SECURITIES AND EXCHANGE COMMISSION

                              WASHINGTON, DC 20549

                                   ----------

                                   FORM 10-KSB

                   ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 2004

                          Commission File No. 000-23016

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                                 MEDIFAST, INC.
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             DELAWARE                                    13-3714405
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        Incorporation State                        Tax Identification number

11445 CRONHILL DRIVE, OWINGS MILLS, MD                      21117
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     Principal 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

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<PAGE>

Check 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 past 12
months,  and (2) has been  subject to such filing  requirements  for the past 90
days.

                  Yes |X| No |_|

Check if disclosure of delinquent  filers pursuant to Item 405 of Regulation S-B
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-KSB or any  amendment to this Form 10-KSB.
|_|

The  issuer's  revenues  for the  fiscal  year  ended  December  31,  2004  were
$27,340,000

Aggregate  market value of voting  stock held by  non-affiliates  of  registrant
(deemed by  registrant  for this  purpose to be neither a director  nor a person
known to  registrant  to  beneficially  own,  exclusive  of  shares  subject  to
outstanding  options,  less than 5% of the  outstanding  shares of  registrant's
Common  Stock)  computed by reference to the closing  sales price as reported on
the American Stock Exchange on December 31, 2004: $3.52.

Number of shares  outstanding of  registrant's  Common Stock, as of December 31,
2004: 11,001,070 shares

Documents incorporated by reference: None

Transitional Small Business Disclosure Format (check one)

                  Yes |_| No |X|


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<PAGE>

                                     PART I

ITEM 1. BUSINESS.

SUMMARY

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

MARKETS

      Over  the past 20 years  the  obesity  rates  in the  United  States  have
increases dramatically.  The Centers for Disease Control (CDC) estimate that 64%
of the U.S.  adult  population is overweight or obese.  The amount of overweight
adolescents  and  children  ages 6-19 years have more than  tripled  since 1980.
Currently,  the CDC  estimates  that over 30% of  adolescents  and  children are
overweight.

      The CDC estimates  that in the U.S. the associated  costs with  overweight
and  obesity  reached  $117  billion in 2000.  The most common  health  problems
associated   with  obesity  are  type  II  diabetes,   coronary  heart  disease,
hypertension  and  stroke,  depression  and certain  forms of cancer.  It's also
estimated  that poor  nutrition  and physical  inactivity  account for more than
300,000 premature deaths per year in the U.S.

      A 2003 market research study  concluded  consumers spend about $39 billion
per year trying to lose weight or prevent  weight gain.  This includes  consumer
spending  on  diet  foods,  medically  supervised  and  commercial  weight  loss
programs,  diet books,  appetite  suppressants,  fitness clubs,  diet sodas, and
videos and cassettes.

DISTRIBUTION CHANNELS

THE MEDIFAST  LIFESTYLES PROGRAM- The Medifast Lifestyles Program is a medically
supported  network of health  care  professionals  who  support  patients on the
Medifast program.  Patients order products  directly from Medifast's  website or
toll-free number. The Lifestyles medical  practitioner ensures that each patient
receives personalized  attention throughout the weight loss program.  Management
estimates that more than 15,000 physicians  nationwide have prescribed  Medifast
as a treatment  for their  overweight  patients  since 1980,  and an estimated 1
million patients have used its' products to lose and maintain their weight.

      The Company maintains an in-house Lifestyles support program for customers
who have a Medifast physician,  who does not have the time to provide counseling
support.  These in-house qualified medical practitioners  coordinate supervision
of the Medifast  program with the patient's  primary care  physician.  Customers
have access to qualified medical practitioners for program support and advice by
calling a toll free telephone help line or by e-mail.  The in-house  medical and
marketing staff have developed  extensive  program support materials on Medifast
products and programs,  which are placed free of charge in customer  orders,  in
addition to being available on the Company's website.


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<PAGE>

TAKE SHAPE FOR  LIFE(TM) - The Take Shape for Life  program is a  comprehensive,
medically supervised health network designed to assist in long-term weight loss,
health management, or nutritional supplementation. The program features Medifast
weight  and  disease  management  products,  along with a team of  personal  and
professional Health Advisors, to support the individual through their weight and
or health management program.

      Program  entrants  are  encouraged  to  consult  with their  primary  care
physician  and a Take Shape for Life Health  Advisor to  determine  the Medifast
program  that  is  right  for  them.  Physician  directed  Health  Advisors  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.

      The  Company  has  developed  a Tasting  program,  which is  similar  to a
home-based  Party Plan  model for  introducing  new  customers  to the  Medifast
products  and  program.  Physician  directed  Health  Advisors  recruit  program
entrants and provide them with program information, Medifast product samples and
the opportunity to order products.

MEDIFAST  PHYSICIANS  AND  CLINICS - Many  Medifast  physicians  have  chosen to
implement the Medifast program within their practice.  These physicians carry an
inventory of Medifast  products  and resell them to patients.  They also provide
appropriate  testing,  medical  support  and  evaluations  for  patients  on the
program.  Physicians  can also  direct  their  patients to order  directly  from
Medifast, if they do not have space to stock inventory.

HI-ENERGY  WEIGHT  CONTROL  CENTERS - In 2003,  the Company  acquired  Hi-Energy
Weight Control  Centers,  a national company  specializing in weight  management
programs, with weight loss centers in over 50 locations.  During 2004 the number
of  Hi-Energy  Weight  Control  Centers grew to over 100  nationally.  Hi-Energy
Weight  Control  Centers offer a competitive  marketing  edge through a regional
advertising  program,  exclusive  territories and marketing support. The Company
continues to seek out qualified licensees to add to its growing number of weight
control  clinics   nationwide.   Additionally,   the  Company  is  operating  11
corporately owned clinics that serve as models to attract qualified licensees.

CONSUMERS CHOICE SYSTEM(TM) - Founded in March 1996, and acquired by Medifast in
2003, CCS is a retail distribution company focusing on high quality,  innovative
products for women.  CCS  products,  under the Woman's  Wellbeing  brand include
supplements  addressing  menopause  relief,  coronary  health and joint  health.
Products  under the UTI brand address the  detection,  relief and  prevention of
urinary tract and bladder infections.  CCS products are currently distributed in
retail  outlets  nationwide.  The  Company  is  currently  launching  Medifast's
"Maintain," a pharmacist-directed Diabetic line of products. The CCS business is
supported by a website and toll-free  customer  service line where customers can
inquire about product information and retail availability.

THE MEDIFAST(R) BRAND

      Medifast  is a  medically  supervised  weight  management  program,  which
specializes in  multidisciplinary  patient education  programs using the highest
quality meal replacement  supplements.  In recent years Medifast's core products
and  programs  have  continued  to expand  over a wellness  spectrum  to include
disease management  products.  Medifast offers products specially formulated for
Diabetics  as well as products  for women's  health,  joint  health and coronary
health.


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<PAGE>

      In 2003,  Medifast began a two-year study with The Johns Hopkins Bloomberg
School of Public  Health to  evaluate  the  efficacy  of its  Medifast  Plus for
Diabetics  compared to basic nutrition  recommendations by the American Diabetes
Association (ADA).  Preliminary  results showed that participants using Medifast
Plus for  Diabetics  lost  twice as much  weight  as those  following  the ADA's
guidelines.  Additionally,  two-thirds of those on the Medifast  program lost at
least  5% of their  weight,  which is a  standard  measure  of the Food and Drug
Administration's (FDA) threshold to indicate clinically significant weight loss,
versus  one-quarter  of those on the ADA diet.  In addition to weight loss,  the
initial study results indicate that Medifast  participants  sustained an average
9% decrease  in blood  fasting  glucose  and an average 19%  decrease in insulin
levels. The final study results are expected to be released in 2005.

      Many Medifast Plus for Diabetics  products have earned the coveted Seal of
Approval  from the Glycemic  Research  Institute.  The line,  designated  as Low
Glycemic,  does not overly  stimulate  blood  glucose  and  insulin and does not
stimulate  fat-storing  enzymes.  Products  included  in the  Medifast  Plus for
Diabetics line consist of three  delicious  patented  shakes,  home style chili,
apple  cinnamon,  French vanilla berry  oatmeal,  maple and brown sugar oatmeal,
creamy chicken soup, creamy broccoli soup, chicken noodle soup,  minestrone soup
and two snack bars.

      The Company  expanded  the product  line of its  cutting  edge  adolescent
weight management program,  Fit!(TM) in 2003. The line, which formerly consisted
of only  one  ready-to-drink  and two  chocolate  bars,  now  consists  of three
delicious powdered shakes, vanilla berry oatmeal, chicken noodle soup, hot cocoa
with   marshmallows,   chocolate   pudding,   3   power-packed   bars   and  one
ready-to-drink.

      Medifast has  commissioned  another  study at Johns  Hopkins that began in
2004 to evaluate the  effectiveness  of Medifast  Fit!  meal  replacements  in a
weight loss program for  overweight  children.  The study aims to prove that the
Medifast program will generate greater initial weight loss,  greater  reductions
in body fat and greater improvements in overall health than a standard reference
diet.  The  study  will  also  evaluate  the  weight  loss  outcomes  in a joint
parent-child approach versus children dieting without parental support.

      Most  Medifast(R)  products qualify to make the FDA's heart healthy claim,
"May Reduce the Risk of Heart  Disease." In order to make this claim,  a product
must  contain at least 6.25 grams of soy  protein per serving and be low in fat,
saturated fat, and cholesterol. Unlike popular fad diets and herbal supplements,
Medifast(R) 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(R) brand of meal replacement food supplements.

      Medically supervised, low calorie diets 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.

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.


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<PAGE>

      The Company has proven it can compete in this  competitive  market because
its products have been clinically tested and proven at Johns Hopkins  University
and have  been  safely  and  effectively  used by  customers  for over 20 years.
Medifast  has been on the  cutting  edge of product  development  with soy based
nutritional  and weight  management  products  since 1989.  These  products  are
formulated with  high-quality,  low-calorie,  low-fat  ingredients  that provide
alternatives to fad diets or medicinal weight loss remedies.

PRODUCTS

      The  Company  offers a variety of weight and disease  management  products
under  the  Medifast(R)  brand  and for  select  private  label  customers.  The
Medifast(R) line includes  Medifast(R) 55,  Medifast(R) 70, Medifast(R) Plus for
Appetite Suppression, Medifast(R) Plus for Diabetics, Medifast(R) Plus for Joint
Health,  Medifast(R)  Plus for Women's  Health,  Medifast(R)  Plus for  Coronary
Health,  Medifast(R) Fit!,  Medifast(R) Take Shape(TM),  Medifast(R)  Supplement
Bars,  Medifast(R) Creamy Soups,  Medifast(R)  Minestrone Soup,  Medifast(R) Hot
Cocoa,  Medifast(R) Oatmeals,  Medifast(R) Pro Teas,  Medifast(R) Chicken Noodle
Soup,  Medifast(R)  Fast  Soups,  Medifast(R)  Homestyle  Chili and  Medifast(R)
Multigrain Crackers.

      Medifast   nutritional   products  are   formulated   with   high-quality,
low-calorie,  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  DuPont  Protein  Technologies'  Supro(R)  brand soy
protein, which is a high-quality complete protein derived from soybeans.

      The Consumers  Choice Systems  subsidiary sells products under the private
label Woman's Wellbeing. These products include Menopause Relief Pills, Personal
Cream  Lubricant,  a UTI Home Screening  Test Stick,  UTI Cleansing  Wipes,  UTI
Cranberry-Plus-Blueberry,  Women's  Wellbeing Meal  Replacements and all-natural
weight loss pills.

      Medifast(R)   brand   awareness   continues  to  expand  through   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(R)  products  have been proven to be  effective  for weight and
disease  management in clinical  studies  conducted by 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  powders and supplement bars
and subcontracts the production of its Ready-to-Drink products.

NEW PRODUCTS

      The Company  expanded the  Medifast  product  line with  twenty-three  new
products in 2004. Medifast introduced Medifast(R)  Cappuccino,  Medifast(R) Chai
Latte,  Medifast(R)  Hot Cocoa with  Marshmallows,  Medifast(R)  Maple and Brown
Sugar Oatmeal,  Medifast(R) Banana Cream Pudding,  Medifast(R)  Chicken and Wild
Rice Soup,  Medifast(R) Cranberry Mango Fruit Drink,  Medifast(R) Tropical Fruit
Punch Drink and Medifast(R) Garden Vegetable Crackers.  Medifast also introduced
a line of salad dressings and three new meal replacement bars. Last, the Company
introduced  a line  called  Essential  1 Meals  that  includes  grilled  chicken
breasts, grilled beef patties, tuna salad and chicken salad.

      Consumers  Choice  Systems  reformulated  its  existing  Menopause  Relief
capsules,  adding a new type of soy and  developing the product into an extended
time-release formula, branded as Menopause Relief 24. Menopause Relief 24 is the
only time release  formula for relieving the symptoms of menopause in the market
today. The Company also introduced two new all natural weight loss pills in 2004
under the private  label Woman's  Wellbeing  called Active Trim and Always Trim.
These two new diet formulas are  all-natural  capsules that help burn fat, boost
energy and suppress appetite.


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MARKETING

      The  Company  continued  to build and  leverage  its core  Medifast  brand
through  multiple   marketing   strategies  to  its  target   audiences.   Print
advertising,  television,  and radio  were all used to target new  customers  by
stressing  Medifast's quick, easy and safe approach to weight management.  Also,
direct mail has been utilized to encourage and support existing customers.

      Online  advertising  began  to be  used in 2004  and it  included  keyword
search, banner ads, affiliate programs, and targeted direct email campaigns. The
online advertising has been supported by Medifast's well designed, user-friendly
website,  which provides a wealth of information  and customer  support for easy
ordering functionality.

      The Company has  expanded  its public  relations  efforts in order to gain
exposure in the media to promote  greater  consumer  awareness  of the  Medifast
brand. Mr. Dick Vitale, the famous basketball  commentator,  continues to be the
Company's  spokesperson,  particularly  supporting  the Company's Take Shape for
Life programs and its Diabetic products and programs.

SALES

The Company's Sales division handles three primary areas:

Physician  and Clinic  Sales--  The sales team is  responsible  for  prospecting
larger medical accounts,  clinics,  hospitals,  and HMOs. During 2004, the sales
team  attended a number of medical  professional  trade  shows,  which  expanded
Medifast's penetration of the clinical business segment.

Hi-Energy  Weight  Control  Centers--  During 2004  Hi-Energy  provided  ongoing
support  to its  licensees  as well as to the  Company's  11  corporately  owned
centers  which  opened  at the end of  2004.  This  support  included  marketing
materials,  ads, on-site trainings,  fitness programs,  nutritional programs and
clinical operation  materials and forms.  Employees attended  professional trade
shows,  prospected new licensees,  and partnered with area physicians to provide
Hi-Energy programs and services to local hospitals and private practices.

Take Shape for Life--  Provides a sales  force of Health  Advisors  who  support
patients and their primary care physicians with a defined support program.

MANUFACTURING

      Jason  Pharmaceuticals,  Inc.,  the Company's  wholly owned  manufacturing
subsidiary,  produces  over 95% 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  purchased
additional  lines for the internal  production of its growing  nutritional  meal
replacement bar product line in 2003.

      The manufacturing  facility has the capacity for significant  increases to
its  production  output  with  minimal  capital  expenditures.  It is  presently
operating on a single shift.  Adding an additional shift,  along with diminutive
machinery  expenses  would  enable the  Company to produce  enough  products  to
generate over $200 million in sales.


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      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.

FINANCING AND STRATEGIC ALTERNATIVES

      Management desires to develop strategic marketing relationships with other
third  parties  having  existing  relationships  with the  medical  professional
community,  specifically  to reach the diabetic  population in the United States
and to secure international distribution in Europe and Asia.

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 medical  foods,  vitamins,  and  nutritional
products.  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.

      The FDA  also  requires  "medical  food"  labeling  to list  the  name and
quantity   of  each   ingredient   and   identify   the  product  as  a  "weight
management/modified fasting or fasting supplement" in the labeling.

      To the extent that sales of vitamins, diet, or 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.


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<PAGE>

EMPLOYEES

      At December 31, 2004,  the Company  employed 130 full-time and  contracted
employees, of whom 46 were engaged in manufacturing,  warehouse management,  and
shipping, and 84 in marketing, administrative, call center and corporate support
functions.  None  of  the  employees  are  subject  to a  collective  bargaining
agreement with the Company.

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 $200  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 11 leases for its corporately owned Hi-Energy Weight Control clinics
throughout Florida,  Arkansas,  Mississippi and Texas. The leases range in terms
from one to five years.

ITEM 3. LEGAL PROCEEDINGS.

On December 16, 2003, John Donavin, on behalf of the General Public, filed suit,
against  Jason  Pharmaceuticals,  Inc.  in the  Superior  Court of the  State of
California,  City and County of San  Francisco.  The suit alleges that  Medifast
bars  contain  Vitamin  D3  or  Vitamin  D in  violation  of  Federal  laws  and
regulations,  and asks for equitable relief and damages.  The Company's  General
counsel believes that the Company's  formulation used in its "meal  replacement"
bars for over 20 years has been and is in  conformity  with current and past FDA
regulations. The Company believes that the plaintiff's claim lacks merit and may
even be considered frivolous. The suit has been stayed upon appeal to the FDA to
clarify its regulations. The Company believes recent legislation restricting the
ability of plaintiff's lawyers from filing local class action suits should favor
the Company's legal position in this case.

A former counsel  continues to claim that he transferred  his personal  Medifast
stock to a third party  organization in 2000, in an attempt to keep these assets
out of his  bankrupt  estate  and  therefore  outside  the  jurisdiction  of the
Bankruptcy Court. The Company  contests,  and will vigorously  defend,  all such
claims made by him.  The Trustee in  Bankruptcy  for his  bankruptcy  estate has
determined that he has no authority to transfer these shares,  and has concluded
that the attempted transfer was therefore invalid. The trustee has demanded that
he produce the shares,  and plans to file a petition with the  Bankruptcy  Court
requesting  that the Court order him to do so.  These assets will be made a part
of the bankrupt estate and will be used to pay creditors.


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<PAGE>

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

      The Medifast Annual  Shareholder  Meeting was held on September 3, 2004 at
Sunrise Distributing,  the Company's distribution headquarters. The shareholders
voted Bradley T.  MacDonald  (98%) and Rev.  Donald F. Reilly,  O.S.A.* (98%) as
Class I  Directors  that will hold  office  until  2007,  Scott  Zion* (98%) and
Michael C.  MacDonald  (98%) as Class II Directors,  and Mary T. Travis*  (98%),
Michael J. McDevitt (98%), and Rev. Joseph Calderone, O.S.A.* (98%) as Class III
Directors.  Class II and III  Directors  will hold office  until the next Annual
Shareholders Meeting at which time their respective class term expires and their
respective  successors  will be duly elected and  qualified.  Additionally,  the
shareholders  approved the  appointment  of Bagell,  Josephs & Company,  LLC, an
independent  member of the BDO Seidman  Alliance,  as the Company's  independent
auditors for the fiscal year ending December 31, 2004.

      Additionally  the Board of Directors  elected Mr.  Bradley T. MacDonald as
Chairman of the Board and CEO and Mr.  Conrad  Sump,  Esq. as  Secretary  of the
Corporation.

      * Independent Director

      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 American  Stock  Exchange.  The following is a
list of the low and high closing prices by fiscal quarters for 2004 and 2003:

                                                             2004
                                                       ---------------
                                                        Low       High
                                                       -----     -----
        Quarter ended March 31, 2004 .............      8.60     14.05
        Quarter ended June 30, 2004 ..............      4.78      9.33
        Quarter ended September 30, 2004 .........      3.05      5.09
        Quarter ended December 31, 2004 ..........      3.20      5.24

                                                             2003
                                                       ---------------
                                                        Low       High
                                                       -----     -----
        Quarter ended March 31, 2003 .............       3.79     6.10
        Quarter ended June 30, 2003 ..............       4.80    14.95
        Quarter ended September 30, 2003 .........      11.15    17.21
        Quarter ended December 31, 2003 ..........      11.60    18.49

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


                                       10
<PAGE>

      (c) There were 6,366 beneficial  holders of the Company's Common Stock, as
of December 31, 2004.

      (d) No dividends on common stock were declared by the Company  during 2004
or 2003.

ITEM 6. 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.


                                       11
<PAGE>

2004 COMPARISON WITH 2003

OPERATING

      Consolidated net sales for 2004 were $27,340,000 as compared to 2003 sales
of $25,379,000, an increase of $1,961,000, or 8%. A major reason for the revenue
increase for the Company is attributed  to the  continued  success from the Take
Shape for Life division, national advertising, the Hi-Energy acquisition and the
redesigned website. The Take Shape for Life division added a Take Shape for Life
replicating website option for Health Advisors, an Internet distribution program
for their customers, as well as the new Tasting Party Program. These have proven
to be effective at generating  revenues and recruiting  Health Advisors into the
Take Shape for Life Network.  The national  advertising campaign included print,
TV, radio,  direct mail and web  marketing.  The Company  increased its Internet
sales in 2004 as compared to 2003, by redesigning its website and increasing its
web marketing. The redesigned website created an easy to use shopping cart and a
more  user-friendly  interface.  The  acquisition  of Hi-Energy  Weight  Control
Centers contributed to revenues throughout 2004.

      Cost of sales  decreased from $6,825,000 in 2003 compared to $6,746,000 in
2004, a decrease of $79,000.  The decrease is  attributed  to decreases in costs
through economies of scale.

      Gross margins  increased to 75% in 2004 from 73% in 2003. This was largely
due to  greater  economies  of  scale  as a  result  of the  acquisition  of the
Company's  119,000 square foot  distribution  facility  thereby  creating higher
margins  of  the  Medifast(R)  products  through  purchasing  capabilities.  The
increase is also  attributed to the increased  margin of Medifast(R)  direct and
Internet  sales  directly to patients via the Lifestyles and Take Shape for Life
programs. Selling, general and administrative (SG&A) expenses of $17,590,000 for
2004  were  $2,634,000  more  than the  $14,956,000  in 2003,  due to  increased
advertising expenses to include television advertising,  celebrity endorsements,
expenses  involved with starting and operating new  corporately  owned Hi-Energy
Weight  Control  Clinic  locations,  the  expansion  of the Take  Shape for Life
commissioned   sales   organization,   and  overall   corporate   infrastructure
improvements.  The Company  experienced income from operations for the year 2004
of $3,004,000.  This compares with income from operations of $3,598,000 in 2003,
a decrease of 17%.

      In 2004, the Company realized a tax expense of $1,159,000,  as compared to
a tax  expense  of  $1,148,000  in 2003 as a result of the  elimination  of the
deferred tax asset and the net operating loss for income tax purposes.  Interest
expense  increased  to $245,000 in 2004,  as compared to $154,000 in 2003.  This
increase was due to a complete  year of additional  debt,  which was acquired in
2003.

      A  preferred  stock  dividend  in the amount of $18,000  was  expensed  to
shareholders in 2004.

LIQUIDITY AND CAPITAL RESOURCES

      At December 31, 2005, the Company had net working capital of $7,465,000, a
decrease  of  $1,933,000  from the  $9,398,000  net working  capital  balance at
December  31, 2003.  Cash and  investment  securities  at December 31, 2004 were
$3,238,000.  On November 7, 2003 Medifast,  Inc.'s wholly owned subsidiary Jason
Pharmaceuticals,  Inc.  increased its Secured Line of Credit from  $1,000,000 to
$5,000,000 from Mercantile  Safe-Deposit and Trust of Baltimore,  Maryland.  The
line of credit is at LIBOR plus two percent.  The increased  line may be used to
finance  equipment,  inventory,  and  receivables of Medifast,  Inc. The Company
currently has no off-balance sheet arrangements.


                                       12
<PAGE>

      In the year ended December 31, 2004, the Company generated a negative cash
flow of  $2,332,000  from  operations,  primarily  attributable  to purchases of
inventory and the pay down of accounts payable and accrued expenses.

      In the year ended December 31, 2004, net cash used in investing activities
was $3,940,000,  which primarily consisted of the purchase of intangible assets,
purchase of property and equipment, and the purchase of a building.

      In the year ended December 31, 2004, net cash used in financing activities
was $304,000, representing the principal repayments of long-term debt.

      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

      On June 11, 2003 Jason Enterprises,  Inc. acquired the assets of Consumers
Choice  Systems,  Inc.,  a Delaware  Corporation.  The Company  obtained all the
assets of the business  that support  their  retail and  international  business
including the distribution  rights in 18,000 retail food and drug stores.  Jason
Enterprises,  Inc.  acquired  the  assets for 76,120  shares of  Medifast,  Inc.
restricted  common stock and 50,000  five-year  warrants at a purchase  price of
$10.00 per share.  The  transaction  will be accounted for as an asset  purchase
transaction. The Company is expecting to record limited and selected liabilities
that amount to approximately $1.35 million.

      On July 24, 2003 the  Company  announced  an  agreement  with  Amazon.com.
Through the agreement the Consumer Choice  Systems,  Women's  Wellbeing  branded
products will be offered on Amazon.com's website in the women's health section.

      On July 25, 2003,  the Company  announced that it had sold an aggregate of
550,000 shares of common stock and warrants to purchase  82,500 shares of common
stock (the "PIPE Shares") to Mainfield  Enterprises,  Inc. and Portside Growth &
Opportunity Fund. The shares of common stock were sold for a cash  consideration
of $12.40 per share, or a total of $6,820,000, and the warrants, exercisable for
a period of five years from the date of issuance,  at an exercise price equal to
one hundred fifteen percent (115%) of the five-day volume weighted average price
(the "PIPE  Transaction"),  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  (the
"Securities Purchase Agreement").

      On September  12, 2003  Medifast,  Inc.'s  wholly owned  subsidiary  Seven
Crondall,  LLC purchased a 119,825 sq. foot distribution facility located at 601
Sunrise Ave., Ridgely,  Maryland 21660 from New Roads, Inc. for $2,200,000.  The
Company  financed  $1,760,000  through Merrill Lynch Capital at the 30 day LIBOR
interest rate plus 220 basis points over seven years.

      On  November  7, 2003  Medifast,  Inc.'s  wholly  owned  subsidiary  Jason
Properties,  LLC  purchased  the assets of  Hi-Energy  Weight  Control  Centers,
located in Gulf Breeze, Florida. The acquisition includes equipment,  inventory,
trademarks,  and licenses for fifty Hi-Energy  clinics.  The clinics are located
primarily  in the  southeastern  region of the United  States.  The assets  were
purchased for $1,500,000 in cash, which included selected  liabilities,  capital
expenditures, costs of assets and miscellaneous fees.


                                       13
<PAGE>

SEASONALITY

      The Company's  weight  management/diet  control is subject to seasonality.
Traditionally  the  holiday  season  in   November/December  of  each  year  are
considered  poor sales for diet  control  products  and  services.  January  and
February generally show increases in sales.

INFLATION

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

INFORMATION SYSTEMS INFRASTRUCTURE

      Throughout  2004 the Company  significantly  enhanced the capacity and the
functionality of its IT infrastructure.  The enhancements  include a more robust
email  system and  upgraded  network  operating  system.  The Company also added
additional  servers,  as well as a higher  capacity  network  switch.  A Virtual
Private  Network was  implemented  between the remote office sites.  The Company
continued its upgrades and service  enhancements to its Navision (ERP) system to
more effectively and efficiently manage inventory and sales growth.

ITEM 7. CONTROLS AND PROCEDURES

INTERNAL CONTROL POLICY

      In April 2003, the Company implemented an Internal Control Policy allowing
for the  confidential  receipt and  treatment of  complaints  with regard to the
Company's internal accounting controls and auditing matters. A director, officer
or employee may file a confidential and anonymous concern regarding questionable
accounting or auditing maters to an independent  representative  of the Medifast
Audit Committee.  As of December 31, 2004, an evaluation was performed under the
supervision and with the  participation of the Company's  management,  including
the  Chief  Executive   Officer  and  the  Chief  Financial   Officer,   of  the
effectiveness of the design and operation of the Company's  disclosure  controls
and procedures.  Based on that evaluation,  the Company's management,  including
the Chief Executive Officer and the Chief Financial Officer,  concluded that the
Company's  disclosure  controls and procedures were effective as of December 31,
2004. There have been no significant  changes in the Company's internal controls
or in other factors that could significantly affect internal controls subsequent
to December 31, 2004.

CODE OF ETHICS

      In  September  2002,  the  Company  implemented  a Code of Ethics by which
directors, officers and employees commit and undertake to personal and corporate
growth,  dedicate themselves to excellence,  integrity and responsiveness to the
marketplace,  and work  together  to enhance  the value of the  Company  for the
shareholders, vendors, and customers.

TRADING POLICY

      In March  2003,  the Company  implemented  a Trading  Policy  whereby if a
director,  officer or employee has material non-public  information  relating to
the  Company,  neither  that  person  nor  any  related  person  may buy or sell
securities of the Company or engage in any other action to take advantage of, or
pass on to others, that information. Additionally, insiders may purchase or sell
MED securities if such purchase or sale is made within 30 days after an earnings
or special announcement to include the 10-KSB, 10-QSB and 8-K in order to insure
that investors have available the same information  necessary to make investment
decisions as insiders.


                                       14
<PAGE>

ITEM 8. FINANCIAL STATEMENTS.

      See pages F-1 through F-20.

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, 2004.


                                       15
<PAGE>

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
         COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.

(a) The following are the Board of Directors:

                                                                  Date First
     Name                         Age         Position          Became Director
     ----                         ---         --------          ---------------
Bradley T. MacDonald ..........   57   Chairman of the Board,       1996
                                       Chief Executive Officer
                                       and Director

Donald F. Reilly ..............   57   Director                     1998

Michael C. MacDonald ..........   51   Director                     1998

Scott Zion ....................   54   Director                     1999

Michael J. McDevitt ...........   56   Director                     2002

Mary T. Travis ................   54   Director                     2002

Joseph D. Calderone ...........   56   Director                     2003

      BRADLEY T.  MACDONALD  became  Chairman  of the Board and Chief  Executive
Officer of Medifast,  Inc. on January 28, 1998. Prior to joining the Company, he
was  appointed  as Program  Director  of the U.S.  Olympic  Coin  Program of the
Atlanta Centennial  Olympic Games. 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 a retail  drug,  consumer
candy, and pilot sunglass companies. Mr. MacDonald was national president of the
Marine Corps  Reserve  Officers  Association  and retired from the United States
Marine  Corps  Reserve as a Colonel in 1997,  after 27 years of service.  He has
been appointed to the Defense  Advisory Board for Employer  Support of the Guard
and  Reserve  (ESGR).  Mr.  MacDonald  serves on the Board of  Directors  of the
Wireless  Accessories Group (OTCBB:  WIRX). He is also on the Board of Directors
of the Marine Corps Reserve Toys for Tots Foundation and is a Foundation Trustee
of the Marine Reserve Association.

      REVEREND DONALD FRANCIS REILLY,  O.S.A., a Director,  holds a Doctorate in
Ministry  (Counseling)  from New York  Theological  and an M.A. from  Washington
Theological  Union as well as a B.A.  from  Villanova  University.  Reverend Don
Reilly was ordained a priest in 1974. His assignments included Associate Pastor,
pastor at St. Denis, Havertown, Pennsylvania, Professor at Villanova University,
Personnel  Director  of the  Augustinian  Province of St.  Thomas of  Villanova,
Provincial  Counselor,  Founder  of SILOAM  Ministries  where he  ministers  and
counsels  HIV/AIDS  patients  and  caregivers.  He is  currently on the Board of
Directors of Villanova  University,  is President of the board of "Bird Nest" in
Philadelphia,  Pennsylvania  and is Board Member of Prayer Power. Fr. Reilly was
recently  elected  Provincial  of the  Augustinian  Order at  Villanova,  PA. He
oversees  more than 300  Augustinian  Friars and their  service  to the  Church,
teaching at universities and high schools,  ministering to parishes,  serving as
chaplain in the Armed Forces and  hospitals,  ministering  to AIDS victims,  and
serving missions in Japan and South America.


                                       16
<PAGE>

      MICHAEL C. MACDONALD,  a Director, is a corporate officer and President of
Global  Accounts  and  Marketing  Operations,  for the  Xerox  Corporation.  Mr.
MacDonald's former positions at Xerox Corporation include executive positions in
the sales and  marketing  areas.  He is  currently  on the Board of  Trustees of
Rutgers  University and a Director of the Jimmy V Foundation.  Mr.  MacDonald is
the brother of Bradley T. MacDonald, the CEO of the Company.

      SCOTT ZION, is a Director and also Assistant Secretary for Medifast,  Inc.
He received a Bachelor of Arts Degree from Denison University,  Granville, Ohio.
Mr. Zion is currently a principal in Resources  Development,  Inc. a health care
consulting company in Napa, California.  Prior to forming Resources Development,
he was  Senior  Vice  President  of Sales and  Marketing  for  Santen,  Inc.  an
ophthalmic  pharmaceutical  company. Before Santen, he was Senior Vice President
and  General  Manager  for  Akorn,   Inc.,  an  ophthalmic   manufacturing   and
distribution company.  Pilkington Barnes Hind, a worldwide contact lens company,
as Head of North American Sales and Marketing, also employed him. Prior to that,
he spent 20 years with the Mead Johnson  Nutritional  Division of Bristol  Myers
Squibb in various positions of increasing responsibility in sales management. He
has extensive  experience in nutritional  products  particularly in the areas of
sales and marketing.

      MICHAEL J. MCDEVITT, a Director,  is a retired FBI Special Agent with over
29 years of government  service with the United States Marine Corps and the FBI.
He  had  attained  Senior  Executive  status  within  the  FBI's   Investigative
Technology  Branch and is  currently  employed  within the  private  sector as a
physical security specialist.

      MARY T. TRAVIS,  a Director,  is currently  employed with Sunset  Mortgage
Company,  L.P.  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 36
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.
She is the key financial  executive on the Company's Audit  Committee  providing
oversight of the Company's external auditors.

      REVEREND  JOSEPH  D.  CALDERONE,  O.S.A.,  a  Director,  is the  Associate
Director of Campus  Ministry at  Villanova  University.  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  is  currently  a Captain in the US Navy
Reserves and serves as the Wing Chaplain for the 4th Marine Aircraft Wing.


                                       17
<PAGE>

ITEM 11. EXECUTIVE COMPENSATION.

      The following table sets forth  information as to the  compensation of the
Chief  Executive  Officer of the Company and each other  executive  officer that
received compensation in excess of $100,000 for 2004, 2003, and 2002.

Annual Compensation

<TABLE>
<CAPTION>
                                                             Value of Common/
                                      Salary     Bonus       Preferred Stock Issued     Option       Other Annual
Name                          Year    ($)        ($)         in Lieu of Cash            Awards       Compensation
----                          ----   -------    ------       ----------------------     ------       ------------
<S>                          <C>     <C>         <C>                    <C>            <C>                 <C>
Bradley T. MacDonald         2004    225,000         0                  0                   0              0
 Chairman of the Board       2003    225,000    112,000                 0                   0              0
 & CEO                       2002    145,000     75,000                 0              100,000(1)          0
</TABLE>

----------
(1)   The  Board of  Directors  reinstated  100,000  options  at $1.50 per share
      granted in 1997 and not exercised.  Mr. MacDonald  exercised those options
      in December 2002 per the Board's direction.

Annual Compensation

<TABLE>
<CAPTION>
                                                             Value of Common/
                                      Salary    Bonus        Preferred Stock Issued     Option       Other Annual
Name                          Year    ($)       ($)          in Lieu of Cash            Awards       Compensation
----                          ----   -------    ------       ----------------------     ------       ------------
<S>                           <C>     <C>          <C>                <C>               <C>               <C>
Leo V. Williams, III          2004    118,000      0                  0                 10,000            0
 Executive Vice President
</TABLE>


                                       18
<PAGE>

STOCK OPTIONS

      The Company's 1993 Employee Stock Option Plan (the "Plan"),  as amended in
July 1995,  December  1997,  June 2002,  and again in July 2003  authorizes  the
issuance of options for 1,250,000  shares of Common Stock.  The Plan  authorizes
the Board of Directors or the Compensation  Committee  appointed by the Board to
grant incentive stock options and non-incentive  stock options to officers,  key
employees,  directors, and independent  consultants,  with directors who are not
employees and consultants eligible only to receive  non-incentive stock options.
Employee stock options are vested over 2 years.

      * The following tables set forth pertinent  information as of December 31,
2004 with respect to options  granted  under the Plan since its inception to the
persons set forth under the Summary  Compensation  Table, all current  executive
officers as a group and all current Directors who are not executive  officers as
a group of the Company. In addition, a chart listing option holders, grants made
in FY 2004, and a list of aggregated options and the value of these options,  is
provided.

<TABLE>
<CAPTION>
                                                               ALL CURRENT        ALL CURRENT
                                                               EXECUTIVE          INDEPENDENT
                                             BRADLEY T.         OFFICERS           DIRECTORS
                                            MACDONALD (1)      AS A GROUP         AS A GROUP
                                            -------------      ----------         ----------
<S>                                           <C>                 <C>               <C>
Options granted ..................            215,000             75,000            110,000
Average exercise price ...........            $  0.86            $  1.98            $  1.07
Options exercised ................            215,000             49,999            100,000
Average exercise price ...........            $  0.86            $  0.88            $  0.70
Shares sold ......................                  *                  *                  *
Options unexercised as of 12/31/04                  0             11,667             10,000
</TABLE>

<TABLE>
<CAPTION>
                                                                    Approximate 5 YR                              Value of
                                            FY 04 Grants @        Potential Realizable     Unexercised           Unexercised
                                          Price & Expiration      Value at 10% Annual        Options               Options
                                              Month/Year           Stock Appreciation    as of 12/31/04        as of 12/31/04
<S>                                        <C>                           <C>                  <C>                   <C>
Current Executive Officers and Directors   10,000@$8.60  2009            $13.86               10,000                $0
Employees                                  20,000@$8.60  2009            $13.86               20,000                 0
Consultants                                0                                                       0                 0
                                                                                              ------               ---
                                                                                              30,000               $ 0
</TABLE>


                                       19
<PAGE>

NUTRACEUTICAL GROUP INDUSTRY COMPARISON OF STOCK PRICES

<TABLE>
<CAPTION>
                                                   December 31, 2004       December 31, 2003               $              %
Company                                               Stock Price             Stock Price               Change          Change
-------                                            -----------------       -----------------            ------          ------
<S>                                                      <C>                     <C>                      <C>         <C>
Medifast (MED) ......................................    $3.52                  $14.10                   10.58         (75.0)%
Natural Alternatives International, Inc. (NAII) .....     9.23                    6.40                    2.83          44.22%
Weider Nutrition (WNI) ..............................     4.35                    4.45                   (0.10)         (2.3)%
Pure World, Inc (PURW) ..............................     1.56                    2.51                   (0.95)        (37.9)%
Natures Sunshine Products, Inc. (NATR) ..............    20.36                    8.31                   12.05         145.0%

<CAPTION>
                                                   December 31, 2004       December 31, 1999               $             %
Company                                               Stock Price             Stock Price               Change          Change
-------                                            -----------------       -----------------            ------          ------
<S>                                                      <C>                     <C>                      <C>         <C>
Medifast (MED) ......................................    $3.52                   $ .22                    3.30        1500.0%
Natural Alternatives International, Inc. (NAII) .....     9.23                    3.25                    5.98         184.0%
Weider Nutrition (WNI) ..............................     4.35                    3.22                    1.13          35.1%
Pure World, Inc (PURW) ..............................     1.56                    3.13                   (1.57)        (50.2)%
Natures Sunshine Products, Inc. (NATR) ..............    20.36                    7.42                   12.94         174.4%
</TABLE>

INDEX COMPARISON

$100 invested in 1999 would return:

                                                         1999             2004
                                                         ----             ----
Nutraceutical Group Index ...................            $100            $ 469

Medifast ....................................            $100            $1600

      Factual material is obtained from sources believed to be reliable, but the
publisher is not responsible for any errors or omissions contained herein.

COMPENSATION OF DIRECTORS

      The Company is authorized  to pay a fee of $300 for each meeting  attended
by its Directors who are not executive officers. It reimburses those who are not
employees  of the Company for their  expenses  incurred in  attending  meetings.
Independent  Directors  claimed  $17,500 in Director's  fees and/or  expenses in
2004.  See "Executive  Compensation  - Stock Options" for stock options  granted
under the 1993 Plan to the Directors.


                                       20
<PAGE>

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

      The following table sets forth  information with respect to the beneficial
ownership of shares of Common Stock or voting Preferred Stock as of December 31,
2004 of the Chief Executive Officer,  each Director,  each nominee for Director,
each current  executive  officer named in the Summary  Compensation  Table under
"Executive  Compensation"  and all executive  officers and Directors as a group.
The number of shares  beneficially  owned is  determined  under the rules of the
Securities  and  Exchange  Commission  and the  information  is not  necessarily
indicative  of  beneficial  ownership  for any other  person.  Under such rules,
"beneficial  ownership"  includes shares as to which the undersigned has sole or
shared voting power or investment  power and shares,  which the  undersigned has
the right to acquire  within 60 days of March 15, 2005  through the  exercise of
any stock option or other right.  Unless otherwise  indicated,  the named person
has sole investment and voting power with respect to the shares set forth in the
table.

                                                      NUMBER            % OF
NAME AND ADDRESS*                                    OF SHARES       OUTSTANDING
-----------------                                    ---------       -----------
Bradley T. MacDonald ...........................     1,270,373(1)      11.6%
Donald F. Reilly ...............................        65,452          0.6%
Michael C. MacDonald ...........................        39,354          0.4%
Scott Zion .....................................       192,000          1.8%
Mary Travis ....................................         5,340          0.05%
Michael J. McDevitt ............................        13,900          0.1%

Executive Officers and Directors as a group
     (8 persons) ...............................     1,666,005         15.1%

*The address is c/o Medifast, Inc., 11445 Cronhill Drive, Owings Mills, Maryland
21117

(1)   Mr.  MacDonald  beneficially  owns  1,090,373  shares of common  stock and
      90,000  shares of voting  Series "C"  Preferred  Convertible  Stock.  Mrs.
      Shirley D. MacDonald and Ms. Margaret E.  MacDonald,  wife and daughter of
      Mr. MacDonald, individually or jointly own 442,625 shares of stock.

PART IV

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.

(a)   Exhibits

      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***

--------
*     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.


                                       21
<PAGE>

**    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

March 23, 2004, to report the official 2004 financial guidance

July 2, 2004, to report the Company had decreased 2004 guidance

September  10, 2004 to report the Annual  Meeting of  Shareholders  September 3,
2004

ITEM 14. ACCOUNTING FEES

      In 2004, the Company  incurred  $70,000 in accounting  fees as compared to
$60,000 in 2003.  These fees include work performed on quarterly  audits and the
preparation of the Company's 10-QSB's and 10-KSB.


                                       22
<PAGE>

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. MACDONALD
-------------------------
Bradley T. MacDonald
Chairman, CEO & CFO
Dated: March 14, 2005

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


BRADLEY T. MACDONALD                Chairman of the Board,        March 14, 2005
---------------------------------   Director, Chief Executive
Bradley T. MacDonald                Officer and Chief  Financial
                                    Officer


SCOTT ZION                          Director                      March 14, 2005
---------------------------------
Scott Zion


/s/ MICHAEL C. MACDONALD            Director                      March 14, 2005
---------------------------------
Michael C. MacDonald


/s/ MARY T. TRAVIS                  Director                      March 14, 2005
---------------------------------
Mary T. Travis


/s/ REV. DONALD F. REILLY, OSA      Director                      March 14, 2005
---------------------------------
Rev. Donald F. Reilly, OSA


/s/ MICHAEL J. MCDEVITT             Director                      March 14, 2005
---------------------------------
Michael J. McDevitt



/s/ JOSEPH D. CALDERONE             Director                      March 14, 2005
---------------------------------
Joseph D. Calderone


                                       23
<PAGE>

                       MEDIFAST, INC. AND ITS SUBSIDIARIES

                                    CONTENTS

CONSOLIDATED FINANCIAL STATEMENTS                                           PAGE

Report of Independent Registered Public Accounting Firm ...............      F-2

Balance sheets as of December 31, 2004 and 2003 .......................      F-3

Statements of income for the years ended
  December 31, 2004 and 2003 ..........................................      F-4

Statement of changes in stockholders' equity and
  comprehensive loss for the years ended
  December 31, 2004 and 2003 ..........................................      F-5

Statements of cash flow for the years ended
  December 31, 2004 and 2003 ..........................................      F-6

Notes to consolidated financial statements ............................      F-7
<PAGE>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Medifast, Inc.
Owings Mills, Maryland

We have  audited the  consolidated  balance  sheets of  Medifast,  Inc.  and its
subsidiaries  as of  December  31, 2004 and 2003,  and the related  consolidated
statements of income, changes in stockholders' equity and comprehensive loss and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  consolidated  financial  position  of
Medifast,  Inc.  and  subsidiaries  as of December  31,  2004 and 2003,  and the
consolidated  results of their operations and their  consolidated cash flows for
the years then ended in conformity with accounting principles generally accepted
in the United States of America.


Bagell, Josephs & Company, LLC

Gibbsboro, New Jersey
March 4, 2005


                                      F-2
<PAGE>

                         MEDIFAST, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                          December 31, 2004  December 31, 2003
                                                                                          -----------------  -----------------
<S>                                                                                          <C>                <C>
ASSETS
CURRENT ASSETS:
      Cash                                                                                   $    612,000       $  2,524,000
      Accounts receivable-net of allowance for doubtful accounts of $87,000 and $55,000         1,063,000            641,000
      Inventory                                                                                 4,251,000          2,988,000
      Investment securities                                                                     2,626,000          3,983,000
      Deferred compensation                                                                       321,000            321,000
      Prepaid expenses and other current assets                                                 1,079,000            936,000
      Current portion of deferred tax asset                                                        19,000            596,000
                                                                                             ------------       ------------
           TOTAL CURRENT ASSETS                                                                 9,971,000         11,989,000

Property, plant and equipment - net                                                             8,698,000          7,449,000
Trademarks and intangibles - net                                                                7,138,000          4,419,000
Deferred tax asset, net of current portion                                                         91,000                 --
Other assets                                                                                       70,000            375,000
                                                                                             ------------       ------------
           TOTAL ASSETS                                                                      $ 25,968,000       $ 24,232,000
                                                                                             ============       ============

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
      Accounts payable and accrued expenses                                                  $    940,000       $  1,714,000
      Income taxes payable                                                                        674,000                 --
      Dividends payable                                                                            65,000             58,000
      Line of credit                                                                              369,000             55,000
      Current maturities of long-term debt                                                        458,000            764,000
                                                                                             ------------       ------------
           TOTAL CURRENT LIABILITIES                                                            2,506,000          2,591,000

      Long-term debt, net of current portion                                                    4,256,000          4,564,000
                                                                                             ------------       ------------
           TOTAL LIABILITIES                                                                    6,762,000          7,155,000
                                                                                             ------------       ------------

STOCKHOLDERS' EQUITY:

SeriesB Convertible Preferred Stock; par value $1.00; 600,000 shares
      authorized; 300,614 and 403,734 shares issued and outstanding                               301,000            404,000
Series C Convertible Preferred Stock; stated value $1.00;
      1,015,000 shares authorized; 200,000 and 267,000 shares issued and outstanding              200,000            267,000
Common stock; par value $.001 per share; 15,000,000 shares authorized;
      11,001,070 and 10,482,609 shares issued and outstanding                                      11,000             10,000
Additional paid-in capital                                                                     20,556,000         20,120,000
Accumulated comprehensive loss                                                                    (39,000)           (25,000)
Accumulated deficit                                                                            (1,287,000)        (3,016,000)
                                                                                             ------------       ------------
                                                                                               19,742,000         17,760,000
Less: cost of 78,160 and 83,863 shares of common stock in treasury                               (536,000)          (683,000)
                                                                                             ------------       ------------
TOTAL STOCKHOLDERS' EQUITY                                                                     19,206,000         17,077,000
                                                                                             ------------       ------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                   $ 25,968,000       $ 24,232,000
                                                                                             ============       ============
</TABLE>

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


                                      F-3
<PAGE>

                         MEDIFAST, INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                         YEARS ENDED DECEMBER 31,
                                                         2004               2003
                                                    ------------       ------------
<S>                                                 <C>                <C>
Revenue                                             $ 27,340,000       $ 25,379,000
Cost of sales                                         (6,746,000)        (6,825,000)
                                                    ------------       ------------
GROSS PROFIT                                          20,594,000         18,554,000

Selling, general, and administration                 (17,590,000)       (14,956,000)

                                                    ------------       ------------
INCOME FROM OPERATIONS                                 3,004,000          3,598,000

OTHER INCOME (EXPENSE):
     Interest expense                                   (245,000)          (150,000)
     Interest income                                     154,000            110,000
     Other expense                                        (7,000)                --
                                                    ------------       ------------
                                                         (98,000)           (40,000)
                                                    ------------       ------------

NET INCOME BEFORE PROVISION FOR INCOME TAXES           2,906,000          3,558,000
Provision for income taxes                            (1,159,000)        (1,148,000)
                                                    ------------       ------------

NET INCOME                                             1,747,000          2,410,000
                                                    ------------       ------------

Less:  Preferred stock dividend requirement              (18,000)           (58,000)
                                                    ------------       ------------

NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS      $  1,729,000       $  2,352,000
                                                    ============       ============

Basic earnings per share                            $       0.16       $       0.25
                                                    ============       ============
Diluted earnings per share                          $       0.14       $       0.22
                                                    ============       ============

Weighted average shares outstanding -
     Basic                                            10,832,360          9,305,731
                                                    ============       ============
     Diluted                                          12,413,424         10,952,367
                                                    ============       ============
</TABLE>

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


                                      F-4
<PAGE>

                         MEDIFAST, INC. AND SUBSIDIARIES
               CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS'
                          EQUITY AND COMPREHENSIVE LOSS
                        FOR THE YEARS ENDED 2004 AND 2003

<TABLE>
<CAPTION>
                                           SERIES B                       SERIES C
                                 ---------------------------     ---------------------------
                                       PREFERRED STOCK                PREFERRED STOCK                  COMMON STOCK
                                 ---------------------------     ---------------------------     -------------------------------
                                                   Stated                         Stated                         Par Value
                                   Number           Value          Number          Value           Number          $0.00
                                 of Shares         Amount         of Shares        Amount         of Shares        Amount
                                 -----------     -----------     -----------     -----------     -----------     -----------
<S>                                 <C>          <C>                 <C>         <C>               <C>           <C>
Balance, December 31, 2002           521,290     $   521,000         985,000     $   985,000       7,204,693     $     7,000

Preferred converted to
Common Stock                        -117,556        -117,000        -718,000        -718,000       1,671,108           2,000

Options exercised to
Common Stock                                                                                         615,714

Warrants Converted to
Common Stock                                                                                         288,724

Common Stock issued to
Directors, consultants
and acquisitions                                                                                     665,970           1,000

Common Stock issued
for Series "C" dividend                                                                               36,400

Dividend paid in stock

Net Income
                                 -----------     -----------     -----------     -----------     -----------     -----------
Balance, December 31, 2003           403,734         404,000         267,000         267,000      10,482,609          10,000

Preferred converted to
Common Stock                        -103,120        -103,000         -67,000         -67,000         340,240

Options exercised to
Common Stock                                                                                          47,221           1,000

Warrants Converted to
Common Stock                                                                                          46,700

Conversion of debt to equity                                                                          55,400

Conversion of debt to
equity out of Treasury

Common stock issued to
Consultants                                                                                           15,500

Shares issued out of
Treasury

Common Stock issued
for Series "C" dividend                                                                               13,400

Dividend paid in stock

Net Income
                                 -----------     -----------     -----------     -----------     -----------     -----------
Balance, December 31, 2004           300,614     $   301,000         200,000     $   200,000      11,001,070     $    11,000
                                 ===========     ===========     ===========     ===========     ===========     ===========

<CAPTION>
                                                                    COMMON STOCK
                                --------------------------------------------------------------------------------
                                    Additional                       Accumulated
                                     Paid-In      Accumulated       Comprehensive                      Treasury
                                     Capital        Deficit             Loss            Total            Stock
                                   -----------     -----------      -----------      -----------     -----------
<S>                                <C>             <C>              <C>              <C>             <C>
Balance, December 31, 2002         $ 9,613,000     ($5,381,000)     $        --      $ 5,745,000     ($  167,000)

Preferred converted to
Common Stock                           833,000

Options exercised to
Common Stock                           590,000                                           590,000        -516,000

Warrants Converted to
Common Stock                           350,000                                           350,000

Common Stock issued to
Directors, consultants
and acquisitions                     8,716,000                                         8,717,000

Common Stock issued
for Series "C" dividend                 18,000                                            18,000

Dividend paid in stock                                 -45,000                           -45,000

Net Income                                           2,410,000          -25,000        2,385,000
                                   -----------     -----------      -----------      -----------     -----------
Balance, December 31, 2003          20,120,000      -3,016,000          -25,000       17,760,000        -683,000

Preferred converted to
Common Stock                           170,000

Options exercised to
Common Stock                            34,000                                            35,000         -31,000

Warrants Converted to
Common Stock                           125,000                                           125,000        -123,000

Conversion of debt to equity            28,000                                            28,000

Conversion of debt to
equity out of Treasury                 114,000                                           114,000         166,000

Common stock issued to
Consultants                             93,000                                            93,000         135,000

Shares issued out of
Treasury                              -135,000                                          -135,000         135,000

Common Stock issued
for Series "C" dividend                  7,000          -7,000

Dividend paid in stock                                 -11,000                           -11,000

