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, 2008




Commission
File No. 000-23016







MEDIFAST,
INC.









DELAWARE
                
                13-3714405Incorporation
      State
                
                Tax
      Identification number11445
      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 x No  ̈




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  ̈ 
No 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 x 
No  ̈




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




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    ̈
            
            Accelerated
      filer  x
            
            Non-accelerated
      filer   ̈




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




The
aggregate market value of the voting common equity held by non-affiliates of the
registrant as of June 30, 2008, based upon the closing price of $5.26 per
share on the New York Stock Exchange on that date, was $64,000,000.




As of
March 13, 2009, the Registrant had 14,585,960 shares of Common Stock
outstanding.




2




Table
of Contents





PagePART
      IItem
      1.
                                                                                      Business
                                                                                      
                                                                                      
                                                                                      4Item
      1A.
                                                                                      Risk
      Factors
                                                                                      
                                                                                      
                                                                                      14Item
      1B.
                                                                                      Unresolved
      Staff Comments
                                                                                      
                                                                                      
                                                                                      16Item
      2.
                                                                                      Properties
                                                                                      
                                                                                      
                                                                                      16Item
      3.
                                                                                      Legal
      Proceedings
                                                                                      
                                                                                      
                                                                                      16Item
      4.
                                                                                      Submission
      of Matters to a Vote of Security Holders
                                                                                      
                                                                                      
                                                                                      16PART
      IIItem
      5.
                                                                                      Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                                                                                      
                                                                                      
                                                                                      17Item
      6.
                                                                                      Selected
      Financial Data
                                                                                      
                                                                                      
                                                                                      18Item
      7.
                                                                                      Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                                                                      
                                                                                      
                                                                                      19Item
      7A
                                                                                      Quantitative
      and Qualitative Disclosures about Market Risk
                                                                                      
                                                                                      
                                                                                      26Item
      8.
                                                                                      Financial
      Statements and Supplementary Data
                                                                                      
                                                                                      
                                                                                      26Item
      9.
                                                                                      Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                                                                                      
                                                                                      
                                                                                      26Item
      9A.
                                                                                      Controls
      and Procedures
                                                                                      
                                                                                      
                                                                                      26PART
      IIIItem
      10.
                                                                                      Directors,
      Executive Officers and Corporate Governance
                                                                                      
                                                                                      
                                                                                      28Item
      11.
                                                                                      Executive
      Compensation
                                                                                      
                                                                                      
                                                                                      33Item
      12.
                                                                                      Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                                                                                      
                                                                                      
                                                                                      43Item
      13.
                                                                                      Certain
      Relationships and Related Transactions, and Director
      Independence
                                                                                      
                                                                                      
                                                                                      45Item
      14.
                                                                                      Principal
      Accounting Fees and Services
                                                                                      
                                                                                      
                                                                                      45PART
      IVItem
      15.
                                                                                      Exhibits,
      Financial Statement Schedules
                                                                                      
                                                                                      
                                                                                      46





3


PART
I
 
 ITEM
1. BUSINESS.
 
 SUMMARY
 
 Medifast,
Inc. (the "Company” or “Medifast”) is a Delaware corporation, incorporated in
1993. 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
Centers for Disease Control and Prevention show that obesity is not only affects
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 increases
the risk of 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 by the CDC in October 2007 shows
how children are now being affected by Type 2 diabetes. Obese children suffering
from Type 2 diabetes are at increased risk of suffering significant morbidities
in the form of amputations, kidney problems, and blindness.
 
 Obesity
is defined as a Body Mass Index (BMI) of 30 kg/m2 or
greater, whereas overweight is defined as a BMI ranging between 25 and 30
kg/m2.
According to a recent study conducted by the Centers 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 to 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.  According to the United States
Department of Health and Human Services, only 25% of adults and less than 25% of
teenagers include the suggested 5 or more servings of vegetables and fruits in
their daily meal. More than half of American adults fail to engage in the
suggested amount of physical activity, and more than 1/3 of young Americans do
not engage in regular vigorous physical activity at all.
  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.
  4
  Distribution
Channels
  Medifast Direct –In the
direct to consumer channel, customers order Medifast product directly through
the Company’s website, www.choosemedifast.com, or our in-house call
center.  The product is shipped directly to the customer’s house.
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.  The Medifast
Direct division focuses 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 clients 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 BeSlimTM
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.
 
 Take
Shape for Life is a member of the Direct Selling Association (DSA), a national
trade association representing over 200 direct selling companies doing business
in the United States.  To become a member of the DSA Take Shape
forLife,
like other active DSA member companies, underwent a comprehensive and rigorous
one-year company review by DSA legal staff that included a detailed analysis of
its company business plan materials.  This review is designed to ensure
that a company’s business practices do not contravene DSA’s Code of
Ethics.  Compliance with the requirements of the Code of Ethics is
paramount to become and remain a member in good standing of DSA.
 Accordingly, Membership in DSA by Take Shape for Life demonstrates its
commitment to the highest standards of ethics and a pledge not to engage in any
deceptive, unlawful, or unethical business practices.   Among those
Code of Ethics proscriptions are pyramid schemes or endless chain schemes as
defined by federal, state, or local laws.  Moreover, Take Shape for Life,
like other DSA member companies in good standing, has pledged to provide
consumers with accurate and truthful information regarding the price, grade,
quality, and performance of the products Take Shape for Life markets.
 
 Medifast Weight Control Centers
–  The Medifast Weight Control Center is the brick and mortar
clinic channel of Medifast located in Texas and Florida.   In
2008, the Company opened ten new Medifast Weight Control Centers and had a total
of twenty locations in operation at year-end. 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 offer customized patient counseling
programs, and the Inbody TM
composition analysis.
 
 In 2008,
the Company began offering the clinic model as a franchise
opportunity.  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 June 3,
2008 the Company announced that it sold the rights to open four Medifast Weight
Control Centers in Southern California and three Medifast Weight Control Centers
in Central California to two different local business operators.  On
October 8, 2008, the Company announced the opening of its first franchise clinic
in the Baltimore, MD area. In December 2008, three Medifast Weight Control
Center franchise locations opened in Southern California and one location opened
in Central California.  At December 31, 2008, five franchise locations
were operating.
 
 The
Company continues to support its controlled label licensee model, Hi-Energy, by
providing marketing materials, ads, on-site trainings, fitness programs,
nutritional programs and clinical operation materials and forms.
 
 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.
  5
 
 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.
  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 such as those specially formulated for people with diabetes
as well as products for women’s health, joint health and coronary
health.
 
 While all
Medifast products are suitable for individuals with type 2 diabetes, Medifast
also has a line of products specially designed to meet the needs of people with
diabetes – Medifast Plus for Diabetics. Medifast Plus for Diabetics products
consist of three delicious, patented shakes that have been certified ‘low
glycemic’ by the Glycemic Research Institute.
 
 Over 40
Medifast products qualify for 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, sodium, 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.” The following
abstracts include both peer-reviewed research (consisting of prospective
controlled clinical trials and retrospective studies) and in-house clinical data
(studies 7 & 8).
 
 Study 1
 Reference
 Haddock
CK, Poston WSC, Foreyt JP, DiBartolomeo JJ. “Effectiveness of Medifast
supplements combined with obesity pharmacotheraphy: A clinical program
evaluation.” Eating and Weight
Disorders.13:95-101; 2008.
 
 Purpose
 To
evaluate the long-term impact of Medifast meal-replacement supplements (MMRS)
combined with appetite-suppressant medication (ASM) among participants who
received 52 weeks of treatment as part of a medically supervised weight-control
program.
 
 Results
 Participants
who completed 52 weeks of treatment experienced substantial weight losses at 12
(-9.4 + 5.7kg), 24 (-12.0 + 8.1kg), and 52 weeks (12.4 + 9.2kg), and all
measures were significantly different from baseline weight (p<0.001 for all
contrasts) for both true completers (n=324) and for ITT analysis (n=1,351).
Fifty percent of patients remained in the program at 24 weeks and nearly 25%
were still participating at one year. Results were better than those typically
reported for obesity pharmacotherapy in both short- and long-term studies, and
also better than those reported for partial meal-replacement
programs.
 
 This study was published in the June
2008 issue ofEating and Weight Disorders. Results of this study were
presented at the American Society of Bariatric Physicians’ annual meeting in May
2007.
 
 Study 2
 Reference
 Davis LM,
Coleman CD, Andersen WS, Cheskin LJ. “The effect of metabolism-boosting
beverages on 24-hr energy expenditure.” The Open Nutrition Journal.
2:37-41; 2008.
  6
  Purpose
 To test
the effect of thermogenic meal-replacement beverages (TMRB) containing 90 mg of
EGCG and 100 mg of caffeine on resting energy expenditure (REE). Thirty adults
(19 women, 11 men) were stratified into 3 groups: lean (n=10, BMI 21.5 + 2.1);
overweight/obese (OW) (n=10, BMI 29.8 + 2.7); or weight maintainers (WM) (n=10,
BMI 28.8 + 4.0). Following an overnight fast, baseline measurements, including
REE via indirect calorimetry, were performed. REE was repeated at 30, 60, 90,
and 120 minutes after consuming a TMRB. Appetite was assessed via visual
analogue scale at baseline, 30 minutes, and 120 minutes after consuming the
TMRB.
 
 Results
 Mean
24-hour REE was increased 5.9 + 2.5% overall (p=0.000), 5.7 + 3.1% among lean
subjects (p=0.0002), 5.3 + 1.4% among OW subjects (p=0.000), and 6.8 + 2.7%
among WM subjects (p=0.0007). Appetite was significantly reduced 30 minutes
after consuming the TMRB (p=0.0002). TMRBs appear to be a promising
weight-control tool.
 
 This
study was presented as a poster session at Experimental Biology,
2008.
 
 Study 3
 Reference
 Cheskin
LJ, et al. “Efficacy of
meal replacements versus a standard food-based diet for weight loss in type 2
diabetes.” The Diabetes
Educator.34(1):118-127; Jan/Feb 2008.
 
 Purpose
 To
compare the efficacy of a portion-controlled meal-replacement diet (PCD) to a
standard diet (SD) (based on recommendations by the American Diabetes
Association) in achieving and maintaining weight loss among 119 obese men and
women with type 2 diabetes mellitus.
 
 Results
 Using
intention-to-treat analyses, weight loss at 34 weeks and weight maintenance at
86 weeks was significantly better on PCD versus SD. Approximately 40% of the PCD
participants lost >5% of their initial weight compared with 12% of those on
the SD. Significant improvements in biochemical and metabolic measures were
observed at 34 weeks in both groups. The retention rate and self-reported ease
of adherence in the PCD group were significantly higher throughout the
study.
 
 This study was published in the
January/February 2008 issue ofThe Diabetes Educator. The peer-reviewed journal is the
official journal of the American Association of Diabetes Educators. The study
was also presented at the American Diabetes Association’s 65thAnnual Scientific Session,
2005.
 
 Study 4
 Reference
 Cheskin
LJ, et al. “A RCT
comparing balanced energy deficit diets with or without meal replacements
for weight loss and maintenance among children dieting alone or with a parent.”
Johns Hopkins Bloomberg School of Public Health, Center for Human Nutrition,
Department of International Health.
 
 Purpose
 To
compare the safety and efficacy of supplemental Medifast portion-controlled meal
replacements (MRs) to a USDA Food Guide Pyramid-based diet. Both weight-loss
diets were 20% energy-restricted (~500 kcal deficit). Eighty children (8-15
y.o.), BMI>95th%ile, were screened and 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 alone vs. with a parent or food vs. MR made no difference in
weight outcome. However, following initial weight loss (6 mos) and 1 yr
maintenance (18 mos), significant 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% @ 6 mos, 5.6% @ 18 mos); LDL (
19.8% @ 6 mos, 7.9% @ 18 mos); and triglycerides ( 23.6% @ 6 mos, 22.3% @ 18
mos). No significant betweengroup differences, differences in growth rates, or
adverse events were observed. Conclusions: Among overweight 8-15 y.o. children,
dieting with or without a parent, meal replacements were as safe and effective
as a food-based diet for weight loss and maintenance.
 
 This
study was presented as a poster session at Experimental Biology,
2007.
 
 Study 5
 Reference
 Matalon
V. “Impaired capacity to lose visceral adipose tissue during weight reduction in
obese postmenopausal women with the Trp64Arg B3-adrenoceptor gene variant.”
Diabetes.49:1709-1713;
2000.
  7
 
 Purpose
 To
examine the effect of the Trp64Arg gene variant on total and visceral adipose
tissue loss, and cardiovascular risk factors in response to weight reduction
among 24 obese women (age 57 + 4 yrs) in a 13 + 3 mos weight reduction program
of 1,200 kcal with or without the inclusion of Medifast.
  Results
 Whether
women were carriers or noncarriers of the Trp64Arg allele, significant weight
loss (-16.4 + 5.0kg vs. -14.1 + 6.2kg, NS) and reductions in body fat (-10.0 +
5.2 vs. -11.5 + 3.9kg, NS) were observed in response to a calorie-restricted
program with or without Medifast. Loss of visceral adipose tissue was 43% lower
in carriers of the Trp64Arg allele compared with noncarriers (-46 + 27 vs. -81 +
51cm2, p=0.05). The study concluded that older women carrying the Trp64Arg
B3-adrenoceptor gene variant have an impaired capacity to lose visceral adipose
tissue in response to a calorie-restricted diet.
  Study 6
 Reference
 Matalon
V. “An evaluation of weight loss following a carbohydrate and fat restricted
diet with appetite suppressant and dietary supplementation.” The Bariatrician.10-13;
2000.
 
 Purpose
 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) in an open label
trial. Baseline and 6-mos evaluations of body weight (lbs), body fat (%), BMI
(kg/m2), lean body mass, water weight, and blood pressure were performed. At 6
mos, statistically significant differences were found for body weight
(p<0.001), percent body fat (p<0.001), BMI (p<0.001), lean body mass
(p<0.001), water weight (p=0.01), and body systolic (p=0.003) and diastolic
(p<0.001) blood pressure.
 
 Results
 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.
 
 Study 7
 Reference
 Crowell
MD, Cheskin LJ. “Multicenter evaluation of health benefits and weight loss on
the Medifast weight management program.” The Johns Hopkins University School of
Medicine.
 
 Purpose
 To
retrospectively evaluate the efficacy of a medically supervised,
protein-supplemented modified program (Medifast) for weight reduction and to
evaluate the impact of weight reduction on coexisting health
problems.
 
 Results
 The
results of the study concluded that medically supervised, protein-sparing
meal-replacement programs 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 total
cholesterol and triglycerides, systolic and diastolic blood pressure, and
normalized blood pressure in hypertensive patients.
 
 Study 8
 Reference
 Davis LM,
Cheskin LJ. “Dietary intervention using Medifast meal replacements in
pre-bariatric surgery patients.” Johns Hopkins Weight Management Center;
2006.
 
 Purpose
 N=14
severely obese patients—13 females (11 African Americans, 2 Caucasians) and 1
male (Caucasian)—with a mean BMI of 64.14 kg/m2 (range 40.2kg/m2 to 91.7kg/m2)
entered a 6-month weight-control program at the Johns Hopkins Weight Management
Center. All patients were Medicaid (Priority Partners) recipients. The program
provided a comprehensive approach to weight control focused on diet, behavior,
and physical activity. Portion-controlled meal replacements (MRs) supplied by
Medifast were utilized as part of the dietary-behavior intervention. All
subjects met with a licensed dietitian and were prescribed a 1,000-1,200
kcal/day diet plan incorporating up to 6 MRs/day. Only 1 subject chose not to
incorporate meal replacements as part of a low-calorie diet plan. The average
intake of meal replacements was 2.5-3 per day through the duration of the
study.
  8
  Results
 After 6
months on the program, patients lost an average of 26.73 lbs (-2.86kg/m2) and
6.96% body weight, and reported a high level of satisfaction with their diet
plan. Program completers at 1 month were N=13, at 3 months N=12, and 6 months
N=10.
 
 A
statistical review of patient charts, unpublished data on file.
2006.
 Scientific
Advisory Board
 
 In
September 2008, Medifast announced the formation of its Scientific Advisory
Board.
 
 The role
of the Board is to continually review the effectiveness, safety, and nutritional
benefits of Medifast’s products and programs. The team of specialists will also
assist in the development of new Meals and supplements, as well as weight-loss
approaches for specific medical needs (i.e., patients with heart disease) or
lifestyles (vegetarians, etc.).
 
 The work
of this cross-disciplinary group builds on Medifast’s heritage of medically
sound approaches to weight loss, and the incorporation of leading-edge clinical
research into the company’s products and programs.
 
 Lawrence
Cheskin, M.D.
 Director
of the Johns Hopkins Weight Management Center in Baltimore, MD
 
 Miriam
Cohen, M.D., F.A.C.C.
 Cardiologist
and Assistant Professor at the University of Maryland Medical
School
 
 Scott
Kahan, M.D., M.P.H.
 Instructor
at the Johns Hopkins Bloomberg School of Public Health
 
 Varsha
Vaidya, M.D.
 Assistant
Professor of Psychiatry and General Internal Medicine at Johns Hopkins
University School of Medicine, Director of the Obesity Psychiatry program at
Johns Hopkins Bayview Medical Center
 
 Alison
Duncan, Ph.D., RD
 Associate
Professor, Department of Human Health and Natural Sciences at University of
Guelph, Functional Foods Expert
 
 Debra L.
Miller, Ph.D.
 Director
of Nutrtion at the Hershey Company
  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 28 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.
  9
 
 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, New! Medifast Momentum Drinks, New! Momentum Flavor
Infusers, New! Antioxidant Shakes, New! Antioxidant Flavor Infusers, New! Super
Omega 3, Medifast® Bars, New! Medifast Crispy 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, meal replacement bars, crackers, soy crisps and omega 3
capsules.
  NEW
PRODUCTS
 
 In 2008,
the Company expanded the Medifast product line in 2008 by introducing a new line
of metabolic boosters.  This product line includes shakes and flavor
infusers (to flavor water) that includes a specific blend of caffeine and
epigallocatechin gallate (EGCG), designed to help burn calories and
fat.  Consuming three of these products a day can help burn an extra
100 calories per day.
 
 The
Company also added new products aimed at optimizing health. The first of these
products was a  new supplement line- Super Omega 3.  This
product boasts one of the highest concentrations of docosahexanoic acid (DHA)
and eicosapentanoic acid (EPA) on the market as well as organic Flax Seed for
healthy hair, skin, and nails.  This product services a variety of
needs from decreasing body fat to improving satiety, to providing
cardioprotection to prevention of cognitive decline.  The Company also
designed a special line of antioxidant infusers and shakes.  Each
Shake and Infuser gives you the antioxidant power of two full servings of fruits
and vegetables.
 
 Medifast
also began its plan to expand the Medifast bar line to include Crispy bars that
are fully interchangeable with all the other meals in the program.  In
the past, bars could only be enjoyed once a day because of the higher calorie
and carbohydrate level.  The new bars contain only 110 calories, 11g
of protein, less than 13g of carbohydrates and are fully fortified with 20% of
the RDI for 24 Essential Vitamins and Minerals. These new bars are available in
Chocolate, Chocolate Mint, Peanut Butter, Oatmeal Raisin, Cinnamon Roll,
Strawberry Crunch, Caramel, Lemon, Fruit & Nut, and Smores
flavors.
  MARKETING
 
 In 2008,
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, radio commercials, and
DJ testimonials.  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 and extending
into 2009. Direct mail campaigns, e-mail newsletters and outbound calling
programs were utilized to reactivate, encourage and support existing
customers.  Medifast continued to enhance the Medifast website
including adding 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 programs contribute to the retention of Medifast
customer through improved compliance with the program.
  10
 
 SALES
 
 The
Company’s Sales division handles three primary areas:
 
 Physician
Sales - The sales team is responsible for prospecting medical accounts, clinics,
hospitals, and HMOs.  During 2008, 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.
 
 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.
  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.
  11
  EMPLOYEES
 
 As of
December 31, 2008, the Company employed 290 full-time employees, of whom 156
were engaged in manufacturing, warehouse management, and shipping, and 134 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.
  OTHER
MATTERS
 
 An
Independent Committee of the Board of Directors of Medifast was constituted to
review the public allegations of a third party "Convicted Felon" on his website
pertaining to alleged illegal activities of Take Shape for Life, a
Direct Selling Subsidiary of Medifast Inc.  Other public Direct Selling
Companies have been attacked by this individual and his network of associates
using the same blueprint of allegations. These public allegations were made in
mid- February and were immediately followed by significant short selling and
short selling option puts that shaved over $30 million from the Market
Capitalization of Medifast. The company has demanded that this third
party take down its website information containing false information or be
subject to appropriate legal action.
  Medifast,
in a press release on February 17th, 2009,
responded to the False Claims in SEC File # 001-31573; Film #09617581. The
Independent Committee appointed Chairman is Mr. Barry B. Bondroff, CPA, an
officer and director with Gorfine, Schiller & Gardyn, PA.  Members
are: Mr. George J. Lavin Esq, founding Partner of the law firm, Lavin, O’Neil,
Ricci, Ceprone & Dispicio, who is an expert in Product Liability Law, Lt.
Gen. Dennis M. McCarthy USMC (Ret.), Executive Director of the Reserve Officers
Association of the United States and a licensed attorney, Capt. Joseph D.
Calderone USNR (Ret.), chaplain and counselor of the Villanova University Law
School, and Mr. Charles P. Connolly, former President and CEO of First Union
Corp.
  After an
investigation of the facts and information developed to date the committee
unanimously agreed that the allegations were false, misleading and or without
merit.
  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 atwww.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.  The Company will
furnish without charge a copy of the Company’s Annual Report on Form 10-K,
including the financial statements and schedules thereto, to any person
requesting in writing and stating that he or she is the beneficial owner of
Common Shares of the Company.
  Requests
and inquiries should be addressed to:
  Investor
Relations
 Medifast,
Inc.
 11445
Cronhill Dr.
 Owings
Mills, MD  21117
  12
 
 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, 2008 and the
effectiveness of internal control over financial reporting as of December 31,
2008 and 2007.  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.
  EXECUTIVE
OFFICERS OF THE COMPANY
 
 Name
                                        Age
                                        
                                        PositionBradley
      T. MacDonald
                                        61
                                        
                                        Chairman
      of the Board of DirectorsMichael
      S. McDevitt
                                        30
                                        
                                        Chief
      Executive Officer and Chief Financial OfficerLeo
      V. Williams
                                        61
                                        
                                        Executive
      Vice PresidentMargaret
      MacDonald- Sheetz
                                        31
                                        
                                        Chief
      Operating Officer and PresidentBrendan
      N. Connors
                                        31
                                        
                                        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 was appointed and served on the
Defense Advisory Board for Employer Support of the Guard and Reserve
(ESGR.)    Mr. MacDonald serves on the Board of Directors of
Stevenson University in Maryland, and the Institute of Notre Dame High School,
Baltimore, Maryland. He is also the Vice-Chairman on the Board of Directors of
the Marine Corps Reserve Toys for Tots Foundation.
  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
V. 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 served as the Vice-Chairman of the
Board, Marine Corps Toys for Tots Foundation.  Currently, he serves on
the Board of Directors of the Direct Selling Association, U.S. Naval Academy
Foundation, Maryland Chapter of the American Diabetes Association, Naval Academy
Alumni Association Board of Trustees, Board of Trustees for the University of
the District of Columbia, and on the Navy Mutual Aid Association
Board.
  Margaret
MacDonald - Sheetz, MBA
 Ms. Sheetz 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.
Sheetz received an Executive MBA from Loyola University. In March 2007, she was
promoted to President and Chief Operating Officer of Medifast Inc.
  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.
  13
 
 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 againstsuch 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.
  14
 
 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 fluctuations 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.
 
 Since
we cannot  exert the same level of influence or control over our
independent health coaches as we could were they our own employees, our health
coaches could fail to comply with our policies and procedures, which could
result in claims against us that could harm our financial condition and
operating results.
 Our
health coaches are independent contractors and, accordingly, we are not in a
position to directly provide the same direction, motivation and oversight as we
would if health coaches were our own employees. As a result, there can be no
assurance that our health coaches will participate in our marketing strategies
or plans, accept our introduction of new products, or comply with our health
coach policies and procedures.
  Extensive
federal, state and local laws regulate our business, products and direct selling
program.   While we have implemented health coach policies and
procedures designed to govern their conduct and to protect the trademarks and
brand of the Company it can be difficult to enforce these policies and
procedures because of the large number of health coaches and their independent
status. Violations by our independent health coaches of applicable law or of our
policies and procedures in dealing with customers could reflect negatively on
our products and operations and harm our business reputation. In addition, it is
possible that a court could hold us civilly or criminally accountable based on
vicarious liability because of the actions of our independent health
coaches.
 
 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.
  Adverse
publicity associated with our products, ingredients, or sales channels, or those
of similar companies, could harm our financial condition, operating results, and
stock price.
 
 Adverse
publicity, whether or not accurate, relating to the Company, our products or our
operations, our sales channels and independent health coaches could adversely
impact the Company’s financial condition, operating results, and stock
price.  In addition, it could lead to lawsuits or other legal
challenges and could negatively impact our reputation, the market demand for our
products, or our general business.
  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.
  15
  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 on 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
  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
twenty 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. Sotomeyor, 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-1Holdings, LLC.   All parties, including Medifast, Inc.
recently reached a global settlement including dismissal of the litigation with
prejudice and general releases.  On October 17, 2008, Medifast agreed
to pay legal fees in the amount of $130,000 in cash, and 14,286 shares of
Medifast treasury stock valued at $70,000 to settle the case.  Mr.
Sotomayor also received 29,647 Medifast, Inc. warrants with a strike price of
$4.80 a share from Mr. David Scheffler. The Board of Directors approved a
settlement that was considered significantly less costly than the future
litigation costs for defense. Medifast vehemently denied the alleged charges in
the complaint and had fortuitous defenses that it believes would have prevailed
in a trial. The total impact of the settlement to Medifast, Inc. was a
one time charge to earnings of approximately $200,000 in the fourth quarter of
2008.
  ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
 Not
applicable
  16
 
 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 2008 and 2007:
 
 2008Low
                            
                            
                            HighQuarter
      ended March 31, 2008
                            
                            
                            3.68
                            
                            
                            
                            4.99Quarter
      ended June 30, 2008
                            
                            
                            4.35
                            
                            
                            
                            6.68Quarter
      ended September 30, 2008
                            
                            
                            4.80
                            
                            
                            
                            8.85Quarter
      ended December 31, 2008
                            
                            
                            3.52
                            
                            
                            
                            6.792007Low
                            
                            
                            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
                            
                            
                            
                            6.24
 
 (b) The
quotations reflect inter-dealer prices, without retail mark-up, markdown or
commissions and may not represent actual transactions.
 
 (c) There
were approximately 208 record holders of the Company's Common Stock as of March
13, 2009.   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, 2008.
 
 (d) No
dividends on common stock were declared by the Company during 2008 or
2007.
 .
 17
 
 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.
 
 2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005
                  
                  
                  2004Revenue
                  
                  
                  105,445,000
                  
                  
                  
                  83,779,000
                  
                  
                  
                  74,086,000
                  
                  
                  
                  40,129,000
                  
                  
                  
                  27,340,000Operating
      income
                  
                  
                  8,199,000
                  
                  
                  
                  5,715,000
                  
                  
                  
                  7,381,000
                  
                  
                  
                  3,549,000
                  
                  
                  
                  3,004,000Income
      from continuing operations
                  
                  
                  7,850,000
                  
                  
                  
                  5,543,000
                  
                  
                  
                  7,463,000
                  
                  
                  
                  3,405,000
                  
                  
                  
                  2,906,000EPS
      - basic
                  
                  
                  0.41
                  
                  
                  
                  0.30
                  
                  
                  
                  0.41
                  
                  
                  
                  0.17
                  
                  
                  
                  0.16EPS
      - diluted
                  
                  
                  0.38
                  
                  
                  
                  0.28
                  
                  
                  
                  0.38
                  
                  
                  
                  0.17
                  
                  
                  
                  0.14Total
      assets
                  
                  
                  51,037,000
                  
                  
                  
                  43,724,000
                  
                  
                  
                  36,677,000
                  
                  
                  
                  30,120,000
                  
                  
                  
                  25,968,000Current
      portion of long-term debt and revolving credit facilities
                  
                  
                  3,421,000
                  
                  
                  
                  1,863,000
                  
                  
                  
                  1,804,000
                  
                  
                  
                  1,194,000
                  
                  
                  
                  827,000Total
      long-term debt
                  
                  
                  4,313,000
                  
                  
                  
                  4,570,000
                  
                  
                  
                  3,509,000
                  
                  
                  
                  3,977,000
                  
                  
                  
                  4,256,000Weighted
      average shares outstandingBasic
                  
                  
                  13,126,534
                  
                  
                  
                  12,960,930
                  
                  
                  
                  12,699,066
                  
                  
                  
                  12,258,734
                  
                  
                  
                  10,832,360Diluted
                  
                  
                  14,329,525
                  
                  
                  
                  13,644,149
                  
                  
                  
                  13,482,894
                  
                  
                  
                  12,780,959
                  
                  
                  
                  12,413,424
 
 18
 
 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.
  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.
 
 19
 
 CONSOLIDATED
RESULTS OF OPERATIONS
 2008
COMPARISON WITH 2007
 
 OPERATING
 
 Revenue:  Revenue
increased to $105.4 million in 2008 as compared to $83.8 million in 2007, an
increase of $21.6 million or 26%. The Take Shape for Life sales channel
accounted for 47% of total revenue, direct response marketing 42%,
brick-and-mortar clinics 8%, and doctors 3%.  Take Shape for Life
sales, which are fueled by person-to-person recruiting and support increased by
79% year-over-year.   The Company’s Medifast Weight Control
Center clinic division , increased sales by 68% as compared to 2007 due to the
opening of new clinics in 2008.  The direct marketing sales channel,
which is fueled primarily by consumer advertising, decreased revenues by
approximately 6% year-over year on less advertising spend.  The
Company’s doctor’s sales decreased by 24% compared to 2007 due to certain
doctors transitioning to the professional division of Take Shape for
Life.
 
 The Take
Shape for Life division grew 79% 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
and acquisition of clients, 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 and clients.  The growth in this segment correlates
directly to the increase in health coaches, which began to accelerate following
our National Convention in July 2008.  The number of active health
coaches grew 84% to 3,400 at the end of the fourth quarter of 2008 as compared
to 1,850 for the same time period in 2007.   The Company
completed our 2008 National Convention in Orlando, FL on July 26th, 2008
where approximately 750 health coaches participated, an increase of nearly 88%
from prior year.  The individuals that attended the event attended
workshops and heard lectures by accredited individuals in the areas of
recruiting, product and nutrition knowledge, and business skills.
 
 The
Medifast Weight Control Centers, which represent approximately 8% of the
Company’s overall revenues, are currently operating in twenty locations in
Dallas, Houston, and Orlando.  In 2008, the Company experienced
revenue growth of 68% versus the same time period last year. The average monthly
revenue per clinic also witnessed growth of 6%, averaging $38,000 per clinic in
2008 as compared to $36,000 in 2007.   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.  The recent growth in the Medifast Weight Control Centers has
proven that the model is in high demand from a select portion of the weight loss
consumers.  Throughout the year, the Company invested in the
infrastructure of its clinic model. The major aspects of the investment in this
division included an expanded support team, the creation of a point of sale
system, a robust customer data tracking system, and finalizing the franchise
opportunity documentation.   During 2008, the Company opened
eight additional corporately owned clinics in the Houston, TX market and two
additional centers in the Dallas, TX market.
 
 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 June 3, 2008 the Company announced that it
sold the rights to open four Medifast Weight Control Centers in Southern
California and three Medifast Weight Control Centers in Central California to
two different local business operators.  On October 8, 2008, the
Company announced the opening of its first franchise clinic in the Baltimore, MD
area. In December 2008, three Medifast Weight Control Center franchise locations
opened in Southern California and one location opened in Central
California.  At December 31, 2008, five franchise locations were in
operation.
 
 Overall,
selling, general and administrative expenses increased by $15.3 million as
compared to 2007.   Take Shape for Life commission expense, which
is completely variable based upon revenue, increased by approximately $10.1
million as the Company showed sales growth of 79% as compared to 2007. Salaries
and benefits increased by approximately $2 million in 2008. The increase
includes the hiring of additional expertise in critical areas such as Take Shape
for Life and the Medifast Weight Control Centers to support the strong growth in
2008 and beyond.  Also, additional personnel were hired in the call
center during the first and second quarters of 2008 as the Company brought the
outsourced Take Shape for Life call center in-house early in the second quarter
of 2008.   Going forward, savings will be realized on
communication expense as a result of bringing the call center
in-house.  The opening of eight new corporately owned clinics in the
Houston, TX market and two in the Dallas, TX market also required the hiring of
additional center managers and support
staff.     Advertising expense in 2008 was
approximately $17.8 million compared to approximately $18.4 million for the same
period last year, a decrease of $600,000.  Communication expense
decreased by $200,000 as a result of the Take Shape for Life call center moving
in-house during the second quarter of 2008.    Other
expenses increased by $2.4 million which included items such as depreciation,
amortization, credit card processing fees, charitable contributions, and
property taxes.  Operating expenses increased by $950,000 which
primarily resulted from additional printing expense for our direct to consumer
postcard mailings and Take Shape for Life printed material, as well as
maintenance, repairs, and supplies for our manufacturing and distribution
facilities. Office expenses increased by $300,000 and stock compensation expense
increased by $225,000 as additional restricted shares were issued to key
executives and Board members in the third and fourth quarters of
2008.
  20
 
 Costs and
Expenses Cost of revenue increased $3.9 million to $25.3 million in 2008 from
$21.5 million in 2007.  As a percentage of sales, gross margin
increased to 75.9% in 2008 from 74.4% in 2007.  The margin improved
due to efficiencies gained from new machinery purchases in prior year, new
shipping rules that resulted in additional shipping revenue from customers
netting against shipping expense, as well as a price increase on July 1,
2008.
 
 Other
Income/Expense:  Other expense increased from a $172,000 in 2007 to
$349,000 at December 31, 2008.  The $177,000 increase in other expense
resulted primarily from realized losses of $216,000 on the Company’s equity
investment portfolio managed by Merrill Lynch due to the weakness of the stock
market in 2008.  Other income/expense consists of interest expense on
debt, gains or losses on the sale of equity investments, dividends and interest
on equity and bond investments, and interest payments received on the CCS note
receivable.  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:In2008, we recorded
$2,415,000 in income tax expense which represents an effective rate of
30.8%.In the
fourth quarter of 2008, the Company amended prior year tax returns to properly
roll forward prior net operating losses for tax purposes which resulted in a
$162,000 tax refund receivable at December 31, 2008.  The effective
rate would have been 32.8% without the benefit of the tax refund.  In
2007, we recorded $1,706,000 in income tax expense, which represents an annual
effective rate of 30.8%.   The Company anticipates a tax rate of
approximately 35-37% in 2009.
 
 Net
income: Net income was $5.4 million in 2008 as compared to $3.8 million in 2007,
an increase of 42%.   The improved profitability during 2008 is
due to sales growth in the Take Shape for Life division and Medifast Weight
Control Centers, and gross margin improvement.
  SEGMENT
RESULTS OF OPERATIONS
  Net Sales by Segment as of December 31,2008
                        
                        
                        2007
                        
                        
                        2006Segments
                        
                        Sales
                        
                        
                        % of Total
                        
                        
                        Sales
                        
                        
                        % of Total
                        
                        
                        Sales
                        
                        
                        % of TotalMedifast
                        
                        
                        97,116,000
                        
                        
                        
                        92
                        %
                        
                        
                        78,861,000
                        
                        
                        
                        94
                        %
                        
                        
                        70,181,000
                        
                        
                        
                        95
                        %All
      Other
                        
                        
                        8,329,000
                        
                        
                        
                        8
                        %
                        
                        
                        4,918,000
                        
                        
                        
                        6
                        %
                        
                        
                        4,015,000
                        
                        
                        
                        5
                        %Eliminations
                        
                        
                        
                        
                        
                        
                        0
                        %
                        
                        
                        
                        
                        
                        
                        0
                        %
                        
                        
                        (110,000
                        )
                        
                        
                        0
                        %Total
      Sales
                        
                        
                        105,445,000
                        
                        
                        
                        100
                        %
                        
                        
                        83,779,000
                        
                        
                        
                        100
                        %
                        
                        
                        74,086,000
                        
                        
                        
                        100
                        %
  2008
vs. 2007
 
 Medifast
Segment:  The Medifast reporting segment consists of the sales 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 2008 vs. 2007 above.
 
 All Other
Segment:  The All Other reporting segment consists of the sales from
Hi-Energy and Medifast Weight Control Centers.  Sales increased by
$3,411,000 year-over year due to the opening of ten new centers throughout 2008,
including eight centers in Houston, TX and two centers in Dallas,
TX.   The Dallas, TX market continues to mature with the average
clinic generating approximately $50,000 per month in sales.   The
Company is continuing to focus on improved advertising effectiveness, improved
closing rates on walk-in sales, as well as the hiring of more experienced
clinic.  At the end of 2008, there were twenty corporately owned
centers opened as compared to ten centers at the end of 2007.  In
addition, the Company began franchising the Medifast Weight Control Center model
in 2008.  At the end of 2008, there were five franchise centers in
operation.
 
 2007
vs. 2006
 
 Medifast
Segment:  The Medifast reporting segment consists of the sales 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 2007 vs. 2006 above.
  21
  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
ten clinics open at the end of 2007 as compared to twelve at the end of
2006.
  Net
      Profit by Segment as of December 31,2008
                      
                      
                      2007
                      
                      
                      2006Segments
                      
                      Profit
                      
                      
                      % of Total
                      
                      
                      Profit
                      
                      
                      % of Total
                      
                      
                      Profit
                      
                      
                      % of TotalMedifast
                      
                      
                      8,104,000
                      
                      
                      
                      149
                      %
                      
                      
                      5,937,000
                      
                      
                      
                      155
                      %
                      
                      
                      6,218,000
                      
                      
                      
                      121
                      %All
      Other
                      
                      
                      (2,669,000
                      )
                      
                      
                      -49
                      %
                      
                      
                      (2,100,000
                      )
                      
                      
                      -55
                      %
                      
                      
                      (952,000
                      )
                      
                      
                      -18
                      %Eliminations
                      
                      
                      
                      
                      
                      
                      0
                      %
                      
                      
                      
                      
                      
                      
                      0
                      %
                      
                      
                      (110,000
                      )
                      
                      
                      -2
                      %Net
      Profit
                      
                      
                      5,435,000
                      
                      
                      
                      100
                      %
                      
                      
                      3,837,000
                      
                      
                      
                      100
                      %
                      
                      
                      5,156,000
                      
                      
                      
                      100
                      %
 
 2008
vs. 2007
 
 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 2008 vs. 2007 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 $569,000.   The Hi-Energy and Medifast
Weight Control Centers showed an increase in net profitability year-over-year of
$339,000.           The
increase in profitability was due to improved profitability in established
centers.  During the year, ten new centers were opened and should have
a positive impact on 2009 earnings.   Medifast Corporate expenses
increased by $908,000 year-over-year.  Corporate expenses include
items such as auditors’ fees, attorney’s fees, Board of Director expenses,
investor relations, corporate consulting, and corporate outings.  In
2008, the Company had additional legal expenses associated with the Sotomayor
legal action that resulted in a $200,000 one time charge to earnings in the
fourth quarter of 2008.  See Item 3 – Legal Proceedings on page 16 for
more detail.  In addition, the Company had an increase in realized
losses on equity securities in its investment account in the fourth quarter of
2008 due to the weakness in the stock  market.  See footnote
17, “Business Segments” for a detailed breakout of expenses.
  2007
vs. 2006
 
 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 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 $726,000 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.
  22
 
 Contractual
Obligations and Commercial Commitments
 
 As of
December 31, 2008, 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,
2008
 
 Payments
      due by period2009
                    
                    
                    2010
                    
                    
                    2011
                    
                    
                    2012
                    
                    
                    2013
                    
                    
                    Thereafter
                    
                    
                    TotalContractual
      ObligationsTotal
      Debt
                    
                    
                    3,420,000
                    
                    
                    
                    257,000
                    
                    
                    
                    494,000
                    
                    
                    
                    225,000
                    
                    
                    
                    225,000
                    
                    
                    
                    3,113,000
                    
                    
                    
                    7,734,000Operating
      Leases
                    
                    
                    926,000
                    
                    
                    
                    819,000
                    
                    
                    
                    776,000
                    
                    
                    
                    676,000
                    
                    
                    
                    227,000
                    
                    
                    
                    -
                    
                    
                    
                    3,424,000Copier
      Equipment Service Contracts
                    
                    
                    399,000
                    
                    
                    
                    355,000
                    
                    
                    
                    334,000
                    
                    
                    
                    283,000
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,371,000Total
      contractual obligations
                    
                    
                    4,745,000
                    
                    
                    
                    1,431,000
                    
                    
                    
                    1,604,000
                    
                    
                    
                    1,184,000
                    
                    
                    
                    452,000
                    
                    
                    
                    3,113,000
                    
                    
                    
                    12,529,000
 
 LIQUIDITY
AND CAPITAL RESOURCES
 
 The Company had stockholders’ equity of
$38,173,000 and working capital of $12,669,000 on December 31, 2008 compared
with $32,420,000 and $10,395,000 at December 31, 2007,
respectively.  The $5.8 million net increase in stockholder’s equity
reflects $5.4 million in 2008 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 decreased from $2.2 million at December 31, 2007 to $1.8
million at December 31, 2008.  The decrease is due to large inventory
purchases in the fourth quarter of 2008 to include ten new meal replacement bars
as well as an increase in inventory levels in preparation for the “diet” season
beginning in January 2009.  In addition, the Company’s capital
expenditures increased by approximately $2.3 million in 2008 as compared to
2007.  In 2008, capital expenditures included the opening of ten new
Medifast Weight Control Centers, development of a point-of-sale system for the
Clinics, development of a new web shopping platform for the direct response
segment, new software system for our Take Shape for Life division, ERP
enhancements, and phone system upgrades.
 
 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, 2008 the Company generated cash flow of $5,496,000 from
operations, primarily attributable to higher operating income.  This
was offset by net changes in operating assets and liabilities that decreased
cash flow by $4,781,000.    The total use of cash from
operations was $6,649,000. The largest use of cash was for the purchase of
inventory.  During 2008, inventory increased by $4.7
million.  Inventory increased due to our increased sales, introduction
of ten new meal replacement bars late in the fourth quarter of 2008 as well as
the typical fourth quarter inventory build-up in order to prepare for “diet
season” in the first quarter of 2009.  Additional uses of cash
included an increase in prepaid taxes of $1.1 million, increase in other assets
of $251,000, and a reduction in income taxes payable of
$592,000.  This was offset by sources of cash from a decrease in
accounts receivable - $43,000, decrease in prepaid expenses - $693,000, decrease
in deferred compensation - $282,000, and an increase in accounts payable -
$850,000.
  In the
year ended December 31, 2008, net cash used in investing activities was
$7,313,000, which primarily consisted of the purchase of property and
equipment.  The increase in property and equipment relates to the
building of a large amount of infrastructure in 2008 to support
growth.  This included the opening of ten new Medifast Weight Control
Center locations, development of a point-of-sale system for the Medifast Weight
Control Centers, development of a new web shopping platform for the direct
response segment, new software system for our Take Shape for Life division, ERP
enhancements, IT infrastructure to support new systems, phone system upgrades,
and leasehold improvements to manufacturing and distribution facilities to
support future growth.
  23
  In the
year ended December 31, 2008, financing activities generated $1,463,000 in cash
flow.  Sources of cash included funds drawn from the line of credit -
$1.6 million, a decrease in notes receivable - $132,000, and issuances of
warrants and options exercised with cash - $32,000.  This was offset
by a use of cash in the repayment of long term debt - $264,000.
  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.
  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 ten 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.  In addition 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.
 
 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.
  24
  Costs and
Expenses:  Cost of revenue increased $3.3 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.
  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.
  25
 
 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 same degree of
seasonality in 2008.  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.
  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, 2008, there was $7.7 million of variable
interest loans outstanding which is subject to interest rate
risk.  Interest rates on our variable rate loans ranged from 1.74% to
2.94% for the year ended December 31, 2008.  Each 100 basis point
increase in the bank’s LIBOR rates relative to these borrowings would impact
interest expense by $77,000 over a 12-month period.
  ITEM
8. FINANCIAL STATEMENTS.
 
 The
information required by this item is set forth on pages 48 to 70 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,
2008.
  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.
  26
  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,
2008.
  Changes
in our Internal Control
  There was
no change in our internal control over financial reporting during the quarter
ended December 31, 2008 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 Medifast, Inc. 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.
  27
 
 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:
  DirectorName
      and Experience
                    
                    SinceBarry B. Bondroff, CPA,
      age 60, is an officer and director with Gorfine, Schiller & Gardyn,
      PA, a full-service certified public accounting firm offering a wide range
      of accounting and consulting services.    Previously,
      he was a Senior Managing Director with SMART. Bondroff brings over 35
      years of experience providing companies of all sizes and industries with
      practical and cost-effective accounting, assurance, tax, business,
      technology and financial advisory services. Prior to managing SMART,
      Bondroff was the Managing Director for Grabush, Newman & Co., P.A.,
      which combined with SMART in May 2003. Bondroff began his career with
      Grabush Newman in 1970, and in 1976 became Officer and was promoted to
      Managing Director in 1982. He earned his Bachelor of Science degree in
      Accounting from the University of Baltimore. Additionally, Bondroff serves
      on the Board of Directors for the publicly traded First Mariner Bank of
      Maryland, a NASDAQ listed SEC registrant. He is active with First Mariner
      serving on the Executive Committee, Loan Committee, Audit Committee and as
      Chairman of the Compensation Committee. In addition to his professional
      affiliations, Bondroff served on the Executive Committee for Israel Bonds
      and was a Director of Cycle Across Maryland. He has served the National
      Jewish Medical and Research Center, the Jewish Center for Business
      Development and has assisted the Baltimore Symphony Orchestra in its
      fundraising efforts. In addition, Barry was a past President and Treasurer
      of the Edward A. Meyerberg Northwest Senior Center, and also served as a
      Member of the Board of Directors for the Levindale Hebrew Geriatric Center
      and Hospital.  He currently serves as Treasurer for Special
      Olympics of Maryland, and as a Trustee for Stevenson University in
      Maryland.
                    
                    2008Joseph D. Calderone, age
      60, is the chaplain and counselor at the Villanova University School of
      Law.  He most recently served as the interim President at
      Merrimack College in North Andover, MA.  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.
                    
                    2003Charles P. Connolly, age
      60, 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.
                    
                    2006George J. Lavin, Jr.,
      Esq., age 80, 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
  28
  Bradley T. MacDonald,age 61, is the Executive 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
      28th
      of 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
      was appointed and served on the Defense Advisory Board for Employer
      Support of the Guard and Reserve (ESGR.)   He also served
      on the Board of Directors of the Baltimore County Chamber of
      Commerce.  Currently, Mr. MacDonald serves on the Board of
      Directors of Stevenson University in Maryland, and the Institute of Notre
      Dame High School, Baltimore, Maryland. He is also the Vice-Chairman of the
      Board of Directors of the Marine Corps Reserve Toys for Tots
      Foundation.  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.
                      
                      1996Michael C. MacDonald,
      age 56, is senior vice president, operational effectiveness for Xerox
      Corporation. He leads a corporate initiative to review the company's core
      functions including marketing, learning, human resources and other key
      areas to ensure the Company is maximizing the effectiveness of its
      resources and delivering a solid return on investment. Previously, he was
      president of global accounts and marketing operations for Xerox
      Corporation responsible for corporate marketing, xerox.com, advertising,
      brand, public relations, and corporate communications.  He was
      named to this position in October 2004 and was appointed a corporate
      senior vice president in July 2000.  MacDonald is on the board
      of directors of PAETEC and the Jimmy V Foundation.  Mr.
      MacDonald completed executive business and management programs at Columbia
      University in 1992 and the International Senior Management Program at
      Harvard University in 1998.
                      
                      1998Dennis M. McCarthy, age
      64, 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.
                      
                      2006Michael S. McDevitt,age
      30, 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
  29
  Jeannette M. Mills, age
      42, currently serving as senior vice president with the Baltimore Gas and
      Electric Company, a subsidiary of Constellation Energy. A Baltimore, Md.
      native, Mills earned her Bachelor of Science in Electrical Engineering
      from Virginia Polytechnic Institute (Virginia Tech) and she currently
      serves on the Advisory Board of the Bradley Department of Electrical and
      Computer Engineering. In 2006, Mills earned her Masters of Business
      Administration from Loyola College. Ms. Mills also works in the community
      includes serving as Chair of the Board of Directors for Voices for
      Children, Howard County's Court Appointed Special Advocate Program.
      Additionally, she serves on the Board of the Creative Alliance, a Program
      that builds communities by bringing together artists and audiences from
      diverse backgrounds to experience spectacular arts programs and engage in
      the creative process.
                        
                        2008Donald F. Reilly, OSA,
      age 61, 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, Staff at Villanova University, Personnel Director
      of the Augustinian Province of St. Thomas of Villanova, Provincial
      Counselor, Co-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.  He also serves on the Board
      of Trustees of Merrimack College, MA, St. Augustine Prep, NJ, and Malvern
      Prep, PA.  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, Peru, and South Africa.
                        
                        1998Margaret
      MacDonald–Sheetz, age 31, 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.
                        
                        2008Mary T. Travis, age 57,
      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 40 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 12 members of which 9 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:  Barry B. Bondroff,
Joseph D. Calderone, Charles P. Connolly, George J. Lavin, Jr. Esq., Dennis M.
McCarthy, Jeannette M. Mills, Donald F. Reilly, and Mary T.
Travis.
  30
 
 Board
Meetings
  For the
fiscal year ended December 31, 2008 (“Fiscal 2008”), 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’sPrinciples of
Corporate Governance, which is available on the Company’s websitewww.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.  Twelve directors attended the 2008 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.
  Audit
Committee
  Our
audit committee consists of Barry B. Bondroff, Charles P. Connolly, George J.
Lavin, and Mary T. 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 atwww.choosemedifast.com by
following the links through “Investor Relations” to “Corporate
Governance.”  In fiscal 2008, the audit committee met four
times.
  31
 
 Nominating
and Corporate Governance Committee
  The
nominating and corporate governance committee consists of Joseph D. Calderone,
Jeannette M. Mills, Donald F. Reilly, and George J. 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 atwww.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 2008, the nominating and
corporate governance committee met four times.
  Compensation
Committee
  The
compensation committee currently consists of Joseph D. Calderone, Dennis M.
McCarthy, Esq. Jeannette M. Mills, 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 atwww.choosemedifast.com by
following the links through “Investor Relations” to “Corporate
Governance.”  In fiscal 2008, the compensation committee met four
times.
 
 Executive
Committee
 
 Messrs.
Bradley T. MacDonald, Michael C. MacDonald, Michael S. McDevitt, Dennis M.
McCarthy, Esq., and Jeannette M. Mills 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 2008.
  32
  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 2008, 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 2008.
 
 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 atwww.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.
  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, CFO, and President
during Fiscal 2008, as well as the other individuals included in the Summary
Compensation Table on page 35, 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.
  33
  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.
  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.
  34
  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 intend to issue stock options as part of
compensation in 2009 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.
  2008
Summary Compensation Table
 
 The
following table sets forth the annual and long-term compensation for the fiscal
year ended December 31, 2008, 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
                                        
                                        
                                        TotalName
      and Pricipal Position
                                        
                                        Year
                                        
                                        ($)
                                        
                                        
                                        ($)(1)
                                        
                                        
                                        ($)(1)
                                        
                                        
                                        ($)(2)
                                        
                                        
                                        ($)
                                        
                                        
                                        ($)(3)
                                        
                                        
                                        ($)Bradley
      T. MacDonald
                                        
                                        2008
                                        
                                        $
                                        225,000
                                        
                                        
                                        
                                        107,000
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        $
                                        100,000
                                        
                                        
                                        $
                                        6,700
                                        
                                        
                                        $
                                        438,700Chairman
      of the BoardMichael
      S. McDevitt
                                        
                                        2008
                                        
                                        
                                        135,000
                                        
                                        
                                        
                                        450,000
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        75,000
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        2,700
                                        
                                        
                                        
                                        662,700Chief
      Executive and CFOLeo
      V. Williams
                                        
                                        2008
                                        
                                        
                                        132,500
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        25,000
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        2,900
                                        
                                        
                                        
                                        160,400Executive
      Vice PresidentMargaret
      MacDonald - Sheetz
                                        
                                        2008
                                        
                                        
                                        100,000
                                        
                                        
                                        
                                        372,000
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        50,000
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        3,000
                                        
                                        
                                        
                                        525,000Chief
      Operating Officer, PresidentBrendan
      N. Connors
                                        
                                        2008
                                        
                                        
                                        99,000
                                        
                                        
                                        
                                        101,000
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        20,000
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        3,000
                                        
                                        
                                        
                                        223,000VP
      of Finance
  (1)
                  
                  Amounts
      are calculated based on provisions of SFAS, No 123R, “Share Based
      Payments.” See note 2 of the consolidated financial statements of the
      Company’s Annual Report on Form 10-K for the year ended
      December 31, 2008 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.
  2008
Grants of Plan-Based Awards
 
 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.
  35
  The
Medifast Board of Directors on July 24, 2008 approved restricted common stock
grants to the Named Executives with a 5 year vesting period, beginning on the
grant date.  Named Executive Officers were granted 425,000 shares of
restricted common stock to retain their services over the next five years,
reward their efforts in the participation of the successful succession and
transition of the company operations to the new senior management team, and
incentivize continued sales and profit growth in accordance with targets set by
the Board of Directors.
 
 The
Medifast Board of Directors on November 24, 2008 approved restricted common
stock grants to key executives as a 2008 performance bonus for exceeding
internal sales and profit forecasts.  Key executives were granted
150,000 shares of restricted common stock over a five year vesting period,
beginning on January 1, 2009.
 
 Outstanding
Equity Awards at Fiscal Year-End Table
  Option Awards
                                            
                                            Stock AwardsName
                                            
                                            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
                                              VestedExercisable
                                            
                                            
                                            Un-Exercisable
                                            
                                            
                                            Price ($)
                                            
                                            Date
                                            
                                            Vested (#)(1)
                                            
                                            
                                            ($)(2)
                                            
                                            
                                            (#)
                                            
                                            
                                            ($)Bradley
      T. MacDonaldChairman
      of the Board
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            
                                            107,000
                                            
                                            
                                            
                                            590,640
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Michael
      S. McDevittChief
      Executive Officer, CFO
                                            
                                            
                                            100,000
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            2.87
                                            
                                            3/31/2010
                                            
                                            
                                            307,085
                                            
                                            
                                            
                                            1,695,109
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Leo
      V. WilliamsExecutive
      Vice President
                                            
                                            
                                            10,000
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            3.83
                                            
                                            10/28/2010
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Margaret
      MacDonald - SheetzChief
      Operating Officer, President
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            
                                            255,000
                                            
                                            
                                            
                                            1,407,600
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Brendan
      N. ConnorsVP
      of Finance
                                            
                                            
                                            23,334
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            2.87
                                            
                                            3/31/2010
                                            
                                            
                                            83,000
                                            
                                            
                                            
                                            458,160
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
  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, 2008, or $5.52 per
      share.
  36
  2008
Option Exercises and Stock Vested Table
 
 Thefollowing table sets
forth information regarding option exercises and stock vesting for the Named
Executive Officers during 2008.
  Option Awards
                                            
                                            
                                            Stock AwardsNumber of
                                              Shares Acquired
                                              on Exercise
                                            
                                            
                                            Value Realized
                                              on Exercise
                                            
                                            
                                            Number of
                                              Shares
                                              Acquired on
                                              Vesting
                                            
                                            
                                            Value
                                              Realized on
                                              VestingName
                                            
                                            (#)
                                            
                                            
                                            ($)(1)
                                            
                                            
                                            (#)
                                            
                                            
                                            ($)(2)Bradley
      T. MacDonald
                                            
                                            
                                            
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Executive
      Chairman of the Board
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            20,000
                                            
                                            
                                            
                                            107,400Michael
      S. McDevitt
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            15,000
                                            
                                            
                                            
                                            81,000Chief
      Executive Officer, CFO
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            33,333
                                            
                                            
                                            
                                            208,33130,000
                                            
                                            
                                            
                                            161,100Leo
      V. Williams
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Executive
      Vice President
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Margaret
      MacDonald - Sheetz
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            15,000
                                            
                                            
                                            
                                            81,000Chief
      Operating Officer, President
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            25,000
                                            
                                            
                                            
                                            156,25025,000
                                            
                                            
                                            
                                            134,250Brendan
      N. Connors
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            3,000
                                            
                                            
                                            
                                            16,200VP
      of Finance
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            5,000
                                            
                                            
                                            
                                            31,25010,000
                                            
                                            
                                            
                                            53,700
  (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.
  37
  Equity Compensation Plan Information
at Fiscal Year Ended December 31, 2008
  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
                  
                  
                  223,334
                  (1)
                  
                  $
                  3.65
                  
                  
                  
                  1,229,166Equity
      compensation plans not approved by security holders
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
  (1)
              Consists
      of 143,334 shares of common stock issuable upon the exercise of
      outstanding options and 80,000 shares of common stock issuable upon the
      exercise of outstanding warrants.
  2008
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, 2008.
  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
                                    
                                    
                                    
                                    (381,000
                                    )
                                    
                                    $
                                    0
                                    
                                    
                                    $
                                    792,000Chairman
      of the BoardMichael
      S. McDevitt
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Chief
      Executive Officer, CFOLeo
      V. Williams
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Executive
      Vice PresidentMargaret
      MacDonald - Sheetz
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Chief
      Operating Officer, PresidentBrendan
      N. Connors
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -VP
      of Finance
  (1)
              All
      amounts are reported in compensation on the “2008 Summary Compensation
      Table”
  38
  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 2008,
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 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. 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.
 
 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 -
Sheetz.Ms. MacDonald - Sheetz entered into a six year
employment agreement effective February 8, 2006.  Ms. MacDonald -
Sheetz 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 - Sheetz’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.
  39
  Potential
Payments upon Termination or Change in Control
 
 As of
December 31, 2008, 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 on December 31, 2008 they would have received the
following amounts:
 
 Severance ($) (1)Bradley
      T. MacDonald
                      
                      $
                      337,500Michael
      S. McDevitt
                      
                      $
                      202,500Margaret
      MacDonald - Sheetz
                      
                      $
                      150,000Brendan
      N. Connors
                      
                      $
                      148,500
 
 (1) Based
on 2008 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, 2008:
  Severance
                      ($)(1)
                    
                    
                    Accelerated
                      Vesting
      of
                      Stock
      Awards
                      ($)(2)
                    
                    
                    TotalBradley
      T. MacDonald
                    
                    $
                    337,500
                    
                    
                    $
                    590,640
                    
                    
                    $
                    928,140Michael
      S. McDevitt
                    
                    
                    202,500
                    
                    
                    
                    1,695,109
                    
                    
                    
                    1,897,609Margaret
      MacDonald - Sheetz
                    
                    
                    150,000
                    
                    
                    
                    1,407,600
                    
                    
                    
                    1,557,600Brendan
      N. Connors
                    
                    
                    148,500
                    
                    
                    
                    458,160
                    
                    
                    
                    606,660
 
 (1)
              Based
      on 2008 salary.
 (2)
              Accelerated
      vesting of stock awards were based on NYSE close price of the Common
      Shareson
      December 31, 2008 of $5.52 per share, and for option awards the difference
      between $5.52 and the exercise or base price of the
  award.
  40
  2008
Director Compensation
  The
table below summarizes the compensation paid by the Company to non-employee
directors for the fiscal year ended December 31, 2008.
  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 ($)Barry
      B. Bondroff
                      
                      $
                      -
                      
                      
                      $
                      5,370
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      5,370Joseph
      D. Calderone, OSA
                      
                      
                      -
                      
                      
                      
                      21,570
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      26,940Charles
      P. Connolly
                      
                      
                      16,000
                      
                      
                      
                      21,570
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      37,570George
      Lavin, Jr., Esq.
                      
                      
                      -
                      
                      
                      
                      21,570
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      21,570Michael
      C. MacDonald
                      
                      
                      -
                      
                      
                      
                      21,570
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      26,940Dennis
      M. McCarthy
                      
                      
                      -
                      
                      
                      
                      21,570
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      21,570Jeannette
      M. Mills
                      
                      
                      
                      
                      
                      
                      5,370
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      5,370Rev.
      Donald F. Reilly, OSA
                      
                      
                      -
                      
                      
                      
                      21,570
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      26,940Mary
      T. Travis
                      
                      
                      -
                      
                      
                      
                      21,570
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      26,940
  Employee
Directors do not receive any additional compensation for their services as
director.
 
 Additional
fees are paid to the Audit Committee Chairman.  In 2008, 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 2
      of the consolidated financial statement of the Company’s Annual Report on
      Form 10-K for the year ended December 31, 2008 regarding
      assumptions underlying valuation of equity
  awards.
  41
  The table
below summarizes the equity based awards held by the Company’s non-employee
directors as of December 31, 2008.
  Option Awards
                      
                      
                      Stock AwardsName
                      
                      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
                        VestedExercisable
                      
                      
                      Un-Exercisable
                      
                      
                      Price ($)
                      
                      
                      Date
                      
                      
                      Vested (#)
                      
                      
                      ($)Barry
      B. Bondroff
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      5,000
                      
                      
                      
                      27,600Joseph
      D. Calderone, OSA
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      14,000
                      
                      
                      
                      77,280Charles
      P. Connolly
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      9,000
                      
                      
                      
                      49,680George
      J. Lavin, Jr., Esq.
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      9,000
                      
                      
                      
                      49,680Michael
      C. MacDonald
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      14,000
                      
                      
                      
                      77,280Dennis
      M. McCarthy
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      9,000
                      
                      
                      
                      49,680Jeannette
      M. Mills
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      5,000
                      
                      
                      
                      27,600Rev.
      Donald F. Reilly, OSA
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      15,000
                      
                      
                      
                      82,800Mary
      T. Travis
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      15,000
                      
                      
                      
                      82,800
 
 The
Medifast Board of Directors on July 24, 2008 approved restricted common stock
grants to Board members with a 5 year vesting period, beginning on the grant
date.  The grant was to tenured Board members that successfully
implemented the Senior Management Succession Plan over the last four years
through advice, counsel, and mentorship.  A total of 55,000 shares of
restricted common stock were granted to tenured Directors.
 
 The
Medifast Board of Directors on November 24, 2008 approved restricted common
stock grants to key executives and Board members as a 2008 performance bonus for
exceeding internal sales and profit forecasts.   Non-management
Board members were each granted 5,000 shares of restricted common stock vesting
over two years, beginning on January 1, 2009.
  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, 2008.
 
 COMPENSATION
COMMITTEE OF THE BOARD OF DIRECTORS
  Mary T.
Travis, Chairman
 Joseph D.
Calderone
 Dennis M.
McCarthy, Esq.
 Jeannette
M. Mills
  42
  ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
 
  The
following table shows as of December 31, 2008, 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 StockRenaissance
      Technologies, LLC and James H. Simons
                              800
      Third Avenue
                              New
      York, NY 10022
                            
                            
                            732,700
                            
                            
                            
                            5.0
                            %Berg
      and Berg Enterprises, LLC
                              10050
      Bandley Drive
                              Cupertino,
      CA  94014
                            
                            
                            900,480
                            
                            
                            
                            6.2
                            %
  43
  The
following table shows as of March 13, 2009 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)
                          
                          
                          903,550
                          
                          
                          
                          -
                          
                          
                          
                          6.19
                          %Michael
      S. McDevitt
                          
                          
                          399,784
                          
                          
                          
                          -
                          
                          
                          
                          2.74
                          %Margaret
      MacDonald
                          
                          
                          252,900
                          
                          
                          
                          -
                          
                          
                          
                          1.73
                          %Brendan
      N. Connors, CPA
                          
                          
                          81,509
                          
                          
                          
                          
                          
                          
                          
                          0.56
                          %Donald
      F. Reilly
                          
                          
                          67,183
                          
                          
                          
                          -
                          
                          
                          
                          *Michael
      C. MacDonald
                          
                          
                          63,697
                          
                          
                          
                          -
                          
                          
                          
                          *Charles
      P. Connolly
                          
                          
                          29,075
                          
                          
                          
                          -
                          
                          
                          
                          *Mary
      T.Travis
                          
                          
                          29,033
                          
                          
                          
                          -
                          
                          
                          
                          *Joseph
      D. Calderone, OSA
                          
                          
                          17,700
                          
                          
                          
                          -
                          
                          
                          
                          *Dennis
      M. McCarthy, Esq.
                          
                          
                          13,075
                          
                          
                          
                          -
                          
                          
                          
                          *Leo
      V. Williams
                          
                          
                          11,770
                          
                          
                          
                          -
                          
                          
                          
                          *George
      J. Lavin, Jr., Esq.
                          
                          
                          10,700
                          
                          
                          
                          -
                          
                          
                          
                          *Barry
      B. Bondroff, CPA
                          
                          
                          3,500
                          
                          
                          
                          -
                          
                          
                          
                          *Jeannette
      M. Mills
                          
                          
                          3,500
                          
                          
                          
                          -
                          
                          
                          
                          *All
      directors, nominees for directors and executive officers as a
      group
                          
                          
                          1,886,976
                          
                          
                          
                          -
                          
                          
                          
                          12.94
                          %(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 13, 2009, 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)
                Unless
      otherwise noted, reflects the number of shares that could be purchased by
      exercise of options available at March 13, 2009, or within 60 days
      thereafter under our stock option
plans.
 (3)
                  The
      shares set forth as beneficially owned by Mr. Bradley T. MacDonald
      include 396,402 shares owned by his wife Shirley MacDonald, and 65,667
      shares owned by the MacDonald Family Trust.  His daughter,
      Margaret MacDonald, beneficially owns 252,900 shares which added to
      Bradley T. MacDonald’s 903,550 beneficially owned shares results in
      1,156,450 shares owned by the MacDonald
family.
  44
 
 ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
 As of December 31, 2008, there were no
related party transactions.
 
 ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
 Fees
to Independent Registered Public Accountants for Fiscal 2008 and
2007
  The
following services were provided by Bagell, Josephs, Levine & Co during
fiscal 2008 and 2007:
  2008
                          
                          
                          2007Audit
      Fees(1)
                          
                          $
                          154,000
                          
                          
                          $
                          199,000Tax
      fees(2)
                          
                          
                          29,000
                          
                          
                          
                          30,000All
      other fees
                          
                          
                          -
                          
                          
                          
                          -Total
                          
                          $
                          183,000
                          
                          
                          $
                          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.
  45
  PART
IV
  ITEM
15. EXHIBITS AND FINACIAL STATEMENT SCHEDULES
  (a)      
1.       Financial Statements
 
 See Index
to the Consolidated Financial Statements on page 47 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 47 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.
  46







MEDIFAST,
INC. AND SUBSIDIARIES





INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS





Report
      of Independent Registered Public Accounting Firm
              48Consolidated
      Balance Sheets
              49Consolidated
      Statements of Income
              50Consolidated
      Statements of Stockholders’ Equity
              51Consolidated
      Statements of Cash Flows
              52Notes
      to Consolidated Financial Statements
              54




47


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To the
Board of Directors and


Stockholders
of Medifast, Inc.


Owing
Mills, Maryland 21117




We have
audited the accompanying consolidated balance sheets of Medifast, Inc. as of
December 31, 2008 and 2007, and the related consolidated statements of income,
changes in stockholders’ equity and accumulated other comprehensive income, and
cash flows for each of the years in the three-year period ended December 31,
2008.  Medifast, Inc.’s management is responsible for these financial
statements.  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.  The
company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting.  Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the company’s
internal control over financial reporting.  Accordingly, we express no
such opinion.  An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, 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 consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Medifast, Inc. as of
December 31, 2008 and 2007, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 2008 in
conformity with accounting principles generally accepted in the United States of
America.




/s/Bagell,
Josephs, Levine & Company, L.L.C.


Bagell,
Josephs, Levine & Company, L.L.C.


Marlton,
NJ 08053




March 6,
2009


48





MEDIFAST,
INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


As
of December 31, 2008 and 2007





2008
                    
                    
                    2007ASSETSCurrent
      assets:Cash
      and cash equivalents
                    
                    $
                    1,841,000
                    
                    
                    $
                    2,195,000Accounts
      receivable-net of allowance for doubtful accounts of
    $100,000
                    
                    
                    448,000
                    
                    
                    
                    493,000Inventory
                    
                    
                    13,856,000
                    
                    
                    
                    9,181,000Investment
      securities
                    
                    
                    1,099,000
                    
                    
                    
                    1,439,000Deferred
      compensation
                    
                    
                    531,000
                    
                    
                    
                    814,000Prepaid
      expenses and other current assets
                    
                    
                    2,034,000
                    
                    
                    
                    2,727,000Prepaid
      income tax
                    
                    
                    1,131,000
                    
                    
                    
                    -Note
      receivable - current
                    
                    
                    180,000
                    
                    
                    
                    180,000Current
      portion of deferred tax asset
                    
                    
                    100,000
                    
                    
                    
                    100,000Total
      current assets
                    
                    
                    21,220,000
                    
                    
                    
                    17,129,000Property,
      plant and equipment - net
                    
                    
                    21,709,000
                    
                    
                    
                    17,031,000Trademarks
      and intangibles - net
                    
                    
                    5,547,000
                    
                    
                    
                    7,356,000Deferred
      tax asset, net of current portion
                    
                    
                    1,131,000
                    
                    
                    
                    897,000Note
      receivable, net of current assets
                    
                    
                    1,080,000
                    
                    
                    
                    1,212,000Other
      assets
                    
                    
                    350,000
                    
                    
                    
                    99,000TOTAL
      ASSETS
                    
                    $
                    51,037,000
                    
                    
                    $
                    43,724,000LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable and accrued expenses
                    
                    $
                    5,130,000
                    
                    
                    $
                    4,279,000Income
      taxes payable
                    
                    
                    -
                    
                    
                    
                    592,000Line
      of credit
                    
                    
                    3,164,000
                    
                    
                    
                    1,599,000Current
      maturities of long-term debt
                    
                    
                    257,000
                    
                    
                    
                    264,000Total
      current liabilities
                    
                    
                    8,551,000
                    
                    
                    
                    6,734,000Other
      liabilitiesLong-term
      debt, net of current portion
                    
                    
                    4,313,000
                    
                    
                    
                    4,570,000Total
      liabilities
                    
                    
                    12,864,000
                    
                    
                    
                    11,304,000Stockholders'
      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; 14,585,960
      and 13,709,098 shares issued and outstanding
                    
                    
                    15,000
                    
                    
                    
                    14,000Additional
      paid-in capital
                    
                    
                    30,787,000
                    
                    
                    
                    26,953,000Accumulated
      other comprehensive income (loss)
                    
                    
                    (389,000
                    )
                    
                    
                    321,000Retained
      earnings
                    
                    
                    15,253,000
                    
                    
                    
                    9,818,00045,666,000
                    
                    
                    
                    37,106,000Less:
      cost of 272,192 and 270,534 shares of common stock in
    treasury
                    
                    
                    (1,956,000
                    )
                    
                    
                    (1,971,000
                    )Less:  Unearned
      compensation
                    
                    
                    (5,537,000
                    )
                    
                    
                    (2,715,000
                    )Total
      stockholders' equity
                    
                    
                    38,173,000
                    
                    
                    
                    32,420,000TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                    
                    $
                    51,037,000
                    
                    
                    $
                    43,724,000





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


49





MEDIFAST,
INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF INCOME





Years Ended December
      31,(Restated)2008
                              
                              
                              2007
                              
                              
                              2006Revenue
                              
                              $
                              105,445,000
                              
                              
                              $
                              83,779,000
                              
                              
                              $
                              74,086,000Cost
      of sales
                              
                              
                              (25,332,000
                              )
                              
                              
                              (21,464,000
                              )
                              
                              
                              (18,237,000
                              )Gross
      profit
                              
                              
                              80,113,000
                              
                              
                              
                              62,315,000
                              
                              
                              
                              55,849,000Selling,
      general, and administration
                              
                              
                              (71,914,000
                              )
                              
                              
                              (56,600,000
                              )
                              
                              
                              (48,468,000
                              )Income
      from operations
                              
                              
                              8,199,000
                              
                              
                              
                              5,715,000
                              
                              
                              
