UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION





WASHINGTON,
      DC 20549





FORM
      10-K/A


Amendment
      No. 1





ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF


THE
      SECURITIES EXCHANGE ACT OF 1934





For
      the
      fiscal year ended December 31, 2005





Commission
      File No. 000-23016




MEDIFAST,
      INC.








DELAWARE
            
            13-3714405Incorporation
                State
            
            Tax
                Identification number




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





Phone
      (410) 581-8042




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




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




COMMON
      STOCK, PAR VALUE $.001 PER SHARE







Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act. Yes o No x




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 filero
            
            Accelerated
                filero
            
            Non-accelerated
                filerx




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, 2005, based upon the closing price of $3.04 per
      share on the American Stock Exchange on that date, was $32,985,000.




As
      of
      March 14, 2006, the Registrant had 12,786,124 shares of Common Stock
      outstanding.









**DOCUMENTS
      INCORPORATED BY REFERENCE**




Portions
      of the definitive Proxy Statement for the 2006 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.





**Explanatory
      Note**




This
      Amendment No. 1 to our Annual Report on Form 10-K for the fiscal year ended
      December 31, 2005 initially filed with the Securities and Exchange Commission
      on
      March 15, 2006 is being filed to reflect restatements of Medifast, Inc.’s
      Consolidated Balance Sheets as of December 31, 2005 and 2004, and the related
      Consolidated Statements of Income, Cash Flows, and Stockholders’ Equity for each
      of the three years in the period ended December 31, 2005. These restatements
      reflect the adjustment detailed in Note R to the Consolidated Financial
      Statements relating to amortization expense on a customer list acquired in
      December 2004.




The
      following sections of this report have been revised to reflect above
      restatement: Part II – Item 6-Selected Financial Data, Item 7 –
Management’s Discussion and Analysis of Financial Condition and Results of
      Operations, Item 8 – Financial Statements and Supplementary Data and Item 9A –
Controls and Procedures; and Part IV – Exhibits and Financial Statement
      Schedules. For the convenience of the reader, this Amendment No. 1 includes,
      in
      their entirety, those items in the Original filing not being amended and
      restated. Except as discussed above, we have not modified or updated the
      disclosure presented in the Original Annual Report. This Form 10-K/A does
      not reflect events that have occurred after the filing of the Original Annual
      Report or modify or update disclosures presented in the Original Annual Report
      affected by subsequent events. Accordingly, this Form 10-K/A should be read
      in conjunction with our filings made with the Securities and Exchange Commission
      (“SEC”) subsequent to the date of the filing of the Original Annual Report.




In
      addition, in accordance with applicable SEC rules, this Form 10-K/A
      includes updated certifications from our Chief Executive Officer and Chief
      Financial Officer.




2





PART
      I





**ITEM
      1. BUSINESS.**





**SUMMARY**





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




**MARKETS**





Over
      the
      past 20 years the obesity rates in the United States have increased
      dramatically. The Centers for Disease Control (CDC) estimate that 64% of the
      U.S. adult population is overweight, and 30% of these individuals (60 million)
      are obese which is defined as having a Body Mass Index >30. The amount of
      overweight adolescents and children ages 6-19 years have more than tripled
      since
      1980. Currently, the CDC estimates that over 30% of adolescents and children
      are
      overweight.





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





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





**Distribution
      Channels**





**The
      Medifast Lifestyles Program** -
      The
      Medifast Lifestyles Program is a medically supported network of health care
      professionals who support patients on the Medifast program. Patients order
      products directly from Medifast’s website or toll-free number. The Lifestyles
      medical practitioner ensures that each patient receives personalized attention
      throughout the weight loss program. Management estimates that more than 15,000
      physicians nationwide have prescribed Medifast as a treatment for their
      overweight patients since 1980, and over an estimated 1 million patients have
      used its’ products to lose and maintain their weight. Direct-to-consumer sales
      represent approximately 45% of Medifast, Inc.’s total sales.





The
      Company maintains an in-house Lifestyles support program for customers who
      have
      a Medifast physician who does not have the time to provide counseling support.
      The Company also offers an additional in-house support program to assist
      customers that are consulting their primary care physician. Customers have
      access to qualified nutritional counselors for program support and advice via
      a
      toll free telephone help line or by e-mail.




3





**Take
      Shape for LifeTM** - Take
      Shape for Life is a physician led network of independent health coaches who
      are
      specifically trained to provide emotional support and 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 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. 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 Advisor to determine the Medifast program that is right
      for them. Physician directed Health Advisors are supported, educated and
      qualified by The Health Institute, a training group staffed by Medifast
      professionals. Health Advisors obtain Medifast qualification based upon testing
      of their knowledge on Medifast products and programs.





Take
      Shape for Life accounts for approximately 35% of Medifast, Inc.’s total
      sales.





**Medifast
      Physicians and Clinics** - Many
      Medifast physicians have chosen to implement the Medifast program within their
      practice. These physicians carry an inventory of Medifast products and resell
      them to patients. They also provide appropriate testing, medical support and
      evaluations for patients on the program. Physicians can also direct their
      patients to order directly from Medifast, if they do not have space to stock
      inventory. Physician sales account for approximately 10% of Medifast, Inc.’s
      total sales.




**Hi-Energy
      Weight Control Centers -** In
      2003,
      the Company acquired Hi-Energy Weight Control Centers, a national company
      specializing in weight management programs, with weight loss centers in over
      50
      locations. Hi-Energy Weight Control Centers offer a competitive marketing edge
      through a regional advertising program, exclusive territories and marketing
      support. The Company continues to seek out qualified licensees to add to its
      growing number of weight control clinics nationwide. Additionally, the Company
      is operating 11 corporately owned clinics that serve as models to attract
      qualified licensees. Hi-Energy clinics account for approximately 7% of Medifast,
      Inc.’s total sales.




**THE
      MEDIFAST® BRAND**





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





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




4





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





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.





Medically
      supervised, low calorie diets are continuing to gain popularity, as consumers
      search for a safe and effective solution that provides balanced nutrition,
      quick
      weight loss and valuable behavior modification education. In addition, consumers
      are becoming more aware of chronic diseases such as diabetes and coronary
      health.




**COMPETITION**




There
      are
      many different kinds of diet products and programs within the weight loss
      industry. These include a wide variety of commercial weight loss programs,
      pharmaceutical products, weight loss books, self-help diets, dietary
      supplements, appetite suppressants and meal replacement shakes and
      bars.




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





The
      Medifast program has been recommended by physicians for more than 25 years
      and
      some Medifast practitioners choose to prescribe appetite suppression diet drugs
      to patients in conjunction with a Medifast based diet. Diet drug therapies
      such
      as those that suppress appetite usually require a restricted calorie diet in
      order to obtain desired results. Medifast is a dosage/portion controlled weight
      management solution that is effective in conjunction with drug therapy as
      prescribed by physicians working within the individual needs of their patients.
      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, Medifast® 70, Medifast® Plus for Appetite Suppression,
      Medifast® Plus for Diabetics, Medifast® Plus for Joint Health, Medifast® Plus
      for Women’s Health, Medifast® Plus for Coronary Health, Medifast® Fit!,
      Medifast® Take ShapeTM, Medifast® Supplement Bars, Medifast® Creamy Soups,
      Medifast® Minestrone Soup, Medifast® Hot Cocoa, Medifast® Oatmeals, Medifast®
Pro Teas, Medifast® Chicken Noodle Soup, Medifast® Fast Soups, Medifast®
Homestyle Chili and Medifast® Multigrain Crackers.




5




Medifast
      nutritional products are formulated with high-quality, low-calorie, low-fat
      ingredients. Many Medifast products are soy based and contain 24 vitamins and
      minerals, as well as other nutrients essential for good health. The Company
      uses DuPont
      Protein Technologies’ Supro® 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 the U.S. government
      and
      Johns Hopkins University. The Company has continued to develop its sales and
      marketing operations with qualified management and innovative programs. The
      Company’s facility in Owings Mills, MD manufactures powders and a portion of its
      supplement bars and subcontracts the production of its Ready-to-Drink products
      and additional bars.




**NEW
      PRODUCTS**




The
      Company expanded the Medifast product line in 2005 by introducing Medifast®
Banana Crème Shake, Medifast® Peach Oatmeal, Medifast® Beef Vegetable Stew,
      Medifast® Red Bell Pepper Italian dressing, and Medifast® Ranch dressing.
      Medifast also introduced a line of diabetic products that includes shakes and
      bars under the Medifast® Maintain line.




**MARKETING**





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





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




**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 2005, the sales team attended
      a
      number of medical professional trade shows, which expanded Medifast's
      penetration of the clinical business segment.





Hi-Energy
      Weight Control Centers— During 2005 Hi-Energy provided ongoing support to its
      licensees as well as to the Company’s 11 corporately owned centers which opened
      at the end of 2004. This support included marketing materials, ads, on-site
      trainings, fitness programs, nutritional programs and clinical operation
      materials and forms. Employees attended professional trade shows, prospected
      new
      licensees, and partnered with area physicians to provide Hi-Energy programs
      and
      services to local hospitals and private practices.




6





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
      manufacturing facility has the capacity for significant increases to its
      production output with minimal capital expenditures. Adding additional shifts,
      along with minor capital expenditures for machinery would enable the Company
      to
      produce enough products to generate over $200 million in sales.





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




**GOVERNMENTAL
      REGULATION HISTORY**





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





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





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




7




**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, 2005, the Company employed 164 full-time and contracted employees,
      of whom 62 were engaged in manufacturing, warehouse management, and shipping,
      and 102 in marketing, administrative, call center and corporate support
      functions. None of the employees are subject to a collective bargaining
      agreement with the Company.




**ITEM
      2. DESCRIPTION OF PROPERTY**





The
      Company owns a 49,000 square-foot facility in Owings Mills, Maryland, which
      contains its Corporate Headquarters and manufacturing plant. In 2003, the
      Company purchased a state-of-the-art 119,000 square-foot distribution facility
      in Ridgely, Maryland. The facility gives the Company the ability to distribute
      over $200 million of Medifast product sales per year. In 2004, the Company
      purchased a 3,000 square foot conference and training facility in Ocean City,
      Maryland. The facility will be used to conduct corporate training meetings,
      Board of Director Meetings and employee morale and wellness
      programs.  The
      Company has 11 leases for its corporately owned Hi-Energy Weight Control clinics
      throughout Florida, Arkansas, Mississippi and Texas. The leases range in terms
      from one to five years.





**ITEM
      3. LEGAL PROCEEDINGS.**





There
      were no material pending legal matters as of 12/31/05.




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





The
      Medifast Annual Shareholder Meeting was held on September 16, 2005 at the Roland
      E. Powell Convention Center in Ocean City, Maryland. The shareholders voted
      Michael C. MacDonald (96%), Mary T. Travis* (98%) and Joseph D. Calderone,
      O.S.A* (98%) as Class II Directors that will hold office until 2008, and Michael
      J. McDevitt (97%), and George Lavin, Jr., Esq* (98%) as Class III Directors.
      Class III Directors will hold office until the next Annual Shareholders Meeting
      at which time their respective class term expires and their respective
      successors will be duly elected and qualified. Additionally, the shareholders
      approved the appointment of Bagell, Josephs & Company, LLC, an independent
      member of the BDO Seidman Alliance, as the Company’s independent auditors for
      the fiscal year ending December 31, 2005. Lastly, the shareholders voted to
      increase the number of authorized shares of common stock by 5 million shares
      to
      20 million shares authorized.





*
      Independent Director




8





(a)
      The
      following are the Board of Directors:




Name
            
            Age
            
            Position
            
            Date First
              Became DirectorBradley
                T. MacDonald
            
            58
            
            Chairman
                of the Board, Chief Executive Officer and Director
            
            1996Donald
                F. Reilly
            
            58
            
            Director
            
            1998Michael
                C. MacDonald
            
            52
            
            Director
            
            1998Mary
                T. Travis
            
            55
            
            Director
            
            2002Joseph
                D. Calderone
            
            57
            
            Director
            
            2003George
                Lavin, Jr
            
            76
            
            Director
            
            2005Michael
                J. McDevitt
            
            57
            
            Director
            
            2002




BRADLEY
      T. MACDONALD became Chairman of the Board and Chief Executive Officer of
      Medifast, Inc. on January 28, 1998. Prior to joining the Company, he was
      appointed as Program Director of the U.S. Olympic Coin Program of the Atlanta
      Centennial Olympic Games. Mr. MacDonald was previously employed by the Company
      as its Chief Executive Officer from September 1996 to August 1997. From 1991
      through 1994, Colonel MacDonald returned to active duty to be Deputy Director
      and Chief Financial Officer of the Retail, Food, Hospitality and Recreation
      Businesses for the United States Marine Corps. Prior thereto, Mr. MacDonald
      served as Chief Operating Officer of the Bonneau Sunglass Company, President
      of
      Pennsylvania Optical Co., Chairman and CEO of MacDonald and Associates, which
      had major financial interests in a retail drug, consumer candy, and pilot
      sunglass companies. Mr. MacDonald was national president of the Marine Corps
      Reserve Officers Association and retired from the United States Marine Corps
      Reserve as a Colonel in 1997, after 27 years of service. He has been appointed
      to the Defense Advisory Board for Employer Support of the Guard and Reserve
      (ESGR).  Mr.
      MacDonald serves on the Board of Directors of the Wireless Accessories Group
      (AMEX:XWG). He is also on the Board of Directors of the Marine Corps Reserve
      Toys for Tots Foundation.





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




9





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




GEORGE
      LAVIN, JR. ESQ., is a senior partner at Lavin, Oneil, Ricci, Ceprone &
Disipio. Mr. Lavin is a 1951 graduate of Bucknell University. He attended the
      University of Pennsylvania School of Law, receiving an LL.B. in 1956, and then
      served as a Special Agent, Federal Bureau of Investigation, United States
      Department of Justice, until 1959. Mr. Lavin is one of the dominant product
      liability defense attorneys in the nation. He has had regional responsibilities
      in several automotive specialty areas, and has been called upon to try matters
      throughout the county on behalf of his clients. Mr. Lavin's present practice
      and
      specialty emphasizes his commitment to defending the automotive industry. Mr.
      Lavin is admitted to practice before the Supreme Court of Pennsylvania, the
      United States Court of Appeals for the Third Circuit and the United States
      District Courts for the Eastern and Middle Districts of Pennsylvania. He is
      a
      member of the Faculty Advisory Board of the Academy of Advocacy, the Association
      of Defense Counsel, The Defense Research Institute, The American Board of Trial
      Advocates, and the Temple University Law School faculty. He has also been
      elected a fellow of the American College of Trial Lawyers. On March 1, 1994,
      Mr.Lavin assumed the title of Counsel to The Firm.




MICHAEL
      J. MCDEVITT, a Director, is a retired FBI Special Agent with over 29 years
      of
      government service with the United States Marine Corps and the FBI. He had
      attained Senior Executive status within the FBI's Investigative Technology
      Branch and is currently providing consulting services, focusing on physical
      threat and risk assessments and conducting specialized training for law
      enforcement and US Government entities.





MARY
      T.
      TRAVIS, a Director, is currently employed with Sunset Mortgage Company, L.P.
      in
      Pennsylvania as the Senior Vice President of wholesale operations and was
      formerly the Vice President of operations for the Financial Mortgage
      Corporation. Mrs. Travis is an expert in mortgage banking with over 36 years
      of
      diversified experience. She is an approved instructor of the Mortgage Bankers
      Association Accredited School of Mortgage Banking. Mrs. Travis was also formally
      a delegate and 2nd Vice president of the Mortgage Bankers Association of Greater
      Philadelphia and the Board of Governors of the State of Pennsylvania. She is
      the
      key financial executive on the Company’s Audit Committee providing oversight of
      the Company’s external auditors.





REVEREND
      JOSEPH D. CALDERONE, O.S.A., a Director, is the Associate Director of Campus
      Ministry at Villanova University. He formerly spent over eight years with the
      Loyola University Medical Center as the hospital Chaplain and taught multiple
      courses including Introduction to the Practice of Medicine and Business Ethics.
      Rev. Calderone is currently a Captain in the US Navy Reserves and serves as
      the
      Wing Chaplain for the 4 th Marine
      Aircraft Wing.




10




**PART
      II**




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





(a)
      The
      Company's Common Stock has been quoted under the symbol MED since December
      20,
      2002. The old symbol, MDFT, had been traded since February 5, 2001. The common
      stock is traded on the American Stock Exchange. The following is a list of
      the
      low and high closing prices by fiscal quarters for 2005 and 2004:




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





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





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





(c)
      There
      were approximately 7,112 record holders of the Company's Common Stock, as of
      December 31, 2005. The Company had no preferred holders of the Company’s stock
      as of December 31, 2005.





(d)
      No
      dividends on common stock were declared by the Company during 2005 or
      2004.




**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 .




11


(Restated)2005
              
              2004
              
              2003
              
              2002
              
              2001Revenue
              
              
              40,129,000
              
              
              27,340,000
              
              
              25,379,000
              
              
              12,345,000
              
              
              5,022,000Operating
                  income
              
              
              3,549,000
              
              
              3,004,000
              
              
              3,598,000
              
              
              1,752,000
              
              
              745,000Income
                  from continuing operations
              
              
              3,405,000
              
              
              2,906,000
              
              
              3,558,000
              
              
              1,698,000
              
              
              566,000EPS
                  - basic
              
              
              0.17
              
              
              0.16
              
              
              0.25
              
              
              0.36
              
              
              0.08EPS
                  - diluted
              
              
              0.17
              
              
              0.14
              
              
              0.22
              
              
              0.30
              
              
              0.07Total
                  assets
              
              
              30,120,000
              
              
              25,968,000
              
              
              24,230,000
              
              
              9,888,000
              
              
              3,357,000current
                  portion of long-term debt and revolving credit facilities
              
              
              1,194,000
              
              
              827,000
              
              
              819,000
              
              
              395,000
              
              
              98,000Total
                  long-term debt
              
              
              3,977,000
              
              
              4,256,000
              
              
              4,564,000
              
              
              2,701,000
              
              
              234,000Weighted
                  average shares outstandingBasic
              
              
              12,258,734
              
              
              10,832,360
              
              
              9,305,731
              
              
              6,722,505
              
              
              6,524,969Diluted
              
              
              12,780,959
              
              
              12,413,424
              
              
              10,952,367
              
              
              8,737,292
              
              
              8,069,646




**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.





**2005
      COMPARISON WITH 2004**





**OPERATING**





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.




12





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 $26,419,000 for 2005 were
      $8,829,000 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
      and marketing expense by approximately $3.2 million to include additional print
      and web advertising as well as strategic testing of television advertising.
      Salaries and benefits increased by approximately $1.1 million, Take Shape for
      Life commissions increased by $1.4 million due to the sales increase in the
      network, office expenses increased by approximately $750,000, operating expenses
      increased by approximately $1 million, and other general and administrative
      expenses, which included items such as depreciation, amortization, charitable
      contributions, and property taxes increased by approximately $1.4
      million.





In
      2005,
      the Company realized a tax expense of $1,002,000, as compared to a tax expense
      of $1,159,000 in 2004. The decrease in tax expense 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.





The
      Company reported net income of $2,112,000, or $0.17 per basic share ($0.17
      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.




**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, through October
      17,
      2005 at an average price of $4.03 per share, aggregating $452,000.




13




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.




**2004
      COMPARISON WITH 2003**




**OPERATING**





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





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





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





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





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




14


**LIQUIDITY
      AND CAPITAL RESOURCES**





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




In
      the
      year ended December 31, 2004, the Company generated cash flow of $1,902,000
      from
      operations, primarily attributable to higher operating income, non-cash
      expenditures for depreciation and amortization and purchases of inventory and
      the pay down of accounts payable and accrued expenses.




In
      the
      year ended December 31, 2004, net cash used in investing activities was
      $3,510,000, which primarily consisted of the purchase of intangible assets,
      purchase of property and equipment, and the purchase of a building.




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




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




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





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





On
      July
      25, 2003, the Company announced that it had sold an aggregate of 550,000 shares
      of common stock and warrants to purchase 82,500 shares of common stock (the
      "PIPE Shares") to Mainfield Enterprises, Inc. and Portside Growth &
Opportunity Fund. The shares of common stock were sold for a cash consideration
      of $12.40 per share, or a total of $6,820,000, and the warrants, exercisable
      for
      a period of five years from the date of issuance, at an exercise price equal
      to
      one hundred fifteen percent (115%) of the five-day volume weighted average
      price
      (the "PIPE Transaction"), all pursuant to the terms of that certain Securities
      Purchase Agreement by and between the Company and Mainfield Enterprises, Inc.
      and Portside Growth & Opportunity Fund dated as of July 24, 2003 (the
      "Securities Purchase Agreement").




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




15




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





**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 2005. 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.





**INFORMATION
      SYSTEMS INFRASTRUCTURE**





In
      November of 2005, the Company began an IT project to implement an Enterprise
      Resource Planning 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. In addition, the Company is implementing new software
      for
      the Take Shape for Life direct selling network. The software will transform
      and
      empower Take Shape for Life’s direct sales model by implementing the
      infrastructure, tools, and support critical to increasing competitive advantage,
      improving expansion and proliferation of the direct selling channel,
      facilitating support, success, and growth of the independent Health Advisor
      network, and meeting the evolving needs of Take Shape for Life’s
      customers.




**ITEM
      8. FINANCIAL STATEMENTS.**





See
      pages
      F-1 through F-27.





**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,
      2005.





16





**ITEM
      9A. CONTROLS AND PROCEDURES**





(a)
      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.




In
      connection with the aforementioned restatement of our financial statements,
      under the supervision and with the participation of our management, including
      our principal executive officer and principal financial officer, we reevaluated,
      as of December 31, 2005, the effectiveness of the design and operation of
      our disclosure controls and procedures, as defined in Rules 13a-15(e) and
      15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Act”).
      Based upon that reevaluation, as a result of a material weakness in internal
      control over financial reporting with respect to amortization expense of a
      customer list, our principal executive officer and principal financial officer
      have concluded that our disclosure controls and procedures were not effective
      to
      provide reasonable assurance that information required to be disclosed by us
      in
      the reports that we file or submit under the Act is (i) recorded,
      processed, summarized and reported, within the time periods specified in the
      Securities and Exchange Commission’s rules and forms; and (ii) accumulated
      and communicated to our management, including our principal executive and
      principal financial officers, as appropriate to allow timely decisions regarding
      required disclosures. In connection with the Original Filing and prior to our
      discovery of the error relating to amortization expense on a customer list,
      our
      principal executive officer and principal financial officer had concluded that
      our disclosure controls and procedures were effective as of December 31,
      2005 to a reasonable assurance level.




**Changes
      in our Internal Control**




There
      was
      no change in our internal control over financial reporting during the quarter
      ended December 31, 2005 that has materially affected, or is reasonably
      likely to materially affect, our internal control over financial reporting.




**Code
      of Ethics**





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





17




**Trading
      Policy**





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




18




**PART
      III**





**ITEM
      10. DIRECTORS AND EXECUTIVE DIRECTORS OF REGISTRANT**




Information
      pertaining to directors and executive officers of the Company and the Company’s
      Code of Conduct are incorporated herein by reference to the Company’s Proxy
      Statement to be filed with the Securities and Exchange Commission within
      120 days after the end of the year covered by this Form 10-K with respect
      to the Annual Meeting of Stockholders to be held on September 8,
      2006.




**ITEM
      11. EXECUTIVE COMPENSATION.**





The
      following table sets forth information as to the compensation of the Chief
      Executive Officer of the Company and each other executive officer that received
      compensation in excess of $100,000 for 2005, 2004, and 2003.




Annual
                CompensationName
            
            Year
            
            Salary
              ($)
            
            Bonus
              ($)
            
            Value of Common/
              Preferred Stock Issued
              in Lieu of Cash
            
            Option
              Awards
            
            Other Annual
              CompensationBradley
                T. MacDonald
            
            2005
            
            
            225,000
            
            
            0
            
            
            0
            
            
            40,000
            
            
            100,000Chairman
                of the Board
            
            2004
            
            
            225,000
            
            
            0
            
            
            0
            
            
            0
            
            
            0&
                CEO
            
            2003
            
            
            225,000
            
            
            112,000
            
            
            0
            
            
            0
            
            
            0





Annual
                CompensationName
            
            Year
            
            Salary
              ($)
            
            Bonus
              ($)
            
            Value of Common/
              Preferred Stock Issued
              in Lieu of Cash ($)
            
            Option
              Awards
            
            Other Annual
              CompensationLeo
                V. Williams, III
            
            2005
            
            
            125,000
            
            
            
            
            
            12,000
            
            
            10,000
            
            
            0Executive
                Vice President
            
            2004
            
            
            118,000
            
            
            0
            
            
            0
            
            
            10,000
            
            
            0




19





**STOCK
      OPTIONS**





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





*
      The
      following tables set forth pertinent information as of December 31, 2005 with
      respect to options granted under the Plan since its inception to the persons
      set
      forth under the Summary Compensation Table, all current executive officers
      as a
      group and all current Directors who are not executive officers as a group of
      the
      Company. In addition, a chart listing option holders, grants made in FY 2005,
      and a list of aggregated options and the value of these options, is
      provided.





BRADLEY
                T.
              MACDONALD (1)
            
            ALL CURRENT
              EXECUTIVE
              OFFICERS
              AS A GROUP
            
            ALL CURRENT
                INDEPENDENT DIRECTORS
              AS A GROUPOptions
                granted
            
            
            255,000
            
            
            210,000
            
            
            110,000Average
                exercise price
            
            $
            0.86
            
            $
            2.20
            
            $
            1.07Options
                exercised
            
            
            228,333
            
            
            49,999
            
            
            100,000Average
                exercise price
            
            $
            0.97
            
            $
            0.88
            
            $
            0.70Shares
                sold
            
            
            *
            
            
            *
            
            
            *Options
                unexercised as of 12/31/05
            
            
            0
            
            
            160,001
            
            
            10,000




FY 05 Grants
                  @
                Price & ExpirationMonth/Year
              
              Approximate 5 YRPotential Realizable
                  Value at 10% Annual Stock Appreciation
              
              Unexercised
                Options
                as of 12/31/05
              
              Value of
                Unexercised
                Options
                as of 12/31/05Current
                  Executive Officers and Directors
              
              
              135,000@$2.67 2010
              
              $
              4.30
              
              
              135,000
              
              $
              0Employees
              
              
              158,333@$2.69 2010
              
              $
              4.33
              
              
              71,666
              
              
              0Consultants
              
              
              0
              
              
              
              
              
              0
              
              
              0206,966
              
              $
              0
  20


**Nutraceutical
      Group Industry Comparison of Stock Prices**





Company
            
            December 31, 2005Stock Price
            
            December 31, 2004Stock Price
            
            $Change
            
            %ChangeMedifast
                (MED)
            
            $
            5.24
            
            $
            3.52
            
            
            1.72
            
            
            48.9
            %Natural
                Alternatives International, Inc. (NAII)
            
            
            6.48
            
            
            9.23
            
            
            (2.75
            )
            
            (29.8
            )%Weider
                Nutrition (WNI)
            
            
            5.09
            
            
            4.35
            
            
            .74
            
            
            17.0
            %Natures
                Sunshine Products, Inc. (NATR)
            
            
            18.08
            
            
            20.36
            
            
            (2.28
            )
            
            (11.2
            )%





Company
            
            December 31, 2005Stock Price
            
            December 31, 2000Stock Price
            
            $Change
            
            %ChangeMedifast
                (MED)
            
            $
            5.24
            
            $
            .14
            
            
            5.10
            
            
            3642
            %Natural
                Alternatives International, Inc. (NAII)
            
            
            6.48
            
            
            2.19
            
            
            4.29
            
            
            196
            %Weider
                Nutrition (WNI)
            
            
            5.09
            
            
            2.12
            
            
            2.97
            
            
            140
            %Natures
                Sunshine Products, Inc. (NATR)
            
            
            18.08
            
            
            6.81
            
            
            11.27
            
            
            165
            %





**Index
      Comparison**




$100
      invested in 2000 would return:





2000
            
            2005Nutraceutical
                Group Index
            
            $
            100
            
            $
            1,136Medifast
            
            $
            100
            
            $
            3,740





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





**COMPENSATION
      OF DIRECTORS**





The
      Company is authorized to pay a fee of $300 for each meeting attended by its
      Directors who are not executive officers. It reimburses those who are not
      employees of the Company for their expenses incurred in attending meetings.
      Independent Directors claimed a total of $56,400 in Director’s fees and/or
      expenses in 2005. See “Executive Compensation - Stock Options” for stock options
      granted under the 1993 Plan to the Directors.




21




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





The
      following table sets forth information with respect to the beneficial ownership
      of shares of Common Stock or voting Preferred Stock as of December 31, 2005
      of
      the Chief Executive Officer, each Director, each nominee for Director, each
      current executive officer named in the Summary Compensation Table under
      "Executive Compensation" and all executive officers and Directors as a group.
      The number of shares beneficially owned is determined under the rules of the
      Securities and Exchange Commission and the information is not necessarily
      indicative of beneficial ownership for any other person. Under such rules,
      "beneficial ownership" includes shares as to which the undersigned has sole
      or
      shared voting power or investment power and shares, which the undersigned has
      the right to acquire within 60 days of March 15, 2006 through the exercise
      of
      any stock option or other right. Unless otherwise indicated, the named person
      has sole investment and voting power with respect to the shares set forth in
      the
      table.




NAME AND ADDRESS*
            
            NUMBEROF SHARES
            
            % OFOUTSTANDINGBradley
                T. MacDonald
            
            
            1,304,479
            (1)
            
            10.2
            %Donald
                F. Reilly
            
            
            72,452
            
            
            0.6
            %Michael
                C. MacDonald
            
            
            53,419
            
            
            0.4
            %Mary
                Travis
            
            
            17,000
            
            
            0.1
            %Michael
                J. McDevitt
            
            
            22,900
            
            
            0.2
            %Joseph
                Calderone
            
            
            6,500
            
            
            0.1
            %Executive
                Officers and Directors as a group (9 persons)
            
            
            1,495,250
            
            
            11.7
            %





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





(1)
            Mr.
                MacDonald beneficially owns 1,304,479 shares of common stock.
                Mrs. Shirley D. MacDonald and Ms. Margaret E. MacDonald, wife and
                daughter
                of Mr. MacDonald, individually or jointly own 716,332 shares of
                stock.





22




**PART
      IV**





**ITEM
      14. EXHIBITS AND REPORTS ON FORM 8-K.**





(a) 
      Exhibits


3.1
              
              Certificate
                  of Incorporation of the Company and amendments thereto*3.2
              
              By-Laws
                  of the Company*10.1
              
              1993
                  Stock Option Plan of the Company as amended*10.3
              
              Lease
                  relating to the Company's Owings Mills, Maryland
                  facility**10.4
              
              Employment
                  agreement with Bradley T.
                  MacDonald***





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





(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





**ITEM
      14. ACCOUNTING FEES**





In
      2005,
      the Company incurred $90,000 in accounting fees as compared to $70,000 in 2004.
      These fees include work performed on quarterly audits and the preparation of the
      Company’s 10-Q’s and 10-K. Tax fees in 2005 and 2004 were $10,000.




23




**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. MacDonaldChairman,
                CEODated:
                September 6, 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,
            
            September
                6, 2007Bradley
                T. MacDonald
            
            Director,
                Chief Executive
                Officer/s/
                GEORGE LAVIN
            
            Director
            
            September
                6, 2007George
                Lavin/s/
                MICHAEL C. MACDONALD
            
            Director
            
            September
                6, 2007Michael
                C. MacDonald/s/
                MARY T. TRAVIS
            
            Director
            
            September
                6, 2007Mary
                T. Travis/s/
                REV. DONALD F. REILLY, OSA
            
            Director
            
            September
                6, 2007Rev.
                Donald F. Reilly, OSA/s/
                MICHAEL J. MCDEVITT
            
            Director
            
            September
                6, 2007Michael
                J. McDevitt/s/
                JOSEPH D. CALDERONE
            
            Director
            
            September
                6, 2007Joseph
                D. Calderone




24




Index
      to
      Exhibits




Exhibit
                  Number
              Description
                  of Exhibit31.1
              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
  25




MEDIFAST,
      INC. AND SUBSIDIARIES


CONTENTS




PAGECONSOLIDATED
                FINANCIAL STATEMENTSReport
                of Independent Registered Public Accounting Firm
            
            
            F-2Balance
                sheets as of December 31, 2005 and 2004
            
            
            F-3Statements
                of income for the years ended December 31, 2005, 2004 and
                2003
            
            
            F-4Statement
                of changes in stockholders' equity and accumulated other comprehensive
                income (loss) for the years ended December 31, 2005, 2004, and 2003
            
            
            F-5,
                6Statements
                of cash flow for the years ended December 31, 2005, 2004, and 2003
            
            
            F-7Notes
                to consolidated financial statements
            
            
            F-8







REPORT
      OF
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




Board
      of
      Directors and Stockholders


Medifast,
      Inc.


Owings
      Mills, Maryland




We
      have
      audited the accompanying consolidated balance sheets of Medifast, Inc. and
      subsidiaries as of December 31, 2005 and 2004, and the related consolidated
      statements of income, stockholders equity and accumulated other comprehensive
      income, and cash flow for each of the three years in the period ended December
      31, 2005 . These
      consolidated financial statements are the responsibility of the Company's
      management. Our responsibility is to express an opinion on these consolidated
      financial statements based on our audits.





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





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the consolidated financial position of Medifast,
      Inc.
      and subsidiaries as of December 31, 2005 and 2004, and the consolidated results
      of their operations and their consolidated cash flows for the years then ended
      in conformity with accounting principles generally accepted in the United States
      of America.





As
      discussed in Note R to the consolidated financial statements, the accompanying
      consolidated financial statements have been restated to correct the Company’s
      accounting for amortization expense on a customer list.




Bagell,
      Josephs, Levine & Company, LLC





Gibbsboro,
      New Jersey


March
      2,
      2006, except


for
      Note
      R as to which the


date
      is
      September 6, 2007





F-2




**MEDIFAST,
      INC. AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**


**As
      of December 31, 2005 and 2004**





(Restated)2005
            
            2004**ASSETS****Current
                assets:**Cash
            
            $
            1,484,000
            
            $
            612,000Accounts
                receivable-net of allowance for doubtful accounts of
                $100,000 and $87,000
            
            
            984,000
            
            
            1,063,000Inventory
            
            
            5,475,000
            
            
            4,251,000Investment
                securities
            
            
            2,700,000
            
            
            2,626,000Deferred
                compensation
            
            
            525,000
            
            
            321,000Prepaid
                expenses and other current assets
            
            
            3,273,000
            
            
            1,079,000Current
                portion of deferred tax asset
            
            
            -
            
            
            19,000**Total
                current assets**
            
            
            **14,441,000**
            
            
            **9,971,000**Property,
                plant and equipment - net
            
            
            9,535,000
            
            
            8,698,000Trademarks
                and intangibles - net
            
            
            5,984,000
            
            
            7,138,000Deferred
                tax asset, net of current portion
            
            
            100,000
            
            
            91,000Other
                assets
            
            
            60,000
            
            
            70,000**TOTAL
                ASSETS**
            
            **$**
            **30,120,000**
            
            **$**
            **25,968,000****LIABILITIES
                AND STOCKHOLDERS' EQUITY****Current
                liabilities:**Accounts
                payable and accrued expenses
            
            $
            2,263,000
            
            $
            940,000Income
                taxes payable
            
            
            899,000
            
            
            674,000Dividends
                payable
            
            
            -
            
            
            65,000Line
                of credit
            
            
            633,000
            
            
            369,000Current
                maturities of long-term debt
            
            
            561,000
            
            
            458,000Deferred
                tax liability - current
            
            
            90,000
            
            
            -**Total
                current liabilities**
            
            
            **4,446,000**
            
            
            **2,506,000****Other
                liabilities and deferred credits**Long-term
                debt, net of current portion
            
            
            3,977,000
            
            
            4,256,000Deferred
                tax liability - non-current
            
            
            -
            
            
            -**Total
                liabilities**
            
            
            **8,423,000**
            
            
            **6,762,000****Stockholders'
                Equity:**Series
                B Convertible Preferred Stock; par value $1.00; 600,000 shares authorized;
                0 and 300,614 shares issued and outstanding
            
            
            -
            
            
            301,000Series
                C Convertible Preferred Stock; stated value $1.00; 1,015,000 shares
                authorized; 0 and 200,000 shares issued and outstanding
            
            
            -
            
            
            200,000Common
                stock; par value $.001 per share; 20,000,000 shares authorized; 12,782,791
                and 11,001,070 shares issued and outstanding
            
            
            13,000
            
            
            11,000Additional
                paid-in capital
            
            
            21,759,000
            
            
            20,556,000Accumulated
                other comprehensive income (loss)
            
            
            282,000
            
            
            (39,000
            )Retained
                earnings (deficit)
            
            
            825,000
            
            
            (1,287,000
            )**22,879,000**
            
            
            **19,742,000**Less:
                cost of 210,902 and 78,160 shares of common stock in
                treasury
            
            
            (1,075,000
            )
            
            (536,000
            )Less:
                Unearned compensation
            
            
            (107,000
            )**Total
                stockholders' equity**
            
            
            **21,697,000**
            
            
            **19,206,000****TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY**
            
            **$**
            **30,120,000**
            
            **$**
            **25,968,000**




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




F-3





**MEDIFAST,
      INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF INCOME**


**Years
      Ended December 31,**





(Restated)**2005**
            
            **2004**
            
            **2003**Revenue
            
            $
            40,129,000
            
            $
            27,340,000
            
            $
            25,379,000Cost
                of sales
            
            
            (10,161,000
            )
            
            (6,746,000
            )
            
            (6,825,000
            )**Gross
                profit**
            
            
            **29,968,000**
            
            
            **20,594,000**
            
            
            **18,554,000**Selling,
                general, and administration
            
            
            (26,419,000
            )
            
            (17,590,000
            )
            
            (14,956,000
            )**Income
                from operations**
            
            
            **3,549,000**
            
            
            **3,004,000**
            
            
            **3,598,000****Other
                income (expense):**Interest
                expense
            
            
            (317,000
            )
            
            (245,000
            )
            
            (150,000
            )Interest
                income
            
            
            158,000
            
            
            154,000
            
            
            110,000Other
                income (expense)
            
            
            15,000
            
            
            (7,000
            )
            
            -(144,000
            )
            
            (98,000
            )
            
            (40,000
            )**Net
                income before provision for income taxes**
            
            
            **3,405,000**
            
            
            **2,906,000**
            
            
            **3,558,000**Provision
                for income taxes
            
            
            (1,002,000
            )
            
            (1,159,000
            )
            
            (1,148,000
            )**Net
                income**
            
            
            **2,403,000**
            
            
            **1,747,000**
            
            
            **2,410,000**Less:
                Preferred stock dividend requirement
            
            
            (291,000
            )
            
            (18,000
            )
            
            (58,000
            )**Net
                income attributable to common shareholders**
            
            **$**
            **2,112,000**
            
            **$**
            **1,729,000**
            
            **$**
            **2,352,000**Basic
                earnings per share
            
            $
            0.17
            
            $
            0.16
            
            $
            0.25Diluted
                earnings per share
            
            $
            0.17
            
            $
            0.14
            
            $
            0.22Weighted
                average shares outstanding -Basic
            
            
            12,258,734
            
            
            10,832,360
            
            
            9,305,731Diluted
            
            
            12,780,959
            
            
            12,413,424
            
            
            10,952,367





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





F-4




**MEDIFAST,
      INC. AND SUBSIDIARIES**


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


**Years
      Ended December 31, 2005, 2004, and 2003**





Series
                B
            
            Series
                C
            
            (Restated)Preferred Stock
            
            Preferred Stock
            
            Common StockNumber
              of Shares
            
            Stated
              Value
              Amount
            
            Number
              of Shares
            
            Stated
              Value
              Amount
            
            Number
              of Shares
            
            Par Value
                $0.00 Amount
            
            Additional
                Paid-In Capital
            
            Retained
                Earnings (deficit)Balance,
                December 31, 2002
            
            
            521,290
            
            $
            521,000
            
            
            985,000
            
            $
            985,000
            
            
            7,204,693
            
            $
            7,000
            
            $
            9,613,000
            
            $
            (5,381,000
            )Preferred
                converted to Common Stock
            
            
            (117,556
            )
            
            (117,000
            )
            
            (718,000
            )
            
            (718,000
            )
            
            1,671,108
            
            
            2,000
            
            
            833,000Options
                exercised to Common Stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            615,714
            
            
            
            
            
            590,000Warrants
                Converted to Common Stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            288,724
            
            
            
            
            
            350,000Common
                Stock issued to Directors,
                consultants,
                  and acquisitions
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            665,970
            
            
            1,000
            
            
            8,716,000Common
                Stock issued for Series “C” dividend
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            36,400
            
            
            
            
            
            18,000Dividend
                paid in stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (45,000
            )Net
                Income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,410,000Balance,
                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 periodTreasury
                shares repurchasedNet
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,403,000Balance,
                December 31, 2005
            
            
            0
            
            $
            0
            
            
            0
            
            $
            0
            
            
            12,782,791
            
            $
            13,000
            
            $
            21,759,000
            
            $
            825,000


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


F-5





MEDIFAST,
      INC. AND SUBSIDIARIES


CONSOLIDATED
      STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND ACCUMULATED OTHER
      COMPREHENSIVE INCOME (LOSS) –
      (CONTINUED)


Years
      Ended December 31, 2005, 2004, and 2003





Common
                StockAccumulated other
              comprehensive
              income
                (loss)
            
            (Restated)Total
            
            Treasury
              Stock
            
            Unearned
              CompensationBalance,
                December 31, 2002
            
            $
            -
            
            $
            5,745,000
            
            $
            (167,000
            )
            
            -Preferred
                converted to Common StockOptions
                exercised to Common Stock
            
            
            
            
            
            590,000
            
            
            (516,000
            )Warrants
                Converted to Common Stock
            
            
            
            
            
            350,000Common
                Stock issued to Directors, consultants and acquisitions
            
            
            8,717,000Common
                Stock issued for Series “C” dividend
            
            
            
            
            
            18,000Dividend
                paid in stock
            
            
            
            
            
            (45,000
            )Net
                Income
            
            
            (25,000
            )
            
            2,385,000Balance,
                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
            
            
            2,724,000Balance,
                December 31, 2005
            
            $
            282,000
            
            $
            22,879,000
            
            $
            (1,075,000
            )
            $
            (107,000
            )





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




F-6





**MEDIFAST,
      INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOW**


**Years
      Ended December 31,**




(Restated)2005
            
            2004
            
            2003**Cash
                flows from Operating Activities:**Net
                income
            
            $
            2,403,000
            
            $
            1,747,000
            
            $
            2,410,000**Adjustments
                to reconcile net income to net cash **provided by operating
                activities from operations:****Depreciation
                and amortization
            
            
            2,266,000
            
            
            1,210,000
            
            
            648,000Realized
                (gain) loss on investment securities
            
            
            10,000
            
            
            19,000
            
            
            (1,000
            )Common
                stock issued for services
            
            
            150,000
            
            
            93,000
            
            
            207,000Vesting
                of unearned compensation
            
            
            15,000
            
            
            -
            
            
            -Net
                change in other accumulated comprehensive income (loss)
            
            
            321,000
            
            
            (14,000
            )
            
            -Provision
                for bad debts
            
            
            13,000
            
            
            -
            
            
            -Deferred
                income taxes
            
            
            100,000
            
            
            486,000
            
            
            1,138,000**Changes
                in Assets and Liabilities:**Decrease
                (increase) in accounts receivable
            
            
            65,000
            
            
            (422,000
            )
            
            (357,000
            )(Increase)
                in inventory
            
            
            (1,225,000
            )
            
            (1,263,000
            )
            
            (1,729,000
            )(Increase)
                in prepaid expenses and other current assets
            
            
            (2,194,000
            )
            
            (143,000
            )
            
            (687,000
            )(Increase)
                in deferred compensation
            
            
            (204,000
            )
            
            -
            
            
            (321,000
            )Decrease
                (increase) in other assets
            
            
            10,000
            
            
            (25,000
            )
            
            44,000Increase
                (decrease) in accounts payable and accrued expenses
            
            
            1,323,000
            
            
            (460,000
            )
            
            525,000Increase
                in income taxes payable
            
            
            160,000
            
            
            674,000
            
            
            -**Net
                cash provided by operating activities**
            
            
            3,213,000
            
            
            1,902,000
            
            
            1,877,000**Cash
                Flows from Investing Activities:**Sale
                (purchase) of investment securities, net
            
            
            (84,000
            )
            
            1,338,000
            
            
            (3,564,000
            )Purchase
                of building
            
            
            -
            
            
            (566,000
            )
            
            (1,823,000
            )Purchase
                of property and equipment
            
            
            (1,672,000
            )
            
            (1,490,000
            )
            
            (1,309,000
            )Purchase
                of intangible assets
            
            
            (276,000
            )
            
            (2,792,000
            )
            
            (2,458,000
            )**Net
                cash (used in) investing activities**
            
            
            (2,032,000
            )
            
            (3,510,000
            )
            
            (9,154,000
            )**Cash
                Flows from Financing Activities:**Issuance
                of common stock, options and warrants
            
            
            66,000
            
            
            7,000
            
            
            6,722,000Increase
                (decrease) in line of credit, net
            
            
            561,000
            
            
            314,000
            
            
            (36,000
            )Purchase
                of treasury stock
            
            
            (452,000
            )
            
            -
            
            
            -Proceeds
                from long-term debt
            
            
            -
            
            
            475,000
            
            
            2,669,000Principal
                repayments of long-term debt
            
            
            (473,000
            )
            
            (1,089,000
            )
            
            (346,000
            )Dividends
                paid on preferred stock
            
            
            (11,000
            )
            
            (11,000
            )
            
            (45,000
            )**Net
                cash provided by (used in) financing activities**
            
            
            (309,000
            )
            
            (304,000
            )
            
            8,964,000**NET
                  INCREASE (DECREASE) IN CASH AND CASH
                  EQUIVALENTS**
            
            
            872,000
            
            
            (1,912,000
            )
            
            1,687,000Cash
                and cash equivalents - beginning of the year
            
            
            612,000
            
            
            2,524,000
            
            
            837,000Cash
                and cash equivalents - end of year
            
            $
            1,484,000
            
            $
            612,000
            
            $
            2,524,000**Supplemental
                disclosure of cash flow information:**Interest
                paid
            
            $
            317,000
            
            $
            245,000
            
            $
            154,000Income
                taxes
            
            $
            1,983,000
            
            $
            -
            
            $
            -**Supplemental
                disclosure of non cash activity:**Conversion
                of preferred stock B and C to common stock
            
            $
            501,000
            
            $
            170,000
            
            $
            835,000Common
                stock for services
            
            $
            150,000
            
            $
            93,000
            
            $
            207,000Common
                stock for intangibles and fixed assets
            
            $
            -
            
            $
            -
            
            $
            1,949,000Conversion
                of debt to equity
            
            $
            -
            
            $
            307,000
            
            $
            -Preferred
                B and C Stock Dividends
            
            $
            287,000
            
            $
            7,000
            
            $
            18,000Line
                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.




F-7





MEDIFAST,
      INC. AND SUBSIDIARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
      31, 2005, 2004, AND 2003




NOTE
      A – BUSINESS





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





The
      Company is engaged in the manufacturing and distribution of Medifast 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.




NOTE
      B -
      SIGNIFICANT ACCOUNTING POLICIES





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





[1]
      PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION:





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





[2]
      CASH
      AND CASH EQUIVALENTS:





For
      the
      purposes of the consolidated statements of cash flow, the Company considers
      all
      highly liquid debt instruments purchased with maturity of three months or less
      to be cash equivalents. At December 31, 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.





At
      December 31, 2004, the Company had invested in four $100,000 certificates of
      deposit, of which three were considered cash equivalents. In 2005, all
      certificates of deposit matured and were rolled into a money market
      account.





F-8




MEDIFAST,
      INC. AND SUBSIDIARIES




NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
      31, 2005, 2004, AND 2003





NOTE
      B -
      SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





[3]
      ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBFUL 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.





[4]
      INVENTORY:





Inventory
      is stated at the lower of cost or market, utilizing the first-in, first-out
      method. The cost of finished goods includes the cost of raw materials, packaging
      supplies, direct and indirect labor and other indirect manufacturing
      costs.





[5]
      ADVERTISING:





Advertising
      costs such as preparation, layout, design and production of advertising are
      deferred. They are expensed when the advertisement is first used, except for
      the
      costs of executory contracts, which are amortized as performance under the
      contract is received. Advertising
      costs deferred at December 31, 2005 and 2004, were $585,000 and $478,000
      respectively. Advertising expense for the years ended December 31, 2005 and
      2004
      amounted to $3,784,000 and $1,055,000, respectively.




[6]
      PROPERTY, PLANT AND EQUIPMENT:





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





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





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





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





F-9




MEDIFAST,
      INC. AND SUBSIDIARIES




NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
      31, 2005, 2004, AND 2003





NOTE
      B -
      SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)




[7]
      INCOME TAXES:





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





[8]
      EARNINGS PER COMMON SHARE:





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





[9]
      REVENUE:





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




F-10




MEDIFAST,
      INC. AND SUBSIDIARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
      31, 2005, 2004, AND 2003





NOTE
      B -
      SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)




[10]
      ESTIMATES:





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





[11]
      FAIR
      VALUE OF FINANCIAL INSTRUMENTS:





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





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





[12]
      CONCENTRATION OF CREDIT RISK:





Financial
      instruments that potentially subject the Company to credit risk consist of
      cash,
      certificates of deposit ,
      investment securities and trade receivables. Cash, money markets and investments
      exceed the federal insurance coverage by $2,248,000 and $3,525,000,
      respectively. The Company securities
      at December 31, 2005 and 2004, 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, 2005 and 2004, the Company had two customers that individually
      represented over 10% of the accounts receivable and in the aggregate,
      approximately 36% and 49% of the accounts receivable, respectively.





[13]
      STOCK-BASED COMPENSATION:





The
      Company has adopted Statement of Financial Accounting Standards No. 123,
“Accounting for Stock Based Compensation” (“SFAS 123”). The provisions of SFAS
      123 allow companies to either expense the estimated value of stock options
      or to
      continue to follow the intrinsic value method set forth in Accounting Principles
      Bulletin Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”),
      but disclose the pro forma effects on net income (loss) had the fair value
      of
      the options been expensed. The Company has elected to continue to apply APB
      25
      in accounting for its employee stock option incentive plans. Under APB 25,
      where
      the exercise price of the Company’s employee stock options equals the market
      price of the underlying stock on the date of grant, no compensation is
      recognized.




F-11




MEDIFAST,
      INC. AND SUBSIDIARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
      31, 2005, 2004, AND 2003





NOTE
      B -
      SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





STOCK
      OPTION PLAN





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





In
      November 1997, June 2002 and July 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.





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 312005
              
              2004
              
              2003(Restated)Net
                  income:As
                  reported
              
              
              2,403,000
              
              
              1,747,000
              
              
              2,410,000Total
                  stock-based employee compensation expense determined under fair
                  value
                  based method for all awards, net of related tax effects
              
              
              (280,000
              )
              
              (108,000
              )
              
              (403,000
              )Pro
                  forma
              
              
              2,123,000
              
              
              1,639,000
              
              
              2,007,000Net
                  income per share:as
                  reported:Basic
              
              $
              0.17
              
              $
              0.16
              
              $
              0.25Diluted
              
              $
              0.17
              
              $
              0.14
              
              $
              0.22Pro
                  forma:Basic
              
              $
              0.17
              
              $
              0.15
              
              $
              0.21Diluted
              
              $
              0.17
              
              $
              0.13
              
              $
              0.18





F-12




MEDIFAST,
      INC. AND SUBSIDIARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
      31, 2005, 2004, AND 2003





[13]
      STOCK-BASED COMPENSATION: (CONTINUED)





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





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





2005
            
            2004
            
            2003Dividend
                yield
            
            
            0.0
            %
            
            0.0
            %
            
            0.0
            %Expected
                volatility
            
            
            0.70
            
            
            0.40
            
            
            0.40Risk-free
                interest rate
            
            
            4.50
            %
            
            4.50
            %
            
            3%
                - 5
            %Expected
                life in years
            
            
            1-5
            
            
            1-5
            
            
            1-5





The
      weighted average fair value at date of grant for options granted during the
      years 2005, 2004, and 2003 were $2.64, $8.60, and 5.32, respectively, using
      the
      above assumptions.





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


2005
              
              2004
              
              2003Shares
              
              Weighted
                  Average
                Exercise
                Price
              
              Shares
              
              Weighted
                  Average
                Exercise
                Price
              
              Shares
              
              Weighted
                  Average
                Exercise
                PriceOutstanding
                  at beginning of year
              
              
              389,397
              
              
              1.51
              
              
              439,455
              
              
              1.76
              
              
              891,669
              
              
              0.69Options
                  granted
              
              
              333,333
              
              
              2.64
              
              
              30,000
              
              
              8.60
              
              
              163,500
              
              
              5.32Options
                  reinstated
              
              
              -
              
              
              0.00
              
              
              -
              
              
              0.00
              
              
              -
              
              
              0.00Options
                  exercised
              
              
              (138,335
              )
              
              (1.83
              )
              
              (47,221
              )
              
              (1.19
              )
              
              (615,714
              )
              
              (1.16
              )Options
                  forfeited or expired
              
              
              (299,668
              )
              
              (1.17
              )
              
              (32,837
              )
              
              (7.01
              )
              
              0
              
              
              0.00Outstanding
                  at end of year
              
              
              284,727
              
              
              2.41
              
              
              389,397
              
              
              1.51
              
              
              439,455
              
              
              1.76Options
                  exercisable at year end
              
              
              254,725
              
              
              3.17
              
              
              350,336
              
              
              1.11
              
              
              302,668
              
              
              0.76Options
                  available for grant at end of year
              
              
              965,273
              
              
              
              
              
              860,603
              
              
              
              
              
              810,545




F-13




MEDIFAST,
      INC. AND SUBSIDIARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
      31, 2005, 2004, AND 2003





NOTE
      B -
      SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





[13]
      STOCK-BASED COMPENSATION: (CONTINUED)





The
      following table summarizes information about stock options outstanding and
      exercisable at December 31, 2005:





Options
                Outstanding
            
            
            
            Options
                ExercisableWeightedAverageContractual
            
            Weighted
            
            
            
            WeightedRange
                of
            
            
            
            Life
            
            Average
            
            
            
            AverageExercise
            
            Number
            
            Remaining
            
            Exercise
            
            Number
            
            ExercisePrices
            
            Outstanding
            
            (in
                Years)
            
            Price
            
            Exercisable
            
            Price$0.25
            
            
            6,669
            
            
            1.0
            
            $
            0.25
            
            
            6,669
            
            $
            0.25$0.32
            
            
            3,334
            
            
            .40
            
            $
            0.32
            
            
            3,334
            
            $
            0.32$0.80
            
            
            16,666
            
            
            1.5
            
            $
            0.80
            
            
            16,666
            
            $
            0.80$2.67
            
            
            178,334
            
            
            4.1
            
            $
            2.67
            
            
            178,334
            
            $
            2.67$3.83
            
            
            40,000
            
            
            4.8
            
            $
            3.83
            
            
            13,332
            
            $
            3.83$4.80
            
            
            19,724
            
            
            2.3
            
            $
            4.80
            
            
            19,724
            
            $
            4.80$8.60
            
            
            10,000
            
            
            3.0
            
            $
            8.60
            
            
            6,666
            
            $
            8.60$11.15
            
            
            10,000
            
            
            2.5
            
            $
            11.15
            
            
            10,000
            
            $
            11.15284,727
            
            
            
            
            $
            2.41
            
            
            254,725
            
            $
            3.17





F-14





MEDIFAST,
      INC. AND SUBSIDIARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
      31, 2005, 2004, AND 2003





NOTE
      B -
      SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





[15]
      RECENT ACCOUNTING PRONOUNCEMENTