UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      DC 20549









FORM
      10-K




ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF


THE
      SECURITIES EXCHANGE ACT OF 1934




For
      the
      fiscal year ended December 31, 2006




Commission
      File No. 000-23016







MEDIFAST,
      INC.




DELAWARE
              
              13-3714405Incorporation
                  State
              
              Tax
                  Identification number11445
                  CRONHILL DRIVE, OWINGS MILLS,
                  MD
              
              21117Principal
                  Office Address




Phone
        (410) 581-8042




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




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




COMMON
      STOCK, PAR VALUE $.001 PER SHARE









New
      York
      Stock Exchange









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


Yes
x  
No o




Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act. Yes o  No x




Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
      during the preceding 12 months (or for such shorter period that the
      registrant was required to file such reports), and (2) has been subject to
      such filing requirements for the past 90 days. Yes x  No o




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




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




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




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




The
      aggregate market value of the voting common equity held by non-affiliates of
      the
      registrant as of June 30, 2006, based upon the closing price of $17.87 per
      share on the American Stock Exchange on that date, was
      $208,000,000.




As
      of
      March 14, 2007, the Registrant had 13,643,998 shares of Common Stock
      outstanding.




DOCUMENTS
      INCORPORATED BY REFERENCE




Portions
      of the definitive Proxy Statement for the 2007 Annual Meeting of Stockholders,
      which will be filed within 120 days after the end of the fiscal year, are
      incorporated by reference into Part III.




2




**Table
        of Contents**  ****
                
                ****
                **Page****PART
                    I**Item
                    1.
                
                Business
                
                4Item
                    1A.
                
                Risk
                    Factors
                
                10Item
                    1B.
                
                Unresolved
                    Staff Comments
                
                11Item
                    2.
                
                Properties
                
                11Item
                    3.
                
                Legal
                    Proceedings
                
                12Item
                    4.
                
                Submission
                    of Matters to a Vote of Security Holders
                
                12**PART
                    II**Item
                    5.
                
                Market
                    for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                    Purchases of Equity Securities
                
                12Item
                    6.
                
                Selected
                    Financial Data
                
                13Item
                    7.
                
                Management’s
                    Discussion and Analysis of Financial Condition and Results of
                    Operations
                
                13Item
                    8.
                
                Financial
                    Statements and Supplementary Data
                
                16Item
                    9.
                
                Changes
                    in and Disagreements with Accountants on Accounting and Financial
                    Disclosure
                
                17Item
                    9A.
                
                Controls
                    and Procedures
                
                17**PART
                    III**Item
                    10.
                
                Directors,
                    Executive Officers and Corporate Governance
                
                19Item
                    11.
                
                Executive
                    Compensation
                
                19Item
                    12.
                
                Security
                    Ownership of Certain Beneficial Owners and Management and Related
                    Stockholder Matters
                
                19Item
                    13.
                
                Certain
                    Relationships and Related Transactions, and Director
                    Independence
                
                19Item
                    14.
                
                Principal
                    Accounting Fees and Services
                
                19**PART
                    IV**Item
                    15.
                
                Exhibits,
                    Financial Statement Schedules
                
                20


3




**PART
      I**





**ITEM
      1. BUSINESS.**





**SUMMARY**





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




**MARKETS**





Over
      the
      past 20 years the obesity rates in the United States have increased
      dramatically. According to a recent study, “Prevalence of Obesity and Overweight
      in the United States published in April 2006 in the Journal of American Medical
      Association almost 7 out of 10 adults in the U.S. are overweight or obese.
      Type
      2 Diabetes is expected to increase by 165 % between 2000 and 2050 according
      to a
      study “Projection of diabetes burden through 2050: impact of change demography
      and disease prevalence in the U.S., published in Diabetes Care in 2001. In
      a
      study published in the Journal of the American Medical Association (JAMA) it
      was
      reported that in 2003-2004, 17.1% of U.S. children and adolescents were
      overweight and 32.2% of adults were obese. It is important to note the
      difference between overweight and obese. Obesity among adults is defined as
      a
      Body Mass Index (BMI) of 30 or higher; overweight is defined as a BMI of 25
      to
      30. The amount of overweight adolescents and children ages 6-19 years have
      more
      than tripled since 1980.





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**




**Medifast
      Direct -** Medifast’s
      primary distribution channel is the direct-to-consumer business. Here, customers
      have access to support from qualified nutritional practitioners and customer
      care representatives via telephone, e-mail and online chats. Medifast Direct
      offers a robust online web community and library for support, information and
      meal planning for weight loss and weight maintenance. This business is driven
      by
      an aggressive multi-media customer acquisition strategy that includes print,
      television, radio, and web advertising as well as public relations initiatives.
      In 2006, the Medifast Direct division focused on targeted marketing initiatives
      and enhancements to its customer support systems by upgrading its call center
      and nutrition support team to better serve its clients. In addition, Medifast
      also began using state of the art web technology which features customized
      meal
      planning and community components.





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





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




4




**Medifast
      Physicians and Clinics** - Many
      Medifast physicians have implemented the Medifast program within their practice.
      These physicians carry an inventory of Medifast products and resell them to
      patients. They also provide appropriate medical monitoring, testing, and support
      for patients on the program. Medifast also offers Medifast physicians a home
      delivery program “Lifestyles” for their patients. The Lifestyles Program is a
      network of health care professionals who support patients on the Medifast
      program. Medifast offers physicians a dedicated website landing page and
      patients order products directly from the company online or through the call
      center. 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 recommended Medifast as a
      treatment for their overweight patients since 1980, and over an estimated 1
      million patients have used its’ products to lose and maintain their weight.





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




**Medifast
      and Hi-Energy Weight Control Centers -** In
      2006,
      Medifast changed nine of its key corporately owned weight control centers to
      Medifast Weight Control Centers in Texas and Florida. The centers offer a new
      medically supervised model and a nationally advertised brand which encourages
      walk-ins and referrals from other Medifast business channels. In addition to
      offering a comprehensive Medifast program, the clinics offer customized patient
      counseling programs, Inbody TM composition analysis as well as appetite suppression medications to customers
      who qualify. The Company intends to open additional corporately owned Medifast
      Weight Control Centers in a select market in 2007 in addition to franchising
      the
      model throughout the United States.





The
      Company continues to support the Hi-Energy licensees by providing marketing
      materials, ads, on-site trainings, fitness programs, nutritional programs and
      clinical operation materials and forms.




**THE
      MEDIFAST® BRAND**




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





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





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





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




**Clinical
      Research Overview**




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





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




5




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




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





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





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





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





This
      study was presented at American Diabetes Association’s 65 th Annual
      Scientific Session in San Diego, CA, June 11, 2005. The information was peer
      reviewed and printed in ADA’s Diabetes Journal as a written published abstract.
      Dr. Cheskin, the principle investigator is currently pursuing publication in
      a
      leading medical journal.




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





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





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





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





The
      18-month study, (6-month weight loss phase, 12-month maintenance phase) examined
      a joint parent-child dieting approach, as opposed to an individually based
      approach, to improve weight loss outcomes. It compares diet using Medifast
      meal
      replacements to a non-supplemented Food Guide pyramid based diet. Comparative
      points include, overall weight loss, compliance, palatability, dietary quality
      and dietary satisfaction. The study also examines whether children who lose
      weight-using Medifast meal replacements as an adjunct to a Food Guide-pyramid
      based diet achieve health benefits compared to baseline values and are these
      health benefits greater than those obtained following the reference diet.





The
      results of this study will be released in 2007.




6




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




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





Results
      of this study will be released in 2007 and presented at the American Society
      of
      Bariatric Physicians annual meeting in May 2007. This study has also been
      submitted to a major medical journal for publication.




**COMPETITION**




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




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





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




**PRODUCTS**




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




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
      Solae® brand soy protein, which is a high-quality complete protein derived from
      soybeans.




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




7




**NEW
      PRODUCTS**




The
      Company expanded the Medifast product line in 2006 by introducing Medifast®
Scrambled Eggs, Medifast® Vanilla Pudding, Medifast® Beef Vegetable Stew, and
      Medifast® Soy Crisps in Apple Cinnamon, Ranch and White Cheddar flavors. In
      addition to these great new additions, Medifast also reformulated all of its
      meal replacement bars to improve flavor and texture.




**MARKETING**





In
      2006,
      the Company continued to build and leverage its core Medifast brand through
      multiple marketing strategies to its target audiences. Customer Acquisition
      strategies include advertising in print magazines, television commercials,
      and
      radio commercials. These mediums were used to target new customers by stressing
      Medifast's quick, easy and safe approach to weight management. The Company
      also
      developed comprehensive public relations campaigns throughout 2006 securing
      media coverage in national consumer and business media outlets including People
      Magazine, Forbes Magazine and CNBC. Also, direct mail campaigns and e-mail
      newsletters have been utilized to encourage and support existing
      customers.





Online
      advertising began in 2004 and 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.
      In
      2006, the online community, meal planner and library, “My Medifast” was added as
      a free service to all customers. Also in 2006, the Company began sponsoring
      customer blogs on its website where customers can interact with other customers
      and ask questions before starting a Medifast program as well as to track their
      success on the Medifast program.





The
      Company launched a new and improved branding for its Take Shape for Life
      division in 2006 including revised logo, messaging, web design and support
      materials giving it a unique positioning as a division of Medifast focused
      on
      optimal health.





**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 2006, the sales team attended
      a
      number of medical professional trade shows, which expanded Medifast's
      penetration of the clinical business segment.





Medifast
      Weight Control Centers- The brick and mortar clinics have Counselors that sell
      Medifast products and full service programs which include weekly one-on-one
      counseling sessions, medical monitoring and physician oversight.





Take
      Shape for Life— Provides a sales force of independent Health Advisors who
      support patients and their primary care physicians with a defined support
      program. Take Shape for Life is a support program that moves beyond the scope
      of
      weight loss to show customers how to achieve optimal health through the balance
      of body, mind, and finances.





**MANUFACTURING**





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





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





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




**GOVERNMENTAL
      REGULATION HISTORY**





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




8




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





**PRODUCT
      LIABILITY AND INSURANCE**





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





**EMPLOYEES**





As
      of
      December 31, 2006, the Company employed 265 full-time and contracted employees,
      of whom 84 were engaged in manufacturing, warehouse management, and shipping,
      and 180 in marketing, administrative, call center and corporate support
      functions. None of the employees are subject to a collective bargaining
      agreement with the Company.