                              7,381,000Other
      income (expense):Interest
      expense
                              
                              
                              (366,000
                              )
                              
                              
                              (387,000
                              )
                              
                              
                              (369,000
                              )Interest
      income
                              
                              
                              149,000
                              
                              
                              
                              105,000
                              
                              
                              
                              175,000Other
      income (expense)
                              
                              
                              (132,000
                              )
                              
                              
                              110,000
                              
                              
                              
                              276,000(349,000
                              )
                              
                              
                              (172,000
                              )
                              
                              
                              82,000Income
      before provision for income taxes
                              
                              
                              7,850,000
                              
                              
                              
                              5,543,000
                              
                              
                              
                              7,463,000Provision
      for income taxes
                              
                              
                              (2,415,000
                              )
                              
                              
                              (1,706,000
                              )
                              
                              
                              (2,307,000
                              )Net
      income attributable to common shareholders
                              
                              $
                              5,435,000
                              
                              
                              $
                              3,837,000
                              
                              
                              $
                              5,156,000Basic
      earnings per share
                              
                              $
                              0.41
                              
                              
                              $
                              0.30
                              
                              
                              $
                              0.41Diluted
      earnings per share
                              
                              $
                              0.38
                              
                              
                              $
                              0.28
                              
                              
                              $
                              0.38Weighted
      average shares outstanding -Basic
                              
                              
                              13,126,534
                              
                              
                              
                              12,960,930
                              
                              
                              
                              12,699,066Diluted
                              
                              
                              14,329,525
                              
                              
                              
                              13,644,149
                              
                              
                              
                              13,482,894





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


50





MEDIFAST,
INC. AND SUBSIDIARIES


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


Years
Ended December 31, 2008, 2007, and 2006





(Restated)Common
      StockPar
      Value
                    
                    
                    Additional
                    
                    
                    
                    
                    
                    AccumulatedNumber
                    
                    
                    $0.001
                    
                    
                    Paid-In
                    
                    
                    Retained
                    
                    
                    other
      comp
                    
                    
                    
                    
                    
                    Treasury
                    
                    
                    Unearnedof
      Shares
                    
                    
                    Amount
                    
                    
                    Capital
                    
                    
                    Earnings
                    
                    
                    income/(loss)
                    
                    
                    Total
                    
                    
                    Stock
                    
                    
                    CompensationBalance,
      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
                    )Common
      stock issued to Directors
                    
                    
                    37,000
                    
                    
                    
                    100
                    
                    
                    
                    152,000
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    152,100Options
      excercised to common stock
                    
                    
                    61,112
                    
                    
                    
                    100
                    
                    
                    
                    72,000
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    72,100
                    
                    
                    
                    (43,000
                    )Shares
      issued to Executives and Directors with 2 to 5 year
vesting
                    
                    
                    736,750
                    
                    
                    
                    700
                    
                    
                    
                    3,493,000
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3,493,000
                    
                    
                    
                    
                    
                    
                    
                    (3,493,000
                    )Vesting
      of unearned compensation to executives and directors
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    852,000Cancellation
      of options and reissuance of restricted shares
                    
                    
                    42,000
                    
                    
                    
                    100
                    
                    
                    
                    105,000
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    105,800
                    
                    
                    
                    
                    
                    
                    
                    (182,000
                    )Treasury
      shares issued in legal settlement
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    12,000
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    12,000
                    
                    
                    
                    58,000Net
      income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    5,435,000
                    
                    
                    
                    (710,000
                    )
                    
                    
                    4,725,000Balance,
      December 31, 2008
                    
                    
                    14,585,960
                    
                    
                    $
                    15,000
                    
                    
                    $
                    30,787,000
                    
                    
                    $
                    15,253,000
                    
                    
                    $
                    (389,000
                    )
                    
                    $
                    45,666,000
                    
                    
                    $
                    (1,956,000
                    )
                    
                    $
                    (5,538,000
                    )




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


51




MEDIFAST,
INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS





Years
      Ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006(Audited)
                  
                  
                  (Audited)
                  
                  
                  (Restated)Cash
      flows from operating activities:Net
      income
                  
                  $
                  5,435,000
                  
                  
                  $
                  3,837,000
                  
                  
                  $
                  5,156,000Adjustments
      to reconcile net income to net cash provided by operating activities
      from continuing operations:Depreciation
      and amortization
                  
                  
                  4,574,000
                  
                  
                  
                  3,471,000
                  
                  
                  
                  2,271,000Realized(gain)
      loss on investment securities
                  
                  
                  216,000
                  
                  
                  
                  103,000
                  
                  
                  
                  (79,000
                  )Loss
      on sale of Consumer Choice Systems
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  323,000Common
      stock issued for services
                  
                  
                  152,000
                  
                  
                  
                  31,000
                  
                  
                  
                  86,000Treasury
      stock issued in legal settlement
                  
                  
                  70,000
                  
                  
                  
                  -
                  
                  
                  
                  -Stock
      options vested during period
                  
                  
                  -
                  
                  
                  
                  100,000
                  
                  
                  
                  40,000Stock
      options cancelled during period
                  
                  
                  (77,000
                  )
                  
                  
                  -
                  
                  
                  
                  -Excess
      tax benefits from share-based payment arrangements
                  
                  
                  -
                  
                  
                  
                  39,000
                  
                  
                  
                  16,000Vesting
      of unearned compensation
                  
                  
                  852,000
                  
                  
                  
                  641,000
                  
                  
                  
                  509,000Net
      change in other comprehensive (loss) income
                  
                  
                  (711,000
                  )
                  
                  
                  (13,000
                  )
                  
                  
                  52,000Deferred
      income taxes
                  
                  
                  (234,000
                  )
                  
                  
                  (390,000
                  )
                  
                  
                  (597,000
                  )Changes
      in assets and liabilities:(Increase)
      Decrease in accounts receivable
                  
                  
                  43,000
                  
                  
                  
                  (43,000
                  )
                  
                  
                  379,000(Increase)
      in inventory
                  
                  
                  (4,675,000
                  )
                  
                  
                  (926,000
                  )
                  
                  
                  (3,138,000
                  )(Increase)
      Decrease in prepaid expenses & other current assets
                  
                  
                  693,000
                  
                  
                  
                  (128,000
                  )
                  
                  
                  675,000(Increase)
      Decrease in deferred compensation
                  
                  
                  282,000
                  
                  
                  
                  (140,000
                  )
                  
                  
                  (148,000
                  )(Increase)
      in prepaid taxes
                  
                  
                  (1,131,000
                  )
                  
                  
                  -
                  
                  
                  
                  -(Increase)
      Decrease  in other assets
                  
                  
                  (251,000
                  )
                  
                  
                  (52,000
                  )
                  
                  
                  13,000Increase
      in accounts payable and accrued expenses
                  
                  
                  850,000
                  
                  
                  
                  1,367,000
                  
                  
                  
                  651,000Increase
      (Decrease) in income taxes payable
                  
                  
                  (592,000
                  )
                  
                  
                  57,000
                  
                  
                  
                  (364,000
                  )Net
      cash provided by operating activities
                  
                  
                  5,496,000
                  
                  
                  
                  7,954,000
                  
                  
                  
                  5,845,000Cash
      Flow from Investing Activities:Sale
      of investment securities, net
                  
                  
                  129,000
                  
                  
                  
                  (4,000
                  )
                  
                  
                  1,237,000(Purchase)
      of property and equipment
                  
                  
                  (7,429,000
                  )
                  
                  
                  (5,151,000
                  )
                  
                  
                  (5,557,000
                  )(Purchase)
      of intangible assets
                  
                  
                  (13,000
                  )
                  
                  
                  (2,814,000
                  )
                  
                  
                  (2,427,000
                  )Net
      cash (used in) investing activities
                  
                  
                  (7,313,000
                  )
                  
                  
                  (7,969,000
                  )
                  
                  
                  (6,747,000
                  )Cash
      Flow from Financing Activities:Issuance
      of common stock, options and warrants
                  
                  
                  30,000
                  
                  
                  
                  216,000
                  
                  
                  
                  795,000(Repayment)
      of long-term debt, net
                  
                  
                  (264,000
                  )
                  
                  
                  (586,000
                  )
                  
                  
                  (481,000
                  )Increase
      in line of credit
                  
                  
                  1,565,000
                  
                  
                  
                  1,706,000
                  
                  
                  
                  623,000Decrease
      in note receivable
                  
                  
                  132,000
                  
                  
                  
                  137,000
                  
                  
                  
                  -Excess
      tax benefits from share-based payment arrangements
                  
                  
                  -
                  
                  
                  
                  (39,000
                  )
                  
                  
                  (14,000
                  )(Purchase)
      of treasury stock
                  
                  
                  -
                  
                  
                  
                  (309,000
                  )
                  
                  
                  (420,000
                  )Net
      cash provided by financing activities
                  
                  
                  1,463,000
                  
                  
                  
                  1,125,000
                  
                  
                  
                  503,000NET
      INCREASE (DECREASE) IN CASH AND
                    CASH
      EQUIVALENTS
                  
                  
                  (354,000
                  )
                  
                  
                  1,110,000
                  
                  
                  
                  -
                    (399,000
                  )Cash
      and cash equivalents - beginning of the year
                  
                  
                  2,195,000
                  
                  
                  
                  1,085,000
                  
                  
                  
                  1,484,000Cash
      and cash equivalents - end of year
                  
                  $
                  1,841,000
                  
                  
                  $
                  2,195,000
                  
                  
                  $
                  1,085,000Supplemental
      disclosure of cash flow information:Interest
      paid
                  
                  $
                  367,000
                  
                  
                  $
                  387,000
                  
                  
                  
                  369,000Income
      taxes
                  
                  $
                  3,661,000
                  
                  
                  $
                  1,790,000
                  
                  
                  $
                  3,403,000Supplemental
      disclosure of non cash activity:Common
      stock issued to Directors over 6-year vesting period
                  
                  $
                  852,000
                  
                  
                  $
                  -
                  
                  
                  $
                  3,373,000Options
      vested during period
                  
                  $
                  -
                  
                  
                  $
                  100,000
                  
                  
                  $
                  40,000Options
      cancelled during period
                  
                  $
                  77,000
                  
                  
                  $
                  -Common
      stock issued for services
                  
                  $
                  152,000
                  
                  
                  $
                  31,000
                  
                  
                  $
                  86,000Common
      shares issued for options or warrants
                  
                  $
                  30,000
                  
                  
                  $
                  -
                  
                  
                  $
                  591,000Treasury
      stock issued in legal settlement
                  
                  $
                  70,000
                  
                  
                  $
                  -
                  
                  
                  $
                  -Line
      of credit converted to long-term debt
                  
                  $
                  -
                  
                  
                  $
                  2,156,000
                  
                  
                  $
                  -





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


52




MEDIFAST,
INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONT.)





Years
      Ended December 31,(Restated)2008
                
                
                2007
                
                
                2006Supplemental
      disclosure of non cash activity:Sale of Consumer Choice
    SystemsInventory
                
                $
                -
                
                
                $
                -
                
                
                $
                358,000Accounts
      Receivable
                
                
                -
                
                
                
                -
                
                
                
                131,000Intangible
      assets, net
                
                
                -
                
                
                
                -
                
                
                
                1,337,000Note
      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


53


Medifast,
Inc. and Subsidiaries


Notes
to Consolidated Financial Statements


December
31, 2008, 2007, 2006





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 six 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, and Medifast Franchise Systems.  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 Medifastâ 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 Medifast Franchise
Systems, 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, 2008, the Company had $923,000 in
miscellaneous short-term investments through Merrill Lynch that are considered
cash equivalents due to terms of maturity, and $918,000 in operating checking
accounts.





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.





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.


54





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, 2008 and 2007, were $557,000 and $1,014,000
respectively.  Advertising expense for the years ended December 31,
2008, 2007, and 2006 amounted to $17,800,000, $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.


55





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 $944,000 and $1,551,000 respectively.  The
Company securities at December 31, 2008 and 2007, include amounts deposited with
multiple financial institutions. The Company 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, 2008 the Company had two customers that individually represented
over 10% of the accounts receivable and in the aggregate, approximately 43% of
the accounts receivable. In 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.





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.





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.





The
Medifast Board of Directors on July 24, 2008 approved restricted common stock
grants to key executives and Board members with a 5 year vesting period,
beginning on the grant date.  Key executives were granted 425,000
shares of restricted common stock to retain their services over the next five
years, reward their efforts in the participation of the successful succession
and transition of the company operations to the new senior management team, and
incentivize continued sales and profit growth in accordance with targets set by
the Board of Directors.  Tenured Board members that successfully
implemented the Senior Management Succession Plan over the last four years
through advice, counsel, and mentorship were awarded 55,000 shares of restricted
common stock.





The
Medifast Board of Directors on November 24, 2008 approved restricted common
stock grants to key executives and Board members as a 2008 performance bonus for
exceeding internal sales and profit forecasts.  Key executives were
granted 150,000 shares of restricted common stock over a five year vesting
period, beginning on January 1, 2009.  Non-management Board members
were each granted 5,000 shares of restricted common stock vesting over two
years, beginning on January 1, 2009.





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 $852,000 and $641,000 at December 31, 2008
and December 31, 2007, respectively.   Expense related to vesting
of options under FASB 123R was $0, $100,000, and $40,000 at December 31, 2008,
2007, and 2006, respectively.


56





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).





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 31,2008
                              
                              
                              2007
                              
                              
                              2006(Restated)Net
      income:As
      reported
                              
                              $
                              5,435,000
                              
                              
                              $
                              3,837,000
                              
                              
                              $
                              5,156,000Add:
      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
                              )Net
      income, pro forma
                              
                              $
                              5,435,000
                              
                              
                              $
                              3,837,000
                              
                              
                              $
                              5,156,000Net
      income per share:as
      reported:Basic
                              
                              $
                              0.41
                              
                              
                              $
                              0.30
                              
                              
                              $
                              0.41Diluted
                              
                              $
                              0.38
                              
                              
                              $
                              0.28
                              
                              
                              $
                              0.38Pro
      forma:Basic
                              
                              $
                              0.41
                              
                              
                              $
                              0.30
                              
                              
                              $
                              0.41Diluted
                              
                              $
                              0.38
                              
                              
                              $
                              0.28
                              
                              
                              $
                              0.38




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:





2008
                  
                  
                  2007
                  
                  
                  2006Dividend
      yield
                  
                  
                  0.0
                  %
                  
                  
                  0.0
                  %
                  
                  
                  0.0
                  %Expected
      volatility
                  
                  
                  0.71
                  
                  
                  
                  0.54
                  
                  
                  
                  0.70Risk-free
      interest rate
                  
                  
                  1.0
                  %
                  
                  
                  4.0
                  %
                  
                  
                  4.50
                  %Expected
      life in years
                  
                  
                  1-5
                  
                  
                  
                  1-5
                  
                  
                  
                  1-5




57





Recent
Accounting Pronouncements




In
September 2006, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 157, "Fair Value Measurements" ("SFAS No. 157"), which
clarifies the definition of fair value whenever another standard requires or
permits assets or liabilities to be measured at fair value. Specifically, the
standard clarifies that fair value should be based on the assumptions market
participants would use when pricing the asset or liability, and establishes a
fair value hierarchy that prioritizes the information used to develop those
assumptions. SFAS No. 157 does not expand the use of fair value to any new
circumstances, and must be applied on a prospective basis except in certain
cases. The standard also requires expanded financial statement disclosures about
fair value measurements, including disclosure of the methods used and the effect
on earnings.




In
February 2008, FASB Staff Position ("FSP") FAS No. 157-2, "Effective
Date of FASB Statement No. 157" ("FSP No. 157-2") was issued. FSP
No. 157-2 defers the effective date of SFAS No. 157 to fiscal years
beginning after December 15, 2008, and interim periods within those fiscal
years, for all nonfinancial assets and liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). Examples of items within the scope of FSP
No. 157-2 are nonfinancial assets and nonfinancial liabilities initially
measured at fair value in a business combination (but not measured at fair value
in subsequent periods), and long-lived assets, such as property, plant and
equipment and intangible assets measured at fair value for an impairment
assessment under SFAS No. 144.




The
partial adoption of SFAS No. 157 on January 1, 2008 with respect to
financial assets and financial liabilities recognized or disclosed at fair value
in the financial statements on a recurring basis did not have a material impact
on the Company's consolidated financial statements. See Note 15 for the
fair value measurement disclosures for these assets and liabilities. The Company
is in the process of analyzing the potential impact of SFAS No. 157
relating to its planned January 1, 2009 adoption of the remainder of the
standard.




On
January 1, 2008 (the first day of fiscal 2008), the Company adopted SFAS
No. 159, "The Fair Value Option for Financial Assets and Financial
Liabilities, Including an amendment of FASB Statement No. 115" ("SFAS
No. 159"). SFAS No. 159 permits entities to choose to measure many
financial instruments and certain other items at fair value, which are not
otherwise currently required to be measured at fair value. Under SFAS
No. 159, the decision to measure items at fair value is made at specified
election dates on an instrument-by-instrument basis and is irrevocable. Entities
electing the fair value option are required to recognize changes in fair value
in earnings and to expense upfront costs and fees associated with the item for
which the fair value option is elected. The new standard did not impact the
Company's Consolidated Financial Statements as the Company did not elect the
fair value option for any instruments existing as of the adoption date. However,
the Company will evaluate the fair value measurement election with respect to
financial instruments the Company enters into in the future.




In
December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("SFAS No. 141(R)"). SFAS No. 141(R) changes how an
entity accounts for the acquisition of a business. While it retains the
requirement to account for all business combinations using the acquisition
method, the new rule will apply to a wider range of transactions or events and
requires, in general, acquisition-date fair value measurement of identifiable
assets acquired, liabilities assumed and non-controlling ownership interests
held in the acquire, among other items. The Company is beginning to review the
provisions of SFAS No. 141(R), which applies prospectively to business
combinations with an acquisition date on or after the beginning of its 2009
fiscal year.




In
December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in
Consolidated Financial Statements: an amendment of ARB No. 51" ("SFAS
No. 160"). SFAS No. 160 replaces the term minority interests with the
newly-defined term of non-controlling interests and establishes this line item
as an element of stockholders' equity, separate from the parent's equity. SFAS
No. 160 also includes expanded disclosure requirements regarding the
interests of the parent and its non-controlling interest. The Company is
continuing to review the provisions of SFAS No. 160, which is effective the
first quarter of fiscal 2009, and currently does not expect this new accounting
standard to have a significant impact on the Consolidated Financial
Statements.




In
March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities: an amendment of FASB Statement No. 133"
("SFAS No. 161"). SFAS No. 161 changes the disclosure requirements for
derivative instruments and hedging activities. The Company is reviewing the
provisions of SFAS No. 161, which is effective the first quarter of fiscal
2009, and currently does not anticipate that this new accounting standard will
have a significant impact on the Consolidated Financial Statements.




In May 2008, the FASB
issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”
(SFAS No. 162). SFAS No. 162 identifies the sources of accounting principles and
the framework for selecting principles used in the preparation of financial
statements.  SFAS No. 162 is effective 60 days following the SEC’s
approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, “The Meaning of Present Fairly in Conformity with Generally
Accepted Accounting Principles”. The implementation of this standard will not
have a material impact on Consolidated Financial Statements.




In
June 2008, the FASB issued FASB Staff Position (“FSP”) Emerging Issues
Task Force (“EITF”) No. 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities.” Under
the FSP, unvested share-based payment awards that contain rights to receive
nonforfeitable dividends (whether paid or unpaid) are participating securities,
and should be included in the two-class method of computing EPS. The FSP is
effective for fiscal years beginning after December 15, 2008 and for
interim periods within those years The implementation of this standard will not
have a material impact on Consolidated Financial Statements.


58




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.





In
addition, the Company has acquired other intangible assets, which include:
customer lists, non-compete agreements, trademarks, patents, and
copyrights.  The non-compete agreements were 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, 2007 and 2006 have been reclassified to
conform to the presentation of the December 31, 2008 amounts.  The
reclassifications have no effect on net income for the years ended December 31,
2007 and 2006.


59





3.
CASH, CASH EQUIVALENTS AND MARKETABLE SECURITES





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





Cost
                    
                    
                    Accrued
      interest
                    
                    
                    Fair
      valueCash
      and cash equivalentsDemand
      deposits
                    
                    $
                    918,000
                    
                    
                    $
                    -
                    
                    
                    $
                    918,000Money
      market accounts
                    
                    
                    923,000
                    
                    
                    
                    -
                    
                    
                    
                    923,000December
      31, 2008
                    
                    $
                    1,841,000
                    
                    
                    $
                    -
                    
                    
                    $
                    1,841,000Investment
      SecuritiesInvestment
      Securities
                    
                    $
                    1,088,000
                    
                    
                    $
                    11,000
                    
                    
                    $
                    1,099,000December
      31, 2008
                    
                    $
                    1,088,000
                    
                    
                    $
                    11,000
                    
                    
                    $
                    1,099,000Cash
      and cash equivalentsDemand
      deposits
                    
                    $
                    971,000
                    
                    
                    $
                    -
                    
                    
                    $
                    971,000Money
      market accounts
                    
                    
                    1,224,000
                    
                    
                    
                    -
                    
                    
                    
                    1,224,000December
      31, 2007
                    
                    $
                    2,195,000
                    
                    
                    $
                    -
                    
                    
                    $
                    2,195,000Investment
      SecuritiesInvestment
      Securities
                    
                    $
                    1,428,000
                    
                    
                    $
                    11,000
                    
                    
                    $
                    1,439,000December
      31, 2007
                    
                    $
                    1,428,000
                    
                    
                    $
                    11,000
                    
                    
                    $
                    1,439,000




The
Company had a net unrealized loss of $711,000 as of December 31, 2008, 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
$216,000, realized loss of $103,000 and realized gain of $79,000 for the years
ended December 31, 2008, 2007, and 2006, respectively.





4.
INVENTORY





Inventory
consists of the following at December 31, 2008 and 2007:





2008
                      
                      
                      2007Raw
      materials
                      
                      $
                      2,810,000
                      
                      
                      $
                      2,136,000Packaging
                      
                      
                      2,234,000
                      
                      
                      
                      2,656,000Finished
      goods
                      
                      
                      8,812,000
                      
                      
                      
                      4,389,000Total
                      
                      $
                      13,856,000
                      
                      
                      $
                      9,181,000




5.  PREPAID EXPENSES AND OTHER CURRENT
ASSETS





Prepaid
expense and other current assets as of December 31, 2008 and 2007, consist of
the following:





2008
                    
                    
                    2007Marketing
      and advertising
                    
                    $
                    1,531,000
                    
                    
                    $
                    1,978,000Supplies
                    
                    
                    413,000
                    
                    
                    
                    377,000Insurance
                    
                    
                    90,000
                    
                    
                    
                    353,000Other
                    
                    
                    -
                    
                    
                    
                    19,000$
                    2,034,000
                    
                    
                    $
                    2,727,000




60





6.  PROPERTY,
PLANT AND EQUIPMENT





Property,
plant and equipment as of December 31, 2008 and 2007, consist of the
following:




2008
                    
                    
                    2007Land
                    
                    $
                    650,000
                    
                    
                    $
                    650,000Building
      and building improvements
                    
                    
                    8,603,000
                    
                    
                    
                    7,949,000Equipment
      and fixtures
                    
                    
                    21,810,000
                    
                    
                    
                    15,093,000Vehicle
                    
                    
                    43,000
                    
                    
                    
                    43,00031,106,000
                    
                    
                    
                    23,735,000Less
      accumulated depreciation and amortization
                    
                    
                    9,397,000
                    
                    
                    
                    6,704,000Property,
      plant and equipment - net
                    
                    $
                    21,709,000
                    
                    
                    $
                    17,031,000





Substantially
all of the Company's property, plant and equipment are pledged as collateral for
various loans (see Note 12).





Depreciation
expense for the years ended December 31, 2008, 2007, and 2006 were $2,751,000,
$2,139,000 and $1,072,000, 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, 2008
                  
                  
                  As of December 31, 2007Gross
      Carrying
                  
                  
                  Accumulated
                  
                  
                  Gross
      Carrying
                  
                  
                  AccumulatedAmount
                  
                  
                  Amortization
                  
                  
                  Amount
                  
                  
                  AmortizationCustomer
      lists
                  
                  $
                  8,332,000
                  
                  
                  $
                  4,649,000
                  
                  
                  $
                  8,332,000
                  
                  
                  $
                  3,065,000Non-compete
      agreements
                  
                  
                  840,000
                  
                  
                  
                  840,000
                  
                  
                  
                  840,000
                  
                  
                  
                  840,000Trademarks,
      patents, and copyrightsfinite
      life
                  
                  
                  1,640,000
                  
                  
                  
                  685,000
                  
                  
                  
                  1,626,000
                  
                  
                  
                  446,000infinite
      life
                  
                  
                  909,000
                  
                  
                  
                  -
                  
                  
                  
                  909,000
                  
                  
                  
                  -Total
                  
                  $
                  11,721,000
                  
                  
                  $
                  6,174,000
                  
                  
                  $
                  11,707,000
                  
                  
                  $
                  4,351,000





Amortization
expense for the years ended December 31, 2008, 2007 and 2006 was as
follows:





(Restated)2008
                  
                  
                  2007
                  
                  
                  2006Customer
      lists
                  
                  $
                  1,584,000
                  
                  
                  $
                  1,096,000
                  
                  
                  $
                  774,000Non-compete
      agreements
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  273,000Trademarks,
      patents, and copyrights
                  
                  
                  239,000
                  
                  
                  
                  236,000
                  
                  
                  
                  152,000Total
      trademarks and intangibles
                  
                  $
                  1,823,000
                  
                  
                  $
                  1,332,000
                  
                  
                  $
                  1,199,000





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,
                  
                  Amount2009
                  
                  
                  1,675,0002010
                  
                  
                  1,104,0002011
                  
                  
                  1,101,0002012
                  
                  
                  666,0002013
                  
                  
                  57,000




61




8.  ACCOUNTS
PAYABLE AND ACCRUED EXPENSES





Accounts
payable and accrued expenses as of December 31, 2008 and 2007 consist of the
following:





2008
                  
                  
                  2007Trade
      payables
                  
                  $
                  3,658,000
                  
                  
                  $
                  3,181,000Accrued
      payroll and related taxes
                  
                  
                  168,000
                  
                  
                  
                  562,000Sales
      commissions payable
                  
                  
                  1,303,000
                  
                  
                  
                  536,000Total
                  
                  $
                  5,130,000
                  
                  
                  $
                  4,279,000





9.  COMMITMENTS
AND CONTINGENCIES





The
Company leases office space for Corporate offices as well as twenty-one
corporately owned Medifast Weight Control Centers under lease terms ranging from
three to five years with leases commencing in 2004, 2005, 2006, 2007 and
2008.  Monthly payments under the Medifast Weight Control Centers
leases range in price from $2,000 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 sales channels.  The leases extend through December
2012.  The annual lease payments are $399,000, $355,000, $334,000, and
$283,000 for the years ended December 31, 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, 2008:





For
      the Years EndingDecember
      31,2009
                  
                  $
                  1,325,0002010
                  
                  
                  1,174,0002011
                  
                  
                  1,110,0002012
                  
                  
                  959,0002013
                  
                  
                  227,000Thereafter
                  
                  
                  -Total
      minimum payments required
                  
                  $
                  4,795,000





Rent expense for the years ended
December 31, 2008, 2007, and 2006 was $956,000, $464,000, and $274,000,
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.


62





10.  INCOME
TAXES





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





(Restated)2008
                      
                      
                      2007
                      
                      
                      2006Current:Federal
                      
                      $
                      1,244,000
                      
                      
                      $
                      926,000
                      
                      
                      $
                      1,073,000State
                      
                      
                      467,000
                      
                      
                      
                      307,000
                      
                      
                      
                      327,000Total
      Current
                      
                      $
                      1,711,000
                      
                      
                      $
                      1,233,000
                      
                      
                      $
                      1,400,000Deferred:Federal
                      
                      $
                      563,000
                      
                      
                      $
                      371,000
                      
                      
                      $
                      786,000State
                      
                      
                      141,000
                      
                      
                      
                      102,000
                      
                      
                      
                      121,000Total
      deferred
                      
                      
                      704,000
                      
                      
                      
                      473,000
                      
                      
                      
                      907,000Income
      tax expense
                      
                      $
                      2,415,000
                      
                      
                      $
                      1,706,000
                      
                      
                      $
                      2,307,000





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)2008
                    
                    
                    2007
                    
                    
                    2006Provision
      at the U.S. federal statutory rate
                    
                    $
                    2,681,000
                    
                    
                    $
                    1,884,000
                    
                    
                    $
                    2,537,000State
      taxes, net of federal benefit
                    
                    
                    473,000
                    
                    
                    
                    277,000
                    
                    
                    
                    371,000Intangible
      assets
                    
                    
                    (479,000
                    )
                    
                    
                    (377,000
                    )
                    
                    
                    (297,000
                    )Other
      temporary differences
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Amended
      tax return refund receivable
                    
                    
                    (162,000
                    )
                    
                    
                    -
                    
                    
                    
                    -Cost
      segregation study
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (275,000
                    )Permanent
      differences
                    
                    
                    (98,000
                    )
                    
                    
                    (78,000
                    )
                    
                    
                    (29,000
                    )Income
      tax expense
                    
                    $
                    2,415,000
                    
                    
                    $
                    1,706,000
                    
                    
                    $
                    2,307,000




63





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:





2008
                        
                        
                        2007Deferred
      tax assetsIntangible
      assets
                        
                        $
                        1,106,000
                        
                        
                        $
                        872,000Accounts
      receivable
                        
                        
                        40,000
                        
                        
                        
                        40,000Inventory
      overhead and write downs
                        
                        
                        44,000
                        
                        
                        
                        44,000Deferred
      compensation
                        
                        
                        41,000
                        
                        
                        
                        41,000Total
      deferred tax assets
                        
                        $
                        1,231,000
                        
                        
                        $
                        997,000Deferred
      Tax LiabilitiesIntangible
      assets
                        
                        $
                        -
                        
                        
                        $
                        -Accounts
      receivable
                        
                        
                        -
                        
                        
                        
                        -Inventory
      overhead and write downs
                        
                        
                        -
                        
                        
                        
                        -Total
      deferred tax liabilities
                        
                        $
                        -
                        
                        
                        $
                        -




The 2008
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 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.





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:





2008
                  
                  
                  2007
                  
                  
                  2006Shares
                  
                  
                  Weighted
                    Average
                    Exercise Price
                  
                  
                  Shares
                  
                  
                  Weighted
                    Average
                    Exercise
                    Price
                  
                  
                  Shares
                  
                  
                  Weighted
                    Average
                    Exercise
                    PriceOutstanding
      at beginning of year
                  
                  
                  291,300
                  
                  
                  $
                  4.19
                  
                  
                  
                  321,579
                  
                  
                  $
                  3.88
                  
                  
                  
                  359,727
                  
                  
                  $
                  2.71Options
      granted
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  100,000
                  
                  
                  
                  6.25Options
      reinstated
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  16,666
                  
                  
                  
                  6.36Options
      exercised
                  
                  
                  (28,334
                  )
                  
                  
                  0.50
                  
                  
                  
                  (27,500
                  )
                  
                  
                  0.89
                  
                  
                  
                  (128,147
                  )
                  
                  
                  (2.11
                  )Options
      forfeited or expired
                  
                  
                  (119,632
                  )
                  
                  
                  6.39
                  
                  
                  
                  (2,779
                  )
                  
                  
                  1.60
                  
                  
                  
                  (26,667
                  )
                  
                  
                  (8.36
                  )Outstanding
      at end of year
                  
                  
                  143,334
                  
                  
                  $
                  3.00
                  
                  
                  
                  291,300
                  
                  
                  $
                  4.19
                  
                  
                  
                  321,579
                  
                  
                  $
                  3.88Options
      exercisable at year end
                  
                  
                  143,334
                  
                  
                  $
                  3.00
                  
                  
                  
                  211,300
                  
                  
                  $
                  3.35
                  
                  
                  
                  211,577
                  
                  
                  $
                  2.77




64




The
weighted average fair value at date of grant for options granted during the year
2006 was $6.25. No stock options were granted in 2007 and 2008.





In 2005,
the Company incorrectly cancelled 75,000 options to a former
consultant.  The options were correctly added back to the 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 during 2008 the consultant exercised the
remaining 25,000 options.





The
following table summarizes information about stock options outstanding and
exercisable at December 31, 2008:





Options Outstanding
                      
                      
                      
                      
                      
                      Options
                        ExercisableWeightedAverageContractual
                      
                      
                      Weighted
                      
                      
                      
                      
                      
                      WeightedRange
      of
                      
                      
                      
                      
                      Life
                      
                      
                      Average
                      
                      
                      
                      
                      
                      AverageExercise
                      
                      Number
                      
                      
                      Remaining
                      
                      
                      Exercise
                      
                      
                      Number
                      
                      
                      ExercisePrices
                      
                      Outstanding
                      
                      
                      (in Years)
                      
                      
                      Price
                      
                      
                      Exercisable
                      
                      
                      Price$
                      2.87
                      
                      
                      123,334
                      
                      
                      
                      1.25
                      
                      
                      $
                      2.87
                      
                      
                      
                      123,334
                      
                      
                      $
                      2.87$
                      3.83
                      
                      
                      20,000
                      
                      
                      
                      1.83
                      
                      
                      $
                      3.83
                      
                      
                      
                      20,000
                      
                      
                      $
                      3.83143,334
                      
                      
                      
                      
                      
                      
                      $
                      3.00
                      
                      
                      
                      143,334
                      
                      
                      $
                      3.00




12.
LONG-TERM DEBT AND LINE OF CREDIT





Long-term
debt as of December 31, 2008 and 2007, consist of the following:





2008
                              
                              
                              2007$200,000
      five-year term loan secured by equipment fixed rate was 3% at December 31,
      2008. Due 2008
                              
                              
                              -
                              
                              
                              
                              7,000$475,000
      seven-year loan secured by the building and land at a  variable
      rate at LIBOR plus 250 bps, which was 2.94% on December 31, 2008. Due
      2011
                              
                              
                              332,000
                              
                              
                              
                              364,000$7,500,000
      revolving line of credit at the LIBOR rate plus 1.3%,  which was
      1.74% at December 31, 2008
                              
                              
                              3,164,000
                              
                              
                              
                              1,599,000$3,000,000
      ten-year term loan, with Merrill Lynch  at LIBOR plus 1.3%, this
      was 1.74% at December 31, 2008. Due 2017
                              
                              
                              2,825,000
                              
                              
                              
                              2,975,000$1,500,000
      ten-year term loan, with Merrill Lynch  at LIBOR plus 1.3%, this
      was 1.74% at December 31, 2008. Due 2017
                              
                              
                              1,413,000
                              
                              
                              
                              1,488,0007,734,000
                              
                              
                              
                              6,433,000Less
      current portion
                              
                              
                              3,421,000
                              
                              
                              
                              1,863,000$
                              4,313,000
                              
                              
                              $
                              4,570,000





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





2009
                    
                    $
                    3,420,0002010
                    
                    
                    257,0002011
                    
                    
                    494,0002012
                    
                    
                    225,0002013
                    
                    
                    225,000Thereafter
                    
                    
                    3,113,000$
                    7,734,000




65





The Company has established a $7.5
million revolving line of credit at LIBOR plus 1.30% with Merrill
Lynch.  The outstanding balance on our line of credit was $3,164,000
and $1,599,000 at December 31, 2008 and 2007, 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 1.74% on December 31, 2008. 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.   The Board of Directors 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.





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 to 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 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
2008, there were no warrants exercised.





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





Years
      EndedExercise
                                  
                                  
                                  
                                  December
      31,Price
                                  
                                  Expiration Date
                                  
                                  2007
                                  
                                  
                                  2007
                                  
                                  
                                  2006$
                                  4.80
                                  
                                  January,
      2009
                                  
                                  
                                  80,000
                                  
                                  
                                  
                                  80,000
                                  
                                  
                                  
                                  120,000$
                                  16.78
                                  
                                  July,
      2008
                                  
                                  
                                  -
                                  
                                  
                                  
                                  82,500
                                  
                                  
                                  
                                  82,50080,000
                                  
                                  
                                  
                                  162,500
                                  
                                  
                                  
                                  202,500Weighted
      average exercise price
                                  
                                  
                                  4.80
                                  
                                  
                                  
                                  10.88
                                  
                                  
                                  
                                  9.68




As of
December 31, 2008, 40,000 of the warrants are exercisable.  The
weighted average exercise price of exercisable warrants is
$4.80.


66




15.  FAIR
VALUE MEASUREMENTS





On
January 1, 2008, the Company adopted SFAS No. 157 “Fair Value
Measurements” (“SFAS 157”). SFAS 157 defines fair value, provides a consistent
framework for measuring fair value under Generally Accepted Accounting
Principles and expands fair value financial statement disclosure requirements.
SFAS 157’s valuation techniques are based on observable and unobservable inputs.
Observable inputs reflect readily obtainable data from independent sources,
while unobservable inputs reflect our market assumptions. SFAS 157 classifies
these inputs into the following hierarchy:





Level 1
Inputs– Quoted prices for identical instruments in active markets.





Level 2
Inputs– Quoted prices for similar instruments in active markets; quoted prices
for identical or similar instruments    in markets that are
not active; and model-derived valuations whose inputs are observable or whose
significant value drivers are observable.





Level 3
Inputs– Instruments with primarily unobservable value drivers.





The
following table represents the fair value hierarchy for those financial assets
and liabilities measured at fair value on a recurring basis as of December 31,
2008.





Fair
Value Measurements on a Recurring Basis as of December 31, 2008





Assets
                        
                        Level
      I
                        
                        
                        Level II
                        
                        
                        Level III
                        
                        
                        TotalInvestment
      securities
                        
                        $
                        1,099,000
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        $
                        1,099,000Cash
      equivalents
                        
                        
                        1,841,000
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,841,000Total
      Assets
                        
                        $
                        2,940,000
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        2,940,000Liabilities
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Total
      Liabilities
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -




16.  RESTATEMENT





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.





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.


67




The
following tables’ present segment information for the years ended December 31,
2008, 2007, and 2006:





Year Ended December 31,
2008Medifast
                                  
                                  
                                  All Other
                                  
                                  
                                  Eliminations
                                  
                                  
                                  ConsolidatedRevenues,
      net
                                  
                                  $
                                  97,116,000
                                  
                                  
                                  $
                                  8,329,000
                                  
                                  
                                  
                                  
                                  
                                  $
                                  105,445,000Cost
      of Sales
                                  
                                  
                                  23,611,000
                                  
                                  
                                  
                                  1,721,000
                                  
                                  
                                  
                                  
                                  
                                  
                                  25,332,000Other
      Selling, General and Adminstrative Expenses
                                  
                                  
                                  59,334,000
                                  
                                  
                                  
                                  8,138,000
                                  
                                  
                                  
                                  
                                  
                                  
                                  67,472,000Depreciation
      and Amortization
                                  
                                  
                                  3,613,000
                                  
                                  
                                  
                                  961,000
                                  
                                  
                                  
                                  
                                  
                                  
                                  4,574,000Interest
      (net)
                                  
                                  
                                  39,000
                                  
                                  
                                  
                                  178,000
                                  
                                  
                                  
                                  
                                  
                                  
                                  217,000Provision
      for income taxes
                                  
                                  
                                  2,415,000
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  
                                  
                                  
                                  2,415,000Net
      income (loss)
                                  
                                  $
                                  8,104,000
                                  
                                  
                                  $
                                  (2,669,000
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  $
                                  5,435,000Segment
      Assets
                                  
                                  $
                                  34,754,000
                                  
                                  
                                  $
                                  16,282,000
                                  
                                  
                                  
                                  
                                  
                                  
                                  $
                                  51,036,000Year Ended December 31,
2007Medifast
                                  
                                  
                                  All Other
                                  
                                  
                                  Eliminations
                                  
                                  
                                  ConsolidatedRevenues,
      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
                                  
                                  
                                  48,248,000
                                  
                                  
                                  
                                  4,769,000
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  53,017,000Depreciation
      and Amortization
                                  
                                  
                                  2,527,000
                                  
                                  
                                  
                                  944,000
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  3,471,000Interest
      (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
                                  
                                  
                                  
                                  
                                  
                                  
                                  $
                                  43,724,000Year Ended December 31,
      2006 (Restated)Medifast
                                  
                                  
                                  All Other
                                  
                                  
                                  Eliminations
                                  
                                  
                                  ConsolidatedRevenues,
      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




68





18.
QUARTERLY RESULTS (Unaudited)





First Quarter
                    
                    
                    Second Quarter
                    
                    
                    Third Quarter
                    
                    
                    Fourth Quarter2008Revenue
                    
                    $
                    25,169,000
                    
                    
                    $
                    27,537,000
                    
                    
                    $
                    27,281,000
                    
                    
                    $
                    25,458,000Gross
      Profit
                    
                    
                    19,069,000
                    
                    
                    
                    20,860,000
                    
                    
                    
                    20,759,000
                    
                    
                    
                    19,425,000Operating
      Income
                    
                    
                    2,062,000
                    
                    
                    
                    2,409,000
                    
                    
                    
                    2,396,000
                    
                    
                    
                    1,332,000Net
      Income
                    
                    
                    1,365,000
                    
                    
                    
                    1,572,000
                    
                    
                    
                    1,549,000
                    
                    
                    
                    949,000Earnings
      per common share - diluted
                    
                    
                    0.10
                    
                    
                    
                    0.11
                    
                    
                    
                    0.11
                    
                    
                    
                    0.072007Revenue
                    
                    $
                    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





(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.


69




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





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





March 12,
2008, to announce financial results for the quarter and year ended December 31,
2007





May 9,
2008, to announce the election of a new Board member





June 25,
2008, to announce the election of a new Board member





December
17, 2008, to announce updated 2008 revenue guidance





February
19, 2009, Company response to false claims





March 5,
2009, to announce the election of two new Board members





March 12,
2009, to announce 2008 revenue and earnings and provided 2009 sales trending
YTD


70





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 16, 2009




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
      16, 2009Bradley
      T. MacDonald
                                      
                                      Director/s/
      GEORGE J. LAVIN, ESQ.
                                      
                                      Director
                                      
                                      March
      16, 2009George
      J. Lavin, Esq./s/
      MICHAEL C. MACDONALD
                                      
                                      Director
                                      
                                      March
      16, 2009Michael
      C. MacDonald/s/
      MARY T. TRAVIS
                                      
                                      Director
                                      
                                      March
      16, 2009Mary
      T. Travis/s/
      REV. DONALD F. REILLY, OSA
                                      
                                      Director
                                      
                                      March
      16, 2009Rev.
      Donald F. Reilly, OSA/s/
      MICHAEL S. MCDEVITT
                                      
                                      Director
                                      
                                      March
      16, 2009Michael
      S. McDevitt/s/
      JOSEPH D. CALDERONE
                                      
                                      Director
                                      
                                      March
      16, 2009Joseph
      D. Calderone/s/
      CHARLES P. CONNOLLY
                                      
                                      Director
                                      
                                      March
      16, 2009Charles
      P. Connolly/s/
      DENNIS M. MCCARTHY, ESQ.
                                      
                                      Director
                                      
                                      March
      16, 2009Dennis
      M. McCarthy/s/
      BARRY B. BONDROFF, CPA
                                      
                                      Director
                                      
                                      March
      16, 2009Barry
      B. Bondroff, CPA/s/
      JEANNETTE M. MILLS
                                      
                                      Director
                                      
                                      March
      16, 2009Jeannette
      M. Mills/s/
      MARGARET MACDONALD - SHEETZ
                                      
                                      Director
                                      
                                      March
      16, 2009Margaret
      MacDonald Sheetz


71