SECURITIES AND EXCHANGE COMMISSION

                              WASHINGTON, DC 20549

                                   ----------

                                  FORM 10-KSB/A


                   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.
              ----------------------------------------------------


          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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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_


                                EXPLANATORY NOTE

This Form  10-KSB/A is being  filed for the  purpose of adding to or  clarifying
disclosures to our Controls and Procedures, Significant Accounting Policies, and
footnotes  previously  included  in our Form  10-KSB for the  fiscal  year-ended
December 31, 2004. The addition to our Controls and Procedures includes a report
on  management's  internal  control over  financial  reporting  required by Item
308(c) of Regulation SB. With respect to our Significant Accounting Policies, we
have added greater detail about our revenue  recognition  policy.  The Trademark
footnote has been revised to clarify and  supplement  disclosures  that might be
useful to the readers of our financial  statements.  In addition,  we have added
updated  certifications  at  Exhibits  31.1,  31.2 & 32.1  to  conform  to  Item
601(b)(31) and (32) of Regulation SB.

Except  as  described  above we have  not  amended  or  modified  the  financial
information or other  disclosures on Form 10-KSB as originally  filed. This Form
10-KSB/A does not reflect events occurring after the filing of the original Form
10-KSB,  nor does it modify or update the  disclosures  therein in any way other
than as required to reflect the amendments described above and set forth below.


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                                     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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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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         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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         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 ShapeTM, 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


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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.

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


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machinery  expenses  would  enable the  Company to produce  enough  products  to
generate over $200 million in sales.

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

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


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distribution  of products  produced by others,  the Company's  principal form of
insurance  consists of arrangements with each of its suppliers of those products
to name the Company as  beneficiary on each of such vendor's  product  liability
insurance policies.  The Company does not buy products from suppliers who do not
maintain such coverage.

EMPLOYEES

         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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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 record holders of the Company's  Common Stock,  as
of December 31, 2004. The Company had 6 preferred holders of the Company's 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

(a) Evaluation of Disclosure Controls and Procedures

The term "disclosure  controls and procedures" is defined in Rules 13a-15(e) and
15d-15(e)  of the  Securities  Exchange Act of 1934,  as amended (the  "Exchange
Act").  This term refers to the  controls and  procedures  of a company that are
designed to ensure that information required to be disclosed by a company in the
reports that it files under the Exchange Act is recorded, processed, summarized,
and reported within the required time periods.  Our Chief Executive  Officer and
our President have evaluated the  effectiveness  of our disclosure  controls and
procedures as of the end of the period covered by this annual report.  They have
concluded  that, as of that date,  our disclosure  controls and procedures  were
effective at ensuring  that required  information  will be disclosed on a timely
basis in our reports filed under the Exchange Act.

(b) Changes in Internal Control over Financial Reporting

No change in our internal control over financial  reporting (as defined in Rules
13a-15(f)  and  15d-15(f)  under the Exchange  Act)  occurred  during the period
covered by this report that has materially affected,  or is reasonably likely to
materially affect, our internal control over financial reporting.

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.


                                       14
<PAGE>

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.

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


                                       16
<PAGE>

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.

         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.

                                                       ALL CURRENT   ALL CURRENT
                                           BRADLEY T.   EXECUTIVE    INDEPENDENT
                                         MACDONALD (1)  AS A GROUP   AS  A GROUP
                                         -------------  ----------  ------------
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>
<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.

  **  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.



                                       21
<PAGE>

     (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: May 27, 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,           May 27, 2005
---------------------------------- Director, Chief Executive
Bradley T. MacDonald               Officer and Chief Financial
                                   Officer

SCOTT ZION                         Director                         May 27, 2005
---------------------------------
Scott Zion

/s/ MICHAEL C. MACDONALD           Director                         May 27, 2005
---------------------------------
Michael C. MacDonald

/s/ MARY T. TRAVIS                 Director                         May 27, 2005
---------------------------------
Mary T. Travis

/s/ REV. DONALD F. REILLY, OSA     Director                         May 27, 2005
---------------------------------
Rev. Donald F. Reilly, OSA

/s/ MICHAEL J. MCDEVITT            Director                         May 27, 2005
---------------------------------
Michael J. McDevitt

/s/ JOSEPH D. CALDERONE            Director                         May 27, 2005
---------------------------------
Joseph D. Calderone



                                       23
<PAGE>

                                Index to Exhibits

Exhibit
Number      Description of Exhibit
-------     ----------------------

31.1        Certification of Chief Executive Officer pursuant to Item 601(b)(31)
            of  Regulation  S-K,  as  adopted  pursuant  to  Section  302 of the
            Sarbanes-Oxley Act of 2002.

31.2        Certification of Chief Financial Officer pursuant to Item 601(b)(31)
            of  Regulation  S-K,  as  adopted  pursuant  to  Section  302 of the
            Sarbanes-Oxley Act of 2002.

32.1        Certification of Chief Executive Officer and Chief Financial Officer
            pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



                                       24


<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



                                      F-1
<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,    December 31,
                                                                                              2004            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       4,749,000
Deferred tax asset, net of current portion                                                      91,000              --
Other assets                                                                                    70,000          45,000
                                                                                          ------------    ------------

           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:

Series B 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


                                                      YEARS ENDED DECEMBER 31,
                                                       2004            2003
                                                   ------------    ------------

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
                                                   ============    ============


       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    Additional
                                   Number     Value      Number     Value       Number      $0.00       Paid-In      Accumulated
                                 of Shares    Amount   of Shares    Amount     of Shares    Amount      Capital        Deficit
                                  --------  ---------  ---------   --------   ----------   -------    -----------   -----------
<S>                                <C>       <C>         <C>       <C>         <C>          <C>        <C>          <C>
Balance, December 31, 2002         521,290   $521,000    985,000   $985,000    7,204,693    $7,000     $9,613,000   ($5,381,000)
Preferred converted to Common     -117,556   -117,000   -718,000   -718,000    1,671,108     2,000        833,000
Options exercised to Common Stock                                                615,714                  590,000
Warrants Converted to Common Stock                                               288,724                  350,000
Common Stock issued to Directors,
consultants and acquisitions                                                     665,970     1,000      8,716,000
Common Stock issued for Series
"C" dividend                                                                      36,400                   18,000
Dividend paid in stock                                                                                                  -45,000
Net Income                                                                                                            2,410,000
                                  --------  ---------  ---------   --------   ----------   -------    -----------   -----------
Balance, December 31, 2003         403,734    404,000    267,000    267,000   10,482,609    10,000     20,120,000    -3,016,000
Preferred converted to Common     -103,120   -103,000    -67,000    -67,000      340,240                  170,000
Options exercised to Common Stock                                                 47,221     1,000         34,000
Warrants Converted to Common Stock                                                46,700                  125,000
Conversion of debt to equity                                                      55,400                   28,000
Conversion of debt to equity out
of Treasury                                                                      114,000
Common stock issued to Consultants                                                15,500                   93,000
Shares issued out of Treasury                                                                            -135,000
Common Stock issued for Series
"C" dividend                                                                      13,400                    7,000        -7,000
Dividend paid in stock                                                                                                  -11,000
Net Income                                                                                                            1,747,000
                                  --------  ---------  ---------   --------   ----------   -------    -----------   -----------
Balance, December 31, 2004         300,614   $301,000    200,000   $200,000   11,001,070   $11,000    $20,556,000   ($1,287,000)
                                  ========  =========  =========   ========   ==========   =======    ===========   ===========
</TABLE>

<TABLE>
<CAPTION>
                                              COMMON STOCK
                                 ----------------------------------------
                                  Accumulated
                                 Comprehensive    Treasury
                                     Loss           Total         Stock
                                 ------------    ----------    ---------
<S>                               <C>            <C>           <C>
Balance, December 31, 2002        $      -       $5,745,000    ($167,000)
Preferred converted to Common
Options exercised to Common Stock                   590,000     -516,000
Warrants Converted to Common Stock                  350,000
Common Stock issued to Directors,
consultants and acquisitions                      8,717,000
Common Stock issued for Series
"C" dividend                                         18,000
Dividend paid in stock                              -45,000
Net Income                         -25,000        2,385,000
                                  --------      -----------    ---------
Balance, December 31, 2003         -25,000       17,760,000     -683,000
Preferred converted to Common
Options exercised to Common Stock                    35,000      -31,000
Warrants Converted to Common Stock                  125,000     -123,000
Conversion of debt to equity                         28,000
Conversion of debt to equity out
of Treasury                                         114,000      166,000
Common stock issued to Consultants                   93,000      135,000
Shares issued out of Treasury                      -135,000      135,000
Common Stock issued for Series
"C" dividend
Dividend paid in stock                              -11,000
Net Income                         -14,000        1,733,000
                                  --------      -----------    ---------
Balance, December 31, 2004        ($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)      (687,000)
        (Increase) in deferred compensation                               (100,000)      (350,000)
        (Increase) decrease in other assets                                (25,000)        44,000
        (Decrease) increase in accounts payable and accrued expenses      (460,000)       525,000
        Increase in income taxes payable                                   674,000             --
                                                                       -----------    -----------
              NET CASH PROVIDED BY OPERATING ACTIVITIES                  1,902,000      1,877,000
                                                                       -----------    -----------

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)    (1,823,000)
   Purchase of property and equipment                                   (1,490,000)    (1,309,000)
   Purchase of intangible assets                                        (2,792,000)    (2,458,000)
                                                                       -----------    -----------
              NET CASH (USED IN) INVESTING ACTIVITIES                   (3,510,000)    (9,154,000)
                                                                       -----------    -----------

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 is  recognized  for product  sales upon shipment and passing of
risk to the  customer  and when  estimates of  discounts,  rebates,  promotional
adjustments,  price adjustments,  returns,  and other potential  adjustments are
reasonably determinable, collection is reasonably assured and the Company has no
further performance obligations.  These estimates are presented in the financial
statements  as  reductions  to net revenues and accounts  receivable.  Estimated
sales returns, allowances and discounts are provided for.


                                      F-9
<PAGE>

                        MEDIFAST, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003


NOTE B - SIGNIFICANT ACCOUNTING POLICIES  (CONTINUED)

Outbound shipping charges to customers and outbound  shipping-related  costs are
netted and included in "cost of sales."

Returns - Consistent  with  industry  practice,  the Company  maintains a return
policy that allows its customers to return product within a specified period (30
days).  Because the period of payment generally  approximates the period revenue
was originally  recognized,  refunds are recorded as a reduction of revenue when
paid. The Company's estimate for returns is based upon its historical experience
with actual returns. While such experience has allowed for reasonable estimation
in the past,  history may not always be an accurate indicator of future returns.
The Company continually monitors its estimates for returns and makes adjustments
when it believes  that actual  product  returns may differ from the  established
accruals.

[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.


                                      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:

         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.
MEDIFAST, INC. AND SUBSIDIARIES


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.



                                      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)

         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>

         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


                                      F-12
<PAGE>

         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-13
<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-14
<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 Financial Accounting Standards Board ("FASB") issued Statement
No.  142  "Goodwill  and Other  Intangible  Assets".  This  statement  addresses
financial  accounting and reporting for acquired  goodwill and other  intangible
assets and supersedes APB Opinion No. 17, "Intangible  Assets". It addresses how
intangible assets that are acquired individually or with a group of other assets
(but not those  acquired in a business  combination)  should be accounted for in
financial  statements upon their acquisition.  This Statement also addresses how
goodwill and other  intangible  assets  should be accounted  for after they have
been  initially  recognized in the  financial  statements.  The Company,  in its
acquisitions,  recognized $893,850 of goodwill.  The Company performs its annual
impairment  test for goodwill at year-end.  As of December 31, 2004, the Company
has determined that there is no impairment of its goodwill.

In addition,  the Company has acquired other intangible  assets,  which include:
customer lists, non-compete agreements,  trademarks and patents. The non-compete
agreements are being  amortized  over the legal life of the  agreements  ranging
between 3 to 7 years.  The  customer  lists are  being  amortized  over a period
ranging  between  5 to 10  years  based on  management's  best  estimate  of the
expected  benefits to be consumed or otherwise  used up.  Trademarks and patents
are regularly reviewed to determine whether the facts and circumstances exist to
indicate  that the  useful  life is shorter  than  originally  estimated  or the
carrying amount of the assets may not be recoverable.  The Company  assesses the
recoverability  of  its  trademarks  and  patents  by  comparing  the  projected
discounted  net  cash  flows  associated  with the  related  asset,  over  their
remaining lives, in comparison to their respective carrying amounts. Impairment,
if any,  is based on the excess of the  carrying  amount  over the fair value of
those assets.

         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.


                                      F-15
<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 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.

         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.


                                      F-16
<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)

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.

[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



                                      F-17

<PAGE>

                        MEDIFAST, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003


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            6,728,000      5,937,000
          Equipment and fixtures                        4,062,000      2,876,000
          Vehicle                                          11,000         20,000
                                                    -------------   ------------
                                                       11,451,000      9,398,000
Less accumulated depreciation and amortization          2,753,000      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 $804,000 and $421,000, respectively.


NOTE E - TRADEMARKS

<TABLE>
<CAPTION>
                              AS OF DECEMBER 31, 2004        AS OF DECEMBER 31, 2003
                          -----------------------------   -----------------------------
                          GROSS CARRYING   ACCUMULATED    GROSS CARRYING   ACCUMULATED
                              AMOUNT       AMORTIZATION       AMOUNT       AMORTIZATION
                            ----------      ----------      ----------      ----------
<S>                         <C>             <C>             <C>             <C>
Customer lists              $4,355,000      $  394,000      $1,724,000      $  150,000
Non-compete agreements         840,000         248,000         840,000          86,000
Trademarks and patents       1,703,000          12,000       1,541,000          14,000
Goodwill                       894,000              --         894,000
                            ----------      ----------      ----------      ----------
    Total                   $7,792,000      $  654,000      $4,999,000      $  250,000
                            ==========      ==========      ==========      ==========
</TABLE>


AMORTIZATION  EXPENSE  FOR THE  YEAR  ENDED  DECEMBER  31,  2004 AND 2003 WAS AS
FOLLOWS:

                                              2004             2003
                                           ----------      ----------
Customer lists                             $  244,000         127,000
Non-compete agreements                        162,000          86,000
Trademarks and patents                             --          14,000
                                           ----------      ----------
Total Trademarks and Intangibles           $  406,000      $  227,000
                                           ==========      ==========

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


                                      F-18
<PAGE>

                        MEDIFAST, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003


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
                                                  ============      ===========

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
                                                     =========



                                      F-19
<PAGE>

                        MEDIFAST, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003


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    $       --
                                                        ==========    ==========


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
                                                 ===========       ==========




                                      F-20

<PAGE>

                        MEDIFAST, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003


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>


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.


                                      F-21
<PAGE>

                        MEDIFAST, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003


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.


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.


                                      F-22
<PAGE>

                        MEDIFAST, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003


NOTE L - SERIES "B" CONVERTIBLE PREFERRED STOCK (CONTINUED)

         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.


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.

                                      F-23
<PAGE>

                        MEDIFAST, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003


NOTE N - WARRANTS (CONTINUED)

         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
          Exercise                                            December 31,
                                                              ------------
           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.


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.

                                      F-24
<PAGE>

                        MEDIFAST, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003


NOTE P - LITIGATION (CONTINUED)

         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-25