Net Income                                           1,747,000          -14,000        1,733,000
                                   -----------     -----------      -----------      -----------     -----------
Balance, December 31, 2004         $20,556,000     ($1,287,000)     ($   39,000)     $19,742,000     ($  536,000)
                                   ===========     ===========      ===========      ===========     ===========
</TABLE>


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


                                      F-5
<PAGE>

                         MEDIFAST, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOW

<TABLE>
<CAPTION>
                                                                          Years Ended December 31,
                                                                             2004             2003
                                                                         -----------      -----------
<S>                                                                      <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income                                                            $ 1,747,000      $ 2,410,000
   ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
        PROVIDED BY OPERATING ACTIVITIES FROM OPERATIONS:
        Depreciation and amortization                                      1,310,000          677,000
        Realized (gain) loss on investment securities                         19,000           (1,000)
        Common stock issued for services                                      93,000          207,000
        Net change in other comprehensive (loss)                             (14,000)              --
        Deferred income taxes                                                486,000        1,138,000

CHANGES IN ASSETS AND LIABILITIES:
        (Increase) in accounts receivable                                   (422,000)        (357,000)
        (Increase) in inventory                                           (1,263,000)      (1,729,000)
        (Increase) in prepaid expenses and other current assets             (143,000)        (735,000)
        (Increase) in deferred compensation                                       --         (350,000)
        Decrease in other assets                                             305,000               --
        (Decrease) increase in accounts payable and accrued expenses        (460,000)         488,000
        Increase in income taxes payable                                     674,000               --
                                                                         -----------      -----------
              NET CASH PROVIDED BY OPERATING ACTIVITIES                    2,332,000        1,748,000
                                                                         -----------      -----------

CASH FLOW FROM INVESTING ACTIVITIES:
   Maturities (purchase) of certificates of deposit                         (112,000)         418,000
   Sale (purchase) of investment securities, net                           1,450,000       (3,982,000)
   Purchase of building                                                     (566,000)      (1,980,000)
   Purchase of property and equipment                                     (1,425,000)      (1,353,000)
   Purchase of intangible assets                                          (3,287,000)      (2,128,000)
                                                                         -----------      -----------
              NET CASH (USED IN) INVESTING ACTIVITIES                     (3,940,000)      (9,025,000)
                                                                         -----------      -----------

CASH FLOW FROM FINANCING ACTIVITIES:
   Issuance of common stock, options and warrants                              7,000        6,722,000
   (Decrease) increase in line of credit, net                                314,000          (36,000)
   Proceeds from long-term debt                                              475,000        2,669,000
   Principal repayments of long-term debt                                 (1,089,000)        (346,000)
   Dividends paid on preferred stock                                         (11,000)         (45,000)
                                                                         -----------      -----------
              NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES           (304,000)       8,964,000
                                                                         -----------      -----------

NET INCREASE (DECREASE) IN CASH AND
    CASH EQUIVALENTS                                                      (1,912,000)       1,687,000

Cash and cash equivalents - beginning of the year                          2,524,000          837,000
                                                                         -----------      -----------
Cash and cash equivalents - end of year                                  $   612,000      $ 2,524,000
                                                                         ===========      ===========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
   Interest paid                                                         $   245,000      $   154,000
                                                                         ===========      ===========
   Income taxes                                                          $        --      $        --
                                                                         ===========      ===========

SUPPLEMENTAL DISCLOSURE OF NON CASH ACTIVITY:
  Conversion of preferred stock B and C to common stock                  $   170,000      $   835,000
                                                                         ===========      ===========
  Common stock for services                                              $    93,000      $   207,000
                                                                         ===========      ===========
  Common stock for intangibles and fixed assets                          $        --      $ 1,949,000
                                                                         ===========      ===========
  Conversion of debt to equity                                           $   307,000      $        --
                                                                         ===========      ===========
  Preferred Stock Dividends                                              $     7,000      $    18,000
                                                                         ===========      ===========
</TABLE>

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


                                      F-6
<PAGE>

MEDIFAST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003

NOTE A - BUSINESS

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

      The  Company  is  engaged  in  the   manufacturing   and  distribution  of
Medifast(R)  and  Hi-Energy(R)  branded  and  private  label  weight and disease
management  products.  These  products  are sold  through  various  channels  of
distribution,  to include  medical  professionals,  weight loss clinics,  direct
consumer  marketing  supported via the phone and the web, supported by licensed,
qualified  medical  practitioners   including  qualified  health  advisors.  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.


                                      F-7
<PAGE>

MEDIFAST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003

NOTE B - SIGNIFICANT ACCOUNTING POLICIES

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

[1] PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION:

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

[2] CASH AND CASH EQUIVALENTS:

      For the purposes of the consolidated  statements of cash flow, the Company
considers all highly liquid debt  instruments  purchased  with maturity of three
months or less to be cash  equivalents.  At December 31,  2004,  the Company had
invested in four $100,000 certificates of deposit, of which three are considered
cash equivalents.

      At  December  31,  2003,   the  Company  had  invested  in  four  $100,000
certificates of deposit, which are considered cash equivalents. The Company also
invested  $465,000 in  miscellaneous  investments  through Merrill Lynch.  These
investments are considered cash equivalents due to terms of maturity.

[3] ACCOUNTS RECEIVABLE:

      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.

[4] INVENTORY:

      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.

[5] 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, 2004 and 2003, were $478,000 and $295,000 respectively. Advertising
expense for the years ended  December 31, 2004 and 2003  amounted to  $1,055,000
and $2,233,000, respectively.


                                      F-8
<PAGE>

MEDIFAST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003

NOTE B - SIGNIFICANT ACCOUNTING POLICIES  (CONTINUED)

[6] 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 years
         Equipment and fixtures                      3 - 15 years
         Vehicles                                    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.

[7] 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.

[8] 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.

[9] REVENUE:

      Revenue from sales is recognized  when the product is shipped to customers
or purchased by wholesale customers.


                                      F-9
<PAGE>

MEDIFAST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003

NOTE B - SIGNIFICANT ACCOUNTING POLICIES  (CONTINUED)

[10] 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.

[11] 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.

[12] 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, certificates of deposit and investment securities at December
31,  2004  and  2003,   include  amounts   deposited  with  multiple   financial
institutions  that  exceed the federal  insurance  coverage  by  $3,525,000  and
$3,862,000,  respectively. 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, 2004 and 2003,  the  Company  had two  customers  that
individually  represented  over  10%  of  the  accounts  receivable  and  in the
aggregate, approximately 49% and 26% of the accounts receivable, respectively.

[13] STOCK-BASED COMPENSATION:

      The Company has adopted  Statement of Financial  Accounting  Standards No.
123,  "Accounting for Stock-Based  Compensation" ("SFAS 123"). The provisions of
SFAS 123 allow  companies to either  expense the  estimated  fair value of stock
options  or to  continue  to follow  the  intrinsic  value  method  set forth in
Accounting  Principles  Bulletin Opinion No. 25, "Accounting for Stock Issued to
Employees"  ("APB 25") but disclose the pro forma  effects on net income had the
fair value of the options been expensed.  The Company has elected to continue to
apply APB 25 in  accounting  for its  employee  stock  option  incentive  plans.


                                      F-10
<PAGE>

MEDIFAST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003

NOTE B - SIGNIFICANT ACCOUNTING POLICIES  (CONTINUED)

[13] STOCK-BASED COMPENSATION (CONTINUED)

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 nonincentive 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 2003, 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 Company has elected to continue to account for stock option  grants in
accordance  with APB 25 and  related  interpretations.  Under APB 25,  where the
exercise  price of the Company's  employee stock options equals the market price
of the underlying stock on the date of grant, no compensation is recognized.

      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:

<TABLE>
<CAPTION>
                                                                                    Year Ended December 31
                                                                                   2004               2003
                                                                               -------------      -------------
<S>                                                                            <C>                <C>
            Net income:
                As reported                                                    $   1,747,000      $   2,410,000

                Total stock-based employee compensation expense determined
                under fair value based method for all awards, net of
                related tax effects                                                 (108,000)          (403,000)
                                                                               -------------      -------------

                Pro forma                                                      $   1,639,000      $   2,007,000
                                                                               =============      =============
            Net income per share:
                as reported:
                    Basic                                                      $        0.06      $        0.25

                    Diluted                                                    $        0.14      $        0.22

                Pro forma:
                    Basic                                                      $        0.15      $        0.21

                    Diluted                                                    $        0.13      $        0.18
</TABLE>


                                      F-11
<PAGE>

MEDIFAST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003

NOTE B - SIGNIFICANT ACCOUNTING POLICIES  (CONTINUED)

[13] STOCK-BASED COMPENSATION: (CONTINUED)

      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 grant is
estimated as of the date of grant using the Black-Scholes  option-pricing  model
with the following assumptions:

                                                    2004             2003
                                                  -------          -------
            Dividend yield                           0.0%             0.0%
            Expected volatility                      0.40             0.40
            Risk-free interest rate                  4.50%         3.00%-5.00%
            Expected life in years                  1-5               1-5

      The  weighted  average  fair  value at date of grant for  options  granted
during the years 2004 and 2003 were  $8.60 and  $5.32,  respectively,  using the
above assumptions.

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

<TABLE>
<CAPTION>
                                                                          2004                                 2003
                                                                          ----                                 ----
                                                                                Weighted                                Weighted
                                                                                 Average                                Average
                                                                                 Exercise                               Exercise
                                                               Shares             Price              Shares              Price
                                                             -----------        -----------        -----------        -----------
<S>                                                              <C>            <C>                    <C>            <C>
            Outstanding at beginning of year                     439,455        $      1.76            891,669        $      0.69
            Options granted                                       30,000               8.60            163,500               5.32
            Options reinstated                                         0               0.00                  0               0.00
            Options exercised                                    (47,221)             (1.19)          (615,714)             (1.16)
            Options forfeited or expired                         (32,837)             (7.01)                (0)              0.00
                                                             -----------        -----------        -----------        -----------

            Outstanding at end of year                           389,397        $      1.51            439,455        $      1.76
                                                             ===========        ===========        ===========        ===========

            Options exercisable at year end                      350,336        $      1.11            302,668        $      0.76
                                                             ===========        ===========        ===========        ===========
            Options available for grant at end of year           860,603                               810,545
                                                             ===========                           ===========
</TABLE>


                                      F-12
<PAGE>

MEDIFAST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003

NOTE B - SIGNIFICANT ACCOUNTING POLICIES  (CONTINUED)

[13] STOCK-BASED COMPENSATION: (CONTINUED)

      The following table summarizes information about stock options outstanding
and exercisable at December 31, 2004:

<TABLE>
<CAPTION>
                         Options Outstanding                    Options Exercisable
                         -------------------                    -------------------
                                       Weighted
                                        Average
                                      Contractual     Weighted                        Weighted
  Range of                               Life         Average                         Average
  Exercise             Number          Remaining      Exercise         Number         Exercise
   Prices            Outstanding      (in Years)       Price        Exercisable        Price
   ------            -----------      ----------       -----        -----------        -----
<S>                     <C>               <C>          <C>            <C>              <C>
    $0.25               150,000           1.0          $0.25          150,000          $0.25
    $0.32                16,670           2.5          $0.32           16,670          $0.32
    $0.50               100,000           1.6          $0.50          100,000          $0.50
    $0.65                 8,334           3.6          $0.65            8,334          $0.65
    $0.80                16,666           3.3          $0.80           16,666          $0.80
    $0.86                 1,667           3.3          $0.86            1,667          $0.86
    $1.23                 6,668           3.5          $1.23            6,668          $1.23
    $1.26                16,667           3.5          $1.26           16,667          $1.26
    $1.60                 8,334           3.6          $1.60                -          $1.60
    $4.80                22,391           4.1          $4.80           15,999          $4.80
    $8.26                 2,000           4.2          $8.26            1,000          $8.26
    $8.60                30,000           4.8          $8.60            9,999          $8.60
   $11.15                10,000           4.3          $11.15           6,666          $11.15
                        -------           ---          -----          -------          -----
                        389,397           2.2          $1.51          350,336          $1.11
                        =======           ===          =====          =======          =====
</TABLE>

[14] SEGMENT INFORMATION

      In 2004 and 2003, the Company's  international joint venture  arrangements
for  distribution of goods in the Asian market were  responsible for the revenue
recognition of approximately $488,000 and $2,000,000, respectively.


                                      F-13
<PAGE>

MEDIFAST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003

NOTE B - SIGNIFICANT ACCOUNTING POLICIES  (CONTINUED)

[14] SEGMENT INFORMATION (CONTINUED)

In 2004 and 2003,  the  Company's  retail  distribution  through the division of
Consumer   Choice  Systems   recognized   revenue  of  $2,134,000  and  $979,000
respectively.

[15] RECENT ACCOUNTING PRONOUNCEMENTS

      In June  2001,  the 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
consolidated  financial  statements.  This statement has been  considered in the
preparation of the consolidated financial statements.

      On July 20,  2000,  the  Emerging  Issues  Task  Force  issued  EITF 00-14
"Accounting  For Certain Sales  Incentives"  which  establishes  accounting  and
reporting requirements for sales incentives such as discounts,  coupons, rebates
and free products or services. Generally,  reductions in or refunds of a selling
price should be classified as a reduction in revenue.  For SEC registrants,  the
implementation   date  is  the  beginning  of  the  fourth   quarter  after  the
registrant's  fiscal year end December 15, 1999.  EITF 00-14 has been considered
in the preparation of the consolidated financial statements.

      In December  1999, the  Securities  and Exchange  Commission  issued Staff
Accounting   Bulletin  ("SAB")  No.  101,  "Revenue   Recognition  in  Financial
Statements."  SAB 101 provides  guidance for revenue  recognition  under certain
circumstances,  and is effective  during the first  quarter of fiscal year 2001.
SAB 101 has been  considered in the  preparation of the  consolidated  financial
statements.

In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based
Compensation-Transition  and  Disclosure",  an amendment of FASB  Statement  No.
123"("SFAS  148").  SFAS 148 amends  FASB  Statement  No. 123,  "Accounting  for
Stock-Based  Compensation," to provide  alternative methods of transition for an
entity that voluntarily changes to the fair value based method of accounting for
stock-based employee  compensation.  It also amends the disclosure provisions of
that Statement to require prominent disclosure about the effects on reported net
income of an entity's  accounting  policy  decisions with respect to stock-based
employee  compensation.  Finally,  this Statement amends  Accounting  Principles
Board  ("APB")  Opinion  No.  28,  "Interim  Financial  Reporting",  to  require
disclosure  about those effects in interim  financial  information.  SFAS 148 is
effective for financial  statements  for fiscal years ending after  December 15,
2002. The Company will continue to account for stock-based employee compensation
using the intrinsic  value method of APB Opinion No. 25,  "Accounting  for Stock
Issued to Employees",  but has adopted the enhanced  disclosure  requirements of
SFAS 148.


                                      F-14
<PAGE>

MEDIFAST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003

NOTE B - SIGNIFICANT ACCOUNTING POLICIES  (CONTINUED)

[15] RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)

      In May 2003,  the FASB issued SFAS  Statement  No.  150,  "Accounting  for
Certain  Financial  Instruments  with  Characteristics  of both  Liabilities and
Equity".  This Statement  establishes standards for how an issuer classifies and
measures certain financial  instruments with characteristics of both liabilities
and equity.  It requires that an issuer classify a financial  instrument that is
within  its  scope as a  liability  (or an asset  in some  circumstances).  This
statement is effective for financial  instruments entered into or modified after
May 31, 2003,  and  otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003, except for mandatory  redeemable financial
instruments of nonpublic entities, if applicable.

            It is to be  implemented  by reporting  the  cumulative  effect of a
change in an accounting  principle for financial  instruments created before the
issuance  date of the  Statement  and still  existing  at the  beginning  of the
interim  period of  adoption.  The  adoption  of this  statement  did not have a
significant impact on the Company's results of operations or financial position.

            In November 2002, the FASB issued  Interpretation No. 45 ("FIN 45"),
Guarantor's  Accounting and Disclosure  Requirements  for Guarantees,  Including
Indirect Guarantees of Indebtedness of Others. FIN 45 requires a company, at the
time it issues a guarantee, to recognize an initial liability for the fair value
of  obligations   assumed  under  the  guarantees  and  elaborates  on  existing
disclosure  requirements  related to guarantees and warranties.  The recognition
requirements are effective for guarantees  issued or modified after December 31,
2002 for initial recognition and initial measurement provisions. The adoption of
FIN 45 did not have a significant  impact on the Company's results of operations
or financial position.

            In January 2003,  the FASB issued FASB  Interpretation  No. 46 ("FIN
46"),  Consolidation of Variable Interest Entities, an Interpretation of ARB No.
51. FIN 46 requires certain variable interest entities to be consolidated by the
primary  beneficiary of the entity if the equity  investors in the entity do not
have the  characteristics  of a  controlling  financial  interest or do not have
sufficient  equity at risk for the  entity to  finance  its  activities  without
additional  subordinated  financial  support  from  other  parties.  FIN  46  is
effective  for all new  variable  interest  entities  created or acquired  after
January 31, 2003. For variable  interest  entities  created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period  beginning  after June 15, 2003. The adoption of FIN 46 did not
have a  significant  impact on the Company'  results of  operations or financial
position.

[16] INVESTMENTS

      In accordance with SFAS 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 SFAS
No.  115.  Further,  SFAS 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.


                                      F-15
<PAGE>

MEDIFAST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003

[17] RECLASSIFICATIONS

      Certain   amounts  for  the  year  ended   December  31,  2003  have  been
reclassified  to conform to the  presentation  of the December 31, 2004 amounts.
The  reclassifications  have no effect on net income for the year ended December
31, 2003.

NOTE C - INVENTORY

      Inventory consists of the following at December 31, 2004 and 2003:

                                                         2004             2003
                                                     ----------       ----------
      Raw materials                                  $1,085,000       $  813,000
      Packaging                                         958,000          694,000
      Finished goods                                  2,208,000        1,481,000
                                                     ----------       ----------
                                                     $4,251,000       $2,988,000

NOTE D - PROPERTY, PLANT AND EQUIPMENT

      Property, plant and equipment as of December 31, 2004 and 2003, consist of
the following:

                                                         2004             2003
                                                     ----------       ----------
      Land                                           $  650,000       $  565,000
      Building and building improvements              6,666,000        5,937,000
      Equipment and fixtures                          4,062,000        2,876,000
      Vehicle                                            11,000           20,000
                                                     ----------       ----------
                                                     11,389,000        9,398,000
Less accumulated depreciation and amortization        2,691,000        1,949,000
                                                     ----------       ----------
      Property, plant and equipment - net            $8,698,000       $7,449,000
                                                     ==========       ==========

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

      Depreciation  expense for the years ended  December 31, 2004 and 2003 were
$742,000 and $421,000, respectively.


                                      F-16
<PAGE>

MEDIFAST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003

NOTE E - TRADEMARKS

      A summary of Trademarks  and  Intangibles as of December 31, 2004 and 2003
consist of the following:

                                                         2004             2003
                                                     ----------       ----------
      Trademarks                                     $1,010,000       $  660,000
      Customer Lists                                  1,728,000        1,100,000
      Other Intangibles                               5,053,000        2,744,000
                                                     ----------       ----------
                                                      7,791,000        4,504,000
      Less accumulated amortization                     653,000           85,000
                                                     ----------       ----------
      Trademarks and intangibles                     $7,138,000       $4,419,000
                                                     ==========       ==========

      Amortization  expense for the years ended  December 31, 2004 and 2003 were
$568,000 and $227,000, respectively.

NOTE F - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

      Accounts  payable  and accrued  expenses as of December  31, 2004 and 2003
consist of the following:

                                                         2004             2003
                                                     ----------       ----------
      Trade payables                                 $  343,000       $  969,000
      Accrued expenses and other                        116,000          121,000
      Accrued payroll and related taxes                 215,000           96,000
      Sales commissions payable                         266,000          360,000
      Deferred revenue                                       --          168,000
                                                     ----------       ----------
      Total                                          $  940,000       $1,714,000
                                                     ==========       ==========


                                      F-17
<PAGE>

MEDIFAST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003

NOTE G - OPERATING LEASES

            The Company  leases  office space for its eleven  corporately  owned
      Hi-Energy  Weight  Control  Clinics  under lease terms ranging from one to
      five year leases commencing 2004.  Monthly payments under the leases range
      in price from $1,120 to $2,695.  The  Company is required to pay  property
      taxes,  utilities,  insurance  and  other  costs  relating  to the  leased
      facilities.

