UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION




WASHINGTON,
      DC 20549









FORM
      10-K




ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF


THE
      SECURITIES EXCHANGE ACT OF 1934




For
      the
      fiscal year ended December 31, 2007




Commission
      File No. 000-23016







MEDIFAST,
      INC.









DELAWARE
            
            13-3714405Incorporation
                State
            
            Tax
                Identification number




11445
                CRONHILL DRIVE, OWINGS MILLS, MD
            
            21117Principal
                Office Address




Phone
      (410) 581-8042




SECURITIES
      REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE




SECURITIES
      REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:




COMMON
      STOCK, PAR VALUE $.001 PER SHARE







New
      York
      Stock Exchange









Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act. Yes xNo o




Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act. Yes oNo x




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 xNo o




Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the
      best of registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any
      amendment to this Form 10-K. 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.
      (Check one):




Large
                accelerated filer o
            
            Accelerated
                filer x
            
            Non-accelerated
                filer o




Indicate
      by check mark whether the registrant is a shell company (as defined in
      Rule 12b-2 of the Act). Yes oNo x




The
      aggregate market value of the voting common equity held by non-affiliates of
      the
      registrant as of June 30, 2007, based upon the closing price of $8.95 per
      share on the New York Stock Exchange on that date, was
      $109,000,000.




As
      of
      March 17, 2008, the Registrant had 13,814,098 shares of Common Stock
      outstanding.




2





**Table
      of Contents**





**Page****PART
                I**Item
                1.
            
            Business
            4Item
                1A.
            
            Risk
                Factors
            12Item
                1B.
            
            Unresolved
                Staff Comments
            14Item
                2.
            
            Properties
            14Item
                3.
            
            Legal
                Proceedings
            14Item
                4.
            
            Submission
                of Matters to a Vote of Security Holders
            14**PART
                II**Item
                5.
            
            Market
                for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity Securities
            15Item
                6.
            
            Selected
                Financial Data
            16Item
                7.
            
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            16Item
                7A
            
            Quantitative
                and Qualitative Disclosures about Market Risk
            24Item
                8.
            
            Financial
                Statements and Supplementary Data
            24Item
                9.
            
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            24Item
                9A.
            
            Controls
                and Procedures
            24**PART
                III**Item
                10.
            
            Directors,
                Executive Officers and Corporate Governance
            27Item
                11.
            
            Executive
                Compensation
            32Item
                12.
            
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            41Item
                13.
            
            Certain
                Relationships and Related Transactions, and Director
                Independence
            42Item
                14.
            
            Principal
                Accounting Fees and Services
            42**PART
                IV**Item
                15.
            
            Exhibits,
                Financial Statement Schedules
            43




3




**PART
      I**





**ITEM
      1. BUSINESS.**





**SUMMARY**





Medifast,
      Inc. (the "Company” or “Medifast”) is a Delaware corporation, incorporated in
      1980. The Company’s operations are primarily conducted through five of its
      wholly owned subsidiaries, Jason Pharmaceuticals, Inc. ("Jason"), Take Shape
      for
      Life, Inc. (“TSFL”), Jason Enterprises, Inc., Jason Properties, LLC and Seven
      Crondall, LLC. The Company is engaged in the production, distribution, and
      sale
      of weight management and disease management products and other consumable health
      and diet products. Medifast, Inc.’s product lines include weight and disease
      management, meal replacement, and vitamins primarily manufactured in its modern,
      FDA approved facility in Owings Mills, Maryland.





**MARKETS**




Throughout
      the past 30 years, obesity in the United States has dramatically increased.
      The
      obesity epidemic shows no signs of slowing down and recently, the condition
      has
      worsened among Americans rather than improved. Approximately 1.7 billion people
      worldwide are overweight; however the percentage of overweight adults is the
      highest in the United States, with two-thirds of all Americans being overweight
      or obese.




According
      to a recent study, “Prevalence of Obesity and Overweight in the United States”,
      published in April 2006 in the Journal of American Medical Association, almost
      7
      out of 10 adults in the U.S. are overweight or obese, with 60 million (or about
      thirty percent) American adults suffering from obesity.  The
      obesity epidemic raises concern among Americans because of the implications
      associated with their health. The most common health conditions associated
      with
      obesity are type II diabetes, coronary heart disease, hypertension and stroke,
      sleep apnea and respiratory problems, gallbladder disease, depression and
      certain forms of cancer.





The
      Center for Disease Control and Prevention shows that obesity is not only
      affecting adults, but children and adolescents as well. According to the CDC,
      the obesity prevalence in children and adolescents has tripled since 1976.
      Overweight and obesity in children and adolescents pose serious risks for health
      problems such as high blood pressure, high cholesterol and Type 2 Diabetes.





Type
      2
      Diabetes is expected to increase by 165 % between 2000 and 2050 according to
      a
      study “Projection of diabetes burden through 2050: impact of change demography
      and disease prevalence in the U.S.”, published 2001 in Diabetes Care. In
      addition, a study published in October 2007 by the CDC states children are
      now
      being affected by this disease also. Almost half the diabetic children in the
      United States are Type 2. Obese children suffering from Type 2 diabetes also
      suffer from various related conditions such as amputations, kidney problems
      and
      blindness.





It
      is
      important to note the difference between overweight and obese. Obesity among
      adults is defined as a Body Mass Index (BMI) of 30 or higher; overweight is
      defined as a BMI of 25 to 30. According to a recent study conducted by the
      Center for Disease Control and Prevention in 2006, only four (4) states in
      the
      U.S.A. had a prevalence of obesity less than twenty percent (20 %). Twenty-two
      states showed a prevalence equal or greater than twenty-five percent (25%),
      and
      two of those states had a prevalence of obesity equal to or greater than thirty
      percent (30%).





The
      primary obesity causing factors are preventable and well known in the United
      States. These factors are unhealthy diet and physical inactivity. It’s estimated
      that poor nutrition and physical inactivity account for more than 300,000
      premature deaths per year in the U.S. Many Americans ignore this despite what
      research studies show. According to the United States Department of Health
      and
      Human Services, only 25% of the adults and less than 25% of the teenagers
      include the suggested 5 or more servings of vegetables and fruits in their
      daily
      meal. 50% or more of the American adults do not do the suggested amount of
      physical activities. More than 1/3 of the young Americans do not engage
      themselves in regular vigorous physical activities.




The
      United States Department of Human and Health Services states that Americans
      spend $117 billion in costs associated with overweight and obesity. Direct
      medical and healthcare costs total $93 billion. The U.S. weight loss market
      is
      estimated to be a $ 55 billion/ year industry. This includes consumer spending
      on diet foods, health clubs, commercial weight loss centers, low-calorie
      prepared foods, medically supervised and commercial weight loss programs, diet
      books, appetite suppressants, artificial sweeteners, diet sodas, videos and
      cassettes, children’s weight loss camps and more. More specifically, the market
      for diet food home delivery is a rapidly growing $800 million industry in the
      United States.




4




**Distribution
      Channels**





**Medifast
      Direct –** Medifast’s
      primary distribution channel is the direct-to-consumer business. Here, customers
      have access to support from qualified nutritional practitioners and customer
      care representatives via telephone, e-mail and online chats. Medifast Direct
      offers a robust online web community and library for support, information and
      meal planning for weight loss and weight maintenance. This business is driven
      by
      an aggressive multi-media customer acquisition strategy that includes print,
      television, radio, direct mail and web advertising as well as public relations
      initiatives. In 2007, the Medifast Direct division focused on targeted marketing
      initiatives and providing customer support through its in house call center
      and
      nutrition support teams to better serve its clients. In addition, Medifast
      also
      continued to promote its use of leading web technology featuring customized
      meal
      planning and community components.





**Take
      Shape for LifeTM** - Take
      Shape for Life is a physician led network of independent health coaches who
      are
      trained to provide coaching and support to client on Medifast programs. Health
      coaches are conduits to give clients the strategies and skills to successfully
      reach a healthy weight and then provide a road map to empower the individual
      to
      take control of their health. Take Shape for Life offers the exclusive
      BeSlim TM philosophy, which encourages long-term weight maintenance. Take Shape for Life
      also moves beyond the scope of weight loss to show customers how to achieve
      optimal health through the balance of body, mind, and finances. Take Shape
      for
      Life uses the high quality, medically validated products of Medifast as the
      platform to launch integrity based lifelong health optimization
      program.





Program
      entrants are encouraged to consult with their primary care physician and a
      Take
      Shape for Life Health Coach to determine the Medifast program that is right
      for
      them. Health Coaches are supported, educated and qualified by The Health
      Institute, a training group staffed by Medifast professionals. Health Advisors
      obtain Medifast qualification based upon testing of their knowledge on Medifast
      products and programs.





**Medifast
      Physicians –** Medifast
      physicians have implemented the Medifast program within their practice. These
      physicians carry an inventory of Medifast products and resell them to patients.
      They also provide appropriate medical monitoring, testing, and support for
      patients on the program. Management estimates that more than 15,000 physicians
      nationwide have recommended Medifast as a treatment for their overweight
      patients since 1980, and over an estimated 1 million patients have used its’
products to lose and maintain their weight.





The
      Company offers an additional in-house support program to assist customers that
      are consulting their primary care physician. Customers have access to registered
      dieticians that provide program support and advice via a toll free telephone
      help line, by e-mail and online chats.





**Medifast
      Weight Control Centers –** In
      2007,
      Medifast continued to enhance the operations in the ten corporately owned weight
      control centers. The Medifast Weight Control Center is the brick and mortar
      clinic channel of Medifast located in Texas and Florida. The centers offer
      a
      supervised model and a nationally advertised brand which encourages walk-ins
      and
      referrals from other Medifast business channels. In addition to offering a
      comprehensive Medifast program, the clinics offered customized patient
      counseling programs, and the Inbody TM composition analysis. The Company intends to open additional corporately owned
      Medifast Weight Control Centers in the Houston, Texas market in 2008 as well
      as
      offering the model to franchise.





The
      Company continues to support its private label licensee model, Hi-Energy, by
      providing marketing materials, ads, on-site trainings, fitness programs,
      nutritional programs and clinical operation materials and forms.




**THE
      MEDIFAST® BRAND**





Medifast
      enriches lives by providing innovative choices for lasting health through
      products and programs. Medifast is physician recommended and clinically proven
      offering programs for weight management, weight maintenance and long term health
      through multiple channels of distribution. Medifast products are high quality,
      portion controlled meal replacement foods. In recent years, Medifast’s core
      products and programs have continued to expand over a wellness spectrum to
      include health management products including products specially formulated
      for
      people with diabetes as well as products for women’s health, joint health and
      coronary health.





While
      the
      entire Medifast line is Diabetic Friendly, Medifast has created products
      tailored to meet the needs of people with diabetes. Many Medifast Plus for
      Diabetics products have earned the coveted Seal of Approval from the Glycemic
      Research Institute. The line, designated as Low Glycemic, does not overly
      stimulate blood glucose and insulin and does not stimulate fat-storing enzymes.
      Products included in the Medifast Plus for Diabetics line consist of three
      delicious patented shakes, and two meal replacement bars.




5




Most
      Medifast products qualify to make the FDA’s heart healthy claim, “May Reduce the
      Risk of Heart Disease.” In order to make this claim, a product must contain at
      least 6.25 grams of soy protein per serving and be low in fat, saturated fat,
      and cholesterol. Unlike popular fad diets and herbal supplements, Medifast
      products are a safe, nutritionally balanced choice, offering gender specific
      formulas containing high protein and low carbohydrates, a soy protein source
      rather than animal protein source, and vitamin and mineral fortification. It
      is
      very difficult to meet the minimum recommended nutritional requirements on
      a
      low-calorie diet, but a dieter can easily meet these requirements using the
      nutrient dense Medifast brand of meal replacement food supplements.





Portion
      controlled, meal replacement weight management programs are continuing to gain
      popularity, as consumers search for a safe and effective solution that provides
      balanced nutrition, quick weight loss and valuable behavior modification
      education. In addition, consumers are becoming more aware of chronic diseases
      such as diabetes and coronary health.




**Clinical
      Research Overview**





Medifast
      uses both clinical research studies and retrospective analysis data from its
      Medifast clinics as the basis of its claim, “clinically proven.” An overview of
      Medifast clinical research is provided below.





**Crowell,
      M.D. & Cheskin L.J, the Johns Hopkins University School of Medicine.
      Multicenter Evaluation of Health Benefits and Weight Loss on the Medifast Weight
      Management Program.**





The
      purpose of this study was to retrospectively evaluate the efficacy of a
      medically supervised, protein-supplemented modified fasting program (Medifast)
      for weight reduction and to evaluate the impact of weight reduction on
      coexisting health problems. The results of the study concluded that
      medically-supervised, protein-sparing modified fasts offer a safe and effective
      means of weight reduction and are accompanied by significant improvements in
      coexisting health problems. Of samples taken, males lost an average of 67 lbs
      and females lost an average of 47 lbs during fasting. The study found
      significant reductions in systolic and diastolic blood pressure, total
      cholesterol and triglycerides, as well as the normalizing of blood pressure
      and
      hypertensive patients.





**Cheskin,
      MD, FACP, Mitchell, MS, Lewis, BA, Javeri, MD Yep, BS. Johns Hopkins University
      School of Bloomberg Public Health. Efficacy of 2 Diet Plans Designed for People
      with Type 2 Diabetes on Weight and Health Measures**





The
      purpose of this study was to evaluate the efficacy of the standard ADA (American
      Diabetic Association) self-selected diet (SD) vs. a portion controlled diabetic
      food diet (PCD) in obese patients with NIDDM. The study also evaluated not
      only
      the metabolic effects in the long term, but also compliance and any consequent
      medication changes in patients of the two weight loss regimens. (16-34 weeks
      of
      active weight loss, 52 weeks of maintenance) The meal replacements (Medifast)
      used in this study are soy-based products (bars, shakes, soups) that are
      considerably lower in sugar than their non-diabetic counterparts and other
      popular diet products on the market.





The
      results discussion is as follows. Significantly greater results were achieved
      after the initial 34-weeks of weight loss by participants in the PCD group
      in
      pounds and percent weight loss, insulin level and hemoglobin A1c. The PCD group
      also saw significant improvements within group in BMI, systolic BP, diastolic
      BP, waist/hip measurements, cholesterol, HDL triglycerides, glucose and percent
      body fat. Dropout rates were less in the PCD in both weight loss and weight
      maintenance. During weight loss, participants in the PCD group significantly
      decreased their use of medications to treat Type 2 DM. Participants in the
      PCD
      group also self-reported higher ease of compliance with the diet compared to
      the
      SD group (64.2% vs. 56.0%).





Researchers
      recommended that a PCD be considered for type 2 diabetics desiring weight loss,
      but that periodic use of SD during weight maintenance will not adversely affect
      weight loss efforts. The research supports that using a portion-controlled
      diet
      will produce comparable if not better outcomes in type 2 diabetics attempting
      to
      control their weight.





The
      study
      was published in the 2008 January/February issue of 'The Diabetes Educator'.
      The
      peer-reviewed journal is the official journal of the American Association of
      Diabetes Educators. The study was also presented at American Diabetes
      Association’s 65 th Annual
      Scientific Session in San Diego, CA, June 11, 2005 .





6





**Efficacy
      of Parent-Child Dieting Plans Incorporating Medifast Meal Replacements for
      Weight Loss. RCT Comparing Balanced Energy Deficit Diets With or Without Meal
      Replacements for Weight Loss and Maintenance Among Children Dieting Alone or
      With a Parent. Lawrence J. Cheskin, Lisa M. Davis, Andrea Hanlon-Mitola, Amy
      Mitchell, Ami Jhaveri, Mary Yep, Vanessa Mitchell. Johns Hopkins Bloomberg
      School of Public Health, Center for Human Nutrition, Department of International
      Health, Baltimore, MD 21205**





The
      study
      compared the safety and efficacy of supplemental Medifast portion-controlled
      meal replacements (MRs) with a USDA Food Guide Pyramid-based diet. Both weight
      loss diets were 20% energy-restricted (~500 kcal deficit). 80, 8-15yo children,
      BMI > 95 th %ile,
      were screened and 40 randomized to either a MR diet (3 MRs/d during active
      weight loss and 2 MRs/d during maintenance) or to the food-based diet. Subjects
      were further randomized to dieting alone *or* with a
      parent. Results: By ITT analysis, dieting with a parent, or food vs. MR, made
      no
      difference in weight outcome. However, following initial weight loss (6mos)
      and
      1yr maintenance (18mos), significant (p≤0.05) benefits were seen in the MR group
      in BMI%ile (0 mos=98.8 ± 1.0, 6 mos=96.6 ± 3.2, 18 mos=96.4 ± 3.4); body fat
      (↓5.9%@6 mos, 5.3%@ 18 mos), total cholesterol (↓6.7%, 5.6%), LDL (↓19.8%, 7.9%)
      and triglycerides (↓23.6%, 22.3%). No significant between-group differences,
      differences in growth rates, or adverse events were observed. Conclusions:
      Among
      overweight 8-15yo children, dieting with or without a parent, meal replacements
      were as safe and effective as a food-based diet for weight loss and maintenance.
      (Supported by Medifast Inc., MD





Effectiveness
      of Medifast Supplements Combined with Obesity Pharmacotherapy: A Clinical
      Program Evaluation. Principle Investigators: Drs. Walker S.C. Poston, C. Keith
      Haddock, Jennifer E. Taylor, John Foreyt.





The
      purpose of the study is to evaluate the long-term impact of Medifast
      meal-replacement supplements combined with appetite suppressant medication
      (ASM)
      among participants who received a minimum of 12-weeks of treatment.





Results
      of this study were presented at the American Society of Bariatric Physicians
      annual meeting in May 2007 and the study is pending publication in a medical
      journal.





**National
      Institutes of Health: Impaired Capacity to Lose Visceral Adipose Tissue during
      Weight Reduction in Obese Postmenopausal Women with the Trp64Arg B3-
      Adrenoceptor Gene Variant**





This
      study examined whether women on a weight loss program who are carriers of a
      genetic variant (Trp64Arg) lose less visceral fat than women who do not have
      this gene. Participants entered a medically supervised weight loss program
      aimed
      at reducing body weight to less than 120% of ideal value. Food was self selected
      with dietitian supervision, with or without the inclusion of the
      TakeShape TM ,
      a
      Medifast brand modified fasting supplement.





Results
      from the study showed that reductions in body weight, BMI, total fat mass and
      fat-free mass were not significantly different between carriers and non-carriers
      of the variant. Both groups experienced weight reduction of 31-36.1 pounds,
      which the study identified as a significant weight loss effect.





**An
      Evaluation of Weight Loss following a Carbohydrate and Fat Restricted Diet
      with
      Appetite Suppressant and Dietary Supplementation. Vivienne Matalon, M.D. The
      Bariatrician Summer 2000**





This
      was
      an open label trial designed to assess the safety and effectiveness of a weight
      loss regimen consisting of a carbohydrate and fat restricted diet, supplemented
      with an appetite suppressant, a dietary supplement and a liquid protein drink
      (Medifast). At baseline, evaluations included a history and physical, and
      measurements of total body weight (lbs), body fat (%), BMI, lean body mass,
      water weight and blood pressure. Patients were then seen weekly for 6 months.
      At
      each weekly visit, total weight, % body fat, BMI, lean body mass, water weight
      and BP were noted. At the end of the study statistically significant differences
      from baseline to final value were noted for body weight (P<.001), percent
      body fat (P<.001), BMI (P<.001), lean body mass (P<.001), water weight
      (P=.01) and body systolic (P=.003) and diastolic (P<.001) blood
      pressure.





Of
      47
      patients enrolled, 24 (51%) completed six months using the dietary regimen
      prescribed. Data was analyzed for all patients who were treated with the diet,
      as well as for the subset of patients who completed the entire study period.
      The
      dietary regimen showed that a carbohydrate and fat restricted program
      supplemented by a natural appetite suppressant can lead to progressive weight
      loss of comparable value to prescribed pharmacologic agents at the time of
      study. Patients in the study experienced statistically significant decreases
      in
      overall body weight, percent body fat, BMI, lean body mass, total body water
      and
      both systolic and diastolic blood pressure.




7




**COMPETITION**





There
      are
      many different kinds of diet products and programs within the weight loss
      industry. These include a wide variety of commercial weight loss programs,
      pharmaceutical products, weight loss books, self-help diets, dietary
      supplements, appetite suppressants and meal replacement shakes and bars. Some
      of
      Medifast’s top competitors are Jenny Craig, Nutrisystems, EDiets, Herbalife, and
      Weight Watchers.





The
      Company has proven it can compete in this competitive market because its
      products have been clinically tested and proven in clinical studies conducted
      by
      researchers from Johns Hopkins University and other major institutions, the
      Medifast products have been safely and effectively used by customers and
      recommended by physicians for over 25 years. Medifast has been on the cutting
      edge of product development with soy based nutritional and weight management
      products since 1980. These products are formulated with high-quality,
      low-calorie, low-fat ingredients that provide alternatives to fad diets or
      medicinal weight loss remedies.





The
      Company’s diverse multi-channel distribution strategy makes the Medifast brand
      available through multiple support channels, which target different customer
      needs. Medifast practitioners offer Medifast to patients through wholesale
      or an
      innovative home delivery model and some practitioners choose to prescribe
      appetite suppression diet drugs to patients in conjunction with a Medifast
      based
      diet. Medifast Direct via the website and call center serves customers with
      free
      online support and community tools and access to nutritionists and customer
      service representatives. The Take Shape for Life division offers the personal
      support of a health coach that is often a person who has achieved success on
      the
      Medifast program and has turned their success into a business opportunity
      generating incremental revenue for the company through relationship marketing.
      Medifast Weight Control Centers offer a medically supervised and structured
      model for customers who prefer more accountability and personalized counseling
      on the program. The Medifast program alone is a mild ketogenic diet that
      naturally suppresses appetite and eliminates hunger without other therapies
      for
      most people.




**PRODUCTS**




The
      Company offers a variety of weight and disease management products under the
      Medifast® brand and for select private label customers. The Medifast line
      includes Medifast® 55 Shakes, Medifast® 70 Shakes, Medifast® Plus for Appetite
      Suppression Shakes, Medifast® Plus for Women’s Health Shakes, Medifast® Plus for
      Diabetics Shakes, Medifast® Plus for Joint Health Shakes, Medifast® Plus for
      Coronary Health Shakes, Medifast® Bars, Medifast® Creamy Soups, Medifast®
Chicken Noodle Soup, Medifast® Chicken & Wild Rice Soup, Medifast® Beef
      Vegetable Stew, Medifast® Home-style Chili, Medifast® Oatmeal, Medifast®
Pudding, Medifast® Scrambled Eggs, Medifast® Hot Cocoa, Medifast® Cappuccino,
      Medifast® Chai Latte, Medifast® Iced Teas, Medifast® Fruit Drinks, Medifast® Soy
      Crisps, and Medifast® Crackers.




Medifast
      nutritional products are formulated with high-quality, low-calorie, and low-fat
      ingredients. Many Medifast products are soy based and contain 24 vitamins and
      minerals, as well as other nutrients essential for good health. The Company
      uses
      Solae® brand soy protein, which is a high-quality complete protein derived from
      soybeans.




Medifast
      brand awareness continues to expand through the Company’s marketing campaigns,
      product development, line extensions, and the Company’s emphasis on quality
      customer service, technical support and publications developed by the Company’s
      marketing staff. Medifast products have been proven to be effective for weight
      and disease management in clinical studies conducted by researchers from the
      U.S. government and Johns Hopkins University. The Company has continued to
      develop its sales and marketing operations with qualified management and
      innovative programs. The Company’s facility in Owings Mills, MD manufactures all
      powders and subcontracts the production of its Ready-To-Drink products and
      meal
      replacement bars.




**NEW
      PRODUCTS**





The
      Company expanded the Medifast product line in 2007 by introducing Maryland
      Crab
      Soup and reformulating our current line. The reformulation resulted in an
      increase of 4 grams of fiber to various products including the 55, 70, and
      Plus
      lines, as well as various soups, Cappuccino and Chai Latte. Both the Chicken
      Noodle Soup and Chicken Wild rice soup were redesigned to provide additional
      protein. Many products were also reformulated to decrease the amount of
      carbohydrates as well.





**MARKETING**





In
      2007,
      the Company continued to build and leverage its core Medifast brand through
      multiple marketing strategies to its target audiences. Customer acquisition
      strategies include national advertising in print magazines, television
      commercials, web advertising, direct mailings, and radio commercials. In
      addition, the Company executed strategic public relations efforts to secure
      local and national editorial placements to raise brand awareness. These mediums
      were used to target new customers by stressing Medifast's quick, easy and safe
      approach to weight management. The Company invested in two celebrity contracts
      with preliminary marketing and media campaigns launching in late 2007. Direct
      mail campaigns, e-mail newsletters and outbound calling programs were utilized
      to reactivate, encourage and support existing customers. In 2007, Medifast
      continued to enhance the Medifast website including added features in the “My
      Medifast” community which offers meal planning, community message boards, blogs
      and a robust library of information. The Company also continued to feature
      customer blogs on the website for potential customers to interact with loyal
      Medifast customers. Late in 2007, the Company launched an auto ship loyalty
      program where customers receive discounts and rewards with automatic shipments
      of Medifast Meals on a monthly basis. Both the MyMedifast community enhancements
      and Auto-ship program contribute to the retention of Medifast customer through
      improved compliance with the program.





8





**SALES**





The
      Company’s Sales division handles four primary areas:





Physician
      Sales - The sales team is responsible for prospecting medical accounts, clinics,
      hospitals, and HMOs.  During 2007, the sales team attended a number of
      medical professional trade shows, which expanded Medifast's penetration of
      the
      medical weight loss business segment.





Medifast
      Weight Control Center Franchises - The brick and mortar clinics have Counselors
      that sell Medifast products and full service programs which include weekly
      one-on-one counseling sessions, medical monitoring and physician
      oversight.  Franchise sales seek qualified partners to develop defined
      market territories.





Corporate
      Wellness - Provides Medifast Corporate Health Solutions to corporate clients
      who
      seek to provide employee wellness programs with evidence based weight management
      programs.





International
      - Sales manages our bulk export business and has responsibility to qualify
      and
      develop new international business partners.





**MANUFACTURING**





Jason
      Pharmaceuticals, Inc., the Company’s wholly owned manufacturing subsidiary,
      produces over 80% of the Medifast products in a state-of-the-art food and
      pharmaceutical-grade facility in Owings Mills, Maryland. Management purchased
      the plant in July 2002 for $3.4 million. The Company has also invested in
      increasing production capacity with the purchase of two additional manufacturing
      lines and a larger capacity blender. The lines have significantly improved
      the
      Company's production capability, while also improving its overall efficiencies.





