings, and based on the proposed rule will likely include diabetes testing supplies. The competitive bidding program for diabetes testing supplies could be implemented in as many as ten metropolitan service areas in 2007 and could be expanded to include additional competitive bid areas in 2009. Under the proposed competitive bidding regulations, a regional or national DMEPOS competitive bidding program may be implemented in 2010 for DMEPOS items that are provided through mail order.

     Pharmacy

     Through our Pharmacy segment, we market and sell prescription medications primarily to existing Diabetes patients and their spouses. As with our Diabetes segment, we provide delivery to our patients and bill government programs and insurance companies directly on our patient’s behalf.

     The Medicare Modernization Act also provides for a voluntary prescription drug benefit, the Medicare Prescription Drug program (“Part D”), which gives beneficiaries access to prescription drug coverage beginning January 1, 2006. Prior to the implementation of Part D, reimbursement for sales to our patients was covered by the Federal Employees Health Benefit Program (“FEP”), other commercial insurance plans or patients paid at the time of purchase. Under Part D, coverage is now available through both prescription drug plans and Medicare advantage-prescription drug plans, and benefits will include coverage for prescription drugs, as well as insulin and syringes. Our strategy is to expand our Pharmacy business by focusing our efforts to increase revenues from active patients that order diabetes and pharmacy supplies from us. Many of our patients are covered by FEP, which comprised approximately 23% and 57% of the Pharmacy segment’s net revenues for the three months ended December 31, 2006 and 2005, respectively. The FEP program comprised approximately 27% and 58% of the Pharmacy segment’s net revenues for the nine months ended December 31, 2006 and 2005, respectively.

     In December 2003, the service benefit administrator of FEP notified our Pharmacy business and other durable medical equipment suppliers that as of February 1, 2004 certain supplies and medications would only be reimbursable through FEP’s pharmacy benefit administrator. The service benefit administrator subsequently notified us that any reimbursement change, if one were to be implemented, would be subsequent to January 1, 2005. A change in reimbursement, such as processing these supplies and medications as a pharmacy benefit, would result in increased costs

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to some of our FEP patients as well as lower reimbursement rates to us. We have not yet experienced a cut in FEP reimbursement. We are unable to assess the impact of the reimbursement cuts FEP has alluded to until the nature and magnitude of the cuts have been clearly defined.

     During the quarter ended September 30, 2006, we entered in an agreement with Medco Health Solutions, Inc. (“Medco”) whereby Medco will provide us with pharmacy fulfillment services. We continue to work through the integration of Medco’s services and expect that it will be fully integrated by March 31, 2007. We have also agreed to work together to develop ways to serve and improve outcomes of our respective diabetes patients. We are unable to assess the impact that this relationship may have on our Pharmacy and Diabetes segments.

Critical Accounting Policies

     Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make significant estimates and judgments that affect the amounts reported in our consolidated financial statements and the accompanying notes. 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.

     While all of our accounting policies impact the consolidated financial statements, certain policies are 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 accounts receivable, advertising, stock-based compensation, goodwill and other intangible assets. Please refer to the critical accounting policies set forth in our Annual Report on Form 10-K for the fiscal year ended March 31, 2006, filed with the SEC on June 9, 2006, for a description of all critical accounting policies except for a description of our stock-based compensation critical accounting policy, set forth below, which was implemented upon our adoption of SFAS No. 123(R) on April 1, 2006, the beginning of our 2007 fiscal year.

     Stock-based compensation

     The fair value of each stock option granted by PolyMedica is estimated using the Black-Scholes option pricing model. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs. Management estimates expected volatility based on the historical volatility of PolyMedica stock. We arrived at our grant expected life estimate upon review of our historical exercise data and the continued use of a vesting schedule with quarterly increments after the first year for the majority of outstanding stock options. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term which approximates the expected life assumed at the date of grant. Changes in these input variables would affect the amount of expense associated with stock-based compensation. The compensation expense recognized for all equity-based awards is net of estimated forfeitures. We estimate forfeiture rates based on historical analysis of option forfeitures excluding identified unusual events or trends that are not expected to recur. If actual forfeitures should vary from estimated forfeitures, adjustments to compensation expense may be required.

Seasonality

     We do not consider our business to be highly seasonal; however, we generate higher revenues from patients with commercial insurance coverage in our third fiscal quarter ending December 31 and, accordingly, lower revenue in the quarter ending March 31, as a result of the ordering pattern of these same patients. Patients with this insurance coverage typically attempt to maximize their insurance benefits prior to the onset of deductibles commencing each January 1.

     In addition, advertising rates may fluctuate during the year, which may affect our acquisition of new patients. We may purchase less advertising when rates are higher, which generally occurs in November and December, or when

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response rates are lower, typically in July and August. As a result, our acquisition of new patients during these periods is generally lower than other periods, and therefore our net revenues may fluctuate accordingly.

Other

     We operate from distribution, administrative and training facilities located in Florida and Virginia, with administrative and training facilities also located in Maine, Texas, Missouri, Tennessee, and New York. Our corporate headquarters is based in Massachusetts.

     Virtually all of our product sales are denominated in U.S. dollars. 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

Three Months Ended December 31, 2006 Compared to Three Months Ended December 31, 2005

     Net Revenues

     The following table presents segment net revenues expressed as a percentage of net revenues for the three months ended December 31, 2006 and 2005.

	Three Months Ended December 31,
	2006					2005
	Net		% Net			Net		% Net
(in thousands)	Revenues		Revenues			Revenues		Revenues			$ Change		% Change
Net revenues:
Diabetes	$	122,047		68.9	%	$	110,481		83.7	%	$	11,566		10.5	%
Pharmacy		55,168		31.1			21,450		16.3			33,718		157.2
Total net revenues	$	177,215		100.0	%	$	131,931		100.0	%	$	45,284		34.3	%

     The increase in Diabetes net revenues was due primarily to the 7.3% net growth in our patient base, which grew to 925,000 active patients as of December 31, 2006, from approximately 862,000 as of December 31, 2005. In the twelve months since December 31, 2005, we added approximately 191,000 new patients from direct-response advertising and 47,000 from patient list acquisitions. The attrition of approximately 175,000 patients in the twelve months ended December 31, 2006, yielded net growth in the Diabetes patient base from the third quarter of fiscal 2006 through the third quarter of fiscal 2007 of approximately 63,000 patients or 7.3%.

     The increase in Pharmacy net revenues was due primarily to patients enrolled into the Liberty Part D drug benefit program since the inception of the Medicare Prescription Drug program on January 1, 2006. As a result of this program, the Company increased shipped orders by 100.8% and generated a 27.9% increase in the average revenue per shipment in the three months ended December 31, 2006 as compared with last year’s December quarter.

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     Gross Margin

     The following table presents segment gross margins and gross margin percentages for the three months ended December 31, 2006 and 2005.

	Three Months Ended December 31,
	2006					2005
	Gross		Gross			Gross		Gross
(in thousands)	Margin		Margin %			Margin		Margin %			$ Change		% Change
Gross margin:
Diabetes	$	68,918		56.5	%	$	60,941		55.2	%	$	7,977		13.1	%
Pharmacy		9,363		17.0			7,991		37.3			1,372		17.2
Total gross margin	$	78,281		44.2	%	$	68,932		52.2	%	$	9,349		13.6	%

     Gross margin in the third quarter of fiscal 2007 increased 13.6% to $78.28 million from $68.93 million for the same period last year. The $9.35 million increase in gross margin was due to the increase in revenue in both the Diabetes and Pharmacy segments. Overall gross margin was 44.2% of net revenues compared with 52.2% of net revenues last year. The decrease in the gross margin percentage from last year was primarily attributable to the relative increase in revenue from our lower margin Pharmacy segment, the addition of the IntelliCare business and the relative increase of diabetes revenue from commercial insurers.

     Diabetes gross margin increased $7.98 million from last year due to the $11.57 million increase in Diabetes revenue and was 56.5% of net revenues in the third quarter of fiscal 2007 as compared with 55.2% of net revenues last year. The increase in gross margin percentage from last year was due to a decrease in the average diabetes strip and related product costs. However, during the third quarter, these margin improvements were partially offset by higher revenue from our commercial diabetes and insulin pump patients, as well as the IntelliCare acquisition. The Company’s commercial diabetes business results in lower reimbursement rates than non-commercial business and includes the dispensing of higher cost branded products when compared to the Company’s private label products. The acquisition of IntelliCare contributed to a lower gross margin because this business has lower gross margins than the historical Diabetes segment.