**INFORMATION
      SYSTEMS INFRASTRUCTURE**





In
      November of 2005, the Company began an IT project to implement an Enterprise
      Resource Planning (ERP) solution to upgrade our technology infrastructure and
      improve manufacturing and business processes. The new IT infrastructure will
      enable the Company to handle additional business growth and improve the
      efficiencies across the business platform. The new ERP system went live in
      December of 2006 without incident.





**AVAILABLE
      INFORMATION**





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





**EXECUTIVE
      OFFICERS OF THE COMPANY**


**Name**
              
              **Age**
              
              **Position**Bradley
                  T. MacDonald
              
              59
              
              Chief
                  Executive Officer and Chairman of the Board of
                  DirectorsMichael
                  S. McDevitt
              
              28
              
              President
                  and Chief Financial OfficerLeo
                  Williams
              
              59
              
              Executive
                  Vice PresidentMargaret
                  MacDonald
              
              29
              
              Senior
                  Vice President of OperationsBrendan
                  N. Connors
              
              29
              
              Vice
                  President of Finance




9




**Bradley
      T. MacDonald**




Mr.
      MacDonald became Chairman of the Board and Chief Executive Officer of Medifast,
      Inc. on January 28, 1998. Mr. MacDonald was previously employed by the Company
      as its Chief Executive Officer from September 1996 to August 1997. In 2006,
      Mr.
      MacDonald was named “Entrepreneur of the Year” in consumer products for the
      State of Maryland. Prior to joining the Company, he was appointed as Program
      Director of the U.S. Olympic Coin Program of the Atlanta Centennial Olympic
      Games. From 1991 through 1994, Colonel MacDonald returned to active duty to
      be
      Deputy Director and Chief Financial Officer of the Retail, Food, Hospitality
      and
      Recreation Businesses for the United States Marine Corps. Prior thereto, Mr.
      MacDonald served as Chief Operating Officer of the Bonneau Sunglass Company,
      President of Pennsylvania Optical Co., Chairman and CEO of MacDonald and
      Associates, which had major financial interests in 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.




**Michael
      S. McDevitt**




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





**Leo
      Williams**




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





**Margaret
      MacDonald, MBA**




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





**Brendan
      N. Connors, CPA**




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




**ITEM
      1A. RISK FACTORS**





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





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





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





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





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





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





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




10




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





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





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





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





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





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





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





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




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





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





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




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




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




A
      number
      of laws and regulations govern our advertising. The FTC and certain states
      regulate advertising, disclosures to consumers, privacy, consumer pricing or
      billing arrangements, and other consumer matters.




Future
      legislation or regulations, including legislation or regulations affecting
      our
      marketing and advertising practices, relations with consumers or our food and
      weight management products and services, may have an adverse impact on us.




**ITEM
      1B. UNRESOLVED STAFF COMMENTS**





None




**ITEM
      2. DESCRIPTION OF PROPERTY**





The
      Company owns a 49,000 square-foot facility in Owings Mills, Maryland, which
      contains its Corporate Headquarters and manufacturing plant. In 2003, the
      Company purchased a state-of-the-art 119,000 square-foot distribution facility
      in Ridgely, Maryland. The facility gives the Company the ability to distribute
      over $250 million of Medifast product sales per year. In 2004, the Company
      purchased a 3,000 square foot conference and training facility in Ocean City,
      Maryland. The facility will be used to conduct corporate training meetings,
      Board of Director Meetings and employee morale and wellness
      programs.  The
      Company has 11 leases for its corporately owned Medifast Weight Control clinics
      throughout Florida and Texas. The leases range in terms from one to five
      years.




11




**ITEM
      3. LEGAL PROCEEDINGS.**





There
      were no material pending legal matters as of December 31, 2006.




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





Not
      applicable




**PART
      II**





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





(a)
      The
      Company's Common Stock has been quoted under the symbol MED since December
      20,
      2002. The old symbol, MDFT, had been traded since February 5, 2001. The common
      stock is traded on the New York Stock Exchange. The following is a list of
      the
      low and high closing prices by fiscal quarters for 2006 and 2005:




2006Low
              
              HighQuarter
                  ended March 31, 2006
              
              
              5.40
              
              
              9.23Quarter
                  ended June 30, 2006
              
              
              8.75
              
              
              20.90Quarter
                  ended September 30, 2006
              
              
              8.21
              
              
              19.49Quarter
                  ended December 31, 2006
              
              
              8.41
              
              
              14.52





2005Low
              
              HighQuarter
                  ended March 31, 2005
              
              
              2.67
              
              
              3.62Quarter
                  ended June 30, 2005
              
              
              2.82
              
              
              3.30Quarter
                  ended September 30, 2005
              
              
              3.01
              
              
              7.08Quarter
                  ended December 31, 2005
              
              
              3.83
              
              
              5.70


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





(c)
      There
      were approximately 209 record holders of the Company's Common Stock as of March
      14, 2007. This number does not include beneficial owners of our securities
      held
      in the name of nominees. The Company had no preferred holders of the Company’s
      stock as of December 31, 2006.





(d)
      No
      dividends on common stock were declared by the Company during 2006 or
      2005.




12




**ITEM
      6. SELECTED FINANCIAL DATA**




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




2006
              
              2005
              
              2004
              
              2003
              
              2002Revenue
              
              
              74,086,000
              
              
              40,129,000
              
              
              27,340,000
              
              
              25,379,000
              
              
              12,345,000Operating
                  income
              
              
              8,112,000
              
              
              4,074,000
              
              
              3,004,000
              
              
              3,598,000
              
              
              1,752,000Income
                  from continuing operations
              
              
              7,338,000
              
              
              3,930,000
              
              
              2,906,000
              
              
              3,558,000
              
              
              1,698,000EPS
                  - basic
              
              
              0.40
              
              
              0.20
              
              
              0.16
              
              
              0.25
              
              
              0.36EPS
                  - diluted
              
              
              0.38
              
              
              0.19
              
              
              0.14
              
              
              0.22
              
              
              0.30Total
                  assets
              
              
              36,927,000
              
              
              30,545,000
              
              
              25,968,000
              
              
              24,230,000
              
              
              9,888,000current
                  portion of long-term debt and revolving credit facilities
              
              
              1,804,000
              
              
              1,194,000
              
              
              827,000
              
              
              819,000
              
              
              395,000Total
                  long-term debt
              
              
              3,509,000
              
              
              3,977,000
              
              
              4,256,000
              
              
              4,564,000
              
              
              2,701,000Weighted
                  average shares outstandingBasic
              
              
              12,699,066
              
              
              12,258,734
              
              
              10,832,360
              
              
              9,305,731
              
              
              6,722,505Diluted
              
              
              13,482,894
              
              
              12,780,959
              
              
              12,413,424
              
              
              10,952,367
              
              
              8,737,292





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




**FORWARD
      LOOKING STATEMENTS**





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





**2006
      COMPARISON WITH 2005**





**OPERATING**





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





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




13




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





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





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





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





Other
      Income/Expense: Stock compensation expense in 2006 was $533,000 as compared
      to
      $0 in 2005. This expense represents the vesting of share-based compensation
      to
      key executives over five and six-year terms as well as FASB 123R expense for
      the
      vesting of options. In 2006, expense relating to FASB 123R amounted to $40,000.
      The Company has reviewed unvested options and concluded that the effects of
      FASB
      123R are immaterial.





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





Income
      taxes: In the third quarter of 2006, the Company had a $1 million federal tax
      refund receivable. A portion of this refund was factored into the Company’s
      income tax provision, which lowered the estimated tax rate for 2006 **.** **** **** In
      2006,
      the Company recorded $2.3 million in income tax expense, which represents an
      annual effective rate of 31%. In 2005, we recorded income tax expense of $1.2
      million, which reflected an estimated annual effective tax rate of 30.1%. The
      Company anticipates a tax rate of approximately 36-39% in 2007.





Net
      income: Net income increased to $5.1 million in 2006 as compared to $2.4 million
      in 2005, which reflected an increase of 108% or $2.6 million. The increase
      in
      net income is due to an increase in sales offset by increased selling, general,
      and administrative expenses, that primarily consist of increased advertising,
      commissions paid to Take Shape for Life health advisors, outsourced call center
      reps, and new employees.





**LIQUIDITY
      AND CAPITAL RESOURCES**





The
      Company had stockholders’ equity of $28,114,000 and working capital of
      $9,612,000 on December 31, 2006 compared with $22,021,000 and $9,996,000 at
      December 31, 2005, respectively. The $6.1 million net increase in stockholder’s
      equity reflects the increased profitability of the Company. The Company’s cash
      and cash equivalents position decreased from $1.5 million at December 31, 2005
      to $1.1 at December 31, 2006. The decrease is due to increased cash outlays
      for
      infrastructure to include the new ERP system and new production lines and
      blender, as well as inventory build-up for the first quarter of 2007. In
      addition, prepaid advertisements for January and payments to our third party
      call center were uses of cash. On December 31, 2006 the Company’s current ratio
      was 3 to 1.




14




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




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




In
      the
      year ended December 31, 2006, net cash used in investing activities was
      $6,747,000, which primarily consisted of the purchase of intangible assets
      and
      purchases of property and equipment. In 2006, the Company built a large amount
      of infrastructure. This included a new Enterprise Resource Planning system,
      two
      new state of the art manufacturing lines, larger capacity blender and
      improvements at our distribution facility as well as the build out of our new
      Medifast Weight Control Centers.




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




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





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




**2005
      COMPARISON WITH 2004**





**OPERATING**





Revenue:
      Consolidated net sales for 2005 were $40,129,000  as
      compared to 2004 sales of $27,340,000, an increase of $12,789,000, or 47%.
      A
      major reason for the revenue increase for the Company is attributed to the
      continued success of direct sales to consumers as well as the expansion of
      the
      Take Shape for Life division. The increase in direct sales was attributed to
      an
      expanded direct marketing campaign via print, mail, web and television to drive
      customers to the call center and website. Through the effectiveness of our
      online ads and improved web branding a higher percentage of customers ordered
      on
      the Company’s website in 2005. In addition, the Company expanded it remarketing
      campaign to drive new customers to the call center and 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, and
      provided health advisors with additional sponsoring tools to make training
      and
      recruiting easier. These have proven to be effective at generating revenues
      and
      recruiting Health Advisors into the Take Shape for Life Network. The increased
      training and recruitment initiatives in 2005 have resulted in the expansion
      of
      the sales network into additional locations as well as growth in current
      locations.





Costs
      and
      Expenses: Cost of sales increased from 6,746,000 in 2004 to $10,161,000 in
      2005,
      an increase of $3,415,000. As a percentage of sales, cost of goods sold
      increased slightly due to increased fuel charges charged by the major shipping
      companies. Gross margin was 75% at December 31, 2005 and 2004.





Selling,
      general and administrative (SG&A) expenses of $25,894,000 for 2005 were
      $8,304,000 more than the $17,590,000 in 2004, due to increased costs associated
      with the increased scale of the business. The Company increased its advertising
      expense to include additional print and web advertising as well as strategic
      testing of television advertising. In 2005, the Company experienced income
      from
      operations of $4,074,000. This compares with income from operations of
      $3,004,000 in 2004, an increase of 36%. The increase in income is primarily
      due
      to higher gross profit from increased revenue offset by higher general and
      administrative expenses.





Income
      Taxes: In 2005, the Company realized a tax expense of $1,203,000, as compared
      to
      a tax expense of $1,159,000 in 2004. The slight increase in tax expense despite
      the increase in sales is due to timing differences between book and tax purposes
      for intangible assets, and other temporary and permanent differences. Interest
      expense increased to $317,000 in 2005, as compared to $245,000 in 2004. This
      increase was due to a full year of interest expense paid on a new loan acquired
      in 2004.





Net
      Income: The Company reported net income of $2,436,000, or $0.20 per basic share
      ($0.19 per diluted share), versus $1,729,000 or $0.16 per basic share ($0.14
      per
      diluted share), with a dilution increase of 368,000 shares. Earnings per share
      were effected by the interest associated with the conversion of the Series
“B”
preferred stock. This conversion included a $260,000 stock dividend on Series
      “B” preferred stock and a $19,000 stock dividend on Series “C” preferred stock.
      As of December 31, 2005 all Series “B” and Series “C” preferred stock have been
      converted to common stock and included in the weighed average diluted shares.
      There will be no additional stock dividend payments.




15




**LIQUIDITY
      AND CAPITAL RESOURCES**





At
      December 31, 2005, the Company had net working capital of $9,996,000, an
      increase of $2,531,000 from the $7,465,000 net working capital balance at
      December 31, 2004. Cash and investment securities at December 31, 2005 were
      $4,184,000. In November 2005, Medifast, Inc.’s wholly owned subsidiary Jason
      Pharmaceuticals, Inc. renewed its $5,000,000 Secured Line of Credit from
      Mercantile Safe-Deposit and Trust of Baltimore, Maryland. The line of credit
      is
      at LIBOR plus 1.3 percent. The increased line may be used to finance equipment,
      inventory, and receivables of Medifast, Inc. The Company currently has no
      off-balance sheet arrangements.




In
      the
      year ended December 31, 2005, the Company generated cash flow of $3,213,000
      from
      operations, primarily attributable to higher operating income. This was offset
      by net changes in operating assets and liabilities that decreased cash flow
      by
      $2,065,000. The largest uses of cash were for the purchase of inventory and
      prepaid expenses, which primarily consisted of prepaid taxes, insurance, and
      advertising.




In
      the
      year ended December 31, 2005, net cash used in investing activities was
      $2,032,000, which primarily consisted of the purchase of intangible assets
      and
      purchases of property and equipment.




In
      the
      year ended December 31, 2005, net cash used in financing activities was
      $309,000, representing the principal repayments of long-term debt and purchase
      of treasury stock offset by an increase in the line of credit. Medifast, Inc.
      purchased 110,000 shares of its common stock from October 6, 2005 through
      October 17, 2005 at an average price of $4.03 per share, aggregating $452,000.




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





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




**SEASONALITY**





The
      Company's weight management products and programs have historically been subject
      to seasonality. Traditionally the holiday season in November/December of each
      year is considered poor for diet control products and services. January and
      February generally show increases in sales, as these months are considered
      the
      commencement of the “diet season.” The Company did not experience the same
      degree of seasonality in 2006. This is largely due to the increase in the
      consumer’s awareness of the overall health and nutritional benefits accompanied
      with the use of the Company’s product line. As consumers continue to increase
      their association of nutritional weight loss programs with overall health,
      seasonality will continue to decrease.




**INFLATION**





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




**ITEM
      8. FINANCIAL STATEMENTS.**





The
      information required by this item is set forth on pages 22 through 43 hereto
      and
      incorporated by reference herein.




16




**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,
      2006.




**ITEM
      9A. CONTROLS AND PROCEDURES**




**Evaluation
      of Disclosure Controls and Procedures**





We
      have
      established disclosure controls and procedures to ensure that the information
      required to be disclosed by us in the reports that we file or submit under
      the
      Exchange Act is recorded, processed, summarized, evaluated and reported, as
      applicable, within the time periods specified in the rules and forms of the
      Securities and Exchange Commission.




In
      designing and evaluating the disclosure controls and procedures, management
      recognized that any controls and procedures, no matter how well designed and
      operated, can provide only reasonable assurance of achieving the desired control
      objectives, and management necessarily was required to apply its judgment in
      evaluating the cost-benefit relationship of possible controls and
      procedures.




Based
      upon the evaluation of the Company’s disclosure controls and procedures by the
      Company’s management, under the supervision and with the participation of our
      principal executive officer and principal financial officer, as of
      December 31, 2006, our principal executive officer and principal financial
      officer have concluded that our disclosure controls and procedures (as defined
      in Rule 13a-15(e) under the Securities Exchange Act of 1934) are
      effective to ensure that the information required to be disclosed by us in
      the
      reports that we file or submit under the Exchange Act is recorded, processed,
      summarized, evaluated and reported, as applicable, within the time periods specified in
      the
      rules and forms of the Securities and Exchange Commission.




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





Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting, as such term is defined in Exchange Act
      Rule 13a-15(f). There are inherent limitations in the effectiveness of any
      internal controls over financial reporting, including the possibility of human
      error and the circumvention or overriding of controls. Accordingly, even
      effective internal controls over financial reporting can provide only reasonable
      assurance with respect to financial statement preparation. Our internal control
      system was designed to provide reasonable assurance regarding the reliability
      of
      financial reporting and the preparation of financial statements for external
      purposes in accordance with generally accepted accounting principles. Under
      the
      supervision and with the participation of our management, including our
      principal executive officer and principal financial officer, we conducted an
      evaluation of the effectiveness of our internal control over financial reporting
      based on the framework in Internal Control—Integrated Framework issued by the
      Committee of Sponsoring Organizations of the Treadway Commission. Based on
      our
      evaluation under the framework in Internal Control—Integrated Framework, our
      management concluded that our internal control over financial reporting was
      effective as of December 31, 2006 to provide reasonable assurance regarding
      the reliability of financial reporting and the preparation of financial
      statements for external purposes in accordance with generally accepted
      accounting principles. Our management’s assessment of the effectiveness of our
      internal control over financial reporting as of December 31, 2006 has been
      audited by Bagell, Josephs, Levine & Company, LLC, independent registered
      public accounting firm, as stated in their report which is included
      below.




**Changes
      in Internal Controls over Financial Reporting**




There
      were no significant changes in the Company’s internal controls over financial
      reporting that occurred during the last fiscal quarter that have materially
      affected, or are reasonably likely to materially affect, the Company’s internal
      controls over financial reporting.




17




REPORT
      OF
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




Board
      of
      Directors


Medifast,
      Inc. and subsidiaries


Owing
      Mills, Maryland





We
      have
      audited management's assessment, included in Management’s Annual Report on
      Internal Control over Financial Reporting, that Medifast Inc. and subsidiaries
      maintained effective control over financial reporting as of December 31 2006,
      based on "criteria established in Internal Control—Integrated Framework issued
      by the Committee of Sponsoring Organizations of the Treadway Commission (the
      COSO criteria)." Medifast Inc. and subsidiaries’ management is responsible for
      maintaining effective internal control over financial reporting and for its
      assessment of the effectiveness of internal control over financial reporting.
      Our responsibility is to express an opinion on management's assessment and
      an
      opinion on the effectiveness of the company's internal control over financial
      reporting based on our audit.





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





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





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





In
      our
      opinion, management's assessment that Medifast, Inc. and subsidiaries maintained
      effective internal control over financial reporting as of December 31, 2006,
      is
      fairly stated, in all material respects, based on the COSO criteria. Also in
      our
      opinion, Medifast Inc. and subsidiaries maintained, in all material respects,
      effective internal control over financial reporting as of December 31, 2006,
      based on the COSO criteria.





We
      have
      also audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the consolidated balance sheet of Medifast
      Inc.
      and subsidiaries as of December 31, 2006 and the consolidated results of their
      operations and their consolidated cash flow for the year then ended and our
      report dated March 15, 2007 expressed an unqualified opinion
      thereon.





Bagell,
      Josephs, Levine & Co.


Gibbsboro,
      New Jersey


March
      15,
      2007




18




**PART
      III**





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





The
      information required by this item is incorporated by reference to Medifast’s
      Proxy Statement for its 2007 Annual Meeting of Stockholders to be filed with
      the
      SEC within 120 days after the end of the fiscal year ended December 31,
      2006.





The
      required information as to executive officers is set forth in Part I hereof
      and
      is incorporated herein by reference.





The
      Company has adopted a code of business conduct and ethics applicable to the
      Company’s directors, officers, and employees, knows as the Code of Business
      Conduct. The Code of Business Conduct is available on the Company’s website. In
      the event that we amend or waive any of the provision of the Code of Business
      Conduct applicable to one of our principal officers that relates to any element
      of the code of ethics definition enumerated in Item 406(b) of Regulation S-K,
      we
      intend to disclose the same on the Company’s website at
      www.medifastdiet.com  .





**ITEM
      11. EXECUTIVE COMPENSATION.**





The
      information required by this item is incorporated by reference to Medifast’s
      Proxy Statement for its 2007 Annual Meeting of Stockholders to be filed with
      the
      SEC within 120 days after the end of the fiscal year ended December 31,
      2006.




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





The
      information required by this item is incorporated by reference to Medifast’s
      Proxy Statement for its 2007 Annual Meeting of Stockholders to be filed with
      the
      SEC within 120 days after the end of the fiscal year ended December 31,
      2006.




**ITEM
      13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE**





The
      information required by this item is incorporated by reference to Medifast’s
      Proxy Statement for its 2007 Annual Meeting of Stockholders to be filed with
      the
      SEC within 120 days after the end of the fiscal year ended December 31,
      2006.




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





The
      information required by this item is incorporated by reference to Medifast’s
      Proxy Statement for its 2007 Annual Meeting of Stockholders to be filed with
      the
      SEC within 120 days after the end of the fiscal year ended December 31,
      2006.




19




**PART
      IV**




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


(a)
              1.
                  Financial Statements
  
 See
        Index
        to the Consolidated Financial Statements on page 21 of this Annual
        Report
 
 2.
                  Financial Statement Schedules
  None,
        as
        all information required in these schedules is included in the Notes to the
        Consolidated Financial Statements.
 
 3.
                  Exhibits
 
 Reference
        is made to the Exhibit Index on page 41 of this Annual Report for a list
        of
        exhibits required by Item 601 of Registration S-K to be filed as part of
        this Annual Report.
  20




MEDIFAST,
      INC. AND SUBSIDIARIES





INDEX
      TO
      CONSOLIDATED FINANCIAL STATEMENTS




Report
                of Independent Registered Public Accounting Firm
            
            22Consolidated
                Balance Sheets
            
            23Consolidated
                Statements of Operations
            
            24Consolidated
                Statements of Stockholders’ Equity
            
            25Consolidated
                Statements of Cash Flows
            
            27Notes
                to Consolidated Financial Statements
            
            29




21





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




The
      Board
      of Directors and Stockholders of Medifast, Inc.




We
      have
      audited the accompanying consolidated balance sheets of Medifast, Inc. as of
      December 31, 2005 and 2006, and the related consolidated statements of
      operations, stockholders’ equity, and cash flows for each of the three years in
      the period ended December 31, 2006. These financial statements are the
      responsibility of the Company’s management. Our responsibility is to express an
      opinion on these financial statements based on our audits.




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




In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the consolidated financial position of Medifast, Inc. at
      December 31, 2005 and 2006, and the consolidated results of its operations
      and its cash flows for each of the three years in the period ended
      December 31, 2006, in conformity with U.S. generally accepted
      accounting principles.







We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the effectiveness of Medifast, Inc.’s internal
      control over financial reporting as of December 31, 2006, based on criteria
      established in Internal Control — Integrated Framework issued by the
      Committee of Sponsoring Organizations of the Treadway Commission and our report
      dated March 15, 2007 expressed an unqualified opinion theron.




Bagell,
      Josephs, Levine & Company, LLC





Gibbsboro,
      New Jersey


March
      15,
      2007




22


**MEDIFAST,
        INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        BALANCE SHEETS**


**As
        of December 31, 2006 and 2005**
  2006
              
              2005**ASSETS****Current
                  assets:**Cash
                  and cash equivalents
              
              $
              1,085,000
              
              $
              1,484,000Accounts
                  receivable-net of allowance for doubtful accounts
              
              
              448,000
              
              
              985,000of
                  $100,000Inventory
              
              
              8,255,000
              
              
              5,475,000Investment
                  securities
              
              
              1,540,000
              
              
              2,700,000Deferred
                  compensation
              
              
              673,000
              
              
              525,000Prepaid
                  expenses and other current assets
              
              
              2,599,000
              
              
              3,273,000Note
                  receivable - current
              
              
              174,000Current
                  portion of deferred tax asset
              
              
              90,000
              
              
              -**Total
                  current assets**
              
              
              **14,864,000**
              
              
              **14,442,000**Property,
                  plant and equipment - net
              
              
              14,020,000
              
              
              9,535,000Trademarks
                  and intangibles - net
              
              
              6,274,000
              
              
              6,508,000Deferred
                  tax asset, net of current portion
              
              
              367,000
              
              
              -Note
                  receivable, net of current assets
              
              
              1,355,000
              
              
              -Other
                  assets
              
              
              47,000
              
              
              60,000**TOTAL
                  ASSETS**
              
              **$**
              **36,927,000**
              
              **$**
              **30,545,000****LIABILITIES
                  AND STOCKHOLDERS' EQUITY****Current
                  liabilities:**Accounts
                  payable and accrued expenses
              
              $
              2,913,000
              
              $
              2,263,000Income
                  taxes payable
              
              
              535,000
              
              
              899,000Dividends
                  payable
              
              
              -
              
              
              -Line
                  of credit
              
              
              1,256,000
              
              
              633,000Current
                  maturities of long-term debt
              
              
              548,000
              
              
              561,000Deferred
                  tax liability - current
              
              
              
              
              
              90,000**Total
                  current liabilities**
              
              
              **5,252,000**
              
              
              **4,446,000****Other
                  liabilities and deferred credits**Long-term
                  debt, net of current portion
              
              
              3,509,000
              
              
              3,977,000Deferred
                  tax liability - non-current
              
              
              -
              
              
              101,000**Total
                  liabilities**
              
              
              **8,761,000**
              
              
              **8,524,000****Stockholders'
                  Equity:**Preferred
                  stock, $.001 par value (1,500,000 authorized, no shares issued
                  and
                  outstanding)
              
              
              -
              
              
              -Common
                  stock; par value $.001 per share; 20,000,000 shares
                  authorized;13,631,898
                  and 12,782,791 shares issued and outstanding
              
              
              14,000
              
              
              13,000Additional
                  paid-in capital
              
              
              26,629,000
              
              
              21,759,000Accumulated
                  other comprehensive income
              
              
              334,000
              
              
              282,000Retained
                  earnings
              
              
              6,231,000
              
              
              1,149,000**33,208,000**
              
              
              **23,203,000**Less:
                  cost of 249,184 and 210,902 shares of common stock in
                  treasury
              
              
              (1,686,000
              )
              
              (1,075,000
              )Less:
                  Unearned compensation
              
              
              (3,356,000
              )
              
              (107,000
              )**Total
                  stockholders' equity**
              
              
              **28,166,000**
              
              
              **22,021,000****TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY**
              
              **$**
              **36,927,000**
              
              **$**
              **30,545,000**





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


23




**MEDIFAST,
        INC. AND SUBSIDIARIES**


**CONSOLIDATED
        STATEMENTS OF INCOME**
  **Years
                  Ended December 31,****2006**
              
              **2005**
              
              **2004**Revenue
              
              $
              74,086,000
              
              $
              40,129,000
              
              $
              27,340,000Cost
                  of sales
              
              
              (18,237,000
              )
              
              (10,161,000
              )
              
              (6,746,000
              )**Gross
                  profit**
              
              
              **55,849,000**
              
              
              **29,968,000**
              
              
              **20,594,000**Selling,
                  general, and administration
              
              
              (47,737,000
              )
              
              (25,894,000
              )
              
              (17,590,000
              )**Income
                  from operations**
              
              
              **8,112,000**
              
              
              **4,074,000**
              
              
              **3,004,000****Other
                  income (expense):**Interest
                  expense
              
              
              (369,000
              )
              
              (317,000
              )
              
              (245,000
              )Interest
                  income
              
              
              175,000
              
              
              158,000
              
              
              154,000Stock
                  compensation exp
              
              
              (533,000
              )Loss
                  on sale of CCS
              
              
              (323,000
              )Other
                  income (expense)
              
              
              276,000
              
              
              15,000
              
              
              (7,000
              )(774,000
              )
              
              (144,000
              )
              
              (98,000
              )**Income
                  before provision for income taxes**
              
              
              **7,338,000**
              
              
              **3,930,000**
              
              
              **2,906,000**Provision
                  for income taxes
              
              
              (2,256,000
              )
              
              (1,203,000
              )
              
              (1,159,000
              )**Net
                  income**
              
              
              **5,082,000**
              
              
              **2,727,000**
              
              
              **1,747,000**Less:
                  Preferred stock dividend requirement
              
              
              -
              
              
              (291,000
              )
              
              (18,000
              )**Net
                  income attributable to common shareholders**
              
              **$**
              **5,082,000**
              
              **$**
              **2,436,000**
              
              **$**
              **1,729,000**Basic
                  earnings per share
              
              $
              0.40
              
              $
              0.20
              
              $
              0.16Diluted
                  earnings per share
              
              $
              0.38
              
              $
              0.19
              
              $
              0.14Weighted
                  average shares outstanding -Basic
              
              
              12,699,066
              
              
              12,258,734
              
              
              10,832,360Diluted
              
              
              13,482,894
              
              
              12,780,959
              
              
              12,413,424
  The
        accompanying notes are an integral part of these consolidated financial
        statements
  24




**MEDIFAST,
        INC. AND SUBSIDIARIES**
 **CONSOLIDATED
          STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND ACCUMULATED OTHER COMPREHENSIVE
          INCOME (LOSS)**
 **Years
            Ended December 31, 2006, 2005, and 2004**


Series
                    B
                  Preferred
                    Stock
              
              Series
                    C
                  Preferred
                    Stock
              
              Common
                  StockNumber
                  of
                    Shares
              
              Stated
                    Value
                    Amount
              
              Number
                  of
                    Shares
              
              Stated
                    Value
                    Amount
              
              Number
                  of
                    Shares
              
              Par
                      Value
                    $0.001
                    Amount
              
              Additional
                    Paid-In
                    Capital
              
              Retained
                  Earnings
                    (deficit)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 Stock
              
              
              (103,120
              )
              
              (103,000
              )
              
              (67,000
              )
              
              (67,000
              )
              
              340,240
              
              
              
              
              
              170,000Options
                  exercised to Common Stock
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              47,221
              
              
              1,000
              
              
              34,000Warrants
                  Converted to Common Stock
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              46,700
              
              
              
              
              
              125,000Conversion
                  of debt to equity
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              55,400
              
              
              
              
              
              28,000Conversion
                  of debt to equity out of Treasury
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              114,000Common
                  stock issued to Consultants
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              15,500
              
              
              
              
              
              93,000Shares
                  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
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,747,000Balance,
                  December 31, 2004
              
              
              300,614
              
              
              301,000
              
              
              200,000
              
              
              200,000
              
              
              11,001,070
              
              
              11,000
              
              
              20,556,000
              
              
              (1,287,000
              )Preferred
                  converted to Common Stock
              
              
              (300,614
              )
              
              (301,000
              )
              
              (200,000
              )
              
              (200,000
              )
              
              1,001,228
              
              
              1,100
              
              
              500,000Warrants
                  Converted to Common Stock
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,000
              
              
              -
              
              
              2,000Options
                  excercised to common stock
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              138,335
              
              
              100
              
              
              190,000Common
                  Stock issued for Series “C” dividend
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              38,000
              
              
              -
              
              
              19,000
              
              
              (19,000
              )Dividend
                  paid in stock
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (11,000
              )Common
                  stock issued for Series “B” dividend
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              521,158
              
              
              600
              
              
              260,000
              
              
              (261,000
              )Common
                  stock issued to Employees
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              81,000
              
              
              100
              
              
              271,000Treasury
                  shares issued to employees
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              100
              
              
              (39,000
              )Shares
                  issued to officer with two year vesting periodVesting
                  of unearned compensationTreasury
                  shares repurchasedNet
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,727,000Balance,
                  December 31, 2005
              
              
              0
              
              $
              0
              
              
              0
              
              $
              0
              
              
              12,782,791
              
              $
              13,000
              
              $
              21,759,000
              
              $
              1,149,000Warrants
                  converted to common stock
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              142,810
              
              
              200
              
              
              762,000Common
                  stock issued to Directors
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              10,750
              
              
              100
              
              
              69,000Common
                  stock issued to consultants
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,500
              
              
              100
              
              
              17,000Dividend
                  paid in stockOptions
                  excercised to common stock
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              128,047
              
              
              100
              
              
              240,000Options
                  granted to CEO
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              383,000FASB
                  123R vesting
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              41,000Shares
                  issued to executives with 5 & 6 year vesting period
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              565,000
              
              
              600
              
              
              3,374,000Treasury
                  shares issued to employees
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (100
              )
              
              (16,000
              )Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              5,082,000Balance,
                  December 31, 2006
              
              
              0
              
              $
              0
              
              
              0
              
              $
              0
              
              
              13,631,898
              
              $
              14,000
              
              $
              26,629,000
              
              $
              6,231,000




The
        accompanying notes are an integral part of these consolidated financial
        statements
  25


MEDIFAST,
      INC. AND SUBSIDIARIES


CONSOLIDATED
      STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND ACCUMULATED OTHER
      COMPREHENSIVE INCOME


(LOSS)
      -
      (CONTINUED)




Years
      Ended December 31, 2006, 2005, and 2004




**Consolidated
      Statement of Changes in Stockholders’ Equity and Accumulated Other Comprehensive
      Income (Loss)**


Years
      Ended December 31, 2006, 2005,
      2004




Common
                StockAccumulated
                other comprehensive income (loss )
            
            Total
            
            Treasury
                Stock
            
            Unearned
                CompensationBalance,
                December 31, 2003
            
            
            (25,000
            )
            
            17,760,000
            
            
            (683,000
            )
            
            -Preferred
                converted to Common StockOptions
                exercised to Common Stock
            
            
            
            
            
            35,000
            
            
            (31,000
            )Warrants
                Converted to Common Stock
            
            
            
            
            
            125,000
            
            
            (123,000
            )Conversion
                of debt to equity
            
            
            
            
            
            28,000Conversion
                of debt to equity out of Treasury
            
            
            
            
            
            114,000
            
            
            166,000Common
                stock issued to Consultants
            
            
            
            
            
            93,000
            
            
            135,000Shares
                issued out of Treasury
            
            
            
            
            
            (135,000
            )
            
            135,000Common
                Stock issued for Series “C” dividendDividend
                paid in stock
            
            
            
            
            
            (11,000
            )Net
                Income
            
            
            (14,000
            )
            
            1,733,000Balance,
                December 31, 2004
            
            
            (39,000
            )
            
            19,742,000
            
            
            (536,000
            )
            
            -Preferred
                converted to Common Stock
            
            
            
            
            
            
            
            
            (124,000
            )Warrants
                Converted to Common Stock
            
            
            
            
            
            2,000Options
                excercised to common stock
            
            
            
            
            
            190,000Common
                Stock issued for Series “C” dividendDividend
                paid in stock
            
            
            
            
            
            (11,000
            )Common
                stock issued for Series “B” dividendCommon
                stock issued to Employees
            
            
            
            
            
            271,000Treasury
                shares issued to employees
            
            
            
            
            
            (39,000
            )
            
            38,000Shares
                issued to officer with two year vesting period
            
            
            
            
            
            
            
            
            
            
            
            (122,000
            )Vesting
                of unearned compensation
            
            
            
            
            
            
            
            
            
            
            
            15,000Treasury
                shares repurchased
            
            
            
            
            
            
            
            
            (453,000
            )Net
                income
            
            
            321,000
            
            
            3,048,000Balance,
                December 31, 2005
            
            $
            282,000
            
            $
            23,203,000
            
            
            ($1,075,000
            )
            
            ($107,000
            )Warrants
                converted to common stock
            
            
            
            
            
            763,000
            
            
            (137,000
            )Common
                stock issued to Directors
            
            
            
            
            
            69,000Common
                stock issued to consultants
            
            
            
            
            
            17,000Dividend
                paid in stockOptions
                excercised to common stock
            
            
            
            
            
            241,000
            
            
            (490,000
            )Options
                granted to CEO
            
            
            
            
            
            383,000
            
            
            
            
            
            (383,000
            )FASB
                123R vesting
            
            
            
            
            
            41,000Shares
                issued to executives with 5 & 6 year vesting period
            
            
            
            
            
            3,374,000
            
            
            
            
            
            (3,374,000
            )Vesting
                of unearned compensation
            
            
            
            
            
            
            
            
            
            
            
            508,000Treasury
                shares issued to employees
            
            
            
            
            
            (16,000
            )
            
            16,000Net
                income
            
            
            52,000
            
            
            5,133,000Balance,
                December 31, 2006
            
            $
            334,000
            
            $
            33,208,000
            
            
            ($1,686,000
            )
            
            ($3,356,000
            )





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




26


**MEDIFAST,
      INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOW**


**Years
      Ended December 31,**




2006
            
            2005
            
            2004**Cash
                flows from Operating Activities:**Net
                income
            
            $
            5,082,000
            
            $
            2,727,000
            
            $
            1,747,000**Adjustments
                to reconcile net income to net cash provided by operating activities
                from
                operations:**Depreciation
                and amortization
            
            
            2,396,000
            
            
            1,741,000
            
            
            1,210,000Realized
                (gain) loss on investment securities
            
            
            (79,000
            )
            
            10,000
            
            
            19,000Loss
                on sale of Consumer Choice Systems
            
            
            323,000
            
            
            -
            
            
            -Common
                stock issued for services
            
            
            86,000
            
            
            150,000
            
            
            93,000Vesting
                of unearned compensation
            
            
            509,000
            
            
            15,000
            
            
            -Stock
                options vested during year
            
            
            40,000
            
            
            -
            
            
            -Excess
                tax benefits from share-based payment arrangements
            
            
            16,000
            
            
            -
            
            
            -Net
                change in other accumulated comprehensive income (loss)
            
            
            52,000
            
            
            321,000
            
            
            (14,000
            )Provision
                for bad debts
            
            
            -
            
            
            13,000
            
            
            -Deferred
                income taxes
            
            
            (648,000
            )
            
            301,000
            
            
            486,000**Changes
                in Assets and Liabilities:**Decrease
                (increase) in accounts receivable
            
            
            379,000
            
            
            65,000
            
            
            (422,000
            )(Increase)
                in inventory
            
            
            (3,138,000
            )
            
            (1,225,000
            )
            
            (1,263,000
            )(Increase)
                decrease in prepaid expenses and other current assets
            
            
            675,000
            
            
            (2,194,000
            )
            
            (143,000
            )(Increase)
                in deferred compensation
            
            
            (148,000
            )
            
            (204,000
            )
            
            -Decrease
                (increase) in other assets
            
            
            13,000
            
            
            10,000
            
            
            (25,000
            )Increase
                (decrease) in accounts payable and accrued expenses
            
            
            651,000
            
            
            1,323,000
            
            
            (460,000
            )Increase
                (decrease) in income taxes payable
            
            
            (364,000
            )
            
            160,000
            
            
            674,000**Net
                cash provided by operating activities**
            
            
            5,845,000
            
            
            3,213,000
            
            
            1,902,000**Cash
                Flows from Investing Activities:**Sale
                (purchase) of investment securities, net
            
            
            1,237,000
            
            
            (84,000
            )
            
            1,338,000Purchase
                of building
            
            
            -
            
            
            -
            
            
            (566,000
            )Purchase
                of property and equipment
            
            
            (5,557,000
            )
            
            (1,672,000
            )
            
            (1,490,000
            )Purchase
                of intangible assets
            
            
            (2,427,000
            )
            
            (276,000
            )
            
            (2,792,000
            )**Net
                cash (used in) investing activities**
            
            
            (6,747,000
            )
            
            (2,032,000
            )
            
            (3,510,000
            )**Cash
                Flows from Financing Activities:**Issuance
                of common stock, options and warrants
            
            
            795,000
            
            
            66,000
            
            
            7,000Increase
                in line of credit, net
            
            
            623,000
            
            
            561,000
            
            
            314,000Excess
                tax benefits from share-based payment arrangements
            
            
            (14,000
            )
            
            -
            
            
            -Purchase
                of treasury stock
            
            
            (420,000
            )
            
            (452,000
            )
            
            -Proceeds
                from long-term debt
            
            
            -
            
            
            -
            
            
            475,000Principal
                repayments of long-term debt
            
            
            (481,000
            )
            
            (473,000
            )
            
            (1,089,000
            )Dividends
                paid on preferred stock
            
            
            -
            
            
            (11,000
            )
            
            (11,000
            )**Net
                cash provided by (used in) financing activities**
            
            
            503,000
            
            
            (309,000
            )
            
            (304,000
            )**NET
                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS**
            
            
            (399,000
            )
            
            872,000
            
            
            (1,912,000
            )Cash
                and cash equivalents - beginning of the year
            
            
            1,484,000
            
            
            612,000
            
            
            2,524,000Cash
                and cash equivalents - end of year
            
            $
            1,085,000
            
            $
            1,484,000
            
            $
            612,000**Supplemental
                disclosure of cash flow information:**Interest
                paid
            
            $
            369,000
            
            $
            317,000
            
            $
            245,000Income
                taxes
            
            $
            3,403,000
            
            $
            1,983,000
            
            $
            -**Supplemental
                disclosure of non cash activity:**Common
                stock issued to executives over 6-year vesting period
            
            $
            3,373,000
            
            $
            -
            
            $
            -Common
                shares issued for options and warrants
            
            $
            591,000
            
            $
            -
            
            $
            -Options
                vested during period
            
            $
            40,000
            
            $
            -
            
            $
            -Conversion
                of preferred stock B and C to common stock
            
            $
            -
            
            $
            501,000
            
            $
            170,000Common
                stock for services
            
            $
            86,000
            
            $
            150,000
            
            $
            93,000Conversion
                of debt to equity
            
            $
            -
            
            $
            -
            
            $
            307,000Preferred
                B and C Stock Dividends
            
            $
            -
            
            $
            287,000
            
            $
            7,000Line
                of credit converted to long-term debt
            
            $
            -
            
            $
            369,000
            
            $
            -Common
                stock issued for compensation to be earned upon vesting
            
            $
            -
            
            $
            122,000
            
            $
            -




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




27




**MEDIFAST,
      INC. AND SUBSIDIARIES**


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




Years
                  Ended December 31,2006
              
              2005
              
              2004Supplemental
                  disclosure of non cash activity:Sale
                  of Consumer Choice SystemsInventory
              
              $
              358,000
              
              $
              -
              
              $
              -Accounts
                  Receivable
              
              
              131,000
              
              
              -
              
              
              -Intangible
                  assets, net
              
              
              1,337,000
              
              
              -
              
              
              -Note
                  receivable
              
              
              (1,503,000
              )
              
              -
              
              
              -Loss
                  on sale of Consumer Choice Systems
              
              
              (323,000
              )
              
              -
              
              
              -$
              -
              
              $
              -
              
              $
              -




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




28




**Medifast,
      Inc. and Subsidiaries**


**Notes
      to Consolidated Financial Statements**


**December
      31, 2006, 2005, 2004**





**1.
      BACKGROUND**





**Nature
      of the Business**





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





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





**2.
      Summary of Significant Accounting Policies**





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


**Principles
      of Consolidation and Basis of Presentation**





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





**Cash
      and Cash Equivalents**





For
      the
      purposes of the consolidated statements of cash flow, the Company considers
      all
      highly liquid debt instruments purchased with maturity of three months or less
      to be cash equivalents. At December 31, 2006, the Company had $979,000 in
      miscellaneous short-term investments through Merrill Lynch that are considered
      cash equivalents due to terms of maturity, and $106,000 in operating checking
      accounts.





At
      December 31, 2005, the Company had $789,000 in a money market account, $365,000
      in miscellaneous short-term investments through Merrill Lynch that are
      considered cash equivalents due to terms of maturity, and $330,000 in operating
      checking accounts.





**Accounts
      Receivable and Allowance for Doubtful Accounts**





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





**Inventory**





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.





**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, 2006 and 2005, were $960,000 and $585,000
      respectively. Advertising expense for the years ended December 31, 2006 and
      2005
      amounted to $14,300,000 and $3,784,000, respectively




29




**Property,
      Plant, and Equipment**





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


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




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





**Income
      Taxes**





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





**Earnings
      Per Common Share**





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





**Revenue
      Recognition**





Revenue
      is recognized 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 which also
      include estimated sales returns, allowances and discounts.





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.





**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.





30





**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.





**Concentration
      of Credit Risk**





Financial
      instruments that potentially subject the Company to credit risk consist of
      cash,
      certificates of deposit ,
      investment securities and trade receivables. Cash, money markets and investments
      exceed the federal insurance coverage by $2,610,000 and $2,248,000,
      respectively. The Company securities
      at December 31, 2006 and 2005, include amounts deposited with multiple financial
      institutions markets
      its products primarily to medical professionals, clinics, and Internet medical
      sales and has no substantial concentrations of credit risk in its trade
      receivables.





As
      of
      December 31, 2006 and 2005, the Company had two customers that individually
      represented over 10% of the accounts receivable and in the aggregate,
      approximately 12% and 21% of the accounts receivable, respectively.





**Stock-Based
      Compensation**





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





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





Unearned
      compensation represents shares issued to executives that will be vested over
      a
      5-6 year period. These shares will be amortized over the vesting period in
      accordance with FASB 123(R). The expense related to the vesting of unearned
      compensation was $509,000 and $0 at December 31, 2006 and December 31, 2005,
      respectively. Expense related to vesting of options under FASB 123R was $40,000
      and $0 at December 31, 2006 and December 31, 2005, respectively.





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





31




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


Years
                    Ended December 312006
                
                2005
                
                2004Net
                    income:As
                    reported
                
                
                5,082,000
                
                
                2,727,000
                
                
                1,747,000Add:
                    Stock-based employee compensation expense included in net income,
                    net of
                    related tax effects
                
                
                24,000Deduct:
                    Total stock-based employee compensation determined under fair
                    value based
                    method for all awards, net of related tax effects
                
                
                (24,000
                )
                
                (280,000
                )
                
                (108,000
                )Net
                    income, pro forma
                
                
                5,082,000
                
                
                2,447,000
                
                
                1,639,000Net
                    income per share:as
                    reported:Basic
                
                $
                0.40
                
                $
                0.20
                
                $
                0.16Diluted
                
                $
                0.38
                
                $
                0.19
                
                $
                0.14Pro
                    forma:Basic
                
                $
                0.40
                
                $
                0.20
                
                $
                0.15Diluted
                
                $
                0.38
                
                $
                0.19
                
                $
                0.13




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





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


2006
              
              2005
              
              2004Dividend
                  yield
              
              
              0.0
              %
              
              0.0
              %
              
              0.0
              %Expected
                  volatility
              
              
              0.70
              
              
              0.70
              
              
              0.40Risk-free
                  interest rate
              
              
              4.50
              %
              
              4.50
              %
              
              4.50
              %Expected
                  life in years
              
              
              1-5
              
              
              1-5
              
              
              1-5




**Recent
      Accounting Pronouncements**




In
      February 2006, the FASB issued SFAS No. 155, “Accounting for Certain
      Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and
      140.” SFAS No. 155 resolves issues addressed in SFAS No. 133
      Implementation Issue No. D1, “Application of Statement 133 to Beneficial
      Interests in Securitized Financial Assets,” and permits fair value
      re-measurement for any hybrid financial instrument that contains an embedded
      derivative that otherwise would require bifurcation, clarifies which
      interest-only strips and principal-only strips are not subject to the
      requirements of SFAS No. 133, establishes a requirement to evaluate
      interests in securitized financial assets to identify interests that are
      freestanding derivatives or that are hybrid financial instruments that contain
      an embedded derivative requiring bifurcation, clarifies that concentrations
      of
      credit risk in the form of subordination are not embedded derivatives and amends
      SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose
      entity from holding a derivative financial instrument that pertains to a
      beneficial interest other than another derivative financial instrument. SFAS
      No. 155 is effective for all financial instruments acquired or issued after
      the beginning of the first fiscal year that begins after September 15,
      2006. The Company is currently evaluating the effect the adoption of SFAS
      No. 155 will have on its financial position or results of operations.




32




In
      March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of
      Financial Assets, an amendment of FASB Statement No. 140.” SFAS
      No. 156 requires an entity to recognize a servicing asset or liability each
      time it undertakes an obligation to service a financial asset by entering into
      a
      servicing contract under a transfer of the servicer’s financial assets that
      meets the requirements for sale accounting, a transfer of the servicer’s
      financial assets to a qualified special-purpose entity in a guaranteed mortgage
      securitization in which the transferor retains all of the resulting securities
      and classifies them as either available-for-sale or trading securities in
      accordance with SFAS No. 115, “Accounting for Certain Investments in Debt
      and Equity Securities” and an acquisition or assumption of an obligation to
      service a financial asset that does not relate to financial assets of the
      servicer or its consolidated affiliates. Additionally, SFAS No. 156
      requires all separately recognized servicing assets and servicing liabilities
      to
      be initially measured at fair value, permits an entity to choose either the
      use
      of an amortization or fair value method for subsequent measurements, permits
      at
      initial adoption a one-time reclassification of available-for-sale securities
      to
      trading securities by entities with recognized servicing rights and requires
      separate presentation of servicing assets and liabilities subsequently measured
      at fair value and additional disclosures for all separately recognized servicing
      assets and liabilities. SFAS No. 156 is effective for transactions entered
      into after the beginning of the first fiscal year that begins after
      September 15, 2006. The Company is currently evaluating the effect the
      adoption of SFAS No. 156 will have on its financial position or results of
      operations.




In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No.
      157, Fair Value Measurements, (“FAS 157”). This Standard defines fair value,
      establishes a framework for measuring fair value in generally accepted
      accounting principles and expands disclosures about fair value measurements.
      FAS
      157 is effective for financial statements issued for fiscal years beginning
      after November 15, 2007 and interim periods within those fiscal years. The
      adoption of FAS 157 is not expected to have a material impact on the Company’s
      financial position, results of operations or cash flows.





The
      FASB
      also issued in September 2006 Statement of Financial Accounting Standards No.
      158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement
      Plans — an amendment of FASB Statement No. 87, 88, 106 and 132(R), (“FAS 158”) .
      This Standard requires recognition of the funded status of a benefit plan in
      the
      statement of financial position. The Standard also requires recognition in
      other
      comprehensive income certain gains and losses that arise during the period
      but
      are deferred under pension accounting rules, as well as modifies the timing
      of
      reporting and adds certain disclosures. FAS 158 provides recognition and
      disclosure elements to be effective as of the end of the fiscal year after
      December 15, 2006 and measurement elements to be effective for fiscal years
      ending after December 15, 2008. The Company has not yet analyzed the impact
      FAS
      158 will have on its financial condition, results of operations, cash flows
      or
      disclosures.





In
      September 2006, the Securities and Exchange Commission (“SEC”) issued Staff
      Accounting Bulletin (“SAB”) No. 108, “Quantifying Misstatements.” SAB 108
      provides interpretative guidance on how public companies quantify financial
      statement misstatements. There have been two common approaches used to quantify
      such errors. Under an income statement approach, the “roll-over” method, the
      error is quantified as the amount by which the current year income statement
      is
      misstated. Alternatively, under a balance sheet approach, the “iron curtain”
method, the error is quantified as the cumulative amount by which the current
      year balance sheet is misstated. In SAB 108, the SEC established an approach
      that requires quantification of financial statement misstatements based on
      the
      effects of the misstatements on each of the company’s financial statements and
      the related financial statement disclosures. This model is commonly referred
      to
      as a “dual approach” because it requires quantification of errors under both the
      roll-over and iron curtain methods. SAB 108 is effective for the first fiscal
      year ending after November 15, 2006. The adoption of SAB 108 did not have a
      material impact on the Company’s consolidated financial position and results of
      operations.