The
      manufacturing facility has the capacity for significant increases to its
      production output with minimal capital expenditures. Adding additional shifts
      will enable the Company to produce enough products to generate over $250 million
      in sales.





Manufacturing
      processes, product labeling, quality control and equipment are subject to
      regulations and inspections mandated by the Food & Drug Administration
      (FDA), the Maryland State Department of Health and Hygiene, and the Baltimore
      County Department of Health. The plant strictly adheres to all GMP practices
      and
      has maintained its status as an "OU" (Orthodox Union) kosher-approved facility
      since 1982.





**GOVERNMENTAL
      REGULATION HISTORY**





The
      formulation, processing, packaging, labeling and advertising of the Company's
      products are subject to regulation by several federal agencies, but principally
      by the Food and Drug Administration (the "FDA"). The Company must comply with
      the standards, labeling and packaging requirements imposed by the FDA for the
      marketing and sale of foods and nutritional supplements. Applicable regulations
      prevent the Company from representing in its literature and labeling that its
      products produce or create medicinal effects or possess drug-related
      characteristics. The FDA could, in certain circumstances, require the
      reformulation of certain products to meet new standards, require the recall
      or
      discontinuation of certain products not capable of reformulation, or require
      additional record keeping, expanded documentation of the properties of certain
      products, expanded or different labeling, and scientific substantiation. If
      the
      FDA believes the products are unapproved drugs or food additives, the FDA may
      initiate similar enforcement proceedings. Any or all such requirements could
      adversely affect the Company's operations and its financial condition.





To
      the
      extent that sales of foods and nutritional supplements may constitute improper
      trade practices or endanger the safety of consumers, the operations of the
      Company may also be subject to the regulations and enforcement powers of the
      Federal Trade Commission ("FTC"), and the Consumer Product Safety Commission.
      The Company's activities are also regulated by various agencies of the states
      and localities in which the Company's products are sold. The Company's products
      are manufactured and packaged in accordance with customers’ specifications and
      sold under their private labels both domestically and in foreign countries
      through independent distribution channels.




9




**PRODUCT
      LIABILITY AND INSURANCE**





The
      Company, like other producers and distributors of ingested products, faces
      an
      inherent risk of exposure to product liability claims in the event that, among
      other things, the use of its products results in injury. The Company maintains
      insurance against product liability claims with respect to the products it
      manufactures. With respect to the retail and direct marketing distribution
      of
      products produced by others, the Company's principal form of insurance consists
      of arrangements with each of its suppliers of those products to name the Company
      as beneficiary on each of such vendor's product liability insurance policies.
      The Company does not buy products from suppliers who do not maintain such
      coverage.





**EMPLOYEES**





As
      of
      December 31, 2007, the Company employed 245 full-time and contracted employees,
      of whom 136 were engaged in manufacturing, warehouse management, and shipping,
      and 109 in marketing, administrative, call center and corporate support
      functions. None of the employees are subject to a collective bargaining
      agreement with the Company.





**INFORMATION
      SYSTEMS INFRASTRUCTURE**




Our
      website, which is based on internally developed software and other third party
      software, is hosted in San Francisco, California at a ServePath co-location
      facility. This facility provides redundant network connections, an
      uninterruptible power supply, physical and fire security and diesel generated
      power back up for the equipment on which our website relies upon. Our servers
      and our network are monitored 24 hours a day, seven days a week.




We
      use a
      variety of security techniques to protect our confidential customer data. When
      our customers place an order or access their account information, we use a
      secure server (SSL) to transfer information. Our secure server software encrypts
      all information entered before it is sent to our server. All customer data
      is
      protected against unauthorized access. We use PayPal, VeriSign and HackerSafe
      software to secure our credit card transactions.





**AVAILABLE
      INFORMATION**





All
      periodic and current reports, registration statements, code of conduct, code
      of
      ethics and other material that the Company is required to file with the
      Securities and Exchange Commission (“SEC”), including the Company’s annual
      report on Form 10-K, quarterly reports on Form 10-Q, current reports on
      Form 8-K, and amendments to those reports filed or furnished pursuant to
      Section 13(a) of the Securities Exchange Act of 1934 (the “1934 Act
      Reports”). These materials are available free of charge through the Company’s
      investor relations page at  www.ChooseMedifast.com .
      Such
      documents are available as soon as reasonably practicable after electronic
      filing of the material with the SEC. The Company’s Internet web site and the
      information contained therein or connected thereto are not intended to be
      incorporated into this Annual Report on Form 10-K.





**CERTIFICATIONS**





The
      Company’s Chief Executive Officer and Chief Financial Officer have filed their
      certifications as required by the Securities and Exchange Commission (the “SEC”)
      regarding the quality of the Company’s public disclosure for each of the periods
      ended during the Company’s fiscal year ended December 31, 2007 and the
      effectiveness of internal control over financial reporting as of December 31,
      2007 and 2006. Further the Company’s Chief Executive Officer has certified to
      the New York Stock Exchange (“NYSE”) that he is not aware of any violation by
      the Company of the NYSE corporate governance listing standards, as required
      by
      Section 303A.12(a) of the NYSE listing standards





10





**EXECUTIVE
      OFFICERS OF THE COMPANY**





**Name**
            **Age**
            
            **Position**Bradley
                T. MacDonald
            60
            
            Chairman
                of the Board of DirectorsMichael
                S. McDevitt
            29
            
            Chief
                Executive Officer and Chief Financial OfficerLeo
                Williams
            60
            
            Executive
                Vice PresidentMargaret
                MacDonald
            30
            
            Chief
                Operating Officer and PresidentBrendan
                N. Connors
            30
            
            Vice
                President of Finance




**Bradley
      T. MacDonald**


Mr.
      MacDonald became Chairman of the Board of Medifast, Inc. on January 28, 1998.
      Mr. MacDonald was previously employed by the Company as its Chief Executive
      Officer from September 1996 to March 2007 . In 2006,
      Mr. MacDonald was named “Entrepreneur of the Year” in consumer products for the
      State of Maryland. Prior to joining the Company, he was appointed as Program
      Director of the U.S. Olympic Coin Program of the Atlanta Centennial Olympic
      Games. From 1991 through 1994, Colonel MacDonald returned to active duty to
      be
      Deputy Director and Chief Financial Officer of the Retail, Food, Hospitality
      and
      Recreation Businesses for the United States Marine Corps. Prior thereto, Mr.
      MacDonald served as Chief Operating Officer of the Bonneau Sunglass Company,
      President of Pennsylvania Optical Co., Chairman and CEO of MacDonald and
      Associates, which had major financial interests in retail drug, consumer candy,
      and pilot sunglass companies. Mr. MacDonald was national president of the Marine
      Corps Reserve Officers Association and retired from the United States Marine
      Corps Reserve as a Colonel in 1997, after 27 years of service. He has been
      appointed to the Defense Advisory Board for Employer Support of the Guard and
      Reserve (ESGR). Mr. MacDonald serves on the Board of Directors of the Wireless
      Accessories Group (OTCBB: WIRX), Villa Julie College in Stevenson, Maryland
      and
      the Institute of Notre Dame High School, Baltimore, Maryland. He is also on
      the
      Board of Directors of the Marine Corps Reserve Toys for Tots Foundation and
      is a
      Foundation Trustee of the Marine Reserve Association.





**Michael
      S. McDevitt**


Mr.
      McDevitt joined Medifast in 2002 as the Controller and was promoted to Vice
      President of Finance in January 2004. In March 2005, he was promoted to
      President and in January of 2006 was also named Chief Financial Officer. In
      March of 2007, Mr. McDevitt was promoted to CEO of the Company. Prior to joining
      Medifast, Mr. McDevitt worked as a Financial Analyst for the Blackstone Group,
      an investment advisory firm based in New York, NY.





**Leo
      Williams**


Mr.
      Williams became Executive Vice President of Medifast, Inc. in January of 2004.
      Prior to joining Medifast, he was a Future Vehicles Marketing Plans Director
      for
      Ford Division sport utility vehicles and pickup trucks. A retired Marine Corps
      Reserve major general, he was ordered to active duty from October 2002 to
      September 2003 to serve as Deputy Director of the Marine Corps Combat
      Development Command. Mr. Williams is a Board of Director of the Marine Corps
      Reserve Toys for Tots Foundation and the Direct Selling
      Association.





**Margaret
      MacDonald, MBA**


Ms.
      MacDonald joined Medifast in 2000 as the Director of Sales and Administration.
      In 2002 she was promoted to VP of Operations and in 2004 promoted to Senior
      VP
      of Operations. In May of 2006, Ms. MacDonald received an Executive MBA from
      Loyola University. In March 2007, she was promoted to President and Chief
      Operating Officer of Medifast Inc. Prior to joining Medifast, Ms. MacDonald
      was
      a legal assistant at Carrington, Coleman, Sloman, and Blumenthal in Dallas,
      TX.





**Brendan
      N. Connors, CPA**


Mr.
      Connors joined Medifast as the Vice President of Finance in April of 2005.
      Prior
      to joining Medifast, Mr. Connors worked as a Senior Accountant at Wolf &
Company P.C., a certified public accounting and consulting firm in Boston,
      MA.





11





**ITEM
      1A. RISK FACTORS**





The
      following risk factors should be considered when reading this Annual Report
      on
      Form 10-K. If any of the events described below occurs, the Company’s financial
      condition and operating results could be adversely affected.





**Much
      of our growth and future profitability depends on the effectiveness of our
      advertising spent in the Direct to consumer channel.**





Our
      marketing expenditures may not result in increased revenue or generate
      sufficient awareness of the program or the brand to the consumer. We may not
      be
      able to manage our advertising spend in a cost effective manner thereby
      increasing the cost to acquire a new customer to an elevated level that will
      decrease profits.





**We
      may be subject to health related claims from our customers**





A
      customer that suffers health problems may allege that the Medifast program
      contributed to the ailment. The Company is not currently the subject of any
      such
      claims; however, we would defend ourselves vigorously against **** such
      accusations. **** Regardless
      of the ultimate outcome, defending against such claims would be costly and
      could
      adversely affect our results of operations. ****





**A
      competitor or new entrant into the market may develop a product and program
      similar to ours**





Many
      of
      our competitors are significantly larger than us and have more financial
      resources to develop new products and programs. Our business could be affected
      if one of our competitors or a new entrant to the market develops similar
      products and programs through similar marketing channels. This could result
      in
      lower sales as well as pricing competition which could adversely affect the
      Company’s results from operations.





**New
      fad diets or pharmaceutical solutions could put us at a competitive
      disadvantage**





The
      weight loss industry is subject to fad diets. The Atkins craze hit the U.S.
      several years ago and had an impact on many weight loss companies. Another
      fad
      diet could sweep the nation or consumer preferences could change. Our failure
      to
      adapt or respond quickly enough to these changes could have an adverse affect
      on
      our results of operations. In addition, pharmaceutical companies are constantly
      trying to develop safe, effective, drugs that lead to weight loss. If
      successful, many dieters could perceive this to be easier than the Medifast
      program and this would put us at a competitive disadvantage.





**Our
      ability to compete could be negatively affected in the event we fail to protect
      our brand names, trademarks or other intellectual property**




Because
      our business relies heavily on direct to consumer models, brand awareness is
      an
      important factor in our sales strategy. Failure to protect our brand or maintain
      an image of good standing with the public could result in a negative effect
      on
      our operations. Additionally, failure to protect our intellectual property
      could
      result in the arrival of a similar competitor which could reduce our competitive
      edge or decrease our market share.





**The
      business may grow too quickly for the current infrastructure to
      handle**





If
      our
      advertising is extremely successful and our Take Shape for Life relationship
      marketing division sees a large uptick in recruitment we may be unable to handle
      the growth from an operational perspective. Increasing demands on our
      infrastructure could cause long hold times in the call center as well as delays
      on our website. In addition, there could be delays in order processing,
      packaging and shipping. We could run out of a majority of our inventory if
      growth exceeded our production capacity. If these difficulties are encountered
      in a period of hyper-growth then our operating results could
      suffer.





**Any
      deficiencies or shortcomings in our information technology could prevent an
      efficient execution of routine business procedures**





We
      rely
      heavily on our IT infrastructure to support major business components. Any
      disruption to the integrity of this support structure including but not limited
      to; software, telecommunications, Electronic Resource Platform, or the
      Information Technology architecture as a whole could severely limit our ability
      to provide customers and vendors with adequate service and operating responses.
      In addition, our financial reporting is directly correlated with our
      company-wide software Microsoft Navision 4.0. Any compromise in the veracity
      of
      this system could severely alter the accuracy of our tracking, volumes, and
      general reporting including financial statements.




12




**A
      disruption in the supply of raw materials or the inability of third party
      manufacturing for certain products could affect operating results**





We
      rely
      heavily on our vendors to provide quality raw materials for us to utilize in
      our
      on site manufacturing processes. Any disruption in the availability of these
      materials could potentially interrupt our ability to provide certain products
      to
      customers in a timely manner. Also certain products are currently manufactured
      through a third party. The availability of these products is prone to
      fluctuation dependent on the manufacturer’s ability to secure and produce a
      quality product that satisfies our satisfaction standards.





**Our
      stock price may experience volatility due to fluctuations in our operating
      results**





Our
      stock
      price is subject to fluctuations in response to our operating results, a
      competitor’s operating results, or our ability to meet stock analysts forecasts
      and our yearly revenue and EPS guidance. In addition, general trends in the
      weight-loss industry as a whole can have an affect on our stock price. These
      factors may have an adverse affect on the market price of our stock and cause
      it
      to fluctuate significantly.





**We
      may be subject to claims that our employees are unqualified to provide weight
      loss counseling**





Our
      Medifast Weight Control center division provides medical assessments and
      counseling to our customers. We may be subject to claims that our employees
      lack
      the proper training and qualifications to provide proper advice regarding weight
      loss. We could be subject to claims if an employee in one of our clinics gives
      inappropriate weight loss advice that results in health problems. Such claims
      could result in damage to our reputation and could have an affect on our
      operating results.





**Negative
      publicity in the weight loss industry could adversely affect our
      business**





If
      the
      press were to come out with negative media about low-calorie diets, meal
      replacements, or soy protein this could harm our business. Even if not directed
      at Medifast, this perception could be instilled in our target market and cause
      harm to our operating results.





**The
      loss of key personnel could adversely affect our ability to operate and result
      in a negative financial condition**





Certain
      members of our Company oversee integral components of our Company. Although
      we
      do not anticipate the departure of any key employees including but not limited
      to the executive management team, we cannot guarantee their tenure indefinitely
      in the future.





**Our
      results of operations may decline as a result of a downturn in general economic
      conditions or consumer confidence**




Our
      results of operations are highly dependent o n
      product
      sales and program fees. A downturn in general economic conditions or consumer
      confidence and spending in any of our major markets could result in people
      curtailing their discretionary spending, which, in turn, could lead to a
      decrease in product sales in our Medifast Direct and Take Shape for Life
      divisions and a decrease in product and program fees at our Medifast Weight
      Control Centers and Internet product subscriptions. Any such reduction would
      adversely affect our results of operations.





**Our
      Business is subject to regulatory and legislative
      restrictions**




A
      number
      of laws and regulations govern our production, operation, and advertising.
      The
      FTC and certain states regulate advertising, disclosures to consumers, privacy,
      consumer pricing or billing arrangements, and other consumer matters. Our direct
      selling distribution channel is subject to risk of interpretation of certain
      laws pertaining to the prevention of “pyramid” or “chain sale” schemes. Although
      we believe we are in full compliance, should the governing body alter or enforce
      the law in an unanticipated way, there may be a negative result on the company’s
      operations. The Company’s financial reporting is subject to various laws and
      regulations as well, specifically, the Sarbanes-Oxley Act of 2002 and the SEC.
      These requirements demand the Company disclose certain information and maintain
      specific controls to ensure fair and legal accounting practices as outlined
      therein. The Company has taken substantial measures to ensure compliance through
      routine internal and external audits. Failure to correct any flaws in internal
      controls may constitute a public notification of weakness and could have an
      adverse effect on our stock price. Additionally, the Company is required to
      maintain a position of good standing in regards to taxation on both a Federal
      and State level. Failure to comply with federal and state regulations could
      result in additional taxes, fines, or interest due that could financially strain
      the company. Future laws and regulations could be unforeseen and potentially
      have a material negative impact on the Company. Failure to comply with any
      regulations of current or future authoritative entities could have a detrimental
      effect on the Company’s financial standing or operating results





13




**ITEM
      1B. UNRESOLVED STAFF COMMENTS**





None





**ITEM
      2. DESCRIPTION OF PROPERTY**





The
      Company owns a 49,000 square-foot facility in Owings Mills, Maryland, which
      contains its Corporate Headquarters and manufacturing plant. In 2003, the
      Company purchased a state-of-the-art 119,000 square-foot distribution facility
      in Ridgely, Maryland. The facility gives the Company the ability to distribute
      over $250 million of Medifast product sales per year. In 2004, the Company
      purchased a 3,000 square foot conference and training facility in Ocean City,
      Maryland. The facility will be used to conduct corporate training meetings,
      Board of Director Meetings and employee morale and wellness
      programs.  The
      Company has 14 leases for its corporately owned Medifast Weight Control clinics
      throughout Florida and Texas. In addition, the Company leases a building in
      Owings Mills, MD for corporate offices. The leases range in terms from one
      to
      six years .





**ITEM
      3. LEGAL PROCEEDINGS.**




Leonard
      Z. Sotomeyer on December 30, 2003 filed an action in the Supreme Court of the
      State of New York, County of New York, against his former business partner,
      David Scheffler, and T-1 Holdings, LLC, and included Medifast, Inc., formerly
      Heathrite, Inc., as a Defendant, Case 604076-03, seeking monetary damages for
      failure of his former business partner to compensate him under several
      consulting agreements with Medifast, Inc. made with H-T Capital, Inc. and
      derivatively on behalf of T-1 Holdings, LLC. The Court dismissed on Defendants’
motions Sotomeyer’s complaint in its entirety by Order of September 30, 2004.
      Following an appeal, the Appellate Division, First Department, reinstated the
      first and second causes of action while affirming the dismissal of Plaintiff’s
      remaining derivative claims by its decision April 13, 2006. The matter is now,
      again, before the New York Supreme Court for the specific purpose of litigating
      plaintiff’s first and second causes of action only. Medifast has denied any
      wrongdoing and discovery is ongoing. Medifast believes it continues to have
      a
      meritorious defense to the two remaining counts and that any decision rendered
      would not materially impact the ongoing operations of Medifast,
      Inc.





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





Not
      applicable





14





**PART
      II**





**ITEM
      5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.**





(a)
      The
      Company's Common Stock has been quoted under the symbol MED since December
      20,
      2002. The old symbol, MDFT, had been traded since February 5, 2001. The common
      stock is traded on the New York Stock Exchange. The following is a list of
      the
      low and high closing prices by fiscal quarters for 2007 and 2006:





2007Low
            
            HighQuarter
                ended March 31, 2007
            
            
            6.03
            
            
            12.40Quarter
                ended June 30, 2007
            
            
            6.32
            
            
            9.25Quarter
                ended September 30, 2007
            
            
            5.58
            
            
            8.83Quarter
                ended December 31, 2007
            
            
            3.79
            
            
            6.242006Low
            
            
            HighQuarter
                ended March 31, 2006
            
            
            5.40
            
            
            9.23Quarter
                ended June 30, 2006
            
            
            8.75
            
            
            20.90Quarter
                ended September 30, 2006
            
            
            8.21
            
            
            19.49Quarter
                ended December 31, 2006
            
            
            8.41
            
            
            14.52





(b)
      The
      quotations reflect inter-dealer prices, without retail mark-up, markdown or
      commissions and may not represent actual transactions.





(c)
      There
      were approximately 206 record holders of the Company's Common Stock as of March
      17, 2008. This number does not include beneficial owners of our securities
      held
      in the name of nominees. The Company had no preferred holders of the Company’s
      stock as of December 31, 2007.





(d)
      No
      dividends on common stock were declared by the Company during 2007 or
      2006.




15




**ITEM
      6. SELECTED FINANCIAL DATA**




The
      selected condensed consolidated financial data set forth below should be read
      in
      conjunction with “Management’s Discussion and Analysis of Financial Condition
      and Results of Operations” included as Part II, Item 7 of this Annual
      Report on Form  10-K, and the consolidated financial statements and notes
      thereto of the company included in Part II Item 8 of this Annual
      Report on Form  10-K. The historical results provided below are not
      necessarily indicative of future results .




2007
              
              2006
              
              2005
              
              2004
              
              2003Revenue
              
              
              83,779,000
              
              
              74,086,000
              
              
              40,129,000
              
              
              27,340,000
              
              
              25,379,000Operating
                  income
              
              
              5,715,000
              
              
              7,381,000
              
              
              3,549,000
              
              
              3,004,000
              
              
              3,598,000Income
                  from continuing operations
              
              
              5,543,000
              
              
              7,463,000
              
              
              3,405,000
              
              
              2,906,000
              
              
              3,558,000EPS
                  - basic
              
              
              0.30
              
              
              0.41
              
              
              0.17
              
              
              0.16
              
              
              0.25EPS
                  - diluted
              
              
              0.28
              
              
              0.38
              
              
              0.17
              
              
              0.14
              
              
              0.22Total
                  assets
              
              
              43,724,000
              
              
              36,677,000
              
              
              30,120,000
              
              
              25,968,000
              
              
              24,230,000Current
                  portion of long-term debt and revolving credit facilities
              
              
              1,863,000
              
              
              1,804,000
              
              
              1,194,000
              
              
              827,000
              
              
              819,000Total
                  long-term debt
              
              
              4,570,000
              
              
              3,509,000
              
              
              3,977,000
              
              
              4,256,000
              
              
              4,564,000Weighted
                  average shares outstandingBasic
              
              
              12,960,930
              
              
              12,699,066
              
              
              12,258,734
              
              
              10,832,360
              
              
              9,305,731Diluted
              
              
              13,644,149
              
              
              13,482,894
              
              
              12,780,959
              
              
              12,413,424
              
              
              10,952,367




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


**FORWARD
      LOOKING STATEMENTS**





This
      document contains forward-looking statements which may involve known and unknown
      risks, uncertainties and other factors that may cause Medifast, Inc. actual
      results and performance in future periods to be materially different from any
      future results or performance suggested by these statements. Medifast, Inc.
      cautions investors not to place undue reliance on forward-looking statements,
      which speak only to management's expectations on this date.




**Critical
      Accounting Policies and Estimates**





Our
      consolidated financial statements are prepared in accordance with U.S. generally
      accepted accounting principles. Our significant accounting policies are
      described in Note 2 of the consolidated financial statements.





The
      preparation of these financial statements requires management to make estimates
      and assumptions that affect the reported amounts of assets and liabilities,
      the
      disclosure of contingent assets and liabilities at the date of the financial
      statements, and the reported amounts of revenue and expenses during the
      reporting period. Management develops, and changes periodically, these estimates
      and assumptions based on historical experience and on various other factors
      that
      are believed to be reasonable under the circumstances. Actual results may differ
      from these estimates under different assumptions or conditions. Management
      considers the following accounting estimates to be the most critical in
      preparing our consolidated financial statements. These critical accounting
      estimates have been discussed with our audit committee.





*Revenue
      Recognition.* Revenue
      is recognized net of discounts, rebates, promotional adjustments, price
      adjustments, returns and other potential adjustments upon shipment and passing
      of risk to the customer and when estimates of are reasonably determinable,
      collection is reasonably assured and the Company has no further performance
      obligations.




16





*Impairment
      of Fixed Assets and Intangible Assets.* We
      continually assess the impairment of long-lived assets whenever events or
      changes in circumstances indicate that the carrying value of the assets may
      not
      be recoverable. Judgments regarding the existence of impairment indicators
      are
      based on legal factors, market conditions and our operating performance. Future
      events could cause us to conclude that impairment indicators exist and the
      carrying values of fixed and intangible assets may be impaired. Any resulting
      impairment loss would be limited to the value of net fixed and intangible
      assets.




*Income
      Taxes* .
      In the
      preparation of consolidated financial statements, the Company estimates income
      taxes based on diverse legislative and regulatory structures that exist in
      jurisdictions where the company conducts business. Deferred income tax assets
      and liabilities represent tax benefits or obligations that arise from temporary
      differences due to differing treatment of certain items for accounting and
      income tax purposes. The Company evaluates deferred tax assets each period
      to
      ensure that estimated future taxable income will be sufficient in character
      amount and timing to result in their recovery. A valuation allowance is
      established when management determines that it is more likely than not that
      a
      deferred tax asset will not be realized to reduce the assets to their realizable
      value. Considerable judgments are required in establishing deferred tax
      valuation allowances and in assessing probable exposures related to tax matters.
      The Company’s tax returns are subject to audit and local taxing authorities that
      could challenge the company’s tax positions. The Company believes it records
      and/or discloses such potential tax liabilities as appropriate and has
      reasonably estimated its income tax liabilities and recoverable tax
      assets.




*Allowance
      for doubtful accounts* .
      In
      determining the adequacy of the allowance for doubtful accounts, we consider
      a
      number of factors including the aging of the receivable portfolio, customer
      payment trends, and financial condition of the customer, industry conditions
      and
      overall credibility of the customer. Actual amounts could differ significantly
      from our estimates.





**CONSOLIDATED
      RESULTS OF OPERATIONS**


**2007
      COMPARISON WITH 2006**





**OPERATING**





Revenue:
      Revenue increased to $83.8 million in 2007 as compared to $74.1 million in
      2006,
      an increase of $9.7 million or 13%. The direct marketing sales channel accounted
      for 56% of total revenue, Take Shape for Life 33%, doctors 5%, and brick and
      mortar clinics 6%. The direct marketing sales channel, which is fueled primarily
      by consumer advertising, increased revenues by approximately 3% year-over year.
      Take Shape for Life sales, which are fueled by person-to-person recruiting
      and
      support increased by 23% year-over-year. The Company’s doctor’s sales increased
      by 8% compared to 2006. The Company’s clinic division which began operating
      under the Medifast Weight Control Center name in late 2006, increased sales
      by
      37% as compared to 2006.





The
      Take
      Shape for Life division grew 23% year-over-year. This growth can largely be
      attributed to the tools and training that led to an increase in the ability
      of
      the division to both promote growth in recruiting of health coaches, as well
      as
      better supporting this growth as it occurs. This continued investment proved
      to
      be a large part of the current growth trends in Take Shape for Life sales,
      as
      well as the number of active health coaches. The number of active health coaches
      grew to 1,850 at the end of the fourth quarter 2007 compared to 1,200 at the
      same time period in 2006, an increase of 54%. This recent growth in health
      coaches was recently observed in July of 2007, with over 80% attendance growth
      at the 2007 National Convention compared to the attendance at the 2006
      Convention. The company believes that the growth in health coach activity is
      a
      positive trend that should continue, and will lead to significant revenue growth
      in the near future





The
      Medifast Weight Control Centers, which represent approximately 6% of the
      Company’s overall revenues, are currently operating in 11 locations in Dallas
      and Orlando. In 2007, the Company experienced revenue growth of 37% versus
      the
      same time period last year. The average monthly revenue per clinic also
      witnessed significant growth of 64%, averaging $36,000 per clinic in 2007 as
      compared to $22,000 in 2006. In the expanding Dallas, TX market, the average
      monthly revenue per clinic is approximately $50,000. In the estimated $40
      billion weight loss and health living industry, the brick and mortar clinic
      model has always made up a significant portion of overall sales. Medifast has
      incorporated this model with the creation of the Medifast Weight Control
      Centers. The recent growth in this division has proven that the model is in
      high
      demand from a select portion of the weight loss consumers. The Company believes
      that with the recent industry launches of over-the-counter and anticipated
      launches of prescription appetite suppressant medications that this model will
      continue to grow. Therefore, throughout 2007, the Company invested in the
      infrastructure of its clinic model. The major aspects of the investment in
      this
      division included an expanded executive team, the creation of a point of sale
      system, a robust customer data tracking system, finalizing the franchise
      opportunity documentation, and the beginning stages of expansion into several
      new locations. The Company believes this business will be a major driver of
      revenues and profits for the Medifast business as it continues to expand. The
      Company plans to continue the expansion of the Medifast Weight Control Centers
      with both additional corporate locations as well as offering the model through
      a
      franchise opportunity. The Company is opening four additional corporately owned
      clinics in the Houston, TX market by the end of the first quarter of
      2008. Also, on February 18, 2008, the Company announced that it has sold
      its first franchise of Medifast Weight Control Centers. The Company sold the
      rights to open four clinics in the Greater Baltimore Metropolitan Area. The
      franchisee also has the rights to open four additional Medifast Weight Control
      Centers in the Baltimore area over the next two years, bringing the total to
      eight locations.





17





Overall,
      selling, general and administrative expenses increased by $8.1 million as
      compared to 2006. The majority of the increase was due to investments in the
      Company’s future advertising campaigns, along with the necessary infrastructure
      support tools to allow the future campaigns to improve in effectiveness.
      Advertising expense for 2007 was approximately $18.4 million compared to
      approximately $14.3 million for the same period last year, an increase of $4.1
      million. In the prior year, the Company benefited from a substantial editorial
      placement in a major consumer publication at no cost to the Company. During
      2007, the Company has invested in multiple celebrity endorsement contracts
      as
      well as increased public relations expense to focus on increasing brand
      awareness that will benefit our future advertising campaigns. Salaries and
      benefits increased by approximately $1,500,000 in 2007 as the Company hired
      additional expertise in critical areas in order to assist in future growth
      and
      meet regulatory needs. This primarily includes IT, nutrition and product
      development, marketing, Medifast Weight Control Centers, and Take Shape for
      Life. Take Shape for Life commission expense, which is completely variable
      based
      upon revenue, increased by approximately $2,400,000. Communication expense
      which
      includes outsourced call centers decreased by $50,000. The Company has spent
      a
      significant amount of time and materials in 2007 building the future call center
      infrastructure with related technology and personnel. This investment will
      allow
      the call center to increase the percentage of advertising calls to be handled
      in-house. It is believed that this initiative will amount to significant savings
      and improved closing rates in the future. The reduction in outsourced call
      center expenses will continue in stages throughout 2008. Other expenses
      increased by $550,000, which included items such as depreciation, amortization,
      credit card processing fees, charitable contributions, and property taxes.
      Stock
      compensation expense increased by $192,000 as compared to 2006 as stock awards
      vest over 5 and 6 year terms for executives. These increases were offset by
      an
      approximately $250,000 decrease in office expense and the absence of a $323,000
      loss resulting from the sale of the Consumer Choice Systems division in the
      first quarter of 2006.





Costs
      and
      Expenses: Cost of revenue increased $3.2 million to $21.5 million in 2007 from
      $18.2 million in 2006. As a percentage of sales, gross margin remained at
      approximately 75% in 2007 and 2006.





Other
      Income/Expense: Other income/expense decreased from $82,000 in other income
      in
      2006 to $172,000 in other expense at December 31, 2007. Other income/expense
      consists of interest expense on debt, gains on the sale of equity investments,
      interest payments received on the CCS note receivable, and overpayments of
      taxes. In 2007, the Company also realized other income when it exercised a
      stock
      warrant from a former business partner, and realized a loss on disposal of
      assets relating to the closing of three Medifast Weight Control
      Centers.





Income
      taxes **:** **** **** In
      2007,
      we recorded $1,706,000 in income tax expense, which represents an annual
      effective rate of 30.8%. In 2006, we recorded income tax expense of $2,307,000
      which reflected an estimated annual effective tax rate of 30.9%. The Company
      anticipates a tax rate of approximately 32-34% in 2008.





Net
      income: Net income was $3.8 million in 2007 as compared to $5.2 million in
      2006,
      which reflected a decrease of $1.4 million or 26%. The decrease was directly
      related to the initiatives of the Company to create its new advertising campaign
      and improve future capabilities to increase advertising effectiveness.
      Additionally, the Company did not have the benefit of the no cost editorial
      publication that occurred in the first quarter of 2006 that led to significant
      profits.




18




**SEGMENT
      RESULTS OF OPERATIONS**





**Net
      Sales by Segment as of December 31, 2007**





**2007**
            
            **2006**
            
            **2005****Segments**
            
            Sales
            
            % of Total
            
            Sales
            
            % of Total
            
            Sales
            
            % of TotalMedifast
            
            
            78,861,000
            
            
            94
            %
            
            70,181,000
            
            
            95
            %
            
            36,840,000
            
            
            92
            %All
                Other
            
            
            4,918,000
            
            
            6
            %
            
            4,015,000
            
            
            5
            %
            
            3,451,000
            
            
            9
            %Eliminations
            
            
            
            
            
            0
            %
            
            (110,000
            )
            
            0
            %
            
            (162,000
            )
            
            0
            %Total
                Sales
            
            
            83,779,000
            
            
            100
            %
            
            74,086,000
            
            
            100
            %
            
            40,129,000
            
            
            100
            %





**2007
      vs. 2006**





Medifast
      Segment: The Medifast reporting segment consists of the sales of Medifast
      Direct, Take Shape for Life, and Doctors and Clinics. As this represents the
      majority of our business this is referenced to the “Consolidated Results of
      Operations” management discussion for 2007 vs. 2006 above.





All
      Other
      Segment: The All Other reporting segment consists of the sales from Hi-Energy
      and Medifast Weight Control Centers. Sales increased by $903,000 year-over
      year
      as a result of an increase in Medifast Weight Control Centers sales of
      $1,013,000. Sales to Hi-Energy licensees decreased by $110,000 as fewer
      Hi-Energy licensee clinics remain in operation as clinics convert to Medifast
      Weight Control Centers. The increase in Medifast Weight Control Center’s sales
      was due to a renewed focus on the expansion of the corporate clinics, spending
      increases for advertising, increased advertising effectiveness, improved closing
      rates on walk-in sales, as well as the hiring of more experienced clinic
      operators to manage the clinics. There were 10 clinics open at the end of 2007
      as compared to 12 at the end of 2006.





**2006
      vs. 2005**





Medifast
      Segment: The Medifast reporting segment consists of the sales of Medifast
      Direct, Take Shape for Life, and Doctors and Clinics. As this represents the
      majority of our business this is referenced to the “Consolidated Results of
      Operations” management discussion for 2006 vs. 2005 above.





All
      Other
      Segment: The All Other reporting segment consists of the sales from Hi-Energy
      and Medifast Weight Control Centers. Sales increased by $564,000 year-over
      year
      as a result of an increase in Hi-Energy and Medifast Weight Control Centers
      sales of $1,464,000. This was offset by a decrease in Consumer Choice Systems
      sales of $900,000 as the division was sold in January of 2006. The increase
      in
      the Medifast Weight Control Center’s sales were due to spending increases for
      advertising, increased advertising effectiveness, improved closing rates on
      walk-in sales, as well as the hiring of more experienced clinic operators to
      manage the clinics. In addition, new programs were developed that extended
      the
      lifetime value of each customer.





**Net
      Profit by Segment as of December 31, 2007**





**2007**
            
            **2006**
            
            **2005****Segments**
            
            Profit
            
            % of Total
            
            Profit
            
            % of Total
            
            Profit
            
            % of TotalMedifast
            
            
            5,937,000
            
            
            155
            %
            
            6,218,000
            
            
            121
            %
            
            3,771,000
            
            
            179
            %All
                Other
            
            
            (2,100,000
            )
            
            -55
            %
            
            (952,000
            )
            
            -18
            %
            
            (1,497,000
            )
            
            -71
            %Eliminations
            
            
            
            
            
            0
            %
            
            (110,000
            )
            
            -2
            %
            
            (162,000
            )
            
            -8
            %Net
                Profit
            
            
            3,837,000
            
            
            100
            %
            
            5,156,000
            
            
            100
            %
            
            2,112,000
            
            
            100
            %**




19




**2007
      vs. 2006**





Medifast
      Segment: The Medifast reporting segment consists of the profits of Medifast
      Direct, Take Shape for Life, and Doctors and Clinics. As this represents the
      majority of our business this is referenced to the “Consolidated Results of
      Operations” management discussion for 2007 vs. 2006 above. See footnote 17,
“Business Segments” for a detailed breakout of expenses





All
      Other
      Segment: The All Other reporting segment consists of the losses of Hi-Energy,
      Medifast Weight Control Centers, and corporate expenses related to the parent
      company operations. Year-over-year, the loss in the All Other segment increased
      by $1,148,000. Corporate expenses increased by $401,000, as a result of
      increased fees due to increased reporting requirements for the Company as a
      whole. These fees include, but are not limited to auditors’ fees, attorneys’
fees, board of director expenses, investor relations, corporate consulting,
      education and training, and corporate outings. Hi-Energy and Medifast Weight
      Control Center expenses increased by $747,000 due to increased focus on opening
      new Medifast Weight Control clinics, hiring of experienced personnel, increased
      advertising and developing the Franchise model. See footnote 17, “Business
      Segments” for a detailed breakout of expenses.





**2006
      vs. 2005**





Medifast
      Segment: The Medifast reporting segment consists of the profits of Medifast
      Direct, Take Shape for Life, and Doctors. As this represents the majority of
      our
      business this is referenced to the “Consolidated Results of Operations”
management discussion for 2006 vs. 2005 above. See footnote 17, “Business
      Segments” for a detailed breakout of expenses





All
      Other
      Segment: The All Other reporting segment consists of the losses of Hi-Energy
      and
      Medifast Weight Control Centers, Consumers Choice Systems, and corporate
      expenses related to the parent company operations. Year-over-year, the loss
      in
      the All Other segment improved by $545,000. The sale of Consumer Choice Systems
      in January of 2007 had the largest impact as it led to a $489,000 increase
      in
      income as compared to 2005. In addition, decreased selling, general, and
      administrative expenses of the corporate operation, which includes auditor’s
      fees, attorneys’ fees, board of director expenses, investor relations, corporate
      consulting, education and training, and corporate outings, led to improvement
      of
      $186,000. The Hi-Energy and Medifast Weight Control Centers showed an immaterial
      improvement year-over-year due to expenses associated with expanding the clinic
      model. See footnote 17, “Business Segments” for a detailed breakout of
      expenses.





**Contractual
      Obligations and Commercial Commitments**





As
      of
      December 31, 2007, our principal commitments consisted of obligations for
      variable and fixed rate loans detailed in Note 12 of the financial statements,
      operating leases for corporately owned Medifast Weight Control Centers detailed
      in Note 9 of the financial statements, and copier equipment contracts for our
      printing operation that support our marketing efforts.





The
      Company has the following contractual obligations as of December 31,
      2007





**Payments
                due by period****2008**
            
            **2009**
            
            **2010**
            
            **2011**
            
            **2012**
            
            **Thereafter**
            
            **Total****Contractual
                Obligations**Total
                Debt
            
            
            1,863,000
            
            
            257,000
            
            
            257,000
            
            
            494,000
            
            
            225,000
            
            
            3,337,000
            
            
            6,433,000Operating
                Leases
            
            
            673,000
            
            
            691,000
            
            
            583,000
            
            
            538,000
            
            
            435,000
            
            
            16,000
            
            
            2,936,000Copier
                Equipment Service Contracts
            
            
            411,000
            
            
            375,000
            
            
            350,000
            
            
            350,000
            
            
            290,000
            
            
            
            
            
            1,776,000Total
                contractual obligations
            
            
            2,947,000
            
            
            1,323,000
            
            
            1,190,000
            
            
            1,382,000
            
            
            950,000
            
            
            3,353,000
            
            
            11,145,000




20




**LIQUIDITY
      AND CAPITAL RESOURCES**





The
      Company had stockholders’ equity of $32,420,000 and working capital of
      $10,395,000 on December 31, 2007 compared with $27,916,000 and $9,612,000 at
      December 31, 2006, respectively. The $4.5 million net increase in stockholder’s
      equity reflects $3.8 million in 2007 profits as well as equity transactions
      as
      outlined in the “Consolidated Statement of Changes in Stockholders’ Equity and
      accumulated other comprehensive income (loss).” The Company’s cash and cash
      equivalents position increased from $1.1 million at December 31, 2006 to $2.2
      at
      December 31, 2006. The increase is due to improved sales in fourth quarter
      2007
      versus 2006 as well as timing of accounts payable.





In
      September 2007, Medifast, Inc.’s wholly owned subsidiary Jason Pharmaceuticals,
      Inc. increased its Secured Line of Credit from $5 million to $7.5 million and
      moved the line of credit from Mercantile Safe-Deposit and Trust to Merrill
      Lynch. The line of credit is at LIBOR plus 1.3 percent. The increased line
      may
      be used to finance fixed assets, advertising, and inventory of Medifast, Inc.
      The Company currently has no off-balance sheet arrangements.




In
      the
      year ended December 31, 2007, the Company generated cash flow of $7,954,000
      from
      operations, primarily attributable to higher operating income. This was offset
      by net changes in operating assets and liabilities that decreased cash flow
      by
      $1,289,000. The largest use of cash was for the purchase of inventory. The
      Company builds up inventory each year in the fourth quarter in order to prepare
      for “diet season” in the first quarter of 2008. Additional uses of cash included
      the funding of the Chairman of the Boards deferred compensation plan outlined
      in
      Note 1 of the financial statements as well as prepaid advertising for January
      of
      2008. This was offset by an increase in accounts payable and income taxes
      payable of $1,367,000 and $57,000, respectively.




In
      the
      year ended December 31, 2007, net cash used in investing activities was
      $7,969,000, which primarily consisted of the purchase of intangible assets
      and
      purchases of property and equipment. The increase in intangible assets relates
      to the acquisition of customer lists in 2007 which are used in direct response
      marketing campaigns. These campaigns consist of postcards and e-mails that
      are
      sent to customers with a special offer or discount coupon to order on our
      website, choosemedifast.com, or through our in-house call center. In the fourth
      quarter of 2007, the Company leased an additional Xerox Igen3 printer in order
      to increase its direct mailing capabilities. Large customer mailings will be
      sent out bi-weekly throughout 2008. The increase in property and equipment
      relates to the building of a large amount of infrastructure in 2007. This
      included the purchase of a state of the art Avaya phone system, additional
      enhancements to our Enterprise Resource Planning System, IT server and
      networking upgrades, the build out of our new Medifast Weight Control Centers
      as
      well as leasehold improvements to our distribution facility in Ridgely,
      MD.




In
      the
      year ended December 31, 2007, financing activities generated $1,125,000 in
      cash
      flow, representing principal repayments of long-term debt, and the purchase
      of
      25,000 shares of treasury stock. This was offset by an increase in the line
      of
      credit, decrease in the CCS note receivable, and issuances of warrants and
      options exercised with cash.




In
      pursuing its business strategy, the Company may require additional cash for
      operating and investing activities. The Company expects future cash
      requirements, if any, to be funded from operating cash flow and cash flow from
      financing activities.





There
      are
      no current plans or discussions in process relating to any material acquisition
      that is probable in the foreseeable future.




**2006
      COMPARISON WITH 2005**





**OPERATING**





Revenue:
      Revenue increased to $74.1 million in 2006 as compared to $40.1 million in
      2005,
      an increase of $34 million or 85%. The direct marketing sales channel accounted
      for 60% of total revenue, Take Shape for Life 30%, doctors 5%, and clinics
      5%.
      The direct marketing sales channel, which is fueled primarily by consumer
      advertising, increased revenues by approximately 142% year-over year. Take
      Shape
      for Life sales, which are fueled by person-to-person recruiting and support
      increased by 46% year-over-year.





The
      growth in revenue is primarily the result of an increased advertising campaign
      in 2006, which fueled growth across the Company’s multiple distribution
      channels. The Company has expanded into additional print media and national
      cable and network TV spots. The Company also continues to expand its presence
      on
      the web through multiple marketing initiatives. Additionally, the Take Shape
      for
      Life network continues to grow as the sales network expands into additional
      states and increased penetration in existing states. The Company continues
      to
      create new marketing tools and training materials for health advisors to help
      increase the recruitment of both active Health Advisors as well as the lifetime
      value of their customers.





Due
      to
      the significant growth in the first half of 2006, Medifast, Inc. began exploring
      third party over-sourcing capabilities in the call center. The Company began
      using an outsourced call center for overflow call volume in late April. The
      outsourced call center allowed the company to prepare in the fourth quarter
      of
      2006 for anticipated sales growth in the first quarter of 2007 so that a
      shortage of call center representatives would not be experienced as it was
      in
      the first quarter of 2006. The Company is currently exploring bringing all
      call
      center functions in-house. Capital expenditure for a new phone system would
      be
      necessary; however, the return on investment would be under a year. The Company
      has also invested in increasing production capacity with the purchase of two
      additional manufacturing lines and a larger capacity blender. The lines will
      significantly improve the Company's production capability, while also improving
      its overall efficiencies.




21




In
      addition, the Company implemented a new Enterprise Resource Planning (ERP)
      system in December of 2006. The system adds critical functions and controls
      necessary for Sarbanes Oxley compliance and significantly increases the
      Company’s ability to track and forecast inventory. The system provides enhanced
      reporting on all business units and enables the Company to handle significantly
      increased sales volume. The Company believes that these capabilities will
      provide the Company with the scalability necessary to seamlessly handle
      increased demands as the business continues to grow. The Company is exploring
      the ownership of its call center, which would require a new phone system. The
      Company expects that this would be the last large capital expense expected.
      The
      Company now has the manufacturing, distribution, and IT capability to handle
      approximately $250 - $300 million in sales volume





Costs
      and
      Expenses: Cost of revenue increased $8.1 million to $18.2 million in 2006 from
      $10.2 million in 2005. As a percentage of sales, gross margin increased to
      75.4%
      in 2006 as compared to 74.7% in 2005. The slight increase in gross margin is
      primarily due to decreased raw material costs as a result of increased volume
      discounts. The new machines are expected to add to efficiency in the
      future.





Advertising
      expense in 2006 was approximately $14.3 million as compared to approximately
      $3.8 million in 2005, an increase of $10.5 million. The increased marketing
      was
      spent primarily for TV advertising, print, and web media. The Company continues
      to test, analyze and adapt the advertising message and placements on TV, print
      and web media to achieve the lowest cost to acquire new customers. This testing
      will allow the company to spend our advertising dollars most effectively as
      we
      plan on increasing our advertising budget for the year of 2007. The branding
      effect of advertising has proven to have impact in all channels of the business
      driving customers to the web and call center, leads to Take Shape for Life
      health advisors, patients to local Medifast practitioners and significant
      walk-ins to Medifast Weight Control Center clinics.





Aside
      from the increase in advertising expense, selling, general, and administrative
      expenses increased by approximately $11.5 million. A few major expense
      categories attributed to the majority of the increase in expenses and were
      all
      directly related to our dramatic sales growth in 2006. Salaries and benefits
      increased by $3 million to support the 85% increase in sales. In addition,
      Take
      Shape for Life sales increased by 46% year-over-year which led to increased
      commission expense of $3.4 million that is completely variable in relation
      to
      sales growth. Another variable expense that rose by $800,000 with our sales
      growth was credit card processing fees. Currently, over 95% of the Company’s
      transactions are processed via credit card. Additional increases included an
      increase in office expense of $800,000, an increase in operating costs of
      $300,000, and an increase in sales expense of $400,000. Other expenses increased
      by $1.8 million, which included items such as depreciation, amortization, stock
      compensation expense, charitable contributions, and property taxes. To handle
      increased call volume, the Company began using an outsourced call center in
      April of 2006 which led to $1 million in additional expense as compared to
      prior
      year.





Other
      Income/Expense: Other income increased from $15,000 in 2005 to $276,000 in
      2006
      primarily as a result of increased gains on the sale of equity investments,
      interest payments received on the CCS note receivable, and state income tax
      refunds related to 2005 overpayments.





On
      January 17, 2006 the assets of Consumer Choice Systems, a division of Medifast,
      Inc., were sold to a former Board member. The promissory note calls for monthly
      principal only payments over a 10-year term. Therefore, when imputing an
      interest rate on the loan, a $323,000 loss had to be realized due to the
      difference in the present value of the note receivable compared to the amount
      realizable over 10-years. This is a one-time loss that will not affect any
      future periods. The loss is recouped monthly in interest income over a period
      of
      120 months or upon payment of the note in its entirety.





Income
      taxes: In the third quarter of 2006, the Company had a $1 million federal tax
      refund receivable. A portion of this refund was factored into the Company’s
      income tax provision, which lowered the estimated tax rate for 2006 **.** **** **** In
      2006,
      the Company recorded $2.3 million in income tax expense, which represents an
      annual effective rate of 31%. In 2005, we recorded income tax expense of $1
      million, which reflected an estimated annual effective tax rate of 29.4 %.
      The
      Company anticipates a tax rate of approximately 36-39% in 2007. The benefit
      the
      Company received in 2006 from a large income tax refund receivable as a result
      a
      cost segregation study performed on our fixed assets is not expected to benefit
      future periods.





Net
      income: Net income increased to $5.2 million in 2006 as compared to $2.1 million
      in 2005, which reflected an increase of 144% or $3.1 million. The increase
      in
      net income is due to an increase in sales offset by increased selling, general,
      and administrative expenses, that primarily consist of increased advertising,
      commissions paid to Take Shape for Life health advisors, outsourced call center
      reps, and new employees.





22





**LIQUIDITY
      AND CAPITAL RESOURCES**





The
      Company had stockholders’ equity of $27,916,000 and working capital of
      $9,612,000 on December 31, 2006 compared with $21,697,000 and $9,996,000 at
      December 31, 2005, respectively. The $6.2 million net increase in stockholder’s
      equity reflects the increased profitability of the Company. The Company’s cash
      and cash equivalents position decreased from $1.5 million at December 31, 2005
      to $1.1 at December 31, 2006. The decrease is due to increased cash outlays
      for
      infrastructure to include the new ERP system and new production lines and
      blender, as well as inventory build-up for the first quarter of 2007. In
      addition, prepaid advertisements for January and payments to our third party
      call center were uses of cash. On December 31, 2006 the Company’s current ratio
      was 3 to 1.





In
      October 2006, Medifast, Inc.’s wholly owned subsidiary Jason Pharmaceuticals,
      Inc. renewed its $5,000,000 Secured Line of Credit from Mercantile Safe-Deposit
      and Trust of Baltimore, Maryland. The line of credit is at LIBOR plus 1.3
      percent. The increased line may be used to finance equipment, advertising,
      inventory, and receivables of Medifast, Inc. The Company currently has no
      off-balance sheet arrangements.




In
      the
      year ended December 31, 2006, the Company generated cash flow of $5,845,000
      from
      operations, primarily attributable to higher operating income. This was offset
      by net changes in operating assets and liabilities that decreased cash flow
      by
      $3,650,000. The largest use of cash was for the purchase of inventory. We
      increased inventory in the fourth quarter in order to meet anticipated demand
      in
      the first quarter of 2007. This was offset by an increase in accounts payable
      and a reduction in our accounts receivable and prepaid balances.




In
      the
      year ended December 31, 2006, net cash used in investing activities was
      $6,747,000, which primarily consisted of the purchase of intangible assets
      and
      purchases of property and equipment. The increase in intangible assets relates
      to the acquisition of customer lists in 2006 which are used in direct response
      marketing campaigns. These campaigns consist of postcards and e-mails that
      are
      sent to customers with a special offer or discount coupon to order on our
      website, choosemedifast.com, or through our call center. In addition, the
      Company acquired trademarks in preparation for future international ventures
      as
      well as incurred fees in developing patents on our diabetic lines. The increase
      in property and equipment relates to the building of a large amount of
      infrastructure in 2006. This included a new Enterprise Resource Planning system,
      two new state of the art manufacturing lines, larger capacity blender and
      improvements at our distribution facility as well as the build out of our new
      Medifast Weight Control Centers.




In
      the
      year ended December 31, 2006, financing activities generated $503,000 in cash
      flow, representing principal repayments of long-term debt, and the purchase
      of
      25,000 shares of treasury stock. This was offset by an increase in the line
      of
      credit and issuances of warrants and options exercised with cash.




In
      pursuing its business strategy, the Company may require additional cash for
      operating and investing activities. The Company expects future cash
      requirements, if any, to be funded from operating cash flow and cash flow from
      financing activities.





There
      are
      no current plans or discussions in process relating to any material acquisition
      that is probable in the foreseeable future.





**SEASONALITY**





The
      Company's weight management products and programs have historically been subject
      to seasonality. Traditionally the holiday season in November/December of each
      year is considered poor for diet control products and services. January and
      February generally show increases in sales, as these months are considered
      the
      commencement of the “diet season.” The Company did not experience the
      sa me
      degree
      of seasonality in 2007. This is largely due to the increase in the consumer’s
      awareness of the overall health and nutritional benefits accompanied with the
      use of the Company’s product line. As consumers continue to increase their
      association of nutritional weight loss programs with overall health, seasonality
      will continue to decrease.





**INFLATION**





To
      date,
      inflation has not had a material effect on the Company's business.





23





**ITEM
      7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK**




Market
      risk is the potential loss arising from adverse changes in market rates and
      prices, such as interest rates and a decline in the stock market. The Company
      does not enter into derivatives, foreign exchange transactions or other
      financial instruments for trading or speculative purposes. The Company has
      limited exposure to market risks related to changes in interest rates. The
      principal risks of loss arising from adverse changes in market rates and prices
      to which the Company and its subsidiaries are exposed relate to interest rates
      on debt. Since nearly all of our debt is variable rate based, any changes in
      market interest rates will cause an equal change in our net interest expense.
      At
      December 31, 2007, there was $4.8 million of variable interest loans outstanding
      which is subject to interest rate risk. Interest rates on our variable rate
      loans ranged from 5.93% to 7.73% for the year ended December 31, 2007. Each
      100
      basis point increase in the bank’s LIBOR rates relative to these borrowings
      would impact interest expense by $48,000 over a 12-month period.





**ITEM
      8. FINANCIAL STATEMENTS.**





The
      information required by this item is set forth on pages 44 to 66 hereto and
      incorporated by reference herein.





**ITEM
      9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON
      ACCOUNTING** **AND
      FINANCIAL DISCLOSURES.**





There
      were no disagreements with the Company’s independent auditors, regarding
      accounting and financial disclosures for the fiscal year ending December 31,
      2007.





**ITEM
      9A. CONTROLS AND PROCEDURES**




**Disclosure
      Controls and Procedures**




The
      Securities and Exchange Commission defines the term “disclosure controls and
      procedures” to mean a company’s controls and other procedures that are designed
      to ensure that information required to be disclosed in the reports that it
      files
      or submits under the Securities Exchange Act of 1934 is recorded, processed,
      summarized and reported, within the time periods specified in the Securities
      and
      Exchange Commission’s rules and forms. Based on the evaluation of the
      effectiveness of our disclosure controls and procedures by our management,
      with
      the participation of our Chief Executive Officer and our Chief Financial
      Officer, as of the end of the period covered by this report, our Chief Executive
      Officer and our Chief Financial Officer have concluded that our disclosure
      controls and procedures at the end of the period covered by this report were
      effective to ensure that information required to be disclosed in the reports
      that we file or submit under the Securities Exchange Act of 1934 is
      (i) recorded, processed, summarized and reported, within the time periods
      specified in the Commission’s rules and forms, and (ii) accumulated and
      communicated to our management, including our Chief Executive Officer and Chief
      Financial Officer, as appropriate to allow timely decisions regarding
      disclosure.




**Management’s
      Report on Internal Control over Financial Reporting**




Management
      is responsible for establishing and maintaining adequate internal control over
      the Company’s financial reporting. Internal control over financial reporting is
      a process designed to provide reasonable assurance regarding the reliability
      of
      the Company’s financial reporting and the preparation of consolidated financial
      statements for external purposes in accordance with generally accepted
      accounting principles. Internal control over financial reporting includes
      policies and procedures that: (i) pertain to maintaining records that, in a
      reasonable detail, accurately and fairly reflect our transactions and
      dispositions of our assets; (ii) provide reasonable assurance that
      transactions are recorded as necessary for preparation of our financial
      statements in accordance with generally accepted accounting principles and
      that
      the receipts and expenditures of the Company are being made in accordance with
      management and board of director authorization; and (iii) provide
      reasonable assurance that unauthorized acquisition, use or disposition of the
      Company’s assets that could have a material effect on our financial statements
      would be prevented or detected on a timely basis.




Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.




Management
      evaluated the effectiveness of the Company’s internal control over financial
      reporting based on the framework in Internal Control – Integrated Framework
      issued by the Committee of Sponsoring Organizations of the Treadway Commission
      (“COSO”). Based upon that evaluation, management concluded that the Company’s
      internal control over financial reporting was effective as of December 31,
      2007.




The
      Company’s independent registered public accounting firm, Bagell, Josephs,
      Levine, and Co., LLC, has audited the Company’s internal control over financial
      reporting. Their report on the effectiveness of the Company’s internal control
      over financial reporting appears on page 26.




24




**Changes
      in our Internal Control**




There
      was
      no change in our internal control over financial reporting during the quarter
      ended December 31, 2007 that has materially affected, or is reasonably
      likely to materially affect, our internal control over financial reporting.




**Limitations
      on the Effectiveness of Controls**




Our management, including our CEO and CFO, does not expect that our disclosure
      controls or our internal controls will prevent or detect all errors and all
      fraud. A control system, no matter how well designed and operated, can provide
      only reasonable, not absolute, assurance that the control system’s objectives
      will be met. Further, the design of a control system must reflect the fact
      that
      there are resource constraints, and the benefits of controls must be considered
      relative to their costs. Because of the inherent limitations in all control
      systems, no evaluation of controls can provide absolute assurance that all
      control issues and instances of fraud, if any, within General Motors have been
      detected. These inherent limitations include the realities that judgments in
      decision-making can be faulty, and that breakdowns can occur because of simple
      error or mistake. Controls can also be circumvented by the individual acts
      of
      some persons, by collusion of two or more people, or by management override
      of
      the controls. The design of any system of controls is based in part upon certain
      assumptions about the likelihood of future events, and there can be no assurance
      that any design will succeed in achieving its stated goals under all potential
      future conditions. Over time, controls may become inadequate because of changes
      in conditions or deterioration in the degree of compliance with associated
      policies or procedures. Because of the inherent limitations in a cost-effective
      control system, misstatements due to error or fraud may occur and not be
      detected.




25




REPORT
      OF
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




The
      Board
      of Directors and Stockholders of Medifast, Inc.





We
      have
      audited Medifast, Inc. and subsidiaries’ internal control over financial
      reporting as of December 31 2007, based on criteria established in Internal
      Control—Integrated Framework issued by the Committee of Sponsoring Organizations
      of the Treadway Commission (COSO). Medifast Inc. and subsidiaries’ management is
      responsible for maintaining effective internal control over financial reporting
      and for its assessment of the effectiveness of internal control over financial
      reporting included in the accompanying Management’s Report on Internal Control
      over Financial Reporting. Our responsibility is to express an opinion on the
      Company's internal control over financial reporting based on our
      audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we plan
      and perform the audit to obtain reasonable assurance about whether effective
      internal control over financial reporting was maintained in all material
      respects. Our audit of internal control over financial reporting included
      obtaining an understanding of internal control over financial reporting,
      assessing the risk that a material weakness exists, and testing and evaluating
      the design and operating effectiveness of internal control based on the assessed
      risk. Our audit also included performing such other procedures as we considered
      necessary in the circumstances. We believe that our audit provides a reasonable
      basis for our opinion.





A
      company's internal control over financial reporting is a process designed 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. A company's internal control
      over
      financial reporting includes those policies and procedures that (1) pertain
      to
      the maintenance of records that, in reasonable detail, accurately and fairly
      reflect the transactions and dispositions of the assets of the Company; (2)
      provide reasonable assurance that transactions are recorded as necessary to
      permit preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the company are
      being made only in accordance with authorizations of management and directors
      of
      the Company; and (3) provide reasonable assurance regarding prevention or timely
      detection of unauthorized acquisition, use, or disposition of the Company's
      assets that could have a material effect on the financial
      statements.





Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.





In
      our
      opinion, Medifast, Inc. and subsidiaries maintained, in all material respects,
      effective internal control over financial reporting as of December 31, 2007,
      based on criteria established in Internal Control—Integrated Framework issued by
      the Committee of Sponsoring Organizations of the Treadway Commission
      (COSO).




We
      have
      also audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the consolidated balance sheets and the related
      consolidated statements of income, stockholders’ equity and accumulated other
      comprehensive income (loss), and cash flows of Medifast, Inc. and subsidiaries,
      and our report dated March 14, 2008 expressed an unqualified
      opinion.




Bagell,
      Josephs, Levine & Company, LLC


Marlton,
      New Jersey


March
      14,
      2008





26





**PART
      III**





**ITEM
      10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE**





The
      Board
      of Directors currently consists of 10 persons. The directors, their ages, and
      the year in which they first became director are provided in the table
      below:




**Director****Name
                and Experience**
            
            
            **Since****Richard
                T. Aab**,
                age 58, co-founded US LEC in June 1996 and has served as Chairman of
                the Board of Directors since that time. He also served as Chief Executive
                Officer from June 1996 until July 1999. Between 1982 and 1997, Mr.
                Aab held various positions with ACC Corp., an international
                telecommunications company in Rochester, NY, including Chairman and
                Chief
                Executive Officer, and served as a director. Mr. Aab is a member of
                the Board of Trustees of the University of Rochester, the University
                of
                Rochester Medical Center, Rochester Institute of Technology and various
                private corporate institutions.
            
            
            2007**Joseph
                D. Calderone**,
                age 59, is the interim President of Merrimack College in North Andover,
                MA. Formerly, he was the chaplain and counselor at the Villanova
                University School of Law. He formerly spent over eight years with
                the
                Loyola University Medical Center as the hospital Chaplain and taught
                multiple courses including Introduction to the Practice of Medicine
                and
                Business Ethics. Rev. Calderone recently retired as a Captain in
                the US
                Navy Reserves. He served as the Wing Chaplain for the 4th Marine
                Aircraft
                Wing.
            
            
            2003**Charles
                P. Connolly**,
                age 59, is currently an independent director focusing on bank
                relationships, debt refinancing, merger and acquisition strategy
                and
                executive compensation design. Mr. Connolly spent 29 years at First
                Union
                Corp. that merged with Wachovia Bank in 2001. He retired in 2001
                as the
                President and CEO of First Union Corp. Mr. Connolly serves on the
                Boards
                of numerous non-profit organizations. He holds an MBA from the University
                of Chicago and AB from Villanova University.
            
            
            2006**George
                Lavin, Jr., Esq**.,
                age 79, is a senior partner at Lavin, O’Neil, Ricci, Ceprone &
                Disipio. Mr. Lavin is a 1951 graduate of Bucknell University. He
                attended
                the University of Pennsylvania School of Law, receiving an LL.B.
                in 1956,
                and then served as a Special Agent, Federal Bureau of Investigation,
                United States Department of Justice, until 1959. Mr. Lavin is one
                of the
                dominant product liability defense attorneys in the nation. He has
                had
                regional responsibilities in several automotive specialty areas,
                and has
                been called upon to try matters throughout the county on behalf of
                his
                clients. Mr. Lavin's present practice and specialty emphasizes his
                commitment to defending the automotive industry. Mr. Lavin is admitted
                to
                practice before the Supreme Court of Pennsylvania, the United States
                Court
                of Appeals for the Third Circuit and the United States District Courts
                for
                the Eastern and Middle Districts of Pennsylvania. He is a member
                of the
                Faculty Advisory Board of the Academy of Advocacy, the Association
                of
                Defense Counsel, The Defense Research Institute, The American Board
                of
                Trial Advocates, and the Temple University Law School faculty. He
                has also
                been elected a fellow of the American College of Trial Lawyers. On
                March
                1, 1994, Mr.Lavin assumed the title of Counsel to The
                Firm.
            
            
            2005




27


**Bradley
                T. MacDonald,**age
                60, is the Chairman of the Board of Medifast, Inc.   Mr.
                MacDonald has been Chairman of the Board of Medifast, Inc. since
                January
                1998 and was also Chief Executive officer until March of 2007.  He
                was the principal architect of the turnaround of Medifast and formulated
                the “Direct to Consumer” business models that are the primary drivers of
                Revenue to this day. He also was the co-founder of Take Shape for
                Life and
                acquired the Clinic operations in 2002. During his time as CEO, he
                managed
                the company to 29 consecutive quarters of profits and improved
                shareholders equity from negative $4 million to over $27 million
                in less
                than seven years. He also increased the Company’s market cap from less
                than $1 million to over $100 million and listed the company on the
                NYSE.
                In 2006, Mr. MacDonald received the prestigious and audited Ernst
                and
                Young award of “Entrepreneur of the Year” for the state of Maryland in the
                consumer products category.  Also, he helped lead the Company to
                national recognition in Forbes Magazine ranking Medifast 28thof
                the top 200 small companies in America.Mr.
                MacDonald was previously employed by the Company as its Chief Executive
                Officer from September 1996 to August 1997. From 1991 through 1994,
                Colonel MacDonald returned to active duty to be Deputy Director and
                Chief
                Financial Officer of the Retail, Food, Hospitality and Recreation
                Businesses for the United States Marine Corps.  Prior thereto, Mr.
                MacDonald served as Chief Operating Officer of the Bonneau Sunglass
                Company, President of Pennsylvania Optical Co., Chairman and CEO
                of
                MacDonald and Associates, which had major financial interests in
                retail
                drug, consumer candy, and pilot sunglass companies.  Mr. MacDonald
                was national president of the Marine Corps Reserve Officers Association
                and retired from the United States Marine Corps Reserve as a Colonel
                in
                1997, after 27 years of service.  He has been appointed to the
                Defense Advisory Board for Employer Support of the Guard and Reserve
                (ESGR)Mr.
                MacDonald serves on the Board of Directors of the Wireless Accessories
                Group (AMEX: XWG). He also serves on the Board of Directors of the
                Marine
                Corps Reserve Toys for Tots Foundation and is on the Board of Trustees
                of
                Villa Julie College of Stevenson, Maryland and the Institute of Notre
                Dame, the oldest Catholic girl’s urban high school in Maryland, located in
                Baltimore. Mr. MacDonald is the father of Margaret MacDonald who
                performs
                the role of President and Chief Operating Officer at Medifast, Inc.
                Mr.
                Michael C. MacDonald is the brother of Mr. Bradley T.
                MacDonald.
            
            
            1996**Michael
                C. MacDonald**,
                age 54, is president of global accounts and marketing operations
                for Xerox
                Corporation, Stamford, Conn. He was named to this position in October
                2004
                and was appointed a corporate senior vice president in July 2000.
                Mac
                Donald is responsible for directing the company’s largest global accounts,
                improving the customer experience, corporate marketing, xerox.com,
                advertising, worldwide public relations and marketing communications.
                Most
                recently, Mac Donald was president, North American Solutions Group
                responsible for all products, services and solutions sold by Xerox
                direct
                sales force in the United States and Canada. Prior to that, he served
                as
                the group’s senior vice president of marketing and chief of staff. Mac
                Donald is on the board of directors of the Rochester Institute of
                Technology, PAETEC, and the Jimmy V Foundation. He is also a board
                member
                of the CMO Council North American Advisory Board. Mr. MacDonald completed
                executive business and management programs at Columbia University
                in 1992
                and the International Senior Management Program at Harvard University
                in
                1998
            
            
            1998**Dennis
                M. McCarthy**,
                age 63, practiced law for 21 years as a civil litigator in tort and
                contract cases. He was the founding member and managing partner of
                a
                Columbus, Ohio based law firm. Additionally, he served active duty
                in the
                U.S. Marine Corps for 23 years and served 18 years in reserve service.
                Mr.
                McCarthy retired from the Marine Corps in 2005 in the grade of Lieutenant
                General after four years in command of all Marine Reserve forces.
                Mr.
                McCarthy is currently the Executive Director of the Reserve Officers
                Association, a congressionally chartered association devoted to national
                defense. In addition to Medifast, he is a member of the Board of
                Directors
                of Rivada Networks.
            
            
            2006**Michael
                S. McDevitt,**age
                29,
                joined Medifast in 2002 as the Controller and was promoted to Vice
                President of Finance in January 2004. In March 2005, he was promoted
                to
                President and in January of 2006 was also named Chief Financial Officer.
                In March of 2007, Mr. McDevitt was promoted to Chief Executive Officer
                of
                the Company. Prior to joining Medifast, Mr. McDevitt worked as a
                Financial
                Analyst for the Blackstone Group, an investment advisory firm based
                in New
                York, NY.
            
            
            2007




28




**Donald
                F. Reilly, OSA**,
                age 60, holds a Doctorate in Ministry (Counseling) from New York
                Theological and an M.A. from Washington Theological Union as well
                as a
                B.A. from Villanova University. Reverend Don Reilly was ordained
                a priest
                in 1974. His assignments included Associate Pastor, Pastor at St.
                Denis,
                Havertown, Pennsylvania, Professor at Villanova University, Personnel
                Director of the Augustinian Province of St. Thomas of Villanova,
                Provincial Counselor, Founder of SILOAM Ministries where he ministers
                and
                counsels HIV/AIDS patients and caregivers. He is currently on the
                Board of
                Directors of Villanova University, and is Board Member of Prayer
                Power.
                Fr. Reilly was recently re-elected Provincial of the Augustinian
                Order at
                Villanova, PA. He oversees more than 220 Augustinian Friars and their
                service to the Church, teaching at universities and high schools,
                ministering to parishes, serving as chaplain in the Armed Forces
                and
                hospitals, ministering to AIDS victims, and serving missions in Japan
                and
                South America.
            
            
            1998**Mary
                T. Travis****,**age
                56, is currently employed with Eagle National Bank in Pennsylvania
                as the
                Senior Vice President of wholesale operations and was formerly the
                Vice
                President of operations for the Financial Mortgage Corporation.  Mrs.
                Travis is an expert in mortgage banking with over 39 years of diversified
                experience.  She is an approved instructor of the Mortgage Bankers
                Association Accredited School of Mortgage Banking.  Mrs. Travis was
                also formally a delegate and 2nd Vice President of the Mortgage Bankers
                Association of Greater Philadelphia and the Board of Governors of
                the
                State of Pennsylvania.  Mrs. Travis is currently on Board of
                Governors of the Mortgage Bankers Association of Greater
                Philadelphia.
            
            
            2002





**ADDITIONAL
      INFORMATION ABOUT THE BOARD OF DIRECTORS AND COMMITTEES**




**Director
      Independence**




The
      Board
      consists of 10 members of which 8 are non-management directors. Determination
      as
      to the qualifications of an independent directors are determined under
      section 303A.02 of the New York Stock Exchange, or the NYSE, Listed Company
      Manual and the Company’s Categorical Standards of Independence. The NYSE’s
      independence guidelines and the Company’s categorical standards include a series
      of objective tests, such as the director is not an employee of the Company
      and
      has not engaged in various types of business dealings involving the Company,
      which would prevent a director from being independent. The Board of Directors
      has affirmatively determined that none of the Company’s independent directors
      had any relationships with the Company.





The
      Board, in applying the above referenced standards has affirmatively determined
      the Company’s current independent directors are: Richard T. Aab, Joseph
      Calderone, Charles P. Connolly, George Lavin, Jr. Esq., Dennis M. McCarthy,
      Donald F. Reilly, and Mary Travis.




**Board
      Meetings**




For
      the
      fiscal year ended December 31, 2007 (“Fiscal 2007”), the Board of Directors held
      five meetings. All Board members attended at least 75% of the aggregate number
      of Board meetings and applicable committee meetings held while such individuals
      were serving on the Board of Directors, or such committees. Under the
      Company’s *Principles of Corporate Governance* ,
      which
      is available on the Company’s website *www.choosemedifast.com* ,
      by
      following the link through “Investor
      Relations” to “Corporate Governance,” each
      director is expected to dedicate sufficient time, energy and attention to ensure
      the diligent performance of his or her duties, including attending meetings
      of
      the shareholders of the Company, the Board of Directors and committees of which
      he or she is a member .
      Eight
      directors attended the 2007 annual general meeting .





**Committees
      of the Board**




Our
      Board
      of Directors has a standing audit committee, nominating and corporate governance
      committee, compensation committee, and executive committee.




29




***Audit
      Committee***




Our
      audit
      committee consists of Charles Connolly, George Lavin, and Mary Travis, each
      of
      whom are independent as discussed above under “— Director Independence.” As
      required by Rule 303A.07 of the NYSE Listed Company Manual, the Board of
      Directors has affirmatively determined that each audit committee member is
      financially literate, and that Mr. Connolly is an “audit committee
      financial expert,” as defined in Item 407(d)(5) of Regulation S-K.


The
      principal duties of the audit committee are as follows:





Ÿ
            have
                the sole authority and responsibility to hire, evaluate and, where
                appropriate, replace the independent auditors;




Ÿ
            meet
                and review with management and the independent auditors the interim
                financial statements and the Company’s disclosures under Management’s
                Discussion and Analysis of Financial Condition and Results of Operations
                prior to the filing of the Company’s Quarterly Reports on Form 10-Q;




Ÿ
            meet
                and review with management and the independent auditors the financial
                statements to be included in the Company’s Annual Report on Form 10-K
                (or the annual report to shareowners) including (i) their judgment
                about the quality, not just acceptability, of the Company’s accounting
                principles, including significant financial reporting issues and
                judgments
                made in connection with the preparation of the financial statements;
                (ii) the clarity of the disclosures in the financial statements; and
                (iii) the Company’s disclosures under Management’s Discussion and
                Analysis of Financial Condition and Results of Operations, including
                critical accounting policies;




Ÿ
            review
                and discuss with management, the internal auditors and the independent
                auditors the Company’s policies with respect to risk assessment and risk
                management;




Ÿ
            review
                and discuss with management, the internal auditors and the independent
                auditors the Company’s internal controls, the results of the internal
                audit program, and the Company’s disclosure controls and procedures, and
                quarterly assessment of such controls and procedures;




Ÿ
            establish
                procedures for handling complaints regarding accounting, internal
                accounting controls and auditing matters, including procedures for
                confidential, anonymous submission of concerns by employees regarding
                accounting and auditing matters; and




Ÿ
            Review
                and discuss with management, the internal auditors and the independent
                auditors the overall adequacy and effectiveness of the Company’s legal,
                regulatory and ethical compliance programs.




Our
      Board
      of Directors has adopted a written charter for the audit committee which is
      available on the Company’s website at *www.choosemedifast.com* by
      following the links through “Investor Relations” to “Corporate
      Governance.” I n
      fiscal
      2007, the audit committee met four times.




***Nominating
      and Corporate Governance Committee***




The
      nominating and corporate governance committee consists of Joseph Calderone,
      Donald F. Reilly, and George Lavin, all of whom are independent as discussed
      above under “— Director Independence.”




The
      principal duties of the nominating and corporate governance committee are as
      follows:


•
              to
                  recommend to our Board of Directors proposed nominees for election
                  to the
                  Board of Directors both at annual general meetings and to fill
                  vacancies
                  that occur between general meetings;
                  and
 
 •
              To
                  make recommendations to the Board of Directors regarding the Company’s
                  corporate governance matters and
                  practices.




Our
      Board
      of Directors has adopted a written charter for the nominating and corporate
      governance committee, which is available on the Company’s website at *www.choosemedifast.com* by
      following the links through “Investor Relations” to “Corporate Governance” or in
      print to any shareholder who requests it as set forth under “Additional
      Information — Annual Report, Financial and Additional Information.” In
      fiscal 2007, the nominating and corporate governance committee met four
      times.




30




***Compensation
      Committee***




The
      compensation committee currently consists of Joseph D. Calderone, Dennis M.
      McCarthy, Esq., and Mary T. Travis, all of whom were independent as discussed
      above under “— Director Independence .”




The
      principal duties of the compensation committee are as follows:





Ÿ
            measure
                the Chief Executive Officer’s performance against his goals and objectives
                pursuant to the Company plans;




Ÿ
            determine
                the compensation of the Chief Executive Officer after considering
                the
                evaluation by the Board of Directors of his performance;




Ÿ
            review
                and approve compensation of elected officers and all senior executives
                based on their evaluations, taking into account the evaluation by
                the
                Chief Executive Officer;




Ÿ
            review
                and approve any employment agreements, severance arrangements, retirement
                arrangements, change in control agreements/provisions, and any special
                or
                supplemental benefits for each elected officer and senior executive
                of the
                Company;




Ÿ
            approve,
                modify or amend all non-equity plans designed and intended to provide
                compensation primarily for elected officers and senior executives
                of the
                Company;




Ÿ
            make
                recommendations to the Board regarding adoption of equity plans;
                and




Ÿ
            Modify
                or amend all equity plans.




Our
      Board
      of Directors has adopted a written charter for the compensation committee which
      is available on the Company’s website at *www.choosemedifast.com* by
      following the links through “Investor Relations” to “Corporate Governance.” In
      fiscal 2007, the compensation committee met four  times.





***Executive
      Committee***





Messrs.
      Richard R. Aab, Bradley T. MacDonald, Michael C. MacDonald, Michael S. McDevitt,
      and Dennis M. McCarthy, Esq. are members of the Executive Committee. The
      Executive Committee has all the authority of the Board of Directors, except
      with
      respect to certain matters that by statute may not be delegated by the Board
      of
      Directors. The Committee meets periodically during the year to develop and
      review strategic operational and management polices for the Company. The
      Committee held two meetings
      during fiscal 2007.





**ADDITIONAL
      INFORMATION**





**Section 16(a)
      Beneficial Ownership Reporting Compliance**




Section 16(a)
      of the Exchange Act requires the Company’s directors and executive officers and
      persons who beneficially own more than ten percent of a registered class of
      the
      Company’s equity securities to file with the SEC and the NYSE initial reports of
      ownership and reports of changes in ownership of equity securities of the
      Company. Directors, officers and greater-than-ten-percent beneficial owners
      are
      required by SEC regulations to furnish the Company with copies of all
      Section 16(a) forms filed by them. In 2006, to the Company’s knowledge,
      based solely on a review of the copies of such filings on file with the Company
      and written representations from the Company’s directors and executive officers,
      no Section 16(a) filing requirements were applicable to the Company’s
      directors, executive officers and greater-than-ten-percent beneficial owners
      in
      fiscal 2007.





**Codes
      of Business Conduct and Ethics and Corporate Governance
      Guidelines**




Our
      Board
      of Directors has adopted a corporate Code of Business Conduct and Ethics
      applicable to our directors, officers, including our principal executive
      officer, principal financial officer and principal accounting officer, and
      employees, as well as Corporate Governance Guidelines, in accordance with
      applicable rules and regulations of the SEC and the NYSE. Each of our Code
      of
      Business Conduct and Ethics and Corporate Governance Guidelines are available
      on
      our website at *www.choosemedifast.com* by
      following the links through “Investor Relations” to “Corporate
      Governance.”





Any
      amendment to, or waiver from, a provision of the Company’s Code of Business
      Conduct and Ethics with respect to the Company’s principal executive officer,
      principal financial officer, principal accounting officer or controller will
      be
      posted on the Company’s website, *www.choosemedifast.com.*




31




**ITEM
      11. EXECUTIVE COMPENSATION.**





**COMPENSATION
      DISCUSSION AND ANALYSIS**




**Overview
      of Compensation Program**




Our
      Compensation Committee of the Board of Directors has responsibility for
      establishing, implementing and continually monitoring adherence with the
      Company’s compensation philosophy. The Compensation Committee ensures that the
      total compensation paid to our named executive officers is fair, reasonable
      and
      competitive. Generally, the types of compensation and benefits provided to
      our
      named executive officers are similar to those provided to other officers and
      employees of the Company.




Throughout
      this discussion, the individuals who served as our CEO and CFO during Fiscal
      2007, as well as the other individuals included in the Summary Compensation
      Table on page 34, are referred to as the “named executive officers.”




**Objectives
      of Compensation Program**




The
      main
      objective of our executive compensation program is to create a competitive
      total
      rewards package based on the attainment of short-term performance objectives
      and
      long-term strategic goals. Accordingly, our executive compensation program
      consists of the following three principal elements: base salary, cash bonus
      and
      equity grants in the form of stock options and restricted stock, with an
      emphasis on incentive compensation rather than base salary. Our executives
      are
      also eligible to participate in employee benefit and retirement plans offered
      by
      the Company, which currently include defined contribution, and 401(k) plans,
      and
      health care and other insurance programs. The benefit programs available to
      executives are the same as those available to all other eligible employees.




**Decision-Making;
      Role of Executive Officers in Compensation Decisions**




The
      Compensation Committee of our Board of Directors is comprised solely of
      non-affiliate independent Directors who meet the independence requirements
      of
      the NYSE. Our Compensation Committee makes all decisions regarding the
      compensation of our CEO, including establishing the performance goals and
      objectives for our CEO, evaluating our CEO’s performance in light of the goals
      and objectives that were set and determining and recommending to our Board
      the
      CEO’s compensation based on that evaluation.




Our
      CEO
      makes recommendations to our Compensation Committee for the compensation of
      all
      other named executive officers. Our Compensation Committee and Board may accept
      or adjust such recommendations as they determine in the best interests of the
      Company and its stockholders and has final approval over all such compensation
      decisions. To the extent not established by our Board of Directors, our
      Compensation Committee is also authorized to establish compensation and benefits
      for our Chairman and for new and existing non-affiliate independent Directors.




Our
      Chairman, CEO, and Vice President of Human Resources provide advice, analysis
      and recommendations to our Compensation Committee.




Elements
      of Executive Compensation




Our
      Compensation Committee also evaluates the achievement of corporate, individual
      and organizational objectives for each executive officer during the prior fiscal
      year. Each element of compensation is chosen in order to attract and retain
      the
      necessary executive talent, reward corporate performance and provide incentive
      for the attainment of long-term strategic goals. The allocation of each element
      of compensation is determined by our Compensation Committee for each executive
      based on the following factors:




•
            
            Performance
                against corporate, individual and organizational objectives for the
                fiscal
                year;




•
            
            Importance
                of particular skill sets and professional abilities to the achievement
                of
                long-term strategic goals; and




•
            
            Contribution
                as a leader, corporate representative and member of the senior management
                team.




32




These
      elements support our overall compensation philosophy by creating a balanced
      focus on shorter-term corporate performance and the achievement of longer-term
      business goals and stockholder value. While we believe in structuring executive
      compensation plans that give our executives incentive to deliver certain
      objective elements of corporate financial performance over specified time
      periods, we do not believe in a purely mechanical approach. Instead, part of
      our
      executive compensation philosophy includes an element of reward for
      non-quantitative achievements demonstrated by our executives in the actions
      and
      decisions they have taken throughout the year. When establishing our executive
      compensation plans for a given year, it is not possible to foresee all of the
      challenges and demands that will be made of our executives, both as a management
      team and in their areas of individual responsibility. We believe that by
      rewarding the quality of our decision-making and leadership, in addition to
      the
      achievement of quantifiable results, we are building a management team capable
      of creating stockholder value over the longer-term, while remaining disciplined
      in delivering shorter-term financial results. Accordingly, there is no
      pre-established policy or target for the allocation between either cash and
      non-cash or short-term and long-term incentive compensation. Rather, the
      Compensation Committee reviews information provided by industry surveys and
      peer
      company data to determine appropriate level and mix of incentive compensation.
      Income from such incentive compensation is realized as a result of the
      performance of the Company and the individual, depending on the type of award,
      compared to established goals.





Base
      Salary




Our
      base
      salary determinations principally reflect the skills and performance levels
      of
      individual executives, the needs of the Company, and pay practices of comparable
      public companies. It is not our policy to pay our executive officers at the
      highest base salary level. Instead, we establish executive base salaries
      conservatively at or below a midpoint level relative to an appropriate set
      of
      peers. We believe this policy sets a prudent and fiscally responsible tone
      for
      the Company’s overall base salary compensation programs.




Target
      Bonus




Cash
      bonuses principally reflect the Company’s financial performance and achievement
      of corporate objectives established by our Board prior to the fiscal year.
      The
      executive bonus plan is designed to reward our executives for the achievement
      of
      shorter-term financial goals, predominantly revenue growth and profitability,
      with cash flow and other operating ratios also considered. The allocation of
      the
      bonus pool among the employees, including senior executives, is at the
      discretion of the Compensation Committee. The Chief Executive Officer, Chief
      Financial Officer and other senior executives discuss and jointly develop
      recommended bonus allocations among the staff within the various functional
      areas of the Company. In addition, the Chief Executive Officer prepares an
      allocation of bonus payments among the senior executive group. In consultation
      with the Chief Executive Officer, the Compensation Committee evaluates, adjusts
      and approves the amount and allocation of the bonus pool. In determining the
      cash bonus allocation among senior executives, the Compensation Committee and
      the Chief Executive Officer consider each executive’s a) contribution to current
      and long-term corporate goals, and b) value in the labor market.




Equity
      Compensation




Stock
      option and restricted stock awards principally reflect the responsibilities
      to
      be assumed by each executive in the upcoming fiscal year, the responsibilities
      of each executive in prior periods, the size of awards made to each executive
      in
      prior years relative to the Company’s overall performance, available stock for
      issuance under our Option Plan, and potential grants in future years. The
      Committee believes that stock option and restricted stock grants (1) align
      the interests of executives with long-term stockholder interests, (2) give
      executives a significant, long-term interest in the Company’s success, and
      (3) help retain key executives in a competitive market for executive
      talent. The Company does not plan on issuing stock options as part of
      compensation in 2008 and beyond.




Equity
      Ownership by Executives




We
      do not
      currently have a formal equity ownership requirement for our executives.
      However, we encourage our executives to own equity in the Company on a voluntary
      basis. All of our named executive officers own stock, restricted stock and
      vested and unvested stock options. We periodically review the vested and
      unvested equity holdings of our executives and evaluate whether these holdings
      sufficiently align the interests of our executives with the long-term interests
      of our stockholders. We may consider adopting equity ownership requirements
      in
      the future.





33




**2007
      Summary Compensation Table**





The
      following table sets forth the annual and long-term compensation for the fiscal
      year ended December 31, 2007, of the Company’s Chief Executive Officer and
      Chief Financial Officer and each of the three other most highly compensated
      executive officers. These individuals, including the Chief Executive Officer
      and
      Chief Financial Officer are collectively referred to as the Named Executive
      Officers.





**Salary**
            
            **Stock**
              **Awards**
            
            **Option**
              **Awards**
            
            **Bonus**
            
            **Nonqualified**
              **Deferred**
              **Compensation**
              **Contributions**
            
            **All**
              **Other**
            
            **Total****Name
                and Pricipal Position**
            
            **Year**
            
            **($)**
            
            **($)(1)**
            
            **($)(1)**
            
            **($)(2)**
            
            **($)**
            
            **($)(3)**
            
            **($)**Bradley
                T. MacDonald
            
            
            2007
            
            $
            225,000
            
            
            -
            
            
            -
            
            
            -
            
            $
            100,000
            
            $
            6,600
            
            $
            331,600Chairman
                of the BoardMichael
                S. McDevitt
            
            
            2007
            
            
            135,000
            
            
            289,000
            
            
            -
            
            
            75,000
            
            
            
            
            
            2,500
            
            
            501,500Chief
                Executive Officer and CFOLeo
                Williams
            
            
            2007
            
            
            132,500
            
            
            -
            
            
            -
            
            
            25,000
            
            
            
            
            
            1,900
            
            
            159,400Executive
                Vice PresidentMargaret
                MacDonald
            
            
            2007
            
            
            100,000
            
            
            237,000
            
            
            -
            
            
            50,000
            
            
            
            
            
            2,900
            
            
            389,900Chief
                Operating Officer, PresidentBrendan
                N. Connors
            
            
            2007
            
            
            99,000
            
            
            47,000
            
            
            -
            
            
            20,000
            
            
            
            
            
            2,900
            
            
            168,900VP
                of Finance




(1)
            
            Amounts
                are calculated based on provisions of SFAS, No 123R, “Share Based
                Payments.” See note 1 of the consolidated financial statements of the
                Company’s Annual Report on Form 10-K for the year ended
                December 31, 2007 regarding assumptions underlying valuation of
                equity awards.(2)
            
            Bonus
                amounts determined as more specifically discussed above under
                “—Compensation Discussion and Analysis”(3)
            
            The
                amounts represent the Company’s matching contributions under the 401(K)
                plan.





34





**2007
      Grants of Plan-Based Awards**


There
      were no grants of plan-based awards to the Named Executive Officers for the
      fiscal year ended December 31, 2007.




**Outstanding
      Equity Awards at Fiscal Year-End Table**


**Option Awards**
              
              **Stock Awards****Number of**
                **Securities**
                **Underlying**
                **Unexercised**
                **Options (#)**
              
              **Number of**
                **Securities**
                **Underlying**
                **Unexercised**
                **Options (#)**
              
              **Option**
                **Exercise**
              
              **Option**
                **Expiration**
              
              **Number**
                **Shares or**
                **Units of**
                **Stock That**
                **Have Not**
                **Vested**
              
              **Market**
                **Value of**
                **Shares or**
                **Units of**
                **Stock that**
                **have not**
                **Vested**
              
              **Equity**
                **incentive**
                **Plan Awards:**
                **Number of**
                **Unearned**
                **Shares, Units**
                **or Other**
                **rights**
              
              **Equity Incentive**
                **Plan Awards:**
                **Market or**
                **Payout Value of**
                **Unearned**
                **Shares, Units or**
                **Other rights**
                **That Have Not**
                **Vested**Name
              
              **Exercisable**
              
              **Un-Exercisable**
              
              **Price ($)**
              
              **Date**
              
              **Vested (#)(1)**
              
              **($)(2)**
              
              **(#)**
              
              **($)**Bradley
                  T. MacDonaldChairman
                  of the Board
              
              
              20,000
              (3)
              
              80,000
              
              
              6.25
              
              
              2/8/2011
              
              
              -
              
              
              -
              
              
              -
              
              
              -Michael
                  S. McDevittChief
                  Executive Officer, CFO
              
              
              100,000
              
              
              -
              
              
              2.87
              
              
              3/31/2010
              
              
              178,333
              
              
              864,915
              
              
              -
              
              
              -Leo
                  WilliamsExecutive
                  Vice President
              
              
              10,000
              
              
              -
              
              
              3.83
              
              
              10/28/2010
              
              
              -
              
              
              -
              
              
              -
              
              
              -Margaret
                  MacDonaldChief
                  Operating Officer, President
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              
              145,000
              
              
              703,250
              
              
              -
              
              
              -Brendan
                  N. ConnorsVP
                  of Finance
              
              
              23,334
              
              
              -
              
              
              2.87
              
              
              3/31/2010
              
              
              29,000
              
              
              140,650
              
              
              -
              
              
              -




Each
      option has a five year life and an exercise price per share equal to 100% of
      the
      estimated fair value of our common stock on the date of grant.





(1)
            The
                restricted stock grants vest over five and six years of service as
                described below under “Narrative
                Disclosure to Summary Compensation Table and Grants of Plan-Based
                Awards”





(2)
            The
                market value of shares of stock that have not vested is based on
                the
                closing price of our common stock on December 31, 2007, or $4.85
                per
                share.(3)
            Bradley
                T. MacDonald’s options were cancelled on January 25, 2008 and replaced
                with 42,000 shares of restricted stock.Seesubsequent
                events in Note 19of
                the consolidated financial statements of the Company’s Annual Report on
                Form 10-K for additional
                information.





35




**2007
      Option Exercises and Stock Vested Table**





The **** following
      table sets forth information regarding option exercises and stock vesting for
      the Named Executive Officers during 2007.





**Option
                Awards**
            
            **Stock
                Awards****Number
                of**
              **Shares**
              **Acquired
                on**
              **Exercise**
            
            **Value**
              **Realized
                on**
              **Exercise**
            
            **Number
                of**
              **Shares**
              **Acquired
                on**
              **Vesting**
            
            **Value**
              **Realized
                on**
              **Vesting****Name**
            
            **(#)**
            
            **($)(1)**
            
            **(#)**
            
            **($)(2)**Bradley
                T. MacDonald
            
            
            
            
            
            -
            
            
            -
            
            
            -Executive
                Chairman of the Board
            
            
            -
            
            
            -
            
            
            -
            
            
            -Michael
                S. McDevitt
            
            
            -
            
            
            -
            
            
            15,000
            
            
            81,000Chief
                Executive Officer, CFO
            
            
            -
            
            
            -
            
            
            33,333
            
            
            208,331Leo
                Williams
            
            
            -
            
            
            -
            
            
            -
            
            
            -Executive
                Vice President
            
            
            -
            
            
            -
            
            
            -
            
            
            -Margaret
                MacDonald
            
            
            -
            
            
            -
            
            
            15,000
            
            
            81,000Chief
                Operating Officer, President
            
            
            -
            
            
            -
            
            
            25,000
            
            
            156,250Brendan
                N. Connors
            
            
            
            
            
            
            
            
            3,000
            
            
            16,200VP
                of Finance
            
            
            -
            
            
            -
            
            
            5,000
            
            
            31,250




(1)
            Represents
                the difference between the exercise price and the fair market value
                of the
                common stock on the date of exercise, multiplied by the number of
                options
                exercised.


(2)
            Represents
                the number of restricted shares vested, and the number of shares
                vested
                multiplied by the fair market value of the common stock on the vesting
                date.




**Equity
      Compensation Plan Information at Fiscal Year Ended December 31,
      2007**




**Plan
                category**
            
            **Number
                of**
              **securities to be**
              **issued
                upon**
              **exercise
                of**
              **outstanding**
              **options, warrants**
              **and
                rights**
            
            **Weighted**
              **average exercise**
              **price
                of**
              **outstanding**
              **options,**
              **warrants
                and**
              **rights**
            
            **Number
                of**
              **securities**
              **remaining available**
              **for
                future issuance**
              **under
                equity**
              **compensation**
              **plans
                (excluding**
              **securities
                reflected**
              **in
                column (a))****(a)**
            
            **(b)**
            
            **(c)****Equity
                compensation plans approved by security holders**
            
            
            453,800
                (1
            )
            $
            6.59
            
            
            998,700**Equity
                compensation plans not approved by security
                holders**
            
            
            -
            
            
            -
            
            
            -





(1)
            Consists
                of 291,300 shares of common stock issuable upon the exercise of
                outstanding options and 162,500 shares of common stock issuable upon
                the
                exercise of outstanding warrants.





36




**2007
      Non-Qualified Deferred Compensation Table**





The
      following table sets forth all non-qualified deferred compensation of the Named
      Executive Officers for the fiscal year ended December 31, 2007.




**Executive**
              **Contributions**
              **in
                Last FY**
            
            **Company**
              **Contributions**
              **in
                Last FY**
            
            **Aggregate
                Earnings in**
              **Last
                FY**
            
            **Aggregate**
              **Withdrawals/**
              **Distributions**
            
            **Aggregate**
              **Balance
                at**
              **Last
                FYE****($)**
            
            **($)(1)**
            
            **($)**
            
            **($)**
            
            **($)**Bradley
                T. MacDonald
            
            
            
            
            $
            100,000
            
            $
            40,000
            
            
            -
            
            $
            1,074,000Chairman
                of the BoardMichael
                S. McDevitt
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Chief
                Executive Officer, CFOLeo
                Williams
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Executive
                Vice PresidentMargaret
                MacDonald
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Chief
                Operating Officer, PresidentBrendan
                N. Connors
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -VP
                of Finance




(1)
            All
                amounts are reported in compensation on the “2007 Summary Compensation
                Table”




**Deferred
      Compensation Plans**




We
      maintain a non-qualified deferred compensation plan, effective September 10,
      2003, for Senior Executive management. Currently, Bradley MacDonald is the
      only
      participant in the plan. Under the deferred compensation plan that became
      effective in 2003, executive officers of the Company, including the Named
      Executive Officers, may defer a portion of their salary and bonus
      (performance-based compensation) annually. A participant may elect to receive
      distributions of the accrued deferred compensation in a lump sum or in
      installments upon retirement




Each
      participating officer may request that the deferred amounts be allocated among
      several available investment options established and offered by the Company.
      These investment options provide market rates of return and are not subsidized
      by the Company. The benefit payable under the plan at any time to a participant
      following termination of employment is equal to the applicable deferred amounts,
      plus or minus any earnings or losses attributable to the investment of such
      deferred amounts. The amount of compensation in any given fiscal year that
      is
      deferred by each Named Executive Officer is included in the Summary Compensation
      Table under the column headings “Salary” or “Non-Equity Incentive Plan
      Compensation”, as appropriate.




The
      Company has established a trust for the benefit of participants in the deferred
      compensation plan. Pursuant to the terms of the trust, as soon as possible
      after
      any deferred amounts have been withheld from a plan participant, the Company
      will contribute such deferred amounts to the trust to be held for the benefit
      of
      the participant in accordance with the terms of the plan and the trust.




Retirement
      payouts under the plan upon an executive officer’s retirement from the Company
      are payable either in a lump-sum payment or in annual installments over a period
      of up to ten years. Upon death, disability or termination of employment, all
      amounts shall be paid in a lump-sum payment as soon as administratively
      feasible.




In
      2007,
      the Company made a $100,000 contribution to Bradley MacDonald’s deferred
      compensation plan as a performance bonus.




**Narrative
      Disclosure to Summary Compensation Table and Grants of Plan-Based
      Awards**




We
      have
      entered into employment agreements with certain Named Executive Officers,
      certain terms of which are summarized below.





**Bradley
      T. MacDonald** .
      Mr.
      MacDonald entered into a five year employment agreement effective February
      8,
      2006. Mr. MacDonald was granted 100,000 options over a five year vesting period
      beginning on February 8, 2007 in consideration for his five year commitment
      and
      to align his interest with the interests of long-term shareholders. Upon
      termination of Mr. MacDonald’s employment by the Company without cause, or upon
      his resignation for good reason, he would be entitled to receive an amount
      equal
      to one and a half times the sum of his highest annualized salary payable in
      equal monthly installments 30 days after his termination of employment for
      a
      period of one year.




37




**Michael
      S. McDevitt.** Mr.
      McDevitt entered into a six year employment agreement effective February 8,
      2006. Mr. McDevitt was granted 200,000 shares of Medifast, Inc. restricted
      common stock over a six year vesting period beginning on February 8, 2006 in
      consideration for his six year commitment and to align his interests with the
      interests of long-term shareholders. Upon termination of Mr. McDevitt’s
      employment by the Company without cause, or upon his resignation for good
      reason, he would be entitled to receive an amount equal to one and a half times
      the sum of his highest annualized salary payable in equal monthly installments
      30 days after his termination of employment for a period of one
      year.





**Margaret
      MacDonald.** Ms.
      MacDonald entered into a six year employment agreement effective February 8,
      2006. Ms. MacDonald was granted 150,000 shares of Medifast, Inc. restricted
      common stock over a six year vesting period beginning on February 8, 2006 in
      consideration for his six year commitment and to align her interests with the
      interests of long-term shareholders. Upon termination of Ms. MacDonald’s
      employment by the Company without cause, or upon her resignation for good
      reason, she would be entitled to receive an amount equal to one and a half
      times
      the sum of his highest annualized salary payable in equal monthly installments
      30 days after her termination of employment for a period of one
      year.





**Brendan
      N. Connors.** Mr.
      Connors entered into a six year employment agreement effective February 8,
      2006.
      Mr. Connors was granted 30,000 shares of Medifast, Inc. restricted common stock
      over a six year vesting period beginning on February 8, 2006 in consideration
      for his six year commitment and to align his interests with the interests of
      long-term shareholders. Upon termination of Mr. Connors’ employment by the
      Company without cause, or upon his resignation for good reason, he would be
      entitled to receive an amount equal to one and a half times the sum of his
      highest annualized salary payable in equal monthly installments 30 days after
      his termination of employment for a period of one year.





**Potential
      Payments upon Termination or Change in Control**





As
      of
      December 31, 2007, the Company had entered into employment agreements with
      each of the Named Executive Officers. As described in more detail above under
      “Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based
      Awards” The employment agreements with the Named Executive
      Officers generally provide for the payment of benefits if the executive’s
      employment with the Company is terminated either by the Company without Cause
      or
      by the executive for Good Reason. The employment agreements with the Named
      Executive Officers do not provide for any additional payments or benefits upon
      a
      termination of employment by the Company for Cause, upon the executive’s
      resignation other for Good Reason, as applicable, or upon the executive’s death
      or disability. Upon termination by the Company without cause, or upon his or
      her
      resignation for good reason, all of the Named Executive officers are entitled
      to
      receive an amount equal to one and a half times his or her highest annualized
      base salary payable in equal monthly installments 30 days after his or her
      termination of employment. If a named executive had been terminated without
      cause as of December 31, 2007 they would have received the following
      amounts:





Severance ($) (1)Bradley
                T. MacDonald
            
            $
            337,500Michael
                S. McDevitt
            
            $
            202,500Margaret
                MacDonald
            
            $
            150,000Brendan
                N. Connors
            
            $
            148,500





(1)
      Based
      on 2007 salary





If
      there
      were a change in control, which is defined as a sale of the majority of the
      assets of the company or a change of control of the Board of Directors as a
      result of a third party shareholder acquiring or holding over 10% of the common
      stock and attempting to nominate a majority of the Board of Directors in favor
      of his/her shareholder block, the executives would have received the following
      amounts as of December 31, 2007:





38





**Severance**
              **($)(1)**
            
            **Accelerated**
              **Vesting
                of**
              **Stock
                Awards**
              **($)(2)**
            
            **Total**Bradley
                T. MacDonald
            
            $
            337,500
            
            $
            0
            
            $
            337,500Michael
                S. McDevitt
            
            
            202,500
            
            
            1,063,000
            
            
            1,265,500Margaret
                MacDonald
            
            
            150,000
            
            
            703,000
            
            
            853,000Brendan
                N. Connors
            
            
            148,500
            
            
            187,000
            
            
            335,500




(1)
            Based
                on 2007 salary.


(2)
            Accelerated
                vesting of stock awards were based on NYSE close price of the Common
                Shares on December 31, 2007 of $4.85 per share, and for option awards
                the
                difference between $4.85 and the exercise or base price of the
                award.





**2007
      Director Compensation**




The
      table
      below summarizes the compensation paid by the Company to non-employee directors
      for the fiscal year ended December 31, 2007.





**Name**
            
            **Fees**
              **Earned**
              **or Paid**
              **in Cash**
              **($)**
            
            **Stock**
              **Awards**
              **($)(1)**
            
            **Option**
              **Awards**
              **($)**
            
            **Non-Equity**
              **Incentive Plan**
              **Compensation**
              **($)**
            
            **Change in Pension**
              **Value and**
              **Nonqualified**
              **Deferred**
              **Compensation**
              **Earnings ($)**
            
            **All other**
              **Compensation**
              **($)**
            
            **Total**
              **($)**Joseph
                D. Calderone, OSA
            
            $
            -
            
            $
            10,644
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            $
            10,644Charles
                P. Connolly
            
            
            16,000
            
            
            10,644
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            26,644George
                Lavin, Jr., Esq.
            
            
            -
            
            
            10,644
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            10,644Michael
                C. MacDonald
            
            
            -
            
            
            10,644
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            10,644Dennis
                M. McCarthy
            
            
            -
            
            
            10,644
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            10,644Michael
                J. McDevitt
            
            
            -
            
            
            10,644
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            10,644Rev.
                Donald F. Reilly, OSA
            
            
            -
            
            
            10,644
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            10,644Mary
                T. Travis
            
            
            -
            
            
            10,644
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            10,644





Employee
      Directors do not receive any additional compensation for their services as
      director.





Additional
      fees are paid to the Audit Committee Chairman. In 2007, the Chairman received
      an
      additional $16,000 in cash compensation.





(1)
            
            Amounts
                are calculated based on provisions of Statement of Financial Accounting
                Standards, or SFAS, No 123R, “Share Based Payments.” See note 1
                of the consolidated financial statement of the Company’s Annual Report on
                Form 10-K for the year ended December 31, 2007 regarding
                assumptions underlying valuation of equity
                awards.




39




The
      table
      below summarizes the equity based awards held by the Company’s non-employee
      directors as of December 31, 2007.


**Option Awards**
              
              **Stock Awards****Number of**
                **Securities**
                **Underlying**
                **Unexercised**
                **Options (#)**
              
              **Number of**
                **Securities**
                **Underlying**
                **Unexercised**
                **Options (#)**
              
              **Option**
                **Exercise**
              
              **Option**
                **Expiration**
              
              **Number**
                **Shares or**
                **Units of**
                **Stock That**
                **Have Not**
                **Vested**
              
              **Market**
                **Value of**
                **Shares or**
                **Units of**
                **Stock that**
                **have not**
                **Vested****Name**
              
              **Exercisable**
              
              **Un-Exercisable**
              
              **Price ($)**
              
              **Date**
              
              **Vested (#)**
              
              **($)**Michael
                  J. McDevitt
              
              
              2,500
              
              
              -
              
              
              4.80
              
              
              4/4/2008
              
              
              -
              
              
              -Rev.
                  Donald F. Reilly, OSA
              
              
              2,500
              
              
              -
              
              
              4.80
              
              
              4/4/2008
              
              
              -
              
              
              -Mary
                  T. Travis
              
              
              2,500
              
              
              -
              
              
              4.80
              
              
              4/4/2008
              
              
              -
              
              
              -




**Compensation
      Committee Report**





We
      have
      reviewed and discussed with management certain Compensation Discussion and
      Analysis provisions to be included in this Form 10-K. Based on the reviews
      and
      discussions referred to above, we recommend to the Board of Directors that
      the
      Compensation Discussion and Analysis referred to above be included on the Form
      10-K for the year-ended December 31, 2007.





**COMPENSATION
      COMMITTEE OF THE BOARD OF DIRECTORS**




Mary
      T.
      Travis, Chairman


Joseph
      D.
      Calderone


Dennis
      M.
      McCarthy, Esq.





40





**ITEM
      12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.**




The
      following table shows as of December 31, 2007, the amount and percentage of
      our outstanding common stock beneficially owned by each person who is known
      by
      us to beneficially own more than 5% of our outstanding common stock.




**Name
                and Address of**
              **5%
                Beneficial Owner**
            
            **Shares**
              **Beneficially**
              **Owned****(1)**
            
            **Percent of**
              **Outstanding**
              **Common Stock**N/A




The
      following table shows as of March 17, 2008 the amount and percentage of our
      outstanding common stock beneficially owned (unless otherwise indicated) by
      each
      of our (i) directors and nominees for directors, (ii) Named Executive Officers
      and (iii) our directors, nominees for director and executive officers as a
      group.





**Name
                of Beneficial Owner**
            
            **Shares Beneficially**
              **Owned
                (1)(2)**
            
            **Shares**
              **Acquirable**
              **Within 60 days**
              **(3)**
            
            **Percent
                of**
              **Outstanding**
              **Common Stock**
              **(%)**Bradley
                T. MacDonald (4)
            
            
            859,550
            
            
            -
            
            
            6.22
            %Michael
                S. McDevitt
            
            
            312,451
            
            
            -
            
            
            2.26
            %Margaret
                MacDonald
            
            
            179,900
            
            
            -
            
            
            1.30
            %Donald
                F. Reilly
            
            
            62,350
            
            
            -
            
            
            
            *Michael
                C. MacDonald
            
            
            60,119
            
            
            -
            
            
            
            *Brendan
                Connors
            
            
            59,509
            
            
            -
            
            
            
            *Mary
                Travis
            
            
            24,200
            
            
            -
            
            
            
            *Michael
                J. McDevitt
            
            
            18,900
            
            
            -
            
            
            
            *Joseph
                D. Calderone, OSA
            
            
            13,200
            
            
            -
            
            
            
            *Leo
                Williams
            
            
            11,770
            
            
            -
            
            
            
            *Charles
                P. Connolly
            
            
            25,575
            
            
            -
            
            
            
            *George
                Lavin, Jr., Esq.
            
            
            7,200
            
            
            -
            
            
            
            *Dennis
                M. McCarthy, Esq.
            
            
            9,575
            
            
            -
            
            
            
            *Richard
                T. Aab
            
            
            4,000
            
            
            -
            
            
            
            *All
                directors, nominees for directors and executive officers as a
                group
            
            
            1,648,299
            
            
            
            
            
            11.93
            %(14
                persons)




*
            Less
                than 1%.





(1)
            Beneficial
                ownership is determined in accordance with the rules of the Securities
                and
                Exchange Commission. Under those rules and for purposes of the table
                above
                (a) if a person has decision making power over either the voting or
                the disposition of any shares, that person is generally deemed to
                be a
                beneficial owner of those shares; (b) if two or more persons have
                decision making power over either the voting or the disposition of
                any
                shares, they will be deemed to share beneficial ownership of those
                shares,
                in which case the same shares will be included in share ownership
                totals
                for each of those persons; and (c) if a person held options to
                purchase shares that were exercisable on, or became exercisable within
                60
                days of, March 17, 2008, that person will be deemed to be the beneficial
                owner of those shares and those shares (but not shares that are subject
                to
                options held by any other stockholder) will be deemed to be outstanding
                for purposes of computing the percentage of the outstanding shares
                that
                are beneficially owned by that person. Information supplied by officers
                and directors.




(2)
            The
                shares set forth as beneficially owned by our executive officers
                and
                directors do not include the following outstanding options because
                they
                are not exercisable within 60 days of March 17, 2008: Mr. Bradley T.
                MacDonald (80,000)




41


(3)
              Unless
                  otherwise noted, reflects the number of shares that could be purchased
                  by
                  exercise of options available at March 17, 2008, or within 60 days
                  thereafter under our stock option
                  plans.


(4)
            The
                shares set forth as beneficially owned by Mr. Bradley T. MacDonald
                include 396,402 shares owned by his wife Shirley MacDonald, and 46,447
                shares owned by the MacDonald Family Trust. His daughter, Margaret
                MacDonald, beneficially owns 179,900 shares which added to Bradley
                T.
                MacDonald’s 859,500 beneficially owned shares results in 1,039,400 shares
                owned by the MacDonald family.




**ITEM
      13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**





As
      of
      December 31, 2007, there were no related party transactions.





**ITEM
      14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**





**Fees
      to Independent Registered Public Accountants for Fiscal 2006 and
      2007**




The
      following services were provided by Bagell, Josephs, Levine & Co during
      fiscal 2006 and 2007:





**2006**
            
            **2007**Audit
                Fees(1)
            
            $
            179,000
            
            $
            199,000Tax
                fees(2)
            
            
            21,000
            
            
            30,000All
                other fees
            
            
            -
            
            
            -Total
            
            $
            200,000
            
            $
            229,000




(1)
            
            Audit
                fees consist of fees for professional services rendered for the audit
                of
                the Company’s consolidated financial statements included in the Company’s
                Annual Report on Form 10-K, including the audit of internal controls
                required by Section 404 of the Sarbanes-Oxley Act of 2002, and the
                review of financial statements included in the Company’s Quarterly Reports
                on Form 10-Q, and for services that are normally provided by the
                auditor
                in connection with statutory and regulatory filings or
                engagements.(2)
            
            Tax
                fees were billed for tax compliance
                services





**Audit
      Committee Pre-Approval of Audit and Permissible Non-Audit Services of
      Independent Auditors**





The
      Audit
      Committee pre-approves all audit and permissible non-audit services provided
      by
      the independent auditors. These services may include audit services,
      audit-related services, tax services and other services. The Audit Committee
      has
      adopted a policy for the pre-approval of services provided by the independent
      auditors.




Under
      the
      policy, pre-approval is generally provided for work associated with the
      following:




Ÿ
            registration
                statements under the Securities Act of 1933 (for example, comfort
                letters
                or consents);




Ÿ
            due
                diligence work for potential acquisitions or dispositions;




Ÿ
            attest
                services not required by statute or regulation;




Ÿ
            adoption
                of new accounting pronouncements or auditing and disclosure requirements
                and accounting or regulatory consultations;




Ÿ
            internal
                control reviews and assistance with internal control reporting
                requirements;




Ÿ
            review
                of information systems security and controls;




Ÿ
            tax
                compliance, tax planning and related tax services, excluding any
                tax
                service prohibited by regulatory or other oversight authorities;
                expatriate and other individual tax services; and




Ÿ
            Assistance
                and consultation on questions raised by regulatory agencies.




For
      each
      proposed service, the independent auditors are required to provide detailed
      back-up documentation at the time of approval to permit the Audit Committee
      to
      make a determination whether the provision of such services would impair the
      independent auditors’ independence.




The
      Audit
      Committee has approved in advance certain permitted services whose scope is
      routine across business units, including statutory or other financial audit
      work
      for non-U.S. subsidiaries that is not required for the 1934 Act audits.




42




**PART
      IV**




**ITEM
      15. EXHIBITS AND FINACIAL STATEMENT SCHEDULES**


(a)
              1.Financial
                  Statements
 
 See
        Index
        to the Consolidated Financial Statements on page 44 of this Annual
        Report
  2.Financial
                  Statement Schedules
 
 None,
        as
        all information required in these schedules is included in the Notes to the
        Consolidated Financial Statements.
  3.Exhibits
 
 Reference
        is made to the Exhibit Index on page 44 of this Annual Report for a list
        of
        exhibits required by Item 601 of Registration S-K to be filed as part of
        this Annual Report.





43




MEDIFAST,
      INC. AND SUBSIDIARIES





INDEX
      TO
      CONSOLIDATED FINANCIAL STATEMENTS




Report
                of Independent Registered Public Accounting Firm
            45Consolidated
                Balance Sheets
            46Consolidated
                Statements of Income
            47Consolidated
                Statements of Stockholders’ Equity
            48Consolidated
                Statements of Cash Flows
            49Notes
                to Consolidated Financial Statements
            51





44


REPORT
      OF
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




The
      Board
      of Directors and Stockholders of Medifast, Inc.




We
      have
      audited the accompanying consolidated balance sheets of Medifast, Inc. as of
      December 31, 2006 and 2007, and the related consolidated statements of
      income, stockholders’ equity and accumulated other comprehensive income (loss),
      and cash flows for each of the years in the three year period ended
      December 31, 2007. These financial statements are the responsibility of the
      Company’s management. Our responsibility is to express an opinion on these
      financial statements based on our audits.




We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.




In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the consolidated financial position of Medifast, Inc. at
      December 31, 2006 and 2007, and the consolidated results of its operations
      and its cash flows for each of the years in the three year period ended
      December 31, 2007, in conformity with U.S. generally accepted
      accounting principles.





We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the effectiveness of Medifast, Inc. and
      subsidiaries internal control over financial reporting as of December 31,
      2007, based on criteria established in Internal Control — Integrated
      Framework issued by the Committee of Sponsoring Organizations of the Treadway
      Commission (COSO) and our report dated March 14, 2008 expressed an unqualified
      opinion.







Bagell,
      Josephs, Levine & Company, LLC


Marlton,
      New Jersey


March
      14,
      2008




45




**MEDIFAST,
      INC. AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**


**As
      of December 31, 2007 and 2006**





(Restated)2007
            
            2006**ASSETS****Current
                assets:**Cash
                and cash equivalents
            
            $
            2,195,000
            
            $
            1,085,000Accounts
                receivable-net of allowance for doubtful accounts of
                $100,000
            
            
            493,000
            
            
            448,000Inventory
            
            
            9,181,000
            
            
            8,255,000Investment
                securities
            
            
            1,439,000
            
            
            1,540,000Deferred
                compensation
            
            
            814,000
            
            
            673,000Prepaid
                expenses and other current assets
            
            
            2,727,000
            
            
            2,599,000Note
                receivable - current
            
            
            180,000
            
            
            174,000Current
                portion of deferred tax asset
            
            
            100,000
            
            
            90,000**Total
                current assets**
            
            
            **17,129,000**
            
            
            **14,864,000**Property,
                plant and equipment - net
            
            
            17,031,000
            
            
            14,020,000Trademarks
                and intangibles - net
            
            
            7,356,000
            
            
            5,874,000Deferred
                tax asset, net of current portion
            
            
            897,000
            
            
            517,000Note
                receivable, net of current assets
            
            
            1,212,000
            
            
            1,355,000Other
                assets
            
            
            99,000
            
            
            47,000**TOTAL
                ASSETS**
            
            **$**
            **43,724,000**
            
            **$**
            **36,677,000****LIABILITIES
                AND STOCKHOLDERS' EQUITY****Current
                liabilities:**Accounts
                payable and accrued expenses
            
            $
            4,279,000
            
            $
            2,913,000Income
                taxes payable
            
            
            592,000
            
            
            535,000Line
                of credit
            
            
            1,599,000
            
            
            1,256,000Current
                maturities of long-term debt
            
            
            264,000
            
            
            548,000**Total
                current liabilities**
            
            
            **6,734,000**
            
            
            **5,252,000****Other
                liabilities**Long-term
                debt, net of current portion
            
            
            4,570,000
            
            
            3,509,000**Total
                liabilities**
            
            
            **11,304,000**
            
            
            **8,761,000****Stockholders'
                Equity:**Preferred
                stock, $.001 par value (1,500,000 authorized, no shares issued and
                outstanding)
            
            
            -
            
            
            -Common
              stock; par value $.001 per share; 20,000,000 shares authorized;
              13,709,098and
                13,631,898 shares issued and outstanding
            
            
            14,000
            
            
            14,000Additional
                paid-in capital
            
            
            26,953,000
            
            
            26,629,000Accumulated
                other comprehensive income
            
            
            321,000
            
            
            334,000Retained
                earnings
            
            
            9,818,000
            
            
            5,981,000**37,106,000**
            
            
            **32,958,000**Less:
                cost of 270,534 and 249,184 shares of common stock in
                treasury
            
            
            (1,971,000
            )
            
            (1,686,000
            )Less:
                Unearned compensation
            
            
            (2,715,000
            )
            
            (3,356,000
            )**Total
                stockholders' equity**
            
            
            **32,420,000**
            
            
            **27,916,000****TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY**
            
            **$**
            **43,724,000**
            
            **$**
            **36,677,000**





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




46





**MEDIFAST,
      INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF INCOME**





**Years
                Ended December 31,**(Restated)
            
            (Restated)**2007**
            
            **2006**
            
            **2005**Revenue
            
            $
            83,779,000
            
            $
            74,086,000
            
            $
            40,129,000Cost
                of sales
            
            
            (21,464,000
            )
            
            (18,237,000
            )
            
            (10,161,000
            )**Gross
                profit**
            
            
            **62,315,000**
            
            
            **55,849,000**
            
            
            **29,968,000**Selling,
                general, and administration
            
            
            (56,600,000
            )
            
            (48,468,000
            )
            
            (26,419,000
            )**Income
                from operations**
            
            
            **5,715,000**
            
            
            **7,381,000**
            
            
            **3,549,000****Other
                income (expense):**Interest
                expense
            
            
            (387,000
            )
            
            (369,000
            )
            
            (317,000
            )Interest
                income
            
            
            105,000
            
            
            175,000
            
            
            158,000Other
                income
            
            
            110,000
            
            
            276,000
            
            
            15,000(172,000
            )
            
            82,000
            
            
            (144,000
            )**Income
                before provision for income taxes**
            
            
            **5,543,000**
            
            
            **7,463,000**
            
            
            **3,405,000**Provision
                for income taxes
            
            
            (1,706,000
            )
            
            (2,307,000
            )
            
            (1,002,000
            )**Net
                income**
            
            
            **3,837,000**
            
            
            **5,156,000**
            
            
            **2,403,000**Less:
                Preferred stock dividend requirement
            
            
            -
            
            
            -
            
            
            (291,000
            )**Net
                income attributable to common shareholders**
            
            **$**
            **3,837,000**
            
            **$**
            **5,156,000**
            
            **$**
            **2,112,000**Basic
                earnings per share
            
            $
            0.30
            
            $
            0.41
            
            $
            0.17Diluted
                earnings per share
            
            $
            0.28
            
            $
            0.38
            
            $
            0.17Weighted
                average shares outstanding -Basic
            
            
            12,960,930
            
            
            12,699,066
            
            
            12,258,734Diluted
            
            
            13,644,149
            
            
            13,482,894
            
            
            12,780,959





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





47




**MEDIFAST,
      INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND ACCUMULATED OTHER COMPREHENSIVE
      INCOME (LOSS)**


**Years
      Ended December 31, 2007, 2006, and 2005**





(Restated)Common
                StockPar Value
            
            Additional
            
            
            
            AccumulatedNumber
            
            $0.001
            
            Paid-In
            
            Retained
            
            other comp
            
            
            
            Treasury
            
            Unearnedof
                Shares
            
            Amount
            
            Capital
            
            Earnings (deficit)
            
            income/(loss)
            
            Total
            
            Stock
            
            CompensationBalance,
                December 31, 2004
            
            
            11,001,070
            
            $
            11,000
            
            $
            20,556,000
            
            $
            (1,287,000
            )
            $
            (39,000
            )
            $
            19,742,000
            
            $
            (536,000
            )
            
            -Preferred
                converted to Common Stock
            
            
            1,001,228
            
            
            1,100
            
            
            500,000
            
            
            
            
            
            
            
            
            
            
            
            (124,000
            )Warrants
                Converted to Common Stock
            
            
            2,000
            
            
            -
            
            
            2,000
            
            
            
            
            
            
            
            
            2,000Options
                excercised to common stock
            
            
            138,335
            
            
            100
            
            
            190,000
            
            
            
            
            
            
            
            
            190,000Common
                Stock issued for Series “C” dividend
            
            
            38,000
            
            
            -
            
            
            19,000
            
            
            (19,000
            )Dividend
                paid in stock
            
            
            
            
            
            
            
            
            
            
            
            (11,000
            )
            
            
            
            
            (11,000
            )Common
                stock issued for Series “B” dividend
            
            
            521,158
            
            
            600
            
            
            260,000
            
            
            (261,000
            )Common
                stock issued to Employees
            
            
            81,000
            
            
            100
            
            
            271,000
            
            
            
            
            
            
            
            
            271,000Treasury
                shares issued to employees
            
            
            
            
            
            100
            
            
            (39,000
            )
            
            
            
            
            
            
            
            (39,000
            )
            
            38,000Shares
                issued to officer with two year vesting periodVesting
                of unearned compensation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (122,000
            )Treasury
                shares repurchased
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (453,000
            )
            
            15,000Net
                income
            
            
            
            
            
            
            
            
            
            
            
            2,403,000
            
            
            321,000
            
            
            2,724,000Balance,
                December 31, 2005
            
            
            12,782,791
            
            
            13,000
            
            
            21,759,000
            
            
            825,000
            
            
            282,000
            
            
            22,879,000
            
            
            (1,075,000
            )
            
            (107,000
            )Warrants
                converted to common stock
            
            
            142,810
            
            
            200
            
            
            762,000
            
            
            
            
            
            
            
            
            762,200
            
            
            (137,000
            )Common
                stock issued to Directors
            
            
            10,750
            
            
            100
            
            
            69,000
            
            
            
            
            
            
            
            
            69,100Common
                stock issued to consultants
            
            
            2,500
            
            
            100
            
            
            17,000
            
            
            
            
            
            
            
            
            17,100Dividend
                paid in stockOptions
                excercised to common stock
            
            
            128,047
            
            
            100
            
            
            240,000
            
            
            
            
            
            
            
            
            240,100
            
            
            (490,000
            )Options
                granted to CEO
            
            
            
            
            
            
            
            
            383,000
            
            
            
            
            
            
            
            
            383,000
            
            
            
            
            
            (383,000
            )FASB
                123R vesting
            
            
            
            
            
            
            
            
            41,000
            
            
            
            
            
            
            
            
            41,000Shares
                issued to executives with 5 & 6 year vesting period
            
            
            565,000
            
            
            600
            
            
            3,374,000
            
            
            
            
            
            
            
            
            3,374,600
            
            
            
            
            
            (3,374,000
            )Vesting
                of unearned compensation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            508,000Treasury
                shares issued to employees
            
            
            
            
            
            (100
            )
            
            (16,000
            )
            
            
            
            
            
            
            
            (16,100
            )
            
            16,000Net
                income
            
            
            
            
            
            
            
            
            
            
            
            5,156,000
            
            
            52,000
            
            
            5,208,000Balance,
                December 31, 2006
            
            
            13,631,898
            
            
            14,000
            
            
            26,629,000
            
            
            5,981,000
            
            
            334,000
            
            
            32,958,000
            
            
            (1,686,000
            )
            
            (3,356,000
            )Warrants
                converted to common stock
            
            
            40,000
            
            
            100
            
            
            192,000
            
            
            
            
            
            
            
            
            192,100Common
                stock issued to Directors
            
            
            9,700
            
            
            100
            
            
            31,000
            
            
            
            
            
            
            
            
            31,100Options
                excercised to common stock
            
            
            27,500
            
            
            100
            
            
            24,000
            
            
            
            
            
            
            
            
            24,100FASB
                123R vesting
            
            
            
            
            
            
            
            
            101,000
            
            
            
            
            
            
            
            
            101,000Vesting
                of unearned compensation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            641,000Repurchase
                of treasury stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (309,000
            )Treasury
                shares issued to employees
            
            
            
            
            
            (300
            )
            
            (24,000
            )
            
            
            
            
            
            
            
            (24,300
            )
            
            24,000Net
                income
            
            
            
            
            
            
            
            
            
            
            
            3,837,000
            
            
            (13,000
            )
            
            3,824,000Balance,
                December 31, 2007
            
            
            13,709,098
            
            $
            14,000
            
            $
            26,953,000
            
            $
            9,818,000
            
            $
            321,000
            
            $
            37,106,000
            
            $
            (1,971,000
            )
            $
            (2,715,000
            )





48




**MEDIFAST,
      INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**Years
      Ended December 31,**





(Restated)
            
            (Restated)2007
            
            2006
            
            2005**Cash
                flows from Operating Activities:**Net
                income
            
            $
            3,837,000
            
            $
            5,156,000
            
            $
            2,403,000**Adjustments
                to reconcile net income to net cash****provided
                by operating activities from operations:**Depreciation
                and amortization
            
            
            3,471,000
            
            
            2,271,000
            
            
            2,266,000Realized
                (gain) loss on investment securities
            
            
            103,000
            
            
            (79,000
            )
            
            10,000Loss
                on sale of Consumer Choice Systems
            
            
            -
            
            
            323,000
            
            
            -Common
                stock issued for services
            
            
            31,000
            
            
            86,000
            
            
            150,000Vesting
                of unearned compensation
            
            
            641,000
            
            
            509,000
            
            
            15,000Stock
                options vested during year
            
            
            100,000
            
            
            40,000
            
            
            -Excess
                tax benefits from share-based payment arrangements
            
            
            39,000
            
            
            16,000
            
            
            -Net
                change in other accumulated comprehensive income (loss)
            
            
            (13,000
            )
            
            52,000
            
            
            321,000Provision
                for bad debts
            
            
            -
            
            
            -
            
            
            13,000Deferred
                income taxes
            
            
            (390,000
            )
            
            (597,000
            )
            
            100,000**Changes
                in Assets and Liabilities:**Decrease
                (increase) in accounts receivable
            
            
            (43,000
            )
            
            379,000
            
            
            65,000(Increase)
                in inventory
            
            
            (926,000
            )
            
            (3,138,000
            )
            
            (1,225,000
            )(Increase)
                decrease in prepaid expenses and other current assets
            
            
            (128,000
            )
            
            675,000
            
            
            (2,194,000
            )(Increase)
                in deferred compensation
            
            
            (140,000
            )
            
            (148,000
            )
            
            (204,000
            )Decrease
                (increase) in other assets
            
            
            (52,000
            )
            
            13,000
            
            
            10,000Increase
                (decrease) in accounts payable and accrued expenses
            
            
            1,367,000
            
            
            651,000
            
            
            1,323,000Increase
                (decrease) in income taxes payable
            
            
            57,000
            
            
            (364,000
            )
            
            160,000**Net
                cash provided by operating activities**
            
            
            7,954,000
            
            
            5,845,000
            
            
            3,213,000**Cash
                Flows from Investing Activities:**Sale
                (purchase) of investment securities, net
            
            
            (4,000
            )
            
            1,237,000
            
            
            (84,000
            )Purchase
                of property and equipment
            
            
            (5,151,000
            )
            
            (5,557,000
            )
            
            (1,672,000
            )Purchase
                of intangible assets
            
            
            (2,814,000
            )
            
            (2,427,000
            )
            
            (276,000
            )**Net
                cash (used in) investing activities**
            
            
            (7,969,000
            )
            
            (6,747,000
            )
            
            (2,032,000
            )**Cash
                Flows from Financing Activities:**Issuance
                of common stock, options and warrants
            
            
            216,000
            
            
            795,000
            
            
            66,000Increase
                in line of credit, net
            
            
            1,706,000
            
            
            623,000
            
            
            561,000Excess
                tax benefits from share-based payment arrangements
            
            
            (39,000
            )
            
            (14,000
            )
            
            -Purchase
                of treasury stock
            
            
            (309,000
            )
            
            (420,000
            )
            
            (452,000
            )Decrease
                in note receivable
            
            
            137,000
            
            
            -
            
            
            -Principal
                repayments of long-term debt
            
            
            (586,000
            )
            
            (481,000
            )
            
            (473,000
            )Dividends
                paid on preferred stock
            
            
            -
            
            
            -
            
            
            (11,000
            )**Net
                cash provided by (used in) financing activities**
            
            
            1,125,000
            
            
            503,000
            
            
            (309,000
            )**NET
                INCREASE (DECREASE) IN CASH AND****CASH
                EQUIVALENTS**
            
            
            1,110,000
            
            
            (399,000
            )
            
            872,000Cash
                and cash equivalents - beginning of the year
            
            
            1,085,000
            
            
            1,484,000
            
            
            612,000Cash
                and cash equivalents - end of year
            
            $
            2,195,000
            
            $
            1,085,000
            
            $
            1,484,000**Supplemental
                disclosure of cash flow information:**Interest
                paid
            
            $
            387,000
            
            $
            369,000
            
            $
            317,000Income
                taxes
            
            $
            1,790,000
            
            $
            3,403,000
            
            $
            1,983,000**Supplemental
                disclosure of non cash activity:**Common
                stock issued to executives over 6-year vesting period
            
            $
            -
            
            $
            3,373,000
            
            $
            -Common
                shares issued for options and warrants
            
            $
            -
            
            $
            591,000
            
            $
            -Options
                vested during period
            
            $
            100,000
            
            $
            40,000
            
            $
            -Conversion
                of preferred stock B and C to common stock
            
            $
            -
            
            $
            -
            
            $
            501,000Common
                stock for services
            
            $
            31,000
            
            $
            86,000
            
            $
            150,000Preferred
                B and C Stock Dividends
            
            $
            -
            
            $
            -
            
            $
            287,000Line
                of credit converted to long-term debt
            
            $
            2,156,000
            
            $
            -
            
            $
            369,000Common
                stock issued for compensation to be earned upon vesting
            
            $
            -
            
            $
            -
            
            $
            122,000





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




49




**MEDIFAST,
      INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS (CONT.)**





Years
                Ended December 31,2007
            
            2006
            
            2005Supplemental
                disclosure of non cash activity:Sale
                of Consumer Choice SystemsInventory
            
            $
            -
            
            $
            358,000
            
            $
            -Accounts
                Receivable
            
            
            -
            
            
            131,000
            
            
            -Intangible
                assets, net
            
            
            -
            
            
            1,337,000
            
            
            -Note
                receivable
            
            
            -
            
            
            (1,503,000
            )
            
            -Loss
                on sale of Consumer Choice Systems
            
            
            -
            
            
            (323,000
            )
            
            -$
            -
            
            $
            -
            
            $
            -





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




50




**Medifast,
      Inc. and Subsidiaries**


**Notes
      to Consolidated Financial Statements**


**December
      31, 2007, 2006, 2005**





**1.
      BACKGROUND**





**Nature
      of the Business**





Medifast,
      Inc. (the "Company” or “Medifast”) is a Delaware corporation, incorporated in
      1980. The Company’s operations are primarily conducted through five of its
      wholly owned subsidiaries, Jason Pharmaceuticals, Inc. ("Jason"), Take Shape
      for
      Life, Inc. (“TSFL”), Jason Enterprises, Inc., Jason Properties, LLC and Seven
      Crondall, LLC. The Company is engaged in the production, distribution, and
      sale
      of weight management and disease management products and other consumable health
      and diet products. Medifast, Inc.’s product lines include weight and disease
      management, and meal replacement products manufactured in a modern, FDA approved
      facility in Owings Mills, Maryland.





The
      Company is engaged in the manufacturing and distribution of Medifast â branded
      and private label weight and disease management products. These products are
      sold through various channels of distribution, to include web, call center,
      independent health advisors, medical professionals, weight loss clinics, direct
      consumer marketing supported via the phone and the web. The processing,
      formulation, packaging, labeling and advertising of the Company’s products are
      subject to regulation by one or more federal agencies, including the Food and
      Drug Administration, the Federal Trade Commission, the Consumer Product Safety
      Commission, the United States Department of Agriculture, and the United States
      Environmental Protection Agency.





**2.
      Summary of Significant Accounting Policies**





Significant
      accounting policies followed in the preparation of the consolidated financial
      statements are as follows:




**Principles
      of Consolidation and Basis of Presentation**





The
      consolidated financial statements include the accounts of the Company and its
      wholly owned subsidiaries, Jason Pharmaceuticals, Inc., Take Shape For Life,
      Inc., Seven Crondall Associates, LLC, Jason Properties, LLC and Jason
      Enterprises, Inc. All inter-company accounts have been eliminated.





**Cash
      and Cash Equivalents**





For
      the
      purposes of the consolidated statements of cash flow, the Company considers
      all
      highly liquid debt instruments purchased with an original maturity of three
      months or less to be cash equivalents. At December 31, 2007, the Company had
      $1,224,000 in miscellaneous short-term investments through Merrill Lynch that
      are considered cash equivalents due to terms of maturity, and $971,000 in
      operating checking accounts.





At
      December 31, 2006, the Company had $979,000 in miscellaneous short-term
      investments through Merrill Lynch that are considered cash equivalents due
      to
      terms of maturity, and $106,000 in operating checking accounts.





**Accounts
      Receivable and Allowance for Doubtful Accounts**





Accounts
      receivable are recorded net of reserves for sales returns and allowances, and
      net of provisions for doubtful accounts. Allowances for sales returns and
      discounts are based on an analysis of historical trends, and allowances for
      doubtful accounts are based primarily on an analysis of aging accounts
      receivable balances and on the creditworthiness of the customer as determined
      by
      credit checks and analysis, as well as the customer’s payment history.





**Inventory**





Inventories
      consist principally of packaged meal replacements held in the Company’s
      warehouse. Inventory is stated at the lower of cost or market, utilizing the
      first-in, first-out method. The cost of finished goods includes the cost of
      raw
      materials, packaging supplies, direct and indirect labor and other indirect
      manufacturing costs. On a quarterly basis, management reviews inventory for
      unsalable or obsolete inventory. Obsolete or unsalable inventory write-offs
      have
      been immaterial to the financial statements as our products have useful lives
      ranging from 14-24 months.




51





**Advertising**





Advertising
      costs such as preparation, layout, design and production of advertising are
      deferred. They are expensed when the advertisement is first used, except for
      the
      costs of executory contracts, which are amortized as performance under the
      contract is received. Advertising
      costs deferred at December 31, 2007 and 2006, were $1,014,000 and $960,000
      respectively. Advertising expense for the years ended December 31, 2007 and
      2006
      amounted to $18,400,000 and $14,300,000, respectively.





**Property,
      Plant, and Equipment**





Property,
      plant and equipment are stated at cost less accumulated depreciation and
      amortization. The Company computes depreciation and amortization using the
      straight-line method over the estimated useful lives of the assets acquired
      as
      follows:





Building
                and building improvements
            39
                yearsEquipment
                and fixtures
            3
                -
                15 yearsVehicles
            5
                years





The
      carrying amount of all long-lived assets is evaluated periodically to determine
      whether adjustment to the useful life or to the unamortized balance is
      warranted. Such evaluation is based principally on the expected utilization
      of
      the long-lived assets and the projected undiscounted cash flows of the
      operations in which the long-lived assets are used.





In
      accordance with SFAS No. 144, “Long-Lived Assets”, property, plant and
      equipment and other long-lived assets are reviewed for impairment whenever
      events or changes in circumstances indicate that the carrying amount of an
      asset
      may not be recoverable. Recoverability of assets to be held and used is measured
      by a comparison of the carrying amount of an asset to estimated undiscounted
      future cash flows expected to be generated by the asset. If the carrying amount
      of an asset exceeds its estimated future cash flows, an impairment charge is
      recognized by the amount by which the carrying amount of the asset exceeds
      the
      fair value of the asset.





**Income
      Taxes**





The
      Company accounts for income taxes in accordance with Statements of Financial
      Accounting Standards No. 109, “Accounting for Income Taxes,” which requires an
      asset and liability approach to financial accounting and reporting for income
      taxes. Deferred income taxes and liabilities are computed annually for
      differences between the financial statement and the tax basis of assets and
      liabilities that will result in taxable or deductible amounts in the future
      based on enacted tax laws and rates applicable to the periods in which the
      differences are expected to affect taxable income. Valuation allowances are
      established when necessary to reduce deferred tax assets to the amount expected
      to be realized.





**Earnings
      per Common Share**





Basic
      earnings per share is calculated by dividing net profit attributable to common
      stockholders by the weighted average number of outstanding common shares during
      the year. Basic earnings per share exclude any dilutive effects of options,
      warrants and other stock-based compensation, which are included in diluted
      earnings per share.





**Revenue
      Recognition**





Revenue
      is recognized net of discounts, rebates, promotional adjustments, price
      adjustments, returns and other potential adjustments upon shipment and passing
      of risk to the customer and when estimates of are reasonably determinable,
      collection is reasonably assured and the Company has no further performance
      obligations.





**Estimates**





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





**Fair
      Value of Financial Instruments**





The
      carrying amounts reported in the consolidated balance sheets for cash,
      certificates of deposit, accounts receivable, accounts payable and accrued
      liabilities approximate fair value because of the immediate or short-term
      maturity of the financial instruments.





The
      Company believes that its indebtedness approximates fair value based on current
      yields for debt instruments with similar terms.





52




**Concentration
      of Credit Risk**





Financial
      instruments that potentially subject the Company to credit risk consist of
      cash,
      certificates of deposit ,
      investment securities and trade receivables. Cash, money markets and investments
      exceed the federal insurance coverage by $1,551,000 and $2,610,000 respectively.
      The Company securities
      at December 31, 2007 and 2006, include amounts deposited with multiple financial
      institutions markets
      its products primarily to medical professionals, clinics, and Internet medical
      sales and has no substantial concentrations of credit risk in its trade
      receivables.





As
      of
      December 31, 2007 the Company had three customers that individually represented
      over 10% of the accounts receivable and in the aggregate, approximately 70%
      of
      the accounts receivable. In 2006, the Company had two customers that
      individually represented over 10% of the accounts receivable and in the
      aggregate, approximately 12% of the accounts receivable.





**Deferred
      Compensation Plans**





We
      maintain a non-qualified deferred compensation plan for Senior Executive
      management. Currently, Bradley MacDonald is the only participant in the plan.
      Under the deferred compensation plan that became effective in 2003, executive
      officers of the Company may defer a portion of their salary and bonus
      (performance-based compensation) annually. A participant may elect to receive
      distributions of the accrued deferred compensation in a lump sum or in
      installments upon retirement




Each
      participating officer may request that the deferred amounts be allocated among
      several available investment options established and offered by the Company.
      These investment options provide market rates of return and are not subsidized
      by the Company. The benefit payable under the plan at any time to a participant
      following termination of employment is equal to the applicable deferred amounts,
      plus or minus any earnings or losses attributable to the investment of such
      deferred amounts. The Company has established a trust for the benefit of
      participants in the deferred compensation plan. Pursuant to the terms of the
      trust, as soon as possible after any deferred amounts have been withheld from
      a
      plan participant, the Company will contribute such deferred amounts to the
      trust
      to be held for the benefit of the participant in accordance with the terms
      of
      the plan and the trust.




Retirement
      payouts under the plan upon an executive officer’s retirement from the Company
      are payable either in a lump-sum payment or in annual installments over a period
      of up to ten years. Upon death, disability or termination of employment, all
      amounts shall be paid in a lump-sum payment as soon as administratively
      feasible.





**Stock-Based
      Compensation**





Effective
      January 1, 2006, the Company adopted the provisions of Financial Accounting
      Standards Board Statement of Financial Accounting Standard (“SFAS”) No. 123(R),
“Share-Based Payments,” which establishes the accounting for employee
      stock-based awards. Under the provisions of SFAS No.123(R), stock-based
      compensation is measured at the grant date, based on the calculated fair value
      of the award, and is recognized as an expense over the requisite employee
      service period (generally the vesting period of the grant). The Company adopted
      SFAS No. 123(R) using the modified prospective method and, as a result, periods
      prior to December 31, 2005 have not been restated. The Company recognized
      stock-based compensation for awards issued under the Company’s stock option
      plans in other income/expenses included in the Condensed Consolidated Statement
      of Operations. Additionally, no modifications were made to outstanding stock
      options prior to the adoption of SFAS No. 123(R), and no cumulative adjustments
      were recorded in the Company’s financial statements.





Prior
      to
      December 31, 2005, the Company accounted for stock-based compensation in
      accordance with provisions of Accounting Principles Board Opinion No. 25 (“APB
      No. 25”), “Accounting for Stock Issued to Employees,” and related
      interpretations. Under APB No. 25, compensation cost was recognized based on
      the
      difference, if any, on the date of grant between the fair value of the Company’s
      stock and the amount an employee must pay to acquire the stock. The Company
      grants stock options at an exercise price equal to 100% of the market price
      on
      the date of grant. Accordingly, no compensation expense was recognized for
      the
      stock option grants in periods prior to the adoption of SFAS No.
      123(R).





Unearned
      compensation represents shares issued to executives that will be vested over
      a
      5-6 year period. These shares will be amortized over the vesting period in
      accordance with FASB 123(R). The expense related to the vesting of unearned
      compensation was $641,000 and $509,000 at December 31, 2007 and December 31,
      2006, respectively. Expense related to vesting of options under FASB 123R was
      $100,000 and $40,000 at December 31, 2007 and December 31, 2006,
      respectively.





SFAS
      No.
      123(R) requires disclosure of pro-forma information for periods prior to the
      adoption. The pro-forma disclosures are based on the fair value of awards at
      the
      grant date, amortized to expense over the service period. The following table
      illustrates the effect on net income and earnings per share as if the Company
      had applied the fair value recognition provisions of SFAS No. 123, “Accounting
      for Stock-Based Compensation”, for the period prior to the adoption of SFAS No.
      123(R), and the actual effect on net income and earnings per share for the
      period after the adoption of SFAS No. 123(R).





53




If
      compensation expense for the Company's stock-based compensation plans had been
      determined consistent with SFAS 123, the Company's net income and net
      income per share including pro forma results would have been the amounts
      indicated below:


Years
                  Ended December 312007
              
              2006
              
              2005(Restated)
              
              (Restated)Net
                  income:As
                  reported
              
              $
              3,837,000
              
              $
              5,156,000
              
              $
              2,403,000Add:
                  Stock-based employee compensation expense included in net income,
                  net of
                  related tax effects
              
              
              61,000
              
              
              24,000Deduct:
                  Total stock-based employee compensation determined under fair value
                  based
                  method for all awards, net of related tax effects
              
              
              (61,000
              )
              
              (24,000
              )
              
              (291,000
              )Net
                  income, pro forma
              
              $
              3,837,000
              
              $
              5,156,000
              
              $
              2,112,000Net
                  income per share:as
                  reported:Basic
              
              $
              0.30
              
              $
              0.41
              
              $
              0.17Diluted
              
              $
              0.28
              
              $
              0.38
              
              $
              0.17Pro
                  forma:Basic
              
              $
              0.30
              
              $
              0.41
              
              $
              0.17Diluted
              
              $
              0.28
              
              $
              0.38
              
              $
              0.17




The
      pro
      forma effect on net income may not be representative of the pro forma effect
      on
      net income of future years due to, among other things: (i) the vesting period
      of
      the stock options and the (ii) fair value of additional stock options in future
      years.





For
      the
      purpose of the above table, the fair value of each option granted is estimated
      as of the date of grant using the
      Black-Scholes option-pricing model with the following assumptions:





2007
            
            2006
            
            2005Dividend
                yield
            
            
            0.0
            %
            
            0.0
            %
            
            0.0
            %Expected
                volatility
            
            
            0.54
            
            
            0.70
            
            
            0.70Risk-free
                interest rate
            
            
            4.0
            %
            
            4.50
            %
            
            4.50
            %Expected
                life in years
            
            
            1-5
            
            
            1-5
            
            
            1-5




54




**Recent
      Accounting Pronouncements**





In
      September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
      No. 157, “Fair Value Measurements,” which defines fair value, establishes a
      framework for measuring fair value under generally accepted accounting
      principles, and expands disclosures about fair value measurements. SFAS
      No. 157 applies to other accounting pronouncements that require or permit
      fair value measurements. The new guidance is effective for fiscal years
      beginning after November 15, 2007. The adoption of SFAS No. 157 is not
      expected to have a material impact on the Company’s consolidated financial
      position and results of operations.




In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities.” SFAS No. 159 permits entities
      to choose to measure many financial assets and financial liabilities at fair
      value. Unrealized gains and losses on items for which the fair value option
      has
      been elected are reported in earnings. SFAS No. 159 is effective for fiscal
      years beginning after November 15, 2007. The adoption of SFAS No. 159
      is not expected to have a material impact on the Company’s consolidated
      financial position and results of operations.





In
      December 2007, the FASB issued SFAS No. 141R, “Business Combinations” and
      SFAS No. 160, “Non controlling Interests in Consolidated Financial
      Statements - an amendment to ARB No. 51.” SFAS Nos. 141R and 160 require
      most identifiable assets, liabilities, non controlling interests, and goodwill
      acquired in a business combination to be recorded at “full fair value” and
      require non controlling interests (previously referred to as minority interests)
      to be reported as a component of equity, which changes the accounting for
      transactions with non controlling interest holders. Both statements are
      effective for periods beginning on or after December 15, 2008, and early
      adoption is prohibited. Accordingly, SFAS No. 141R will be applied by the
      Company to business combinations occurring on or after January 1, 2009.
      SFAS No. 160 will be applied prospectively to all non controlling
      interests, including any that arose before the effective date. The adoption
      of
      SFAS No. 160 is not expected to have any impact on the Company’s
      consolidated financial position and results of operations.





**Investments**





In
      accordance with FAS No. 115, “ *Accounting
      for Certain Investments in Debt and Equity*  *Securities* ”,
      securities are classified into three categories: held-to-maturity,
      available-for-sale and trading. The Company’s investments consist of debt and
      equity securities classified as available-for-sale securities. Accordingly,
      they
      are carried at fair value in accordance with FAS No. 115. Further, according
      to
      FAS No. 115 the unrealized holding gains and losses for available-for-sales
      securities are excluded from earnings and reported, net of deferred income
      taxes, as a separate component of stockholders’ equity, unless the loss is
      classified as other than a temporary decline in market value.





**Goodwill
      and Other Intangible Assets**





In
      June
      2001, the Financial Accounting Standards Board (“FASB”) issued Statement No. 142
“Goodwill and Other Intangible Assets”. This statement addresses financial
      accounting and reporting for acquired goodwill and other intangible assets
      and
      supersedes APB Opinion No. 17, “Intangible Assets”. It addresses how intangible
      assets that are acquired individually or with a group of other assets (but
      not
      those acquired in a business combination) should be accounted for in financial
      statements upon their acquisition. This Statement also addresses how goodwill
      and other intangible assets should be accounted for after they have been
      initially recognized in the financial statements. Upon the sale of Consumer
      Choice Systems, Inc. on January 17, 2006, the goodwill balance of $894,000
      was
      removed from the Company’s books.





In
      addition, the Company has acquired other intangible assets, which include:
      customer lists, non-compete agreements, trademarks, patents, and copyrights.
      The
      non-compete agreements are fully amortized as of December 31, 2007. The customer
      lists are being amortized over a period ranging between 5 and 7 years based
      on
      management’s best estimate of the expected benefits to be consumed or otherwise
      used up. The costs of patents and copyrights are amortized over 5 and 7 years
      based on their estimated useful life, while trademarks representing brands
      with
      an infinite life, and are carried at cost and tested annually for impairment
      as
      outlined below. Goodwill and other intangible assets are tested annually for
      impairment in the fourth quarter, and are tested for impairment more frequently
      if events and circumstances indicate that the asset might be impaired. An
      impairment loss is recognized to the extent that the carrying amount exceeds
      the
      asset’s fair value. The Company assesses the recoverability of its goodwill and
      other intangible assets by comparing the projected undiscounted net cash flows
      associated with the related asset, over their remaining lives, in comparison
      to
      their respective carrying amounts. Impairment, if any, is based on the excess
      of
      the carrying amount over the fair value of those assets.





**Comprehensive
      Income (Loss)**





Comprehensive
      income (loss) is defined as the change in equity of a business enterprise during
      a period from transactions and other events and circumstances from non-owner
      sources, including unrealized gains and losses on marketable securities. The
      Company presents comprehensive income in its consolidated statements of
      stockholders equity.





**Reclassifications**





Certain
      amounts for the years ended December 31, 2006 and 2005 have been reclassified
      to
      conform to the presentation of the December 31, 2007 amounts. The
      reclassifications have no effect on net income for the years ended December
      31,
      2006 and 2005.





55





**3.
      CASH, CASH EQUIVALENTS AND MARKETABLE SECURITES**





The
      following summarizes cash, cash equivalents, and marketable
      securities:




**Cost**
            
            **Accrued interest**
            
            **Fair
                value****Cash
                and cash equivalents**Demand
                deposits
            
            $
            971,000
            
            $
            -
            
            $
            971,000Money
                market accounts
            
            
            1,224,000
            
            
            -
            
            
            1,224,000December
                31, 2007
            
            $
            2,195,000
            
            $
            -
            
            $
            2,195,000**Investment
                Securities**Investment
                Securities
            
            $
            1,428,000
            
            $
            11,000
            
            $
            1,439,000December
                31, 2007
            
            $
            1,428,000
            
            $
            11,000
            
            $
            1,439,000**Cash
                and cash equivalents**Demand
                deposits
            
            $
            106,000
            
            $
            -
            
            $
            106,000Money
                market accounts
            
            
            979,000
            
            
            -
            
            
            979,000December
                31, 2006
            
            $
            1,085,000
            
            $
            -
            
            $
            1,085,000**Investment
                Securities**Investment
                Securities
            
            $
            1,455,000
            
            $
            85,000
            
            $
            1,540,000December
                31, 2006
            
            $
            1,455,000
            
            $
            85,000
            
            $
            1,540,000




The
      Company had a net unrealized loss of $13,000 as of December 31, 2007 and a
      net
      unrealized gain of $52,000 as of December 31, 2006. The Company had a realized
      loss of $103,000, realized gain of $79,000, and realized loss of $10,000 for
      the
      years ended December 31, 2007, 2006, and 2005, respectively




**4.
      INVENTORY**





Inventory
      consists of the following at December 31, 2007 and 2006:




**2007**
            
            **2006**Raw
                materials
            
            
            $
            2,136,000
            
            $
            1,872,000Packaging
            
            
            
            2,656,000
            
            
            1,625,000Finished
                goods
            
            
            
            4,389,000
            
            
            4,758,000Total
            
            
            $
            9,181,000
            
            $
            8,255,000




**5.**  **PREPAID
      EXPENSES AND OTHER CURRENT ASSETS**




Prepaid
      expense and other current assets as of December 31, 2007 and 2006, consist
      of
      the following:





2007
            
            2006Marketing
                and advertising
            
            $
            1,978,000
            
            $
            1,830,000Supplies
            
            
            377,000
            
            
            158,000Insurance
            
            
            353,000
            
            
            519,000Other
            
            
            19,000
            
            
            92,000$
            2,727,000
            
            $
            2,599,000




56




**6.
      PROPERTY, PLANT AND EQUIPMENT**





Property,
      plant and equipment as of December 31, 2007 and 2006, consist of the
      following:





2007
            
            2006Land
            
            $
            650,000
            
            $
            650,000Building
                and building improvements
            
            
            7,949,000
            
            
            7,182,000Equipment
                and fixtures
            
            
            15,093,000
            
            
            10,805,000Vehicle
            
            
            43,000
            
            
            43,00023,735,000
            
            
            18,680,000Less
                accumulated depreciation and amortization
            
            
            6,704,000
            
            
            4,660,000Property,
                plant and equipment - net
            
            $
            17,031,000
            
            $
            14,020,000





Substantially
      all of the Company's property, plant and equipment are pledged
      as collateral for various loans (see Note Payable footnote).





Depreciation
      expense for the years ended December 31, 2007, 2006, and 2005 were $2,139,000,
      $1,072,000 and $835,000, respectively. In 2007, the Company disposed of assets
      with an accumulated depreciation of $95,000 relating to the closing
      of three corporately owned Medifast Weight Control
      Centers.





**7.
      TRADEMARKS AND INTANGIBLES**




**As
                of December 31, 2007**
            
            **As
                of December 31, 2006**(Restated)
            
            (Restated)**Gross Carrying**
            
            **Accumulated**
            
            **Gross Carrying**
            
            **Accumulated****Amount**
            
            **Amortization**
            
            **Amount**
            
            **Amortization**Customer
                lists
            
            $
            8,332,000
            
            $
            3,065,000
            
            $
            5,587,000
            
            $
            1,969,000Non-compete
                agreements
            
            
            840,000
            
            
            840,000
            
            
            840,000
            
            
            840,000Trademarks,
                patents, and copyrightsfinite
                life
            
            
            1,626,000
            
            
            446,000
            
            
            1,557,000
            
            
            210,000infinite
                life
            
            
            909,000
            
            
            -
            
            
            909,000
            
            
            -Total
            
            $
            11,707,000
            
            $
            4,351,000
            
            $
            8,893,000
            
            $
            3,019,000





**Amortization
      expense for the years ended December 31, 2007, 2006 and 2005 was as
      follows:**





(Restated)
            
            (Restated)2007
            
            2006
            
            2005Customer
                lists
            
            $
            1,096,000
            
            $
            774,000
            
            $
            1,004,000Non-compete
                agreements
            
            
            -
            
            
            273,000
            
            
            369,000Trademarks,
                patents, and copyrights
            
            
            236,000
            
            
            152,000
            
            
            58,000Total
                trademarks and intangibles
            
            $
            1,332,000
            
            $
            1,199,000
            
            $
            1,431,000





On
      January 17, 2006 the Consumer Choice Systems division of the Company was sold
      which included the sale of $1,601,000
      in gross intangible assets and $265,000 in accumulated
      amortization.





Amortization
      expense is included in selling, general and administrative
      expenses.





The
      estimated future amortization expense of trademarks and intangible assets is
      as
      follows:




For the years ending December 31,
              
              Amount2008
              
              $
              1,822,0002009
              
              
              1,675,0002010
              
              
              1,104,0002011
              
              
              1,101,0002012
              
              
              692,000




57




**8.
      ACCOUNTS PAYABLE AND ACCRUED EXPENSES**





Accounts
      payable and accrued expenses as of December 31, 2007 and 2006 consist of the
      following:





2007
            
            2006Trade
                payables
            
            $
            3,181,000
            
            $
            2,214,000Accrued
                payroll and related taxes
            
            
            562,000
            
            
            328,000Sales
                commissions payable
            
            
            536,000
            
            
            371,000Total
            
            $
            4,279,000
            
            $
            2,913,000





**9.
      COMMITMENTS AND CONTINGENCIES**





The
      Company leases office space for Corporate offices as well as fourteen
      corporately owned Medifast Weight Control Centers under lease terms ranging
      from
      one to six years with leases commencing in 2004, 2005, 2006, 2007 and 2008.
      Monthly payments under the Medifast Weight Control Centers leases range in
      price
      from $1,700 to $4,200. The Company is required to pay property taxes, utilities,
      insurance and other costs relating to the leased facilities.





The
      Company leases large commercial printers for our printing operation that
      supports our direct response marketing efforts. The leases extend through
      December 2012. The annual lease payments are $411,000, $375,000, $350,000,
      $350,000, and $290,000 for the years ended December 31, 2008, 2009, 2010, 2011
      and 2012, respectively.





The
      following is a schedule by years of future minimum rental and lease payments
      required under operating lease that have initial or remaining non-cancelable
      lease terms in excess of one year as of December 31, 2007:





For
                the Years EndingDecember
                31,2008
            
            $
            1,084,0002009
            
            
            1,066,0002010
            
            
            933,0002011
            
            
            888,0002012
            
            
            725,000Thereafter
            
            
            16,000Total
                minimum payments required
            
            $
            4,712,000





Rent
      expense for the years ended December 31, 2007, 2006, and 2005 was $464,000,
      $274,000, and $211,000, respectively .





There
      is
      no pending or threatened legal action that would have material adverse on the
      Company’s consolidated financial position, results or operations or cash flows
      in future years.




58




**10.
      INCOME TAXES**





Significant
      components of the income tax benefit for the years ended December 31 are as
      follows:


(Restated)
              
              (Restated)2007
              
              2006
              
              2005Current:Federal
              
              $
              926,000
              
              $
              1,073,000
              
              $
              631,000State
              
              
              307,000
              
              
              327,000
              
              
              181,000Total
                  Current
              
              $
              1,233,000
              
              $
              1,400,000
              
              $
              812,000Deferred:Federal
              
              $
              371,000
              
              $
              786,000
              
              $
              157,000State
              
              
              102,000
              
              
              121,000
              
              
              33,000Total
                  deferred
              
              
              473,000
              
              
              907,000
              
              
              190,000Income
                  tax expense
              
              $
              1,706,000
              
              $
              2,307,000
              
              $
              1,002,000





A
      reconciliation between the provisions for income taxes calculated at the U.S.
      federal statutory income tax rate and the consolidated income tax benefit in
      the
      consolidated statements of income for the years ended December 31 is as
      follows:


(Restated)
              
              (Restated)2007
              
              2006
              
              2005Provision
                  at the U.S. federal statutory rate
              
              $
              1,884,000
              
              $
              2,537,000
              
              $
              1,102,000State
                  taxes, net of federal benefit
              
              
              277,000
              
              
              371,000
              
              
              170,000Intangible
                  assets
              
              
              (377,000
              )
              
              (297,000
              )
              
              (156,000
              )Other
                  temporary differences
              
              
              -
              
              
              -
              
              
              (98,000
              )Cost
                  segregation study
              
              
              -
              
              
              (275,000
              )
              
              -Permanent
                  differences
              
              
              (78,000
              )
              
              (29,000
              )
              
              (16,000
              )Income
                  tax expense
              
              $
              1,706,000
              
              $
              2,307,000
              
              $
              1,002,000




Medifast,
      Inc.’s deferred income taxes reflect the net tax effect of temporary differences
      between the bases of assets and liabilities for financial reporting purposes
      and
      their bases for income tax purposes. Significant components of the Company’s
      deferred tax liabilities and assets as of December 31 are as
      follows:




(Restated)2007
              
              2006Deferred
                  tax assetsIntangible
                  assets
              
              $
              872,000
              
              $
              480,000Accounts
                  receivable
              
              
              40,000
              
              
              37,000Inventory
                  overhead and write downs
              
              
              44,000
              
              
              49,000Deferred
                  compensation
              
              
              41,000
              
              
              41,000Total
                  deferred tax assets
              
              $
              997,000
              
              $
              607,000Deferred
                  Tax LiabilitiesIntangible
                  assets
              
              $
              -
              
              $
              -Accounts
                  receivable
              
              
              -
              
              
              -Inventory
                  overhead and write downs
              
              
              -
              
              
              -Total
                  deferred tax liabilities
              
              $
              -
              
              $
              -




59




The
      2007
      effective income tax rate of 30.8% differed from the federal statutory rate
      of
      34% due to the amortization of intangible assets, timing differences for other
      temporary and permanent differences, and state income taxes.