     Pharmacy gross margin increased $1.37 million from last year due to the $33.72 million increase in net revenues and was 17.0% of net revenues this quarter as compared with 37.3% of net revenues last year. Our Pharmacy segment has lower gross margins than our Diabetes segment due to the level of reimbursement offered under the Part D drug benefit program and higher product costs due primarily to the large percentage of revenue generated from dispensing brand medications. In recent quarters, we have experienced a gross margin reduction in the Pharmacy segment because of a large number of high volume brand drugs that came off of patent protection and were sourced as single source generics. With respect to single source generics, the Company continues to pay near-brand pricing but is reimbursed at a lower generic rate.

     Selling, General and Administrative Expenses

     The following table summarizes significant items included in our selling, general and administrative expenses for the three months ended December 31, 2006 and 2005:

	Dec. 31,			Dec. 31,
	2006			2005
Employee compensation and benefits	$	23,499		$	22,261
Direct-response advertising amortization		12,540			10,828
Depreciation expense		2,492			1,964
Amortization of intangible assets		4,061			2,389
Provision for doubtful accounts		4,495			4,952
Stock-based compensation		3,001			565
Other		10,952			9,369
Selling, general and administrative expenses	$	61,040		$	52,328
Selling, general and administrative expenses as a percentage of net revenues		34.4	%		39.7	%

     The $8.71 million increase in selling, general and administrative expense from last year related to increased headcount and other costs associated with the acquisition of IntelliCare in the third quarter of fiscal 2006, increased amortization expense from certain assets of thirteen diabetes companies acquired since September 30, 2005, an increase in the amortization of direct response advertising, and the inclusion of stock-based compensation in the financial statements in fiscal 2007 in accordance with SFAS 123(R). As a percentage of net revenue, selling, general and administrative expense in the third quarter was 34.4% compared to 39.7% last year and 36.7% last quarter.

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     Other selling, general and administrative expenses include such expenses as legal expenses, audit fees, communication costs and other operating expenses.

     Other Income and Expense

     The following table presents interest expense incurred in connection with debt borrowings for the periods presented and investment income earned on our cash, cash equivalents and deferred compensation plan balances.

	Three Months Ended December 31,
(in thousands)	2006			2005			$ Change			% Change
Investment income	$	351		$	232		$	119			51.3	%
Interest and other expense	$	(2,097	)	$	(1,696	)	$	(401	)		(23.6	)%

     The increase in interest expense incurred in the three months ended December 31, 2006, as compared with the three months ended December 31, 2005, related to interest incurred on outstanding borrowings under the Credit Facility and convertible notes. Borrowings under the Credit Facility were used to fund acquisitions and stock repurchases completed during the fiscal year ended March 31, 2006 and the nine months ended December 31, 2006. Proceeds from the issuance of the convertible notes were used to repay a portion of the outstanding amounts under the Credit Facility, repurchase stock and pay for certain hedge transactions in connection with the convertible notes offering.

     Income Taxes

     The following table presents the income tax provision and effective tax rates for the three months ended December 31, 2006 and 2005.

	Three Months Ended December 31,
(in thousands)	2006			2005
Income tax provision	$	5,656		$	5,526
Effective tax rate		36.5	%		36.5	%

     The effective tax rates in the three months ended December 31, 2006 and 2005 were higher than the Federal U.S. statutory rates due primarily to state taxes and other permanent differences. Our effective tax rate may vary from period to period based on changes in estimated taxable income or loss, changes to federal or state tax laws, future expansion into areas with varying state or local income tax rates, and the deductibility of certain costs and expenses by jurisdiction. Please also see Note 8, Commitments and Contingencies, for the description of a proposed tax deduction disallowance.

Nine Months Ended December 31, 2006 Compared to Nine Months Ended December 31, 2005

     Net Revenues

     The following table presents segment net revenues from continuing operations expressed as a percentage of net revenues for the nine months ended December 31, 2006 and 2005.

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	Nine Months Ended December 31,
	2006					2005
	Net		% Net			Net		% Net
(in thousands)	Revenues		Revenues			Revenues		Revenues			% Change
Diabetes	$	352,527		70.9	%	$	288,997		82.4	%		22.0	%
Pharmacy		144,687		29.1			61,889		17.6			133.8
Total net revenues	$	497,214		100.0	%	$	350,886		100.0	%		41.7	%

     The following table presents the consolidated results of continuing operations on an unaudited pro forma basis as if the acquisition of NDP had taken place at the beginning of the period presented. The following table has been prepared on the basis of estimates and assumptions available at the time of this filing that we believe are reasonable.

	Nine Months Ended
	December 31, 2005
	Net		% Net
(in thousands)	Revenues		Revenues
Diabetes	$	315,859		83.6	%
Pharmacy		61,889		16.4
Total net revenues	$	377,748		100.0	%

     The unaudited pro forma results of operations are for comparative purposes only and do not necessarily reflect the results that would have occurred had the acquisitions occurred at the beginning of the period presented or the results which may occur in the future.

     The increase in Diabetes net revenues was due primarily to the 7.3% net growth in our patient base, which grew to 925,000 active patients as of December 31, 2006, from approximately 862,000 as of December 31, 2005. In addition, Diabetes net revenue growth was attributable to the acquisitions of NDP and IntelliCare in fiscal 2006. The NDP acquisition closed on August 26, 2005 and therefore four months were included in last year’s financial results for the nine months ended December 31, 2005, and the IntelliCare acquisition closed October 31, 2005 and therefore two months were included in last year’s results of operations for the nine month period ended December 31, 2005.

     The increase in Pharmacy net revenues was due primarily to patients enrolled into the Liberty Part D drug benefit program since the inception of the Medicare Prescription Drug program on January 1, 2006. As a result of this program, the Company achieved a 26.3% increase in the average revenue per shipment in the nine months ended December 31, 2006 as compared with the nine months ended December 31, 2005.

     Gross Margin

     The following table presents segment gross margins and gross margin percentages for the nine months ended December 31, 2006 and 2005 for continuing operations.

	Nine Months Ended December 31,
	2006					2005
	Gross		Gross			Gross		Gross
(in thousands)	Margin		Margin %			Margin		Margin %			% Change
Gross margin:
Diabetes	$	199,392		56.6	%	$	167,558		58.0	%		19.0	%
Pharmacy		27,180		18.8			21,802		35.2			24.7
Total gross margin	$	226,572		45.6	%	$	189,360		54.0	%		19.7	%

     The following table presents the consolidated results of continuing operations on an unaudited pro forma basis as if the acquisition of NDP had taken place at the beginning of the period presented. The following table has been prepared on the basis of estimates and assumptions available at the time of this filing that we believe are reasonable.

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	Nine Months Ended
	December 31, 2005
	Gross		Gross
(in thousands)	Margin		Margin %
Gross margin:
Diabetes	$	175,095		55.4	%
Pharmacy		21,802		35.2
Total gross margin	$	196,897		52.1	%

     The unaudited pro forma results of operations are for comparative purposes only and do not necessarily reflect the results that would have occurred had the acquisitions occurred at the beginning of the period presented or the results which may occur in the future.

     Gross margin in the nine months ended December 31, 2006 increased 19.7% to $226.57 million from $189.36 million for the same period last year. The $37.21 million increase in gross margin was due to the increase in revenue in both the Diabetes and Pharmacy segments. Gross margin was 45.6% of net revenues compared with 54.0% of net revenues last year. The decrease in the gross margin percentage from last year was primarily attributable to the increase in Pharmacy revenue and revenue generated through the acquisition of NDP in fiscal 2006. Diabetes gross margin increased $31.83 million from last year due to the $63.53 million increase in Diabetes revenue and was 56.6% of net revenues in the nine months ended December 31, 2006 as compared with 58.0% of net revenues last year. Pharmacy gross margin increased $5.38 million from last year due to the $82.80 million increase in net revenues and was 18.8% of net revenues in the nine months ended December 31, 2006 as compared with 35.2% of net revenues last year. The decrease in gross margin percentage in the Pharmacy segment was due to the growth in net revenues attributable to the Liberty Part D drug benefit program that generates a lower gross margin than the historical pharmacy business.

     Selling, General and Administrative Expenses

     The following table summarizes significant items included in our selling, general, and administrative expenses for the nine months ended December 31, 2006 and 2005:

	Dec. 31,			Dec. 31,
	2006			2005
Employee compensation and benefits	$	70,407		$	59,812
Direct-response advertising amortization		36,235			31,246
Depreciation expense		7,568			5,757
Amortization of intangible assets		10,198			5,253
Provision for doubtful accounts		15,824			14,477
Stock-based compensation		8,954			1,144
Other		32,333			22,961
Selling, general and administrative expenses	$	181,519		$	140,650
Selling, general and administrative expenses as a percentage of net revenues		36.5	%		40.1	%

     The $40.87 million increase in selling, general and administrative expense from last year related primarily to increased headcount to support the growth of the Diabetes and Pharmacy businesses, amortization expense and other general costs associated with the acquisitions of NDP, IntelliCare and certain assets of thirteen diabetes companies acquired since September 30, 2005, the inclusion of stock-based compensation in the financial statements in fiscal 2007 and an increase in direct-response advertising amortization.

     Other selling, general and administrative expenses include such expenses as legal expenses, audit fees, communication costs and other operating expenses.

     Other income and expense

     The following table presents investment income earned on our cash, equivalents, marketable securities and deferred compensation plan balances as well as interest expense incurred in connection with debt borrowings for the periods presented.

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	Nine Months Ended December 31,
(in thousands)	2006			2005			$ Change			% Change
Investment income	$	737		$	931		$	(194	)		(20.8	)%
Interest expense	$	(8,454	)	$	(2,970	)	$	(5,484	)		(184.7	)%

     The increase in interest expense incurred in the nine months ended December 31, 2006, as compared with the nine months ended December 31, 2005, related to interest expense incurred on the higher level of outstanding borrowings under the credit facility and convertible notes issued in fiscal 2007 as compared with fiscal 2006.

     Income Taxes

     The following table presents the income tax provision and effective tax rates for the nine months ended December 31, 2006 and 2005 for continuing operations.

	Nine Months Ended December 31,
(in thousands)	2006			2005
Income tax provision (benefit)	$	13,628		$	17,042
Effective tax rate		36.5	%		36.5	%

     The effective tax rates in the nine months ended December 31, 2006 and 2005 were higher than the Federal U.S. statutory rates due primarily to state taxes. Our effective tax rate may vary from period to period based on changes in estimated taxable income or loss, changes to federal or state tax laws, future expansion into areas with varying state or local income tax rates, and the deductibility of certain costs and expenses by jurisdiction. Please also see Note 8, Commitments and Contingencies, for the description of a proposed tax deduction disallowance.

Liquidity and Capital Resources

     The following table summarizes our sources and uses of cash during the nine months ended December 31, 2006 and 2005.

	Nine Months Ended December 31,
(in thousands)	2006			2005
Net cash provided by operating activities	$	42,314		$	11,719
Net cash used for investing activities		(30,856	)		(46,021	)
Net cash provided by (used for) financing activities		(19,232	)		(31,873	)
Net change in cash and cash equivalents	$	(7,774	)	$	(66,175	)

     Our cash and cash equivalents balance decreased $7.77 million from $9.10 million as of March 31, 2006 to $1.33 million as of December 31, 2006. During the nine months ended December 31, 2006, the Company paid $26.60 million to complete nine acquisitions of competing diabetes programs. To meet its diabetes growth targets, the Company maintains an active diabetes acquisition program to supplement its direct-response advertising programs. In addition, we paid $29.62 million to repurchase 705,000 shares of our common stock in September 2006. The share repurchase was an important component of the $180 million convertible notes transaction in order to help reduce short-selling pressure on the Company’s stock that is common in these transactions, as well as meet the Company’s goal of enhancing shareholder value and meeting our return on equity goals. In connection with the convertible notes transactions and as a result of cash flow generated from operations, we repaid $132.40 million in amounts then outstanding under our Credit Facility. The Company intends to use cash flows generated from operations to complete acquisitions, repurchase stock or repay amounts outstanding under the Credit Facility.

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     We also paid $26.27 million, net, to purchase certain derivative instruments related to the convertible notes transaction. The purchase of these derivative instruments was based primarily on the Company’s goal of reducing the potential dilutive impact of the convertible notes transaction since these derivative instruments resulted in increasing the effective conversion premium of the convertible notes from 14% to 60%.

     These outflows were partially offset by proceeds from $180.0 million of convertible notes transactions completed in the quarter ended September 30, 2006 and cash flow provided by operating activities. The convertible notes transaction was completed in order to reduce the Company’s borrowing rate and also to reduce the volatility and risk of floating-rate debt instruments that are inherent in the funds borrowed under the Company’s Credit Facility. The convertible notes transaction included a one percent (1%) fixed coupon rate, compared with an average interest rate under the Credit Facility in the quarter ended December 31, 2006 of 6.3%. In the quarter ended December 31, 2006, this served to reduce our overall weighted average interest rate to 2.7%.

     The growth of our business is currently funded primarily through cash flow from operations and borrowings under our Credit Facility. For the nine months ended December 31, 2006, cash provided by operating activities was $42.31 million compared to $11.72 million in the year earlier period.

     Contributing to the increase in operating cash flow was a 41.7% increase in net revenues from $350.89 million in the nine months ended December 31, 2005 to $497.21 million in the nine months ended December 31, 2006. Days sales outstanding for the quarter were 53 days a decrease of 14 days from 67 days as of March 31, 2006. The decrease in days sales outstanding demonstrates our continued improvement in the collection of receivables on billings that had been negatively impacted by document re-verification processes that were completed in fiscal 2006. Cash collections for the current quarter also included the release of payments that were suspended by Medicare at the end of September 2006. Inventory days on hand as of December 31, 2006, decreased three days to 41 days compared with 44 days as of March 31, 2006. Cash flow generated from operating activities were used to purchase $44.15 million of direct-response advertising in the nine months ended December 31, 2006. We will continue to engage in a high level of television advertising throughout the remainder of fiscal 2007, which combined with our proactive approach and high level of service to existing patients, has resulted in solid revenue growth.

     Net cash flows used for investing activities in the nine months ended December 31, 2006 was $30.86 million, or a decrease of $15.16 million from the $46.02 million cash used in investing activities in the year ago period. During the nine months ended December 31, 2006, the Company paid $26.60 million to purchase certain assets of nine diabetes companies. In the year earlier period, the Company used $75.37 million to purchase certain diabetes assets, including the NDP and IntelliCare acquisitions and also received $42.10 million from the sale of its Women’s Health Products Division. The NDP acquisition represented the acquisition of the Company’s fourth largest competitor in the mail-order diabetes industry and represented an opportunity to increase the Company’s business with commercial insurers, enhance diabetes management services and expand its health care professional sales force initiatives. The sale of the Women’s Health Products Division represented a decision by the Company to focus on its core diabetes and pharmacy businesses. In the quarter ended December 31, 2006, we received $3.89 million in proceeds from the sale of our Deerfield Beach, Florida facility that was acquired as part of the assets of National Diabetic Assistance Corporation in January 2005.

     Net cash used for financing activities in the nine months ended December 31, 2006 was $19.23 million, a decrease of $12.64 million, as compared with $31.87 million used for financing activities in the nine months ended December 31, 2005. The increase was primarily due to proceeds from the September 2006 issuance of $180 million in convertible notes, partially offset by $5.81 million paid in debt issuance costs, $26.27 million, net, paid to enter into certain convertible note hedge and warrant transactions with respect to our common stock that were entered into for the purpose of reducing the potential dilution upon conversion of the newly issued notes. We also repaid $132.40 million in amounts outstanding under our Credit Facility in the nine months ended December 31, 2006 compared with borrowing $167.50 million in the nine months ended December 31, 2005. In addition, during the nine months ended December 31, 2006, the Company acquired 705,000 shares of our common stock for $29.62 million compared with the purchase of 5 million shares of our common stock for $192.21 million in the year earlier period.

     In April 2006, we increased the available funds under our revolving Credit Facility to $250 million from $217.5 million. As of December 31, 2006, we had $57.60 million outstanding under the Credit Facility. The available Credit Facility balance of $192.40 million will be available to fund acquisitions, stock repurchases, capital expenditures, and for other general corporate purposes.

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     We believe that our ending cash and cash equivalents balance as of December 31, 2006 of approximately $1.33 million coupled with cash flow generated by operations and available Credit Facility funds, will be sufficient to meet working capital, planned capital expenditure investments, future acquisitions of diabetes competitors, and other investing and financing needs, including the payment of dividends to shareholders. In the event that we undertake to make other acquisitions of complementary businesses, products or technologies, we may require substantial additional funding beyond currently available working capital, available Credit Facility funds, and funds generated from operations.

     Other factors which could negatively affect our liquidity include, among other things, a reduction in the demand for our products, an unfavorable outcome of pending litigation, or a reduction in Medicare reimbursement for our products. Sales of a significant portion of our Diabetes and Pharmacy segments depend on the continued availability of Medicare reimbursement.

     Please refer to our Annual Report on Form 10-K for the fiscal year ended March 31, 2006, filed with the SEC on June 9, 2006, for a description of our contractual obligations, specifically our operating lease, capital lease, and other commitments, and our off-balance sheet arrangements. There were no material developments during the nine months ended December 31, 2006.

     New Accounting Pronouncements

     In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainties in income taxes recognized in an enterprise’s financial statements. The Interpretation requires that we determine whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authority. If a tax position meets the more likely than not recognition criteria, “FIN 48” requires the tax position be measured at the largest amount of benefit greater than 50 percent likely of being realized upon ultimate settlement. This accounting standard is effective for fiscal years beginning after December 15, 2006. The effect, if any, of adopting “FIN 48” on our financial position and results of operations has not been finalized.

     In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and should be applied prospectively, except in the case of a limited number of financial instruments that require retrospective application. The Company is in the process of evaluating the effect that SFAS 157 will have on its financial statements, if any.

     In September 2006, The Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when quantifying Misstatements in Current Year Financial Statement (“SAB 108”) to provide guidance on how to assess the materiality of financial statement misstatements. SAB 108 is effective for fiscal years ending after November 15, 2006. The Company is currently evaluating the potential impact of SAB 108 on our results of operations and our financial position.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     Please refer to Item 7A of our Annual Report on Form 10-K for the fiscal year ended March 31, 2006, filed with the SEC on June 9, 2006, for our quantitative and qualitative disclosure about market risk. There were no material developments regarding our assessment of these risks during the nine months ended December 31, 2006.

Item 4. Controls and Procedures

(1) Disclosure controls and procedures

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     Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2006. Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of December 31, 2006, our disclosure controls and procedures were (1) designed to ensure that information required to be disclosed by PolyMedica in the reports that it files or submits under the Exchange Act is accumulated and communicated to PolyMedica’s chief executive officer and chief financial officer by others within those entities, particularly during the period in which this report was being prepared to allow timely decisions regarding required disclosure and (2) effective, in that they provide reasonable assurance that information required to be disclosed by PolyMedica in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

(2) Changes in internal controls

     No change in PolyMedica’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter ended December 31, 2006 that has materially affected, or is reasonably likely to materially affect, PolyMedica’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. – Legal Proceedings

     Please refer to Item 3 of our Annual Report on Form 10-K for the fiscal year ended March 31, 2006, filed with the SEC on June 9, 2006, for a complete description of our legal proceedings. There were material developments regarding these legal proceedings during the nine months ended December 31, 2006.

     On February 23, 2006, plaintiffs filed a motion in the District Court to re-certify the class for the period from January 2001 through August 2001, which the defendants opposed. On March 23, 2006, the Court held an evidentiary hearing relating to class certification and on March 31, 2006 the Court heard oral argument regarding class certification. On September 28, 2006, the Court denied plaintiffs’ motion to re-certify the class for the period from January 2001 through August 2001. On October 5, 2006, plaintiffs filed a motion for partial reconsideration of the Court’s order as to the period January 1, 2001 through March 31, 2001.

     On October 13, 2006, plaintiffs filed a petition requesting that they be permitted to appeal the decision denying plaintiffs’ motion to re-certify the class for the period from January 2001 through August 2001 to the First Circuit Court of Appeals, which defendants opposed.

     On or about October 24, 2006, the parties reached an agreement in principle to settle the matter for $5.5 million. The proposed settlement amount would be covered by insurance and is included in Accrued expenses and Prepaid expenses and other current assets. The settlement has not been finalized and is subject to approval by the District Court. On October 25, 2006, the District Court issued an order for administrative closure of the case pending the parties’ submission of settlement documents for Court approval. Defendants have not yet filed an opposition to the motion for reconsideration because of the settlement and case closure. On or about October 31, 2006, the parties filed a joint motion to stay proceedings in the First Circuit Court of Appeals.

     We believe that we have meritorious defenses to the claims made in the consolidated amended complaint. We are unable to express an opinion as to the likely outcome of this litigation. An unfavorable outcome that exceeds amounts recoverable through our director and officer insurance coverage could have a materially adverse effect on our financial position and results of operations.

Item 1A. – Risk Factors

     Our business is subject to a number of risks. You should carefully consider the following risk factors, together with all of the other information included or incorporated by reference in this report, before you decide

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whether to purchase our common stock. The risks set out below are not the only risks we face. If any of the following risks occur, our business, financial condition and results of operations could be materially adversely affected. In such case, the trading price of our common stock could decline, and you may lose all or part of your investment.

We could experience significantly reduced revenues and profits if payers change, delay or deny reimbursement

     Nearly all of our revenues depend on the continued availability of reimbursement by government and private insurance plans. Any reduction in Medicare or other government program or private plan reimbursements currently available for our products would reduce our revenues. Certain significant reimbursement reductions that became effective January 1, 2005 under the Medicare Modernization Act are discussed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2006, filed with the SEC on June 9, 2006 in Item 2 of Part I “Overview.” Other future reimbursement reductions are possible. 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 reimbursement from Medicare, other government programs and private insurers. Our profits also could be affected by the imposition of more stringent regulatory requirements for Medicare or other government program reimbursement or adjustments to previously reimbursed amounts.

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

Our ability to navigate the challenges of the Medicare Prescription Drug program could negatively impact our Pharmacy segment

     The Medicare Modernization Act provides for a voluntary prescription drug benefit, the Medicare Prescription Drug program, or “Part D”, which gives beneficiaries access to prescription drug coverage. The program involves many challenges and we will continue to closely monitor the implementation of Part D, the cost of coordinating Part D benefits for our Diabetes patients and their spouses, and the net revenue and earnings impact. While we are committed to investing in this long term opportunity, the ultimate impact of such investment depends upon many factors, specifically upon our success in continuing to enroll new patients at the current rate, our ability to successfully adjudicate claims at profitable reimbursement rates, and encourage patients’ compliance with their prescriptions.

     In addition, we presently are a participating pharmacy in approximately 89% of the 2,172 Prescription Drug Plans and approximately 88% of the 36,348 Medicare Advantage-Prescription Drug Plans that have been approved by the Centers for Medicare and Medicaid Services under Part D through pharmacy networks administered by Leader Drug Stores, Inc. and AmerisourceBergen Drug Corporation. While the “any willing pharmacy” provisions of the Medicare Modernization Act would allow us to contract directly with these plans in the event we were no longer permitted to participate in these pharmacy networks, entering into individual contracts with those prescription drug plans of which our patients are members could be time-consuming and we could suffer patient attrition as a result. In addition, these individual contracts could be less profitable than our network pharmacy contracts. Certain prescription drug plans have excluded Liberty as a participating pharmacy in their plans which we believe is a violation of the “any willing pharmacy” provisions of the Medicare Modernization Act. We are presently working to resolve these issues.

Competitive bidding for durable medical equipment suppliers could negatively affect our Diabetes segment

     The Medicare Modernization Act further provides for a program for competitive bidding of certain durable medical equipment items, which are expected to include diabetes test strips and other diabetes testing items, beginning in calendar year 2007. The competitive bidding program for diabetes testing supplies could be implemented in as many as ten metropolitan service areas in 2009 and could be expanded to include additional competitive bid areas in 2009. Under the proposed competitive bidding regulations, a regional or national DMEPOS competitive bidding program may be implemented in 2010 for DMEPOS items that are provided through mail order. Competitive bidding could cause our operating results to be negatively affected.

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We are subject to a corporate integrity agreement

     As part of the civil settlement with the DOJ and OIG, we entered into a five-year corporate integrity agreement on November 8, 2004. This agreement provides for an annual review of a sample of our Medicare claims by an independent review organization for a five-year period, which could be reduced to a shorter period at the discretion of the OIG, and obligates us to continue our compliance program and the measures we have implemented to promote our compliance with Medicare regulations. Should the financial error rate of the sample reviewed by the independent review organization for any given period, exceed the acceptable error rate, we could be subject to a potentially material overpayment assessment for that period.

We are currently involved in litigation and could experience reduced net income if this litigation is not resolved in our favor

     PolyMedica and three former officers of PolyMedica are defendants in a lawsuit alleging violations of certain sections and rules of the Exchange Act, which was initiated in U.S. District Court for the District of Massachusetts in November 2000. PolyMedica believes it has meritorious defenses to the claims made against it in this action in which it is a defendant and intends to contest the claims vigorously. An unfavorable outcome could cause us to be liable for damages, which would reduce our net income in any such period. Our insurance may not provide adequate coverage for such damages. Please see Note 8, Commitments and Contingencies, for a more complete description of this claim.

The profitability of our segments will decrease if we do not receive recurring orders from patients

     The profitability of our segments depends in large part on recurring and sustained orders. We generally incur losses and negative cash flow with respect to the first order from a new patient, due primarily to the marketing and regulatory compliance costs associated with initial patient qualification. Reorder rates are inherently uncertain due to several factors, many of which are outside our control, including patient preferences for home delivery, compliance with their doctor’s orders and prescriptions, competitive price pressures, patient transition to extended care facilities and patient mortality.

We could experience significantly reduced profits from our Diabetes segment if new technologies that reduce or eliminate the need for consumable testing supplies are developed for glucose monitoring

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

Failure to maintain effective internal control over financial reporting could result in a loss of investor confidence in our financial reports and have a materially adverse effect on our stock price

     We must continue to document, test and evaluate our internal control over financial reporting in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires annual reports by management regarding the effectiveness of our internal control over financial reporting and a report by our independent registered public accounting firm attesting to management’s assessment and the effectiveness of the internal control. We have expended and expect that we will continue to expend significant time and resources documenting and testing our internal control over financial reporting. While management’s evaluation as of December 31, 2006 resulted in the conclusion that our internal control over financial reporting was effective as of that date, we cannot predict the outcome of testing in future periods. If we conclude in future periods that our internal control over financial reporting is not effective, or if our independent registered public accounting firm is not able to render the required attestations, it could result in lost investor confidence in the accuracy, reliability and completeness of our financial reports. Any such events could have a materially adverse effect on our stock price.

The market price of our common stock may experience substantial fluctuations for reasons over which we have little control

     Our common stock is traded on the Nasdaq National Market System. The market price of our common stock could fluctuate substantially based on a variety of factors, including, among others:

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– fluctuations in our quarterly results;

– announcements concerning us, our competitors, or manufacturers with whom we have relationships or the healthcare market;

– overall volatility of the stock market;

– changes in government regulations;

– changes in the financial estimates we provide to the market or estimates by analysts; and

– loss of key executives.

     Furthermore, stock prices for many companies fluctuate widely for reasons that may be unrelated to their operating results. These fluctuations, coupled with changes in our results of operations and general economic, political and market conditions, may adversely affect the market price of our common stock.

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

     The expansion of our operations has created significant demand on our administrative, operational and financial personnel and other resources. Additional expansion in existing or new markets, including Part D, 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.

Our debt may adversely affect our cash flow and may restrict our investment opportunities or limit our activities.

     As of December 31, 2006, we had $57.60 million in outstanding indebtedness and $192.40 million in additional borrowing capacity available to us under our revolving Credit Facility as well as $180 million of outstanding convertible debt. Our leverage could have negative consequences, including increasing our vulnerability to adverse economic and industry conditions, limiting our ability to obtain additional financing and limiting our ability to make strategic acquisitions and capital and other expenditures.

     The Credit Facility limits the amount of indebtedness we may incur, requires us to maintain certain levels of net worth, leverage ratio and fixed charge ratio, and restricts our ability to materially alter the character of the business. Our ability to comply with these financial restrictions and covenants is dependent on our future performance, which is subject to prevailing economic conditions and other factors, including factors that are beyond our control such as interest rates. Our failure to comply with any of these restrictions or covenants may result in an event of default under the applicable debt instrument, which could permit acceleration of the debt under that instrument and require us to prepay that debt before its scheduled due date.

Geopolitical events may reduce our ability to obtain favorable advertising rates for our direct-response advertising efforts, which may increase our expenses and/or lead to a reduction in revenues

     The effectiveness of our direct-response advertising is subject to the risks arising from geopolitical events. For example, around the clock news coverage at the onset of the war in Iraq and the war on terrorism affected our ability to obtain favorable rates for our product advertisements and thus affected our ability to obtain new patients since we reduced our advertising. Such geopolitical events may in the foreseeable future have a negative impact on our results of operations by increasing our expenses and/or leading to a reduction in our revenues.

     We could experience a charge to earnings as a result of an impairment of our goodwill, direct-response advertising or other intangible assets

     We are required to perform impairment tests annually and whenever events or changes in circumstance suggest that the carrying value of goodwill, direct-response advertising or other intangible assets may not be recoverable. The

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valuation of our goodwill, direct-response advertising and other intangible assets is based upon the results of these impairment tests. Changes in assumptions used and forecasted results of operations for the reporting unit carrying goodwill, direct-response advertising or other intangible assets, could affect the quantification of an impairment value, should one exist.

     Since our growth strategy may involve the acquisition of other companies, we may record additional goodwill in the future. The possible write-off of this goodwill could negatively impact our future earnings. We will also be required to allocate a portion of the purchase price of any acquisition to the value of non-competition agreements, patient base and contracts that are acquired. The amount allocated to these items could be amortized over a fairly short period. As a result, our earnings and the market price of our common stock could be negatively impacted.

We could be liable for harm caused by products that we sell and may incur significant expenses in connection with the defense of any product liability claims

     The sale of medical products entails the risk that users will make product liability claims. If any such product liability claim is successful, we could be liable for a significant amount of damages. Even if we are ultimately successful on the merits of any such claim, we could incur significant expenses in connection with the defense of any such claim. Our insurance may not provide adequate coverage for any such damages and/or expenses.

We could lose patients and revenues to new or existing competitors

     Competition from other sellers of products offered through our Diabetes and Pharmacy 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 data storage facilities could significantly reduce revenues and profits from our businesses

     We process and store most of our patient data in our facilities in Port St. Lucie, Florida. If we cannot use any of these facilities as a result of a United States Food and Drug Administration, Occupational Safety and Health Administration or other regulatory action, fire, natural disaster or other event, our revenues and profits would decrease significantly. For example, as a result of the disruption caused by the two hurricanes sustained by our Port St. Lucie based facilities in September 2004, excluding amounts that have been reimbursed to us under our property and casualty and business interruption insurance, we experienced reduced revenues of approximately $3.60 million and incurred losses in excess of $1.50 million.

If we or our suppliers do not comply with applicable government regulations, we may be prohibited from selling our products or may incur fines and other expenses

     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 fines and other expenses until we are in compliance with the regulations or change to another acceptable supplier.

We depend on key employees and the loss of a key employee could adversely affect our business

     Our future performance will depend in part on the efforts and abilities of our key employees, and the loss of their services could have an adverse effect on our business. We have no key man life insurance policies on any of our employees.

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:

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– changes in reimbursement guidelines and amounts;

– changes in regulations affecting the healthcare industry;

– changes in suppliers;

– the timing of patient orders;

– the timing and cost of our advertising campaigns;

– the timing of the introduction or acceptance of new products offered by us or our competitors; and

– changes in the mix of our products; product costs are significantly influenced by the product brand chosen by the patients of our diabetes segment. We provide a wide range of product brand choices to our patients, purchased at varying costs from suppliers. Our ability to sustain current gross margin levels is dependent both on our ability to continue securing favorable pricing from suppliers and on the brand choices of our patients.

A reduction in working capital or a change in our business could prevent us from paying dividends to shareholders

     A significant increase in our credit facility utilization or a change in our business could cause us to reduce or eliminate the payment of dividends to shareholders.

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

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

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

– amortization of substantial intangible assets;

– difficulty in retaining key personnel of an acquired business;

– lack of adequate internal control over financial reporting;

– failure to assimilate operations of an acquired business;

– possible operating losses and expenses of an acquired business;

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

– incurrence of debt and related interest expense.

     We cannot guarantee that we would be able to obtain the intended benefits of any of these potential acquisitions. We could also require substantial capital resources to acquire complementary products or businesses. We cannot be certain that existing or additional financing would be available to us on acceptable terms, if at all.

A fundamental change and the provisions in the Notes related to the occurrence of a fundamental change may adversely affect us

     The holders of our 1.0% Convertible Subordinated Notes due September 15, 2011, or Notes, can require us to repurchase all or part of the Notes on certain fundamental changes, including changes in control and turnover in our board of directors.

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     If a fundamental change event occurs we may not have enough funds to purchase all the Notes, which would cause a default under both the indenture governing the Notes and our Credit Facility. If a fundamental change occurs at a time when we are prohibited from purchasing or redeeming Notes, we could seek the consent of our lenders to redeem the Notes or could attempt to refinance this debt. If we do not obtain a consent, we could not purchase or redeem the Notes.