In
      June
      2006, the FASB issued FASB Interpretation No. 48, “Accounting for
      Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109”
(“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attribute
      for financial statement recognition and measurement of a tax position taken
      or
      expected to be taken in a tax return, and also provides guidance on
      de-recognition, classification, interest and penalties, accounting in interim
      periods, disclosure, and transition. FIN 48 is effective for fiscal years
      beginning after December 15, 2006. The adoption of FIN 48 is not expected
      to have a material impact on the Company’s consolidated financial position and
      results of operations.




**Investments**





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




33




**Goodwill
      and Other Intangible Assets**





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





In
      addition, the Company has acquired other intangible assets, which include:
      customer lists, non-compete agreements, trademarks 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.




**Comprehensive
      Income (Loss)**





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




**Reclassifications**





Certain
      amounts for the years ended December 31, 2005 and 2004 have been reclassified
      to
      conform to the presentation of the December 31, 2006 amounts. The
      reclassifications have no effect on net income for the years ended December
      31,
      2005 and 2004.




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





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


**Cost**
              
              **Accrued
                  interest**
              
              **Fair
                  value****Cash
                  and cash equivalents**Demand
                  deposits
              
              $
              106,000
              
              $
              -
              
              $
              106,000Money
                  market accounts
              
              
              979,000
              
              
              -
              
              
              979,000December
                  31, 2006
              
              $
              1,085,000
              
              $
              -
              
              $
              1,085,000**Marketable
                  Securities**Marketable
                  securities
              
              $
              1,206,000
              
              $
              334,000
              
              $
              1,540,000December
                  31, 2006
              
              $
              1,206,000
              
              $
              334,000
              
              $
              1,540,000**Cash
                  and cash equivalents**Demand
                  deposits
              
              $
              330,000
              
              $
              -
              
              $
              330,000Money
                  market accounts
              
              
              1,154,000
              
              
              -
              
              
              1,154,000December
                  31, 2005
              
              $
              1,484,000
              
              $
              -
              
              $
              1,484,000**Cash
                  equivalents and marketable securities**Marketable
                  securities
              
              $
              2,418,000
              
              $
              282,000
              
              $
              2,700,000December
                  31, 2005
              
              $
              2,418,000
              
              $
              282,000
              
              $
              2,700,000




34




**4.
      INVENTORY**





Inventory
      consists of the following at December 31, 2006 and 2005:


2006
              
              2005Raw
                  materials
              
              $
              1,872,000
              
              $
              1,906,000Packaging
              
              
              1,625,000
              
              
              1,142,000Finished
                  goods
              
              
              4,758,000
              
              
              2,427,000$
              8,255,000
              
              $
              5,475,000




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




Prepaid
      expense and other current assets as of December 31, 2006 and 2005, consist
      of
      the following:


2006
              
              2005Marketing
                  and advertising
              
              
              1,830,000
              
              
              1,592,000Taxes
              
              
              -
              
              
              779,000Supplies
              
              
              158,000
              
              
              393,000Insurance
              
              
              519,000
              
              
              294,000Services
              
              
              
              
              
              50,000Other
              
              
              92,000
              
              
              165,0002,599,000
              
              
              3,273,000




**6.
      PROPERTY, PLANT AND EQUIPMENT**





Property,
      plant and equipment as of December 31, 2006 and 2005, consist of the
      following:


2006
              
              2005Land
              
              $
              650,000
              
              $
              650,000Building
                  and building improvements
              
              
              7,182,000
              
              
              6,871,000Equipment
                  and fixtures
              
              
              10,805,000
              
              
              5,583,000Vehicle
              
              
              43,000
              
              
              19,00018,680,000
              
              
              13,123,000Less
                  accumulated depreciation and amortization
              
              
              4,660,000
              
              
              3,588,000Property,
                  plant and equipment - net
              
              $
              14,020,000
              
              $
              9,535,000





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





Depreciation
      expense for the years ended December 31, 2006, 2005, and 2004 were $1,072,000,
      $835,000 and $804,000, respectively.





35




**7.
      TRADEMARKS AND INTANGIBLES**




**As
                  of December 31, 2006**
              
              **As
                  of December 31, 2005****Gross
                    Carrying**
                  **Amount**
              
              **Accumulated**
                  **Amortization**
              
              **Gross
                    Carrying**
                  **Amount**
              
              **Accumulated**
                  **Amortization**Customer
                  lists
              
              $
              6,346,000
              
              $
              1,636,000
              
              $
              4,514,000
              
              $
              873,000Non-compete
                  agreements
              
              
              840,000
              
              
              840,000
              
              
              840,000
              
              
              566,000Trademarks
                  and patents
              
              
              1,707,000
              
              
              143,000
              
              
              1,821,000
              
              
              121,000Goodwill
              
              
              -
              
              
              
              
              
              894,000
              
              
              -Total
              
              $
              8,893,000
              
              $
              2,619,000
              
              $
              8,069,000
              
              $
              1,560,000
 **Amortization
          expense for the years ended December 31, 2006, 2005 and 2004 was as
          follows:**
 2006
              
              2005
              
              2004Customer
                  lists
              
              $
              966,000
              
              $
              479,000
              
              $
              244,000Non-compete
                  agreements
              
              
              273,000
              
              
              369,000
              
              
              162,000Trademarks
                  and patents
              
              
              85,000
              
              
              58,000
              
              
              -Total
                  trademarks and intangibles
              
              $
              1,324,000
              
              $
              906,000
              
              $
              406,000
  On
        January 17, 2006 the Consumer Choice Systems division of the Company was
        sold
        which included the sale of $1,601,000
        in gross intangible assets and $265,000 in accumulated
        amortization.
  The
          estimated future amortization expense of trademarks and intangible assets
          is as
          follows:




For
                  the years ending December 31,
              
              Amount2007
              
              $
              1,640,0002008
              
              
              1,615,0002009
              
              
              675,0002010
              
              
              600,0002011
              
              
              590,000




**8.
      ACCOUNTS PAYABLE AND ACCRUED EXPENSES**




Accounts
      payable and accrued expenses as of December 31, 2006 and 2005 consist of the
      following:




2006
              
              2005Trade
                  payables
              
              $
              2,214,000
              
              $
              1,695,000Accrued
                  payroll and related taxes
              
              
              328,000
              
              
              314,000Sales
                  commissions payable
              
              
              371,000
              
              
              254,000Total
              
              $
              2,913,000
              
              $
              2,263,000




36




**9.
      COMMITMENTS AND CONTINGENCIES**





The
      Company leases office space for its eleven corporately owned Medifast Weight
      Control Centers under lease terms ranging from one to five years with leases
      commencing in 2004, 2005, 2006 and 2007. Monthly payments under the leases
      range
      in price from $1,200 to $3,500. 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, 2006:




For
                    the Years Ending December 31,2007
              
              $
              253,0002008
              
              
              221,0002009
              
              
              215,0002010
              
              
              110,0002011
              
              
              70,000Total
                  minimum payments required
              
              $
              869,000




Rent
      expense for the years ended December 31, 2006, 2005, and 2004 was $116,000,
      $211,000, and $229,000, respectively .





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




**10.
      INCOME TAXES**





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


2006
              
              2005
              
              2004Current:Federal
              
              $
              1,184,000
              
              $
              685,000
              
              $
              600,000State
              
              
              314,000
              
              
              217,000
              
              
              90,000Total
                  Current
              
              $
              1,498,000
              
              $
              902,000
              
              $
              690,000Deferred:Federal
              
              $
              657,000
              
              $
              261,000
              
              $
              408,000State
              
              
              101,000
              
              
              40,000
              
              
              61,000Total
                  deferred
              
              
              758,000
              
              
              301,000
              
              
              469,000Income
                  tax expense
              
              $
              2,256,000
              
              $
              1,203,000
              
              $
              1,159,000





37




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




2006
              
              2005
              
              2004Provision
                  at the U.S. federal statutory rate
              
              $
              2,492,000
              
              $
              1,272,000
              
              $
              1,087,000State
                  taxes, net of federal benefit
              
              
              366,000
              
              
              198,000
              
              
              145,000Intangible
                  assets
              
              
              (298,000
              )
              
              (153,000
              )
              
              (73,000
              )Other
                  temporary differences
              
              
              -
              
              
              (98,000
              )
              
              -Cost
                  segregation study
              
              
              (275,000
              )
              
              -
              
              
              -Permanent
                  differences
              
              
              (29,000
              )
              
              (16,000
              )
              
              -Income
                  tax expense
              
              $
              2,256,000
              
              $
              1,203,000
              
              $
              1,159,000




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




2006
              
              2005Deferred
                  tax assetsIntangible
                  assets
              
              $
              330,000
              
              $
              -Accounts
                  receivable
              
              
              37,000
              
              
              -Inventory
                  overhead and write downs
              
              
              49,000
              
              
              -Deferred
                  compensation
              
              
              41,000
              
              
              -Total
                  deferred tax assets
              
              $
              457,000
              
              $
              -Deferred
                  Tax LiabilitiesIntangible
                  assets
              
              $
              -
              
              $
              (113,000
              )Accounts
                  receivable
              
              
              -
              
              
              (37,000
              )Inventory
                  overhead and write downs
              
              
              -
              
              
              (41,000
              )Total
                  deferred tax liabilities
              
              $
              -
              
              $
              (191,000
              )


The
      2006
      effective income tax rate of 30.7% differed from the federal statutory rate
      of
      34% due to the amortization of intangible assets, a cost segregation study
      performed on fixed assets, as well as timing differences for other temporary
      and
      permanent differences, and state income taxes.





The
      2005
      effective income tax rate of 30.6% differed from the federal statutory rate
      of
      34% due to the amortization of intangible assets, timing differences for other
      temporary and permanent differences, and state income taxes.





The
      2004
      effective income tax rate differed from the federal statutory rate due to state
      taxes, amortization of intangible assets, and for a net operating loss deduction
      carried forward from 2003.




38




**11.
      STOCK OPTION PLAN**





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





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





The
      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.