The
      2006
      effective income tax rate of 30.9% differed from the federal statutory rate
      of
      34% due to the amortization of intangible assets, a cost segregation study
      performed on fixed assets, as well as timing differences for other temporary
      and
      permanent differences, and state income taxes.





The
      2005
      effective income tax rate of 29.4% differed from the federal statutory rate
      of
      34% due to the amortization of intangible assets, timing differences for other
      temporary and permanent differences, and state income taxes.





**11.
      STOCK OPTION PLAN**





On
      October 9, 1993 and as amended in May 1995, the Company adopted a
      stock option plan ("Plan") authorizing the grant of incentive and non-incentive
      options for an aggregate of 500,000 shares of the Company's common stock to
      officers, employees, directors and consultants. Incentive options are to be
      granted at fair market value. Options are to be exercisable as determined by
      the
      stock option committee.





In
      November 1997, June 2002 and July 2004, the Company amended the Plan by
      increasing the number of shares of the Company's common stock subject to the
      Plan by an aggregate of 200,000 shares, 300,000 shares and 250,000 shares
      respectively.





The
      following summarizes the stock option activity for the years ended December
      31:




2007
              
              2006
              
              2005Shares
              
              Weighted
                Average
                Exercise Price
              
              Shares
              
              Weighted
                Average
                Exercise
                Price
              
              Shares
              
              Weighted
                Average
                Exercise
                PriceOutstanding
                  at beginning of year
              
              
              321,579
              
              $
              3.88
              
              
              359,727
              
              $
              2.71
              
              
              389,397
              
              $
              1.51Options
                  granted
              
              
              -
              
              
              
              
              
              100,000
              
              
              6.25
              
              
              333,333
              
              
              2.64Options
                  reinstated
              
              
              -
              
              
              
              
              
              16,666
              
              
              6.36
              
              
              -
              
              
              0.00Options
                  exercised
              
              
              (27,500
              )
              
              0.89
              
              
              (128,147
              )
              
              (2.11
              )
              
              (138,335
              )
              
              (1.83
              )Options
                  forfeited or expired
              
              
              (2,779
              )
              
              1.60
              
              
              (26,667
              )
              
              (8.36
              )
              
              (224,668
              )
              
              (1.17
              )Outstanding
                  at end of year
              
              
              291,300
              
              $
              4.19
              
              
              321,579
              
              $
              3.88
              
              
              359,727
              
              $
              2.71Options
                  exercisable at year end
              
              
              211,300
              
              $
              3.35
              
              
              211,577
              
              $
              2.77
              
              
              329,725
              
              $
              2.56





The
      weighted average fair value at date of grant for options granted during the
      years 2006 and 2005 were $6.25, and $2.64, respectively. No stock options were
      granted in 2007.





In
      2005,
      the Company incorrectly cancelled 75,000 options to a former consultant. The
      options were correctly added back to the 2005 and 2006 option schedule above.
      The omission from the schedule in prior year had no impact on earnings per
      share. During 2007, the former consultant exercised 25,000 options and 25,000
      remain outstanding.





60




The
      following table summarizes information about stock options outstanding and
      exercisable at December 31, 2007:





Options
                Outstanding
            
            
            
            Options
              ExercisableWeightedAverageContractual
            
            Weighted
            
            
            
            WeightedRange
                of
            
            
            
            Life
            
            Average
            
            
            
            AverageExercise
            
            Number
            
            Remaining
            
            Exercise
            
            Number
            
            ExercisePrices
            
            Outstanding
            
            (in
                Years)
            
            Price
            
            Exercisable
            
            Price$
            0.50
            
            
            
            25,000
            
            
            .1
            
            $
            0.50
            
            
            25,000
            
            $
            0.50$
            2.87
            
            
            
            123,334
            
            
            2.25
            
            $
            2.87
            
            
            123,334
            
            $
            2.67$
            3.83
            
            
            
            23,334
            
            
            2.83
            
            $
            3.83
            
            
            23,334
            
            $
            3.83$
            4.80
            
            
            
            12,500
            
            
            .25
            
            $
            4.80
            
            
            12,500
            
            $
            4.80$
            6.25
            
            
            
            100,000
            
            
            3.08
            
            $
            6.25
            
            
            20,000
            
            $
            6.25$
            11.12
            
            
            
            7,132
            
            
            .5
            
            $
            11.12
            
            
            7,132
            
            $
            11.15291,300
            
            
            
            
            $
            2.27
            
            
            211,300
            
            $
            1.96





**12.
      LONG-TERM DEBT AND LINE OF CREDIT**





Long-term
      debt as of December 31, 2007 and 2006, consist of the following:





2007
            
            2006$3,539,000
                ten year term loan secured by two buildings and landat
                a variable rate which was 7.1% at December 31, 2006.
            
            $
            -
            
            $
            3,480,000$200,000
                five-year term loan secured by equipmentfixed
                rate was 3% at December 31, 2007. Due 2008
            
            
            7,000
            
            
            49,000$475,000
                seven-year loan secured by the building and land at avariable
                rate at LIBOR plus 250 bps, which was 7.725 % onDecember
                31, 2007. Due 2011
            
            
            364,000
            
            
            396,000$366,000
                three-year term loan secured by certain assets at LIBOR
                plus250
                basis points, which was at 7.82% at December 31, 2006.
            
            
            -
            
            
            132,000$5,000,000
                revolving line of credit at the LIBOR rate plus 1.30%,which
                was 5.93% on December 31, 2007
            
            
            -
            
            
            1,256,000$7,500,000
                revolving line of credit at the LIBOR rate plus 1.30%,which
                was 5.93% at December 31, 2007
            
            
            1,599,000
            
            
            -$3,000,000
                ten-year term loan, with Merrill Lynchat
                LIBOR plus 1.3%, this was 5.93% at December 31, 2007. Due
                2017
            
            
            2,975,000
            
            
            -$1,500,000
                ten-year term loan, with Merrill Lynchat
                LIBOR plus 1.3%, this was 5.93% at December 31, 2007. Due
                2017
            
            
            1,488,000
            
            
            -6,433,000
            
            
            5,313,000Less
                current portion
            
            
            1,863,000
            
            
            1,804,000$
            4,570,000
            
            $
            3,509,000




61




Future
      principal payments on long-term debt for the next 5 years are as
      follows:





2008
            
            $
            1,863,0002009
            
            
            257,0002010
            
            
            257,0002011
            
            
            494,0002012
            
            
            225,000Thereafter
            
            
            3,337,000$
            6,433,000





The
      Company has established a $7.5 million revolving line of credit at LIBOR plus
      1.30% with Merrill Lynch. In prior year, the Company had a $5 million revolving
      line of credit at Mercantile Bank and Trust at LIBOR plus 1.30%. The outstanding
      balance on our line of credit was $1,599,000 and $1,256,000 at December 31,
      2007
      and 2006, respectively. Effective September 27, 2007, the 10-year term loan
      with
      an original balance of $3,539,000; the 3-year loan with an original balance
      of
      $366,000; and the line of credit balance with Mercantile Safe Deposit and Trust
      Company was refinanced by Merrill Lynch into two ten year term loans for
      $1,500,000 and $3,000,000. These loans are at LIBOR plus 1.3%, which was 5.93%
      on December 31, 2007. The loans are secured by two buildings, together with
      an
      assignment of rents and security interest upon all fixtures now or hereafter
      located in the two buildings.




**13.
      EMPLOYMENT AGREEMENTS**





The
      Board
      of Directors of Medifast, Inc. implemented a management succession plan which
      occurred over the last 24 months. In doing so, they had 3 key executive officers
      sign 6-year employment contracts to ensure that there will be minimal turnover
      in selected key management positions. The Executives associated with this
      succession plan include Michael S. McDevitt, Chief Executive Officer and Chief
      Financial Officer, Margaret MacDonald, Chief Operating Officer and President,
      and Brendan Connors, CPA, VP of Finance. Bradley T. MacDonald, the Executive
      Chairman of the Board of Directors has signed and executed a new 5 year
      employment agreement as the Executive Chairman of the Board of Directors and
      will provide on-going executive mentoring, financial and M&A advice, and new
      business development for the Company.




On
      February 8, 2006, three executive officers of the Company signed 6-year
      employment contracts. The officers received shares of common stock in varying
      amounts totaling 380,000 shares at $6.25 per share that will be vested over
      6
      years. In addition, Bradley T. MacDonald, Chairman and CEO signed a new 5-year
      employment agreement and was granted 100,000 stock options at $6.25 that will
      vest over 5 years beginning on February 8, 2007.





**14.
      WARRANTS**




During
      2003, the Company issued 200,000 warrants to James Paradis and Anthony
      Burrascono, both affiliated with Villanova University and 200,000 warrants
      an
      investment banker, for advisory and consulting services provided to the Company.
      The warrants vest in five equal installments of 40,000 warrants per year over
      a
      five-year period. These are five-year warrants to purchase common shares at
      an
      exercise price of $4.80 per share. These warrants may be cancelled, with a
      90-day notice, if the consultants fail to perform to the satisfaction of the
      Company. During 2005, 120,000 unvested warrants issued to James Paradis and
      Anthony Burrascono were cancelled. In 2006, James Paradis and Anthony Burrascano
      exercised 80,000 warrants at $4.80. In 2005, the Company incorrectly cancelled
      80,000 warrants to a former consultant. The warrants were correctly added back
      to the 2005 and 2006 warrant schedule. The omission from the schedule in prior
      year had no impact on earnings per share. During 2007, the former consultant
      exercised 40,000 warrants and 80,000 remain outstanding.





During
      2003, the Company issued 50,000 warrants to Consumer Choices Systems, Inc.
      (“CCS”) as part of the payment for the purchase of the assets of CCS. These
      warrants are three-year warrants to purchase common shares at an exercise price
      of $10.00 per share. Of this amount, 25,000 warrants were exercised in 2004.
      Of
      the remaining 25,000 warrants, 22,810 were exercised in 2006 and the remaining
      2,190 expired.





During
      2003, the Company issued 63,750 warrants and 18,750 warrants to Mainfield
      Enterprises, Inc. and Portside Growth & Opportunity Fund. These warrants are
      five-year warrants to purchase common shares at exercise prices of $16.78 per
      share, which was equal to one hundred fifteen percent (115%) of the five-day
      volume weighted average price, all pursuant to the terms of that certain
      Securities Purchase Agreement by and between the Company and Mainfield
      Enterprises, Inc. and Portside Growth & Opportunity Fund dated as of July
      24, 2003.




During
      2007, there were 40,000 warrants exercised at $4.80.




62




The
      Company has the following warrants outstanding for the purchase of its common
      stock:


Years
                  EndedExercise
              
              
              
              December
                  31,Price
              
              Expiration
                  Date
              
              2007
              
              2006
              
              2005$
              4.80
              
              
              January,
                  2009
              
              
              80,000
              
              
              120,000
              
              
              240,000$
              10.00
              
              
              June,
                  2006
              
              
              0
              
              
              0
              
              
              25,000$
              16.78
              
              
              July,
                  2008
              
              
              82,500
              
              
              82,500
              
              
              82,500162,500
              
              
              202,500
              
              
              347,500Weighted
                  average exercise price
              
              
              10.88
              
              
              9.68
              
              
              8.02


As
      of
      December 31, 2007, 82,500 of the warrants are exercisable. The weighted average
      exercise price of exercisable warrants is $16.78.





**15.
      QUARTERLY RESULTS (Unaudited)**


First
                  Quarter
              
              Second Quarter
              
              Third
                  Quarter
              
              Fourth
                  Quarter**2007**Revenue
              
              $
              20,089,000
              
              $
              22,041,000
              
              $
              21,846,000
              
              $
              19,803,000Gross
                  Profit
              
              
              15,031,000
              
              
              16,678,000
              
              
              16,323,000
              
              
              14,283,000Operating
                  Income
              
              
              1,914,000
              
              
              1,445,000
              
              
              1,557,000
              
              
              799,000Net
                  Income
              
              
              1,373,000
              
              
              909,000
              
              
              954,000
              
              
              601,000Earnings
                  per common share - diluted
              
              
              0.10
              
              
              0.07
              
              
              0.07
              
              
              0.04**2006**Revenue
              
              $
              19,183,000
              
              $
              19,954,000
              
              $
              19,642,000
              
              
              15,307,000Gross
                  Profit
              
              
              14,405,000
              
              
              15,101,000
              
              
              14,937,000
              
              
              11,406,000Operating
                  Income
              
              
              2,950,000
              
              
              2,350,000
              
              
              1,771,000
              
              
              310,000Net
                  Income
              
              
              2,001,000
              
              
              1,448,000
              
              
              1,455,000
              
              
              252,000Earnings
                  per common share - diluted (1)
              
              
              0.15
              
              
              0.11
              
              
              0.11
              
              
              0.02




(1)
        -Earnings per common share is computed independently for each of the quarters
        presented; accordingly, in the
        sum
        of the quarterly earnings per common share may not equal the total computed
        for
        the year.




**16.
      RESTATEMENT**





The
      December 31, 2005 financial statements have been restated to recognize an
      additional $525,000 in amortization expense for a customer list acquired in
      December 2004. The Company originally assumed an indefinite life on the customer
      list. Per FASB 142, an estimated useful life for a customer list has to be
      assigned when the asset is placed into use. As a result, amortization expense
      should have commenced on January 1, 2005. Pre-tax income decreased by $525,000
      from $3,930,000 to $3,405,000 for the year-ended December 31, 2005. Net income
      for the year ended December 31, 2005 decreased by $324,000 from $2,436,000
      to
      $2,112,000 and retained earnings decreased from $1,149,000 to
      $825,000.





The
      December 31, 2006 financial statements have been restated to decrease
      amortization expense on customer lists by $125,000. Pre-tax income increased by
      $125,000 from $7,338,000 to $7,463,000 for the year-ended December 31, 2006.
      Net
      income for the year ended December 31, 2006 increased by $74,000 from $5,082,000
      to $5,156,000 and retained earnings increased from $5,907,000 to
      $5,981,000.




63




**17.
      BUSINESS SEGMENTS**




Operating
      segments are components of an enterprise about which separate financial
      information is available that is regularly reviewed by the chief operating
      decision maker about how to allocate resources and in assessing performance.
      The
      Company has two reportable operating segments: Medifast and All Other. The
      Medifast reporting segment consists of the following distribution channels:
      Medifast Direct, Take Shape for Life, and Doctors. The All Other reporting
      segments consist of Hi-Energy and Medifast Weight Control Centers, the Company’s
      parent company operations, as well as the Consumer Choice Systems, Inc. division
      which was sold in January of 2006.




The
      accounting policies of the segments are the same as those of the Company. The
      presentation and allocation of assets, liabilities and results of operations
      may
      not reflect the actual economic costs of the segments as stand-alone businesses.
      If a different basis of allocation were utilized, the relative contributions
      of
      the segments might differ, but management believes that the relative trends
      in
      segments would likely not be impacted.




The
      following tables’ present segment information for the years ended December 31,
      2007, 2006, and 2005:





**Year
                Ended December 31, 2007****Medifast**
            
            **All
                Other**
            
            **Eliminations**
            
            **Consolidated**Revenues,
                net
            
            $
            78,861,000
            
            $
            4,918,000
            
            
            
            
            $
            83,779,000Cost
                of Sales
            
            
            20,364,000
            
            
            1,100,000
            
            
            
            
            
            21,464,000Other
                Selling, General and Adminstrative Expenses
            
            
            48,290,000
            
            
            4,769,000
            
            
            
            
            
            53,059,000Depreciation
                and Amortization
            
            
            2,485,000
            
            
            944,000
            
            
            
            
            
            3,429,000Interest
                (net)
            
            
            78,000
            
            
            205,000
            
            
            
            
            
            283,000Provision
                for income taxes
            
            
            1,707,000
            
            
            -
            
            
            
            
            
            1,707,000Net
                income (loss)
            
            $
            5,937,000
            
            $
            (2,100,000
            )
            
            -
            
            $
            3,837,000Segment
                Assets
            
            $
            26,023,000
            
            $
            17,701,000
            
            
            
            
            $
            43,724,000




**Year
                Ended December 31, 2006 (Restated)****Medifast**
            
            **All
                Other**
            
            **Eliminations**
            
            **Consolidated**Revenues,
                net
            
            $
            70,181,000
            
            $
            4,015,000
            
            
            (110,000
            )
            $
            74,086,000Cost
                of Sales
            
            
            17,290,000
            
            
            947,000
            
            
            
            
            
            18,237,000Other
                Selling, General and Adminstrative Expenses
            
            
            42,418,000
            
            
            3,503,000
            
            
            
            
            
            45,921,000Depreciation
                and Amortization
            
            
            1,811,000
            
            
            460,000
            
            
            
            
            
            2,271,000Interest
                (net)
            
            
            146,000
            
            
            48,000
            
            
            
            
            
            194,000Provision
                for income taxes
            
            
            2,298,000
            
            
            9,000
            
            
            
            
            
            2,307,000Net
                income (loss)
            
            $
            6,218,000
            
            $
            (952,000
            )
            
            (110,000
            )
            $
            5,156,000Segment
                Assets
            
            $
            21,978,000
            
            $
            14,949,000
            
            
            
            
            $
            36,927,000**Year
                Ended December 31, 2005 (Restated)****Medifast**
            
            
            **All
                Other**
            
            
            **Eliminations**
            
            
            **Consolidated**Revenues,
                net
            
            $
            36,840,000
            
            $
            3,451,000
            
            
            (162,000
            )
            $
            40,129,000Cost
                of Sales
            
            
            8,442,000
            
            
            1,719,000
            
            
            
            
            
            10,161,000Other
                Selling, General and Adminstrative Expenses
            
            
            21,846,000
            
            
            2,583,000
            
            
            
            
            
            24,429,000Depreciation
                and Amortization
            
            
            1,629,000
            
            
            637,000
            
            
            
            
            
            2,266,000Interest
                (net)
            
            
            184,000
            
            
            (25,000
            )
            
            
            
            
            159,000Provision
                for income taxes
            
            
            968,000
            
            
            34,000
            
            
            
            
            
            1,002,000Net
                income (loss)
            
            $
            3,771,000
            
            $
            (1,497,000
            )
            
            (162,000
            )
            $
            2,112,000Segment
                Assets
            
            $
            15,985,000
            
            $
            14,560,000
            
            
            
            
            $
            30,545,000




64




**18.
      DISPOSAL OF A BUSINESS SEGMENT**





On
      January 17, 2006, Jason Enterprises, Inc., a wholly owned subsidiary of
      Medifast, Inc. sold certain assets of its Consumer Choice Systems division.
      Consumer Choice Systems distributes products focused on women's well being
      to
      include supplements for menopause relief and urinary tract infections. The
      sale
      price was $1.82 million which included $358,000 in inventory, $131,000 in
      receivables, and $1,337,000 in net intangible assets. Consumer Choice Systems
      was sold to a former Medifast, Inc. board member. The sale price was $1.8
      million and will be recorded as a note receivable by Medifast, Inc. over a
      10-year term. The loan is collateralized by 50,000 shares of Medifast, Inc.
      stock. The following table illustrates segment information from the date
      Consumer Choice Systems was purchased by Medifast, Inc. on June 11, 2003 through
      December 31, 2005.




2005
              
              2004
              
              2003Revenues,
                  net
              
              $
              958,000
              
              $
              1,498,000
              
              $
              851,000Cost
                  of Sales
              
              
              733,000
              
              
              686,000
              
              
              343,000Gross
                  Profit
              
              
              225,000
              
              
              812,000
              
              
              508,000Compensation
                  and Professional Fees
              
              
              290,000
              
              
              213,000
              
              
              254,000Selling,
                  General and Adminstrative Expenses
              
              
              208,000
              
              
              256,000
              
              
              212,418Depreciation
                  and Amortization
              
              
              209,000
              
              
              90,000
              
              
              95,000Interest
                  (net)
              
              
              8,000
              
              
              17,000
              
              
              8,000Net
                  income (loss)
              
              
              (490,000
              )
              
              236,000
              
              
              (61,418
              )Earnings
                  per share - basic
              
              
              (0.04
              )
              
              0.02
              
              
              (0.01
              )Earnings
                  per share - diluted
              
              
              (0.04
              )
              
              0.02
              
              
              (0.01
              )Segment
                  Assets
              
              
              2,216,000
              
              
              2,625,000
              
              
              2,497,000Fixed
                  assets, net of depreciation
              
              
              54,000
              
              
              71,000
              
              
              91,000Inventory
              
              
              293,000
              
              
              391,000
              
              
              470,000Prepaid
                  expenses
              
              
              327,000
              
              
              -
              
              
              53,000Accounts
                  receivable
              
              
              171,000
              
              
              629,000
              
              
              221,000Intangible
                  assets
              
              
              443,000
              
              
              635,000
              
              
              635,500Goodwill
              
              
              893,500
              
              
              893,500
              
              
              893,500




**19.
      SUBSEQUENT EVENTS**





On
      February 18, 2008, the Company announced that it has sold its first franchise
      of
      Medifast Weight Control Centers. The Company sold the rights to open four
      clinics in the Greater Baltimore Metropolitan Area. The franchisee also has
      the
      rights to open four additional Medifast Weight Control Centers in the Baltimore
      area over the next two years, bringing the total to eight locations.





On
      January 25, 2008, the Board of Directors modified Bradley T. MacDonald’s
      compensation package for his role in the succession plan and business
      development initiatives as outlined in the December 31, 2006 10-K. The Board
      cancelled the 100,000 options granted to Mr. MacDonald on February 8, 2006
      and
      replaced them with a restricted stock grant of 42,000 shares. The restricted
      shares will vest over a period of 3 years beginning on January 25,
      2009.




65




**INDEX
      TO EXHIBITS**





No.3.1
            
            Certificate
                of Incorporation of the Company and amendments thereto*3.2
            
            By-Laws
                of the Company*10.1
            
            1993
                Stock Option Plan of the Company as amended*10.3
            
            Lease
                relating to the Company's Owings Mills, Maryland
                facility**10.4
            
            Employment
                agreement with Bradley T. MacDonald***10.5
            
            Employment
                agreement with Bradley T. MacDonald signed February 8,
                200610.6
            
            Employment
                agreement with Michael S. McDevitt signed February 8,
                200610.7
            
            Employment
                agreement with Margaret MacDonald signed February 8,
                200610.8
            
            Employment
                agreement with Brendan N. Connors signed February 8,
                200631.1
            
            Certification
                of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation
                S-K,
                as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.31.2
            
            Certification
                of Chief Financial Officer pursuant to Item 601(b)(31) of Regulation
                S-K,
                as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.32.1
            
            Certification
                of Chief Executive Officer and Chief Financial Officer pursuant to
                Section
                906 of the Sarbanes- Oxley Act of
                2002





*
                  Filed as an exhibit to and incorporated by reference to the Registration
                  Statement
                  on Form SB-2 of the Company, File No.
                  33-71284-NY.**
                  Filed as an exhibit to and incorporated by reference to the Registration
                  Statement
                  on Form S-4 of the Company, File No. 33-81524.***Filed
                  as an exhibit to 10KSB, dated April 15, 1999 of the Company, file
                  No.
                  000-23016.(b)
                  Reports on Form 8-K




September
      21, 2005 to report the Annual Meeting of Shareholders September 16,
      2005





October
      19, 2005, to report the repurchase of 110,000 shares of common
      stock





January
      17, 2006, to report the sale of Consumer Choice Systems assets, the promotion
      of
      Michael S. McDevitt
      to Chief Financial Officer, and 2006 financial guidance





August
      14, 2006, to report the acceptance by the New York Stock Exchange to list common
      shares on the NYSE





September
      25, 2006, to report the results of the Annual Meeting of Shareholder on
      September 8, 2006





October
      2, 2006, to announce the election of two new Board of Directors





March
      1,
      2007, to announce Michael S. McDevitt promoted to CEO, Margaret MacDonald
      promoted to President and COO, and Bradley T. MacDonald named Executive Chairman
      of the Board.





March
      7,
      2007, to announce full-year 2007 revenue and diluted earnings per share
      guidance





June12,
      2007, to announce the election of a new Board member





September
      24, 2007, to announce the results of the Annual Meeting of Shareholders on
      September 7, 2007





October
      4, 2007, to announce updated full-year 2007 revenue and diluted earnings per
      share guidance





December
      26, 2007, to announce receipt of notice from New York Stock Exchange concerning
      listing criteria




66




**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15(d) 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.




MEDIFAST,
      INC.


(Registrant)




BRADLEY
                T. MACDONALDBradley
                T. MacDonaldExecutive
                Chairman of the BoardDated:
                March 17, 2008





Pursuant
      to the requirements of the Securities Exchange Act of 1934, the following
      persons on behalf of the Registrant and in the capacities and on the dates
      indicated have signed this Report below.





Name
            Title
            
            Date/s/
                BRADLEY T. MACDONALD
            Chairman
                of the Board,
            
            March
                17, 2008Bradley
                    T. MacDonald
            
            Director/s/
                GEORGE LAVIN
            Director
            
            March
                17, 2008George
                Lavin/s/
                MICHAEL C. MACDONALD
            Director
            
            March
                17, 2008Michael
                    C. MacDonald/s/
                MARY T. TRAVIS
            Director
            
            March
                17, 2008Mary
                T. Travis/s/
                REV. DONALD F. REILLY, OSA
            Director
            
            March
                17, 2008Rev.
                Donald F. Reilly, OSA/s/
                MICHAEL S. MCDEVITT
            Director
            
            March
                17, 2008Michael
                S. McDevitt/s/
                JOSEPH D. CALDERONE
            Director
            
            March
                17, 2008Joseph
                D. Calderone/s/
                CHARLES P. CONNOLLY
            Director
            
            March
                17, 2008Charles
                P. Connolly/s/
                DENNIS M. MCCARTHY
            Director
            
            March
                17, 2008Dennis
                M. McCarthy/s/
                RICHARD T. AAB
            Director
            
            March
                17, 2008Richard
                    T. Aab




67