     Furthermore, the fundamental change provisions, under the indenture governing the Notes, which include a provision requiring additional shares of our common stock to be issued in connection with a fundamental change, may in certain circumstances make more difficult or discourage a takeover of our company and the removal of incumbent management.

The convertible note hedge and warrant transactions may affect the value of our common stock

     In connection with the issuance of the Notes, we entered into privately-negotiated convertible note hedge transactions with Deutsche Bank AG and Bank of America, N.A., which are expected to reduce the potential dilution to our common stock upon any conversion of the Notes. At the same time, we entered into warrant transactions with Deutsche Bank AG and Bank of America, N.A. with respect to our common stock pursuant to which we may issue shares of our common stock. In connection with hedging these transactions, Deutsche Bank AG and Bank of America, N.A. or their affiliates entered into various over-the-counter derivative transactions with respect to our common stock at the pricing of the Notes and may purchase our common stock in secondary market transactions or enter into other over-the-counter derivative transactions in the future. Deutsche Bank AG and Bank of America, N.A. or their affiliates are likely to modify their hedge positions from time to time prior to conversion or maturity of the Notes by purchasing and selling shares of our common stock, other of our securities or other instruments it may wish to use in connection with such hedging.

     The effect, if any, of any of these transactions and activities on the market price of our common stock will depend in part on market conditions and cannot be ascertained at this time, but any of these activities could adversely affect the value of our common stock.

Adverse results in tax audits could result in significant cash expenditures or exposure to unforeseen liabilities

     We are subject to periodic federal, state and local income tax audits for various tax years. Although we attempt to comply with all taxing authority regulations, adverse findings or assessments made by the taxing authorities as the result of an audit could materially adversely affect us.

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

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

Conversion of the Notes will dilute the ownership interest of existing stockholders, including holders who have previously converted their Notes

     The conversion of some or all of the Notes will dilute the ownership interests of existing stockholders. Any sales in the public market of the common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the anticipated conversion could depress the price of our common stock.

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Item 6. Exhibits

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

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

PolyMedica Corporation

(registrant)
 

/s/ Patrick T. Ryan  

Patrick T. Ryan 

President, Chief Executive Officer and Director
(Principal Executive Officer) 

/s/ Keith W. Jones  

Keith W. Jones 

Chief Financial Officer
(Principal Financial and Accounting Officer) 

Dated: February 7, 2007

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Exhibit Index

Exhibit
Number		Description
3.1	-	First Amendment to the Restated Bylaws of the Company adopted November 17, 2006.
31.1	-	Certification by Chief Executive Officer pursuant to Rule 13a–14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.2	-	Certification by Chief Financial Officer pursuant to Rule 13a–14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1	-	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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EX-3.1

                                                                     EXHIBIT 3.1

                                RESTATED BY-LAWS

                                       OF

                             POLYMEDICA CORPORATION

                     (AS AMENDED THROUGH NOVEMBER 17, 2006)





                                TABLE OF CONTENTS

                                                                
ARTICLE I

Meetings of Stockholders                                            1
  Section 1.   Place                                                1
  Section 2.   Annual Meeting                                       1
  Section 3.   Special Meetings                                     1
  Section 4.   Notice                                               1
  Section 5.   Quorum                                               2
  Section 6.   Adjournment                                          2
  Section 7.   Voting                                               2
  Section 8.   Action by Consent                                    3
  Section 9.   Introduction of Business at Meeting                  3
  Section 10.  Action at Meeting                                    4
  Section 11.  Appointment of Judges of Election                    4
ARTICLE II Officers and Directors                                   4
  Section 1.   Enumeration and Election of Directors                4
  Section 2.   Enumeration and Election of Officers                 5
  Section 3.   Qualifications of Directors and Officers             5
  Section 4.   Removal of Directors and Officers                    6
  Section 5.   Resignation of Directors and Officers                6
  Section 6.   Vacancies                                            6
  Section 7.   Compensation of Directors and Officers               6
ARTICLE III Meeting of Directors                                    7
  Section 1.   Regular Meetings                                     7
  Section 2.   Special Meetings                                     7
  Section 3.   Notice                                               7
  Section 4.   Quorum                                               7
  Section 5.   Action by Consent                                    8
ARTICLE IV Powers and Duties of Directors and Officers              8
  Section 1.   Directors                                            8
  Section 2.   Chairman and President                               8
  Section 3.   Vice Presidents                                      8
  Section 4.   Treasurer                                            9
  Section 5.   Clerk                                                9
  Section 6.   Other Officers                                       9
ARTICLE V     Employment Contracts                                  9
ARTICLE VI    Stock and Transfer Books                              9
ARTICLE VII   Issue of Authorized Stock                            10
ARTICLE VIII  Signature of Checks                                  11
ARTICLE IX    Seal and Fiscal Year                                 11
ARTICLE X     Amendment of By-Laws                                 11
ARTICLE XI    Control Share Acquisitions                           12





                                RESTATED BY-LAWS

                                       OF

                             POLYMEDICA CORPORATION

                                    ARTICLE I

                            Meetings of Stockholders

      Section 1. Place. Meetings of the stockholders shall be held at the
principal office of the corporation in Massachusetts or at such other place as
may be named in the notice.

      Section 2. Annual Meetings. The annual meeting of the stockholders shall
be held within six months after the end of the fiscal year of the corporation on
such date and at such hour and place as the Board of Directors or an officer
designated by the Board of Directors shall determine. In the event that no date
for the annual meeting is established or such meeting has not been held on the
date so determined, a special meeting in lieu of the annual meeting may be held
with all of the force and effect of an annual meeting.

      Section 3. Special Meetings. A special meeting of the stockholders may be
called at any time by the Chairman of the Board, the President, the Chief
Executive Officer or a majority of the Board of Directors. Each call of the
meeting shall state the place, date, hour and purposes of the meeting.

      Section 4. Notice. A written notice of the date, place and hour of all
meetings of stockholders stating the purposes of the meeting shall be given by
the Clerk or an Assistant Clerk (or by any other officer who is entitled to call
such a meeting) at least ten (10) days before the meeting to each stockholder
entitled to vote thereat and to each stockholder who by law, by the Restated
Articles of Organization or these Restated By-Laws is entitled to such notice,
by leaving such notice with him or at his residence or usual place of business,
or by mailing it, postage prepaid, and addressed to such stockholder at his
address as it appears in the records of the corporation. Whenever

                                       1


notice of a meeting is required to be given a stockholder under applicable law,
the Restated Articles of Organization or these Restated By-laws, a written
waiver thereof, executed before or after the meeting by such stockholder or his
attorney thereunto authorized and filed with the records of the meeting, shall
be deemed equivalent to such notice.

      Section 5. Quorum. A majority in interest of all stock issued, outstanding
and entitled to vote at a meeting shall constitute a quorum with respect to that
matter, except that if two or more classes of stock are outstanding and entitled
to vote as separate classes, then in the case of each such class, a quorum shall
consist of the holders of the number of shares of the stock of the class issued,
outstanding and entitled to vote.

      Section 6. Adjournment. Any meeting of stockholders may be adjourned to
any other time and to any other place at which a meeting of stockholders may be
held under these Restated By-laws by the stockholders present or represented at
the meeting, although less than a quorum, or by any officer entitled to preside
or to act as clerk of such meeting, if no stockholder is present. It shall not
be necessary to notify any stockholder of any adjournment. Any business which
could have been transacted at any meeting of the stockholders as originally
called may be transacted at any adjournment of the meeting.

      Section 7. Voting. Stockholders entitled to vote shall have one vote for
each share of stock owned by them and a proportionate vote for each fractional
share; provided that the corporation shall not directly or indirectly vote any
share of its own stock, and provided further that stock shall not be voted if
any installment of the subscription therefor has been duly demanded and is
overdue and unpaid. Stockholders may vote in person or by written proxy dated
not more than six months before the meeting named in the proxy. Proxies shall be
filed with the clerk of the meeting, or of any adjourned meeting, before being
voted.

                                       2


      Section 8. Action by Consent. Any action required or permitted to be taken
at any meeting of the stockholders may be taken without a meeting if all
stockholders entitled to vote on the matter consent to the action in writing and
the written consents are filed with the records of the meetings of stockholders,
Such consents shall be treated for all purposes as a vote at a meeting.

      Section 9. Introduction of Business at Meeting. Except as otherwise
provided by law, at any annual or special meeting of stockholders only such
business shall be conducted as shall have been properly brought before the
meeting. In order to be properly brought before the meeting, such business must
have been either (A) specified in the written notice of the meeting (or any
supplement thereto) given to stockholders of record on the record date for such
meeting by or at the direction of the Board of Directors, (B) brought before the
meeting at the direction of the Board of Directors or the chairman of the
meeting, or (C) specified in a written notice given by or on behalf of a
stockholder of record on the record date for such meeting entitled to vote
thereat or a duly authorized proxy for such stockholder, in accordance with all
of the following requirements. A notice referred to in clause (C) hereof must be
delivered personally to or mailed to and received at the principal executive
office of the corporation, addressed to the attention of the Clerk, not more
than five (5) days after the date of the initial notice referred to in clause
(A) hereof, in the case of business to be brought before a special meeting of
stockholders, and not less than thirty (30) days prior to the first anniversary
date of the initial notice referred to in clause (A) hereof to the previous
year's annual meeting, in the case of business to be brought before an annual
meeting of stockholders, provided, however, that such notice shall not be
required to be given more than sixty (60) days to an annual meeting of
stockholders. Such notice referred to in clause (C) hereof shall set forth (i) a
full description of each such item of business proposed to be brought before the
meeting, (ii) the name and address of the person proposing to bring such
business before the meeting, (iii) the class and number of shares held of
record,

                                       3


held beneficially and represented by proxy by such person as of the record date
for the meeting (if such date has then been made publicly available) and as of
the date of such notice, (iv) if any item of such business involves a nomination
for director, all information regarding each such nominee that would be required
to be set forth in a definitive proxy statement filed with the Securities and
Exchange Commission pursuant to Section 14 of the Securities Exchange Act of
1934, as amended, or any successor thereto, and the written consent of each such
nominee to served if elected, and (v) all other information that would be
required to be filed with the Securities and Exchange Commission if, with
respect to the business proposed to be brought before the meeting, the person
proposing such business was a participant in a solicitation subject to Section
14 of the Securities Exchange Act of 1934, as amended, or any successor thereto.
No business shall be brought before any meeting of stockholders of the
corporation otherwise than as provided in this paragraph.

      Notwithstanding the foregoing provisions, the Board of Directors shall not
be obligated to include information as to any nominee for director in any proxy
statement or other communication sent to stockholders.

      The chairman of the meeting may, if the facts warrant, determine and
declare to the meeting that any proposed item of business was not brought before
the meeting in accordance with the foregoing procedure and, if he should so
determine, he shall so declare to the meeting and the defective item of business
shall be disregarded.

      Section 10. Action at Meeting. When a quorum is present at any meeting,
the holders of a majority of the stock present or represented and voting on a
matter (or if there are two or more classes of stock entitled to vote as
separate classes, then in the case of each such class, the holders of a majority
of the stock of that class present or represented and voting on a matter), shall
decide any matter to be voted on by the stockholders, except when a larger vote
is required by law, the Restated Articles of Organization or these Restated
By-laws. When a quorum is present at any meeting, any election by stockholders
shall be determined by a plurality of the votes cast on the election. No ballot
shall be required for such election unless requested by a stockholder present or
represented at the meeting and entitled to vote in the election.

      Section 11. Appointment of Judges of Election. In advance of any meeting
of stockholders, the Board of Directors may appoint judges of election, who need
not be stockholders, to act at such meeting or any adjournment thereof. If
judges of election be not so appointed, the chairman of any such meeting may
and, on the request of any stockholder or his proxy shall, make such appointment
at the meeting. The number of judges shall be one or three as shall be
determined by the Board of Directors, except that, if appointed at the meeting
on the request of one or more stockholders or proxies, the holders of a majority
of the shares of the corporation present and entitled to vote shall determine
whether one or three judges are to be appointed. No person who is a candidate
for office shall act as a judge.

                                   ARTICLE II

                             Officers and Directors

      Section 1. Enumeration and Election of Directors. The corporation shall
have a Board of Directors of not less than three directors, except that whenever
there shall be fewer than three stockholders, the number of directors may be
less than three but in no event less than the number of stockholders. The number
of directors may be decreased at any time and from time to time either by the
stockholders or by a majority of the directors then in office, but only to
eliminate vacancies existing by reason of the death, resignation, removal or
expiration of the term of one or more directors.

      The directors of the corporation shall be divided into three classes,
labelled Class I Directors, Class II Directors and Class III Directors, each
class to consist of approximately an equal number of directors who shall serve
for staggered three-year terms. No one class shall have more than one director
more than any other class. If a fraction is contained in the quotient arrived at
by dividing the designated number of directors by three, then, if such fraction
is one-third, the extra director shall be a member

                                       4


of Class III, and if such a fraction is two-thirds, one of the extra directors
shall be a member of Class III and one of the extra directors shall be a member
of Class II, unless otherwise provided from time to time by resolution adopted
by the Board of Directors.

      At each annual meeting of the stockholders, the successors to the
directors of the class whose term shall expire in that year shall be elected to
hold office for a term of three years from the date of their election for until
their successors shall be duly elected and qualified, provided, however, the
initial directors to be elected as Class I Directors, Class II Directors and
Class III Directors shall be elected for one year, two years and three years,
respectively. In the case of any decrease or increase in the number of
directors, the increase or decrease shall be distributed among the several
classes as equally as possible, as shall be determined by the affirmative vote
of the whole Board of Directors may be enlarged at any time and from time to
time by the stockholders or by vote of majority of the directors then in office.
Each Director shall hold office until the next annual meeting of stockholders
and until his successor is elected and qualified, or until his earlier death,
resignation or removal for cause.

      Section 2. Enumeration and Election of Officers. The officers of the
corporation shall be a President, a Treasurer, a Clerk and such other officers
as the directors may from time to time appoint. The directors at their annual
meeting in each year shall elect a President, a Treasurer and a Clerk, and may
at any time elect such other officers as they shall determine. Except as
hereinafter provided, the President, the Treasurer and the Clerk shall hold
office until the next annual meeting of stockholders and until their respective
successors are elected and qualified. Other officers shall serve at the pleasure
of the directors.

      Section 3. Qualifications of Directors and Officers. Directors and
officers need not be stockholders. No officer need be a director. Two or more
offices may be held by the same person. The Clerk shall be a resident of
Massachusetts unless a resident agent shall have been appointed pursuant to the
Massachusetts Business Corporation Law.

                                       5


      Section 4. Removal of Directors and Officers. Directors may be removed
from office at any time but only for cause and only by the vote of the holders
of two-thirds (66 2/3%) of the shares entitled to vote in the election of
directors. Officers elected or appointed by the directors may be removed from
their respective offices with or without cause by vote of a majority of the
directors then in office. A director or officer may be removed for cause only
after a reasonable notice and opportunity to be heard before the body proposing
to remove him.

      Section 5. Resignation of Directors and Officers. Resignations by officers
or directors shall be given in writing to the President, Treasurer, Clerk or
directors.

      Section 6. Vacancies. Unless and until filled by the stockholders, any
vacancy in the Board of Directors, however occurring, including a vacancy
resulting from an enlargement of the Board, may be filled by vote of a majority
of the directors present at any meeting of directors at which a quorum is
present. Each such successor shall hold office for the unexpired term of his
predecessor and until his successor is chosen and qualified or until his earlier
death, resignation or removal. Vacancies in any other office may be filled by
the directors.

      Section 7. Compensation of Directors and Officers. Directors may be paid
such compensation for their services and such reimbursement for expenses of
attendance at meetings as the Board of Directors may from time to time
determine. No such payment shall preclude any director from serving the
corporation in any other capacity and receiving compensation therefor. Officers
of the corporation shall be entitled to such salaries, compensation or
reimbursement as shall be fixed or allowed from time to time by the Board of
Directors.

                                       6


                                   ARTICLE III

                            Meeting of the Directors


      Section 1. Regular Meetings. Meetings of the directors, including the
Annual Meeting, may be held at such times and places within or without the
Commonwealth of Massachusetts as the directors may fix.

      Section 2. Special Meetings. Special meetings of the directors may be held
at such times and places within or without the Commonwealth of Massachusetts as
may be determined by the directors or by the President. Special meetings of the
directors may be called by the President, the Chairman, the Treasurer, or by two
or more directors, provided reasonable notice thereof is given to each director
by the Clerk or Assistant Clerk, or by the officer or one of the directors
calling the meeting.

      Section 3. Notice. No notice need be given for a regular or annual meeting
of the directors. Forty-eight hours' notice by mail, telegraph, telephone or
word of mouth shall be given for a special meeting unless shorter notice is
adequate under the circumstances. A notice or waiver of notice need not specify
the purpose of any special meeting. Notice of a meeting need not be given to any
director, if a written waiver of notice, executed by him before or after the
meeting, is filed with the records of the meeting, or to any director who
attends the meeting without protesting prior thereto or at its commencement the
lack of notice to him.

      Section 4. Quorum. A majority of the directors then in office shall
constitute a quorum, but a smaller number may adjourn finally or from time to
time without further notice until a quorum is secured. If a quorum is present, a
majority of the directors present may take any action on behalf of the Board
except to the extent that a larger number is required by law or the Restated
Articles of Organization or the Restated By-Laws.

                                       7


      Section 5. Action by Consent. Any action required or permitted to be taken
at any meeting of the directors may be taken without a meeting if all the
directors consent to the action in writing and the written consents are filed
with the records of the meetings of directors. Such consents shall be treated
for all purposes as a vote at a meeting.

                                   ARTICLE IV

                   Powers and Duties of Directors and Officers

      Section 1. Directors. The business of the corporation shall be managed by
the directors, who may exercise all such powers of the corporation as are not by
law, by the Restated Articles of Organization or by the Restated By-Laws
required to be otherwise exercised. The directors may from time to time to the
extent permitted by law delegate any of their powers to committees, officers,
attorneys, or agents of the corporation, subject to such limitations as the
directors may impose.

      Section 2. Chairman and President. The directors may appoint a Chairman of
the Board who, unless otherwise determined by the directors, shall, when
present, preside at all meetings of the directors and shall have such other
powers and duties as customarily belong to the office of Chairman of the Board
or as may be designated from time to time by the directors. The President shall
be the Chief Executive Officer of the corporation unless the directors designate
another officer, in which event he shall, unless the directors otherwise
determine, be the Chief Operating Officer. The Chief Executive Officer shall,
subject to the direction of the directors, have general supervision and control
of the business of the corporation. Except as provided above regarding the
Chairman and unless the directors specify otherwise, the Chief Executive Officer
shall preside at all meetings of stockholders and of the directors at which he
is present. The President and Chief Executive Officer shall perform such other
duties and shall have such other powers as the directors may designate from time
to time.

      Section 3. Vice Presidents. The Vice Presidents, if any, shall have such
powers and duties as may be designated from time to time by the directors or by
the President.

                                       8


      Section 4. Treasurer. Except as the directors shall otherwise determine,
the Treasurer shall be the Chief Financial and Accounting Officer of the
corporation and shall have such other powers and duties as customarily belong to
the office of Treasurer or as may be designated from time to time by the
directors or by the President.

      Section 5. Clerk. The clerk shall record all proceedings of the
stockholders and directors in a book or books to be kept therefor and shall have
custody of the seal of the corporation.

      Section 6. Other Officers. Other officers shall have such powers as may be
designated from time to time by the directors.

                                    ARTICLE V

                              Employment Contracts

      The corporation may enter into employment contracts authorized by the
directors extending beyond the terms of the directors. An employment contract
shall be valid despite any inconsistent provision of these Restated By-laws
relating to terms of officers and removal of officers with or without cause but
shall not affect the authority of the directors to remove officers. Any removal
or failure to reelect an officer shall be without prejudice to the officer's
contract rights, if any.

                                   ARTICLE VI

                            Stock and Transfer Books

      The corporation shall keep in the Commonwealth of Massachusetts at its
principal office (or at an office of its transfer agent or of its Clerk or of
its resident agent) stock and transfer records, which shall contain the names of
all stockholders and the record address and the amount of stock held by each.
The corporation for all purposes may conclusively presume that the registered
holder of a stock certificate is the absolute owner of the shares represented
thereby and that his record address is his proper address. The

                                       9


directors may fix in advance a time, which shall not be more than sixty days
before the date of any meeting of stockholders or the date for the payment of
any dividend or the making of any distribution to stockholders or the last day
on which the consent or dissent of stockholders may be effectively expressed for
any purpose, as the record date for determining the stockholders having the
right to notice of and to vote at such meeting and any adjournment thereof or
the right to receive such dividend or distribution or the right to give such
consent or dissent, and in such case only stockholders of record on such record
date shall have such rights, notwithstanding any transfer of stock on the books
of the corporation after the record date; or without fixing such record date the
directors may for any of such purposes close the transfer books for all or any
part of such period.

      If no record date is fixed and the transfer books are not closed:

                  (1) The record date for determining stockholders having the
            right to notice of or to vote at a meeting of stockholders shall be
            at the close of business on the day next preceding the day on which
            notice is given.

                  (2) The record date for determining stockholders for any other
            purpose shall be at the close of business on the day on which the
            Board of Directors acts with respect thereto.

                                   ARTICLE VII

                            Issue of Authorized Stock

      Any unissued capital stock from time to time authorized under the Restated
Articles of Organization may be issued by vote of the directors.

                                       10


                                  ARTICLE VIII

                               Signature of Checks

      All checks drawn of bank accounts of the corporation may be signed on its
behalf as authorized from time to time by the directors.

                                   ARTICLE IX

                              Seal and Fiscal Year

      The seal shall be circular in form with the name of the corporation around
the periphery and words and figures "Incorporated 1988 Massachusetts" within.
The fiscal year shall commence on April 1st of each year.

                                    ARTICLE X

                          Amendment of Restated By-laws

      Subject to the terms of the Restated Articles of Organization of the
corporation, as amended, these Restated By-laws may be amended, altered or
repealed in whole or in part, and new Restated By-laws may be adopted, by vote
of the holders of a majority of the shares of each class of the capital stock
outstanding and entitled to vote, except with respect to (a) the provisions of
these By-laws governing (i) the staggered Board of Directors, (ii) the removal
of directors and (iii) the amendment of these Restated By-laws and (b) any
provision of these By-laws which by law, the Restated Articles of Organization
or these Restated By-laws requires action by the stockholders, which shall
require the vote of the holders of two-thirds (66-2/3%) of the shares of each
class of the capital stock outstanding and entitled to vote. Subject to the
terms of the Restated Articles of Organization of the corporation, as amended,
the directors may also make, amend or repeal these Restated By-laws in whole or
in part, except with respect to (a) the provisions of these By-laws governing
(i) the staggered Board of Directors, (ii) the removal of directors and (iii)
the amendment of these Restated By-laws and (b) any

                                       11


provision of these By-laws which by law, the Restated Articles of Organization
or these Restated By-laws requires action by the stockholders. Not later than
the time of giving notice of the meeting of stockholders next following the
making, amending or repealing by the directors of any By-law, notice thereof
stating the substance of such change shall be given to all stockholders entitled
to vote on amending the Restated By-laws. Subject to the terms of the Restated
Articles of Organization of the corporation, as amended, any By-law adopted by
the directors may be amended or repealed by the stockholders.

                                   ARTICLE XI

                           Control Share Acquisitions

      Chapter 110D of the Massachusetts General Laws, as it may be amended from
time to time, shall not apply to control share acquisitions of the corporation.

                                       12

EX-31.1

EXHIBIT 31.1

PRINCIPAL EXECUTIVE OFFICER CERTIFICATION

I, Patrick T. Ryan, certify that:
1.	I have reviewed this Quarterly Report on Form 10-Q of PolyMedica Corporation;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: February 7, 2007
	/s/ Patrick T. Ryan Patrick T. Ryan President, Chief Executive Officer and Director

EX-31.2

EXHIBIT 31.2

PRINCIPAL FINANCIAL OFFICER CERTIFICATION

I, Keith W. Jones, certify that:
1.	I have reviewed this Quarterly Report on Form 10-Q of PolyMedica Corporation;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: February 7, 2007
	/s/ Keith W. Jones Keith W. Jones Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the Quarterly Report on Form 10-Q of PolyMedica Corporation (“PolyMedica”) for the three months ended September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Patrick T. Ryan, President and Chief Executive Officer, and Keith W. Jones, Chief Financial Officer of PolyMedica, each hereby certifies, pursuant to 18 U.S.C. Section 1350, that:

     (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

     (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of PolyMedica.

Dated: February 7, 2007	/s/ Patrick T. Ryan Patrick T. Ryan President, Chief Executive Officer and Director
Dated: February 7, 2007	/s/ Keith W. Jones
	Keith W. Jones Chief Financial Officer