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




2006
              
              2005
              
              2004Shares
              
              Weighted
                  Average Exercise Price
              
              Shares
              
              Weighted
                  Average Exercise Price
              
              Shares
              
              Weighted
                  Average Exercise PriceOutstanding
                  at beginning of year
              
              
              359,727
              
              $
              2.71
              
              
              389,397
              
              $
              1.51
              
              
              439,455.00
              
              $
              1.76Options
                  granted
              
              
              100,000
              
              
              6.25
              
              
              333,333
              
              
              2.64
              
              
              30,000.00
              
              
              8.60Options
                  reinstated
              
              
              16,666
              
              
              6.36
              
              
              -
              
              
              0.00
              
              
              -
              
              
              0.00Options
                  exercised
              
              
              (128,147
              )
              
              (2.11
              )
              
              (138,335
              )
              
              (1.83
              )
              
              (47,221
              )
              
              (1.19
              )Options
                  forfeited or expired
              
              
              (26,667
              )
              
              (8.36
              )
              
              (224,668
              )
              
              (1.17
              )
              
              (32,837
              )
              
              (7.01
              )Outstanding
                  at end of year
              
              
              321,579
              
              $
              3.88
              
              
              359,727
              
              $
              2.71
              
              
              389,397.00
              
              $
              1.51Options
                  exercisable at year end
              
              
              211,577
              
              $
              2.77
              
              
              329,725
              
              $
              2.56
              
              
              350,336.00
              
              $
              1.11




The
      weighted average fair value at date of grant for options granted during the
      years 2006, 2005, and 2004 were $6.25, $2.64, and $8.60,
      respectively.





In
      2005,
      the Company incorrectly cancelled 75,000 options to a former consultant. The
      options were correctly added back to the 2005 and 2006 option schedule above.
      The omission from the schedule in prior year had no impact on earnings per
      share. During 2006, the former consultant exercised 25,000 options and 50,000
      remain outstanding.




39




The
      following table summarizes information about stock options outstanding and
      exercisable at December 31, 2006:




Options
                  Outstanding
              
              Options
                  ExercisableRange
                  of ExercisePrices
              
              NumberOutstanding
              
              Weighted
                  Average Contractual Life Remaining(in
                  Years)
              
              Weighted
                  Average ExercisePrice
              
              NumberExercisable
              
              Weighted
                  Average ExercisePrice$0.50
              
              
              50,000
              
              
              1.0
              
              $
              0.50
              
              
              50,000
              
              $
              0.50$1.60
              
              
              2,779
              
              
              .7
              
              $
              1.60
              
              
              2,779
              
              $
              1.60$2.87
              
              
              123,334
              
              
              3.3
              
              $
              2.87
              
              
              123,334
              
              $
              2.67$3.83
              
              
              23,334
              
              
              3.9
              
              $
              3.83
              
              
              13,332
              
              $
              3.83$4.80
              
              
              15,000
              
              
              1.3
              
              $
              4.80
              
              
              15,000
              
              $
              4.80$6.25
              
              
              100,000
              
              
              4.1
              
              $
              6.25
              
              
              -
              
              $
              6.25$11.12
              
              
              7,132
              
              
              1.4
              
              $
              11.12
              
              
              7,132
              
              $
              11.15321,579
              
              
              
              
              $
              3.88
              
              
              211,577
              
              $
              2.77
 **12.
        LONG-TERM DEBT AND LINE OF CREDIT**





Long-term
      debt as of December 31, 2006 and 2005, consist of the following:


2006
              
              2005$3,539,000
                  ten year term loan secured by two buildings and land at a variable
                  rate
                  which was 7.1% at December 31, 2006. Due 2016
              
              $
              3,480,000
              
              $
              2,201,000$200,000
                  five-year term loan secured by equipment fixed rate was 3% at December
                  31,
                  2006. Due 2008
              
              
              49,000
              
              
              90,000$475,000
                  seven-year loan secured by the building and land at a variable
                  rate at
                  LIBOR plus 250 bps, which was 7.85 % on December 31, 2006. Due
                  2011
              
              
              396,000
              
              
              428,000$366,000
                  three-year term loan secured by certain assets at LIBOR plus 250
                  basis
                  points, which was at 7.82% at December 31, 2006. Due 2008
              
              
              132,000
              
              
              254,000$1,256,000
                  ten-year reducing revolver line of credit rate at LIBOR plus 220
                  bps ,
                  which was 6.62% on December 31, 2006
              
              
              -
              
              
              1,506,000$186,976
                  three-year term loan secured by 20,000 restricted common shares
                  variable
                  rate which was 10.25%
              
              
              -
              
              
              59,0004,057,000
              
              
              4,538,000Less
                  current portion
              
              
              548,000
              
              
              561,000$
              3,509,000
              
              $
              3,977,000




40




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




2007
              
              $
              548,0002008
              
              
              404,0002009
              
              
              386,0002010
              
              
              386,0002011
              
              
              386,000Thereafter
              
              
              1,947,000$
              4,057,000




The
      Company has established a $5 million revolving line of credit at the LIBOR
      rate
      plus 1.30% 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 $1,256,000 and $633,000 at December 31, 2006 and 2005,
      respectively. Effective October 2, 2006, the 10-year revolver with an original
      balance of $1,256,000 was refinanced with the Company’s other building loan for
      a total of $3,539,000 with Mercantile Safe Deposit and Trust Company secured
      by
      two buildings and land at a variable rate which was 7.1% on December 31, 2006.




**13.
      EMPLOYMENT AGREEMENTS**





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




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




**14.
      WARRANTS**




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





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





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




41





During
      2006, there were 120,000 warrants exercised at $4.80 and 22,810 warrants
      exercised at $10. In addition, 2,190 warrants expired.




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




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




Years
                      Ended December 31,Exercise
                      Price
              
              Expiration
                  Date
              
              2006
              
              2005
              
              2004$0.35
              
              
              March,
                  2005
              
              
              -
              
              
              -
              
              
              2,000$4.80
              
              
              January,
                  2009
              
              
              120,000
              
              
              240,000
              
              
              360,000$10.00
              
              
              June,
                  2006
              
              
              0
              
              
              25,000
              
              
              25,000$16.78
              
              
              July,
                  2008
              
              
              82,500
              
              
              82,500
              
              
              82,500202,500
              
              
              347,500
              
              
              469,500Weighted
                  average exercise price
              
              
              9.68
              
              
              8.02
              
              $
              7.16


As
        of
        December 31, 2006, 82,500 of the warrants are exercisable.





**15.
      QUARTERLY RESULTS (Unaudited)**


First
                  Quarter
              
              Second
                  Quarter
              
              Third
                  Quarter
              
              Fourth
                  Quarter**2006**Revenue
              
              $
              19,183,000
              
              $
              19,954,000
              
              $
              19,642,000
              
              $
              15,307,000Gross
                  Profit
              
              
              14,405,000
              
              
              15,101,000
              
              
              14,937,000
              
              
              11,406,000Operating
                  Income
              
              
              3,054,000
              
              
              2,541,000
              
              
              1,970,000
              
              
              547,000Net
                  Income
              
              
              1,694,000
              
              
              1,475,000
              
              
              1,470,000
              
              
              443,000Earnings
                  per common share - diluted (1)
              
              
              0.13
              
              
              0.11
              
              
              0.11
              
              
              0.03**2005**Revenue
              
              $
              8,326,000
              
              $
              10,555,000
              
              $
              10,985,000
              
              $
              10,264,000Gross
                  Profit
              
              
              6,253,000
              
              
              7,932,000
              
              
              8,310,000
              
              
              7,473,000Operating
                  Income
              
              
              912,000
              
              
              1,154,000
              
              
              1,266,000
              
              
              742,000Net
                  Income
              
              
              507,000
              
              
              753,000
              
              
              607,000
              
              
              849,000Earnings
                  per common share - diluted (1)
              
              
              0.04
              
              
              0.06
              
              
              0.05
              
              
              0.04


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




42




**16.
      DISPOSAL OF A BUSINESS SEGMENT**





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




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


43




**INDEX
        TO EXHIBITS**




**No.**3.1
              
              Certificate
                  of Incorporation of the Company and amendments thereto*3.2
              
              By-Laws
                  of the Company*10.1
              
              1993
                  Stock Option Plan of the Company as amended*10.3
              
              Lease
                  relating to the Company's Owings Mills, Maryland
                  facility**10.4
              
              Employment
                  agreement with Bradley T. MacDonald***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








*
      Filed
      as an exhibit to and incorporated by reference to the Registration Statement
      on Form SB-2 of the Company, File No. 33-71284-NY.





**
      Filed
      as an exhibit to and incorporated by reference to the Registration Statement
      on Form S-4 of the Company, File No. 33-81524.





***Filed
      as an exhibit to 10KSB, dated April 15, 1999 of the Company, file No.
      000-23016.





(b)
      Reports on Form 8-K





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





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





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





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





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





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





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





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




44


**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the Registrant has duly caused this Report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized.




MEDIFAST,
      INC.


(Registrant)




BRADLEY
              T.
              MACDONALDBradley
                T. MacDonald
              Executive
                Chairman of the Board
              Dated:
                March 16, 2007




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




Name
              
              Title
              
              Date/s/
                  BRADLEY T. MACDONALD
              
              Chairman
                  of the Board,
              
              March
                  16, 2007Bradley
                  T. MacDonald
              
              Director/s/
                  GEORGE LAVIN
              
              Director
              
              March
                  16, 2007George
                  Lavin/s/
                  MICHAEL C. MACDONALD
              
              Director
              
              March
                  16, 2007Michael
                  C. MacDonald/s/
                  MARY T. TRAVIS
              
              Director
              
              March
                  16, 2007Mary
                  T. Travis/s/
                  REV. DONALD F. REILLY, OSA
              
              Director
              
              March
                  16, 2007Rev.
                  Donald F. Reilly, OSA/s/
                  MICHAEL J. MCDEVITT
              
              Director
              
              March
                  16, 2007Michael
                  J. McDevitt/s/
                  JOSEPH D. CALDERONE
              
              Director
              
              March
                  16, 2007Joseph
                  D. Calderone/s/
                  CHARLES P. CONNOLLY
              
              Director
              
              March
                  16, 2007Charles
                  P. Connolly/s/
                  DENNIS M. MCCARTHY
              
              Director
              
              March
                  16, 2007Dennis
                  M. McCarthy




45