            The  following  is a  schedule  by years of  future  minimum  rental
      payments  required  under  operating  lease that have initial or remaining
      non-cancelable lease terms in excess of one year as of December 31, 2004:

                   For the Years Ending
                   December 31,

                            2005                                     $ 238,737
                            2006                                       208,605
                            2007                                       166,355
                            2008                                       121,871
                            2009                                       117,038
                                                                     ---------

                   Total minimum payments required                   $ 852,606
                                                                     =========

NOTE H - INCOME TAXES

            At December 31, 2004 and 2003,  the principal  components of the net
      deferred tax assets are as follows:

                                                           2004             2003
                                                     ----------       ----------
      Net operating loss carry forwards              $       --       $  290,000
      Accounts receivable                                19,000           32,000
      Inventory overhead and write downs                     --          274,000
      Trademarks and intangibles                         91,000               --
                                                     ----------       ----------
            Total deferred tax assets                   110,000          596,000
            Current benefit                              19,000          596,000
                                                     ----------       ----------
                                                     $   91,000       $       --
                                                     ==========       ==========


                                      F-18
<PAGE>

MEDIFAST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003

NOTE H - INCOME TAXES (CONTINUED)

A reconciliation  of the federal  statutory rate to the income tax expense is as
follows:

                                                              Year Ended
                                                              December 31,
                                                              ------------
                                                         2004             2003
                                                     ----------       ----------
      Income tax based on federal statutory rate     $  600,000       $  973,000
      State and local tax, net of federal benefit        90,000          175,000
      Deferred income tax expense                       469,000               --
                                                     ----------       ----------
      Income tax expense                             $1,159,000       $1,148,000
                                                     ==========       ==========

NOTE I - LONG-TERM DEBT AND LINE OF CREDIT

Long-term debt as of December 31, 2004 and 2003, consist of the following:

<TABLE>
<CAPTION>
                                                                              2004         2003
                                                                          ----------   ----------
<S>                                                                       <C>          <C>
$2,850,000 fifteen year term loan secured by the building and land
     at a variable rate which was 5.14% at December 31, 2004              $2,391,000   $2,581,000
$1,760,000 ten-year reducing revolver line of credit rate at LIBOR
     plus 220 bps , which was 4.59% on December 31, 2004                   1,623,000    1,740,000
$186,976 three-year term loan secured by 20,000 restricted common
     shares variable rate which was 8.25% at December 31, 2004               111,000      151,000
$200,000 five-year term loan secured by equipment
    fixed rate was 3% at December 31, 2004                                   130,000      172,000
$475,000 seven-year loan secured by the building and land at a
     variable rate at LIBOR plus 250 bps, which was 4.91% on
     December 31, 2004                                                       459,000           --
$220,000 two-year term loan secured by equipment at a floating rate
    which was 6% at December 31, 2003                                             --       73,000
$100,000 unsecured note payable at a fixed rate of 3%, discounted to an
     incremental borrowing rate of 12%                                            --       59,000
Note payable over 3 years secured by vehicle at a fixed rate of 12.25%            --        2,000
$550,000 agreement three years secured by certain assets of the Company
    variable rate, which was prime floating at December 31, 2003                  --      550,000
                                                                          ----------   ----------
                                                                           4,714,000    5,328,000
Less current portion                                                         458,000      764,000
                                                                          ----------   ----------
                                                                          $4,256,000   $4,564,000
                                                                          ==========   ==========
</TABLE>


                                      F-19
<PAGE>

MEDIFAST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003

NOTE I - LONG-TERM DEBT AND LINE OF CREDIT (CONTINUED)

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

            2005 .....................      $  458,000
            2006 .....................         475,000
            2007 .....................         421,000
            2008 .....................         376,000
            2009 .....................         379,000
            Thereafter................       2,605,000
                                            ----------
                                            $4,714,000
                                            ==========

      The Company has  established a $5 Million  revolving line of credit at the
LIBOR rate plus 2% with  Mercantile  Safe Deposit and Trust  Company  secured by
substantially all of the assets of Jason  Pharmaceuticals,  Inc. The outstanding
balance on this line was  $369,000  and $55,000 at  December  31, 2004 and 2003,
respectively.  Effective  January 17,  2004,  $366,000 of the line of credit was
converted  to a note  payable  secured  by all  assets of Jason  Pharmaceuticals
excluding  trade marks at a variable  rate at libor plus 250 basis  points which
was 4.4% on December 31, 2004.

NOTE J - EMPLOYMENT AGREEMENTS

      The CEO of Medifast, Inc., Bradley T. MacDonald, has a two-year employment
agreement for an aggregate annual base salary of $225,000 with a bonus potential
of 50% of base salary  provided the Company  makes its profit plan per the Board
approved forecast.  This contract has been extended to December 31, 2007. Due to
the  inequities of funding a retirement  plan in the 401K, and in recognition of
the  performance  responsible  for the  turnaround of the Company,  the Board of
Directors approved a Selective Executive Retirement  Compensation Plan funded by
the form of deferred compensation. The Deferred Compensation Plan will be funded
up to $350,000 by a dollar for dollar match program,  having Mr. MacDonald defer
$175,000,  followed by a Company  match of  $175,000.  In June 2004 The Board of
Directors  authorized  an  additional  $50,000 to be deferred  by Mr.  MacDonald
followed by a Company  match of $50,000.  This brought the  Selective  Executive
Retirement  Compensation  Plan total  funded value to  $450,000.  Mr.  MacDonald
exercised  100,000 options at $.25 in January 2003 and 15,000 options at $.75 in
March 2003. He has no options remaining available to exercise.

NOTE K - REDEEMABLE PREFERRED STOCK

      In August 1996,  the Company sold 432,500  shares of Series "A"  nonvoting
preferred stock that generated  gross proceeds of $865,000,  or $2.00 per share.
Each share was  entitled to a dividend  of 8% ($.16) per share.  The shares were
convertible  into the Company's common stock on the basis of one share of common
stock for each share of convertible  preferred  stock.  In 2001,  157,000 shares
opted to convert to Series "C"  Preferred  Convertible  Stock and 85,000  shares
were  redeemed  under the  partial  settlement  and  conversion  to  Series  "C"
preferred  convertible  stock  offered to Series "A" preferred  stockholders  as
approved by the Board of  Directors.  In 2002 the  remaining  75,000 shares were
redeemed.


                                      F-20
<PAGE>

MEDIFAST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003

NOTE L - SERIES "B" CONVERTIBLE PREFERRED STOCK

      In January 2000,  the Company was  authorized to issue 600,000  Series "B"
Convertible  Preferred  Stock  ("Preferred  Stock B") par value $1.00 per share.
Each share is entitled to a dividend of 10% of  liquidation  value $1.00  ($.10)
per share and is to be  converted  on January 15, 2005  unless  converted  prior
thereto. Each holder of Preferred Series "B" stock is entitled to four votes per
share in all matters in which holders of the Company's common stock are entitled
to vote.  These shares were converted to common stock in January 2005. (See note
Q).

      Each share of Preferred Series "B" stock is convertible,  at the option of
the  holder  after one year from the  issuance  date  into  common  stock of the
Company.  The initial  conversion  price will be 75% of the market  value of the
Company's common stock on the day prior to conversion with a maximum  conversion
price of $.50 per share  subject to adjustment  as defined.  In March 2002,  the
Board amended the Series "B" convertible preferred stock terms and conditions as
follows (1) a dividend of 10% paid in preferred stock, or (2) cash at the option
of the holder.  The Board also fixed the  conversions of Series "B" preferred at
$0.50 per share in common stock and eliminated the spiral  conversion  provision
and reduced voting to 2 votes per share.

      Throughout  the year of 2004,  103,120  shares of Series  "B"  Convertible
Preferred  Stock were  converted  into  206,240  shares of Common  Stock.  As of
December 31, 2004 there were 300,614 shares of Series "B" Convertible  Preferred
Stock remaining.

NOTE M - SERIES "C" PREFERRED CONVERTIBLE STOCK

      In the Fall of 2001, the Company was authorized to issue 1,015,000  shares
of Series "C" Preferred  Convertible Stock par value (.001),  market value $1.00
per share.  Each share is  entitled to a dividend  of 10% of  liquidation  value
$1.00  ($.10) per share and is to be  converted  on  December  31,  2006  unless
converted prior thereto.  Each Holder of Preferred  Series "C" Stock is entitled
to one (1) vote per  share in all  matters  in which  holders  of the  Company's
Common Stock are entitled to vote.  Each share of Preferred  Series "C" Stock is
convertible,  at the option of the holder, after one year from the issuance date
into Common Stock of the Company.  The conversion price will be $.50 a share. In
2002, 11,500 warrants issued at $0.35 per share were distributed proportionately
to Series "C' preferred holders.

      Throughout  the  year of 2004,  67,000  shares  of  Series  "C"  Preferred
Convertible  Stock were  converted  into 134,000  shares of Common Stock.  As of
December 31, 2004 there were 200,000 shares of Series "C" Preferred  Convertible
Stock remaining.


                                      F-21
<PAGE>

MEDIFAST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003

NOTE N - 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 Mr.  David  Scheffler,  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  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 2003.

      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  2004,  there were  40,000  warrants  exercised  at $4.80 and 6,700
warrants exercised at $0.35.

      The fair value of these  warrants were estimated  using the  Black-Scholes
pricing model with the following assumptions: interest rate 4.5%, dividend yield
0%, volatility 0.40 and expected life of five years.

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

                                                            Year Ended
                                                           December 31,
Exercise                                             ----------------------
  Price       Expiration Date                          2004          2003
  -----       ---------------                        -------        -------
 $0.35        August, 2004                                --         40,100
 $0.35        March, 2005                              2,000             --
 $0.625       September, 2004                             --          2,500
 $4.80        April, 2008                            360,000        400,000
$10.00        June, 2006                              25,000         25,000
$16.78        July, 2008                              82,500         82,500
                                                     -------        -------
                                                     469,500        550,100
                                                     =======        =======

              Weighted average exercise price        $  7.16        $  6.49
                                                     =======        =======

      As of December 31, 2004, 229,500 of the warrants are exercisable.


                                      F-22
<PAGE>

MEDIFAST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003

NOTE O - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS

      The Company,  like other  manufacturers  and distributors of products that
are ingested,  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.

NOTE P - LITIGATION

      On December 16, 2003 John Donavin, on behalf of the General Public,  filed
suit, against Jason Pharmaceuticals,  Inc. in the Superior Court of the State of
California,  City and County of San  Francisco.  The suit alleges that  Medifast
bars  contain  Vitamin  D3  or  Vitamin  D in  violation  of  Federal  laws  and
regulations,  and asks for equitable relief and damages.  The Company's  general
council believes that the Company's  formulation used in its "meal  replacement"
bars for over 20 years has been and is in  conformity  with current and past FDA
regulations. The Company believes that the plaintiff's claim lacks merit and may
even be considered frivolous. The suit has been stayed upon appeal to the FDA to
clarify its regulations.

      A former  consultant  continues to claim that he transferred  his personal
Medifast  stock to a third  party  organization  in 2000,  in an attempt to keep
these assets out of his bankrupt estate and therefore  outside the  jurisdiction
of the Bankruptcy Court. The Company contests,  and will vigorously  defend, all
such claims made by him. The Trustee in Bankruptcy  for the former  consultant's
bankruptcy  estate has  determined  that he had no authority  to transfer  these
shares  from his estate,  and has  concluded  that the  attempted  transfer  was
therefore  invalid.  The Trustee has  demanded  that he produce the shares,  and
plans to file a petition with the  Bankruptcy  Court  requesting  that the Court
order him to do so. These assets will be made a part of the bankrupt  estate and
will be used to pay creditors.

NOTE Q - SUBSEQUENT EVENTS

      In January  2005,  the remainder of the Series "B"  Convertible  Preferred
Stock was converted to Common Stock in accordance  with the terms and conditions
of the original offering statement,  dated January 19, 2000. The offering stated
that the holders, at the time of conversion, are to receive a dividend at a rate
of 10% per annum and that "interest" will be paid in Common Stock.


                                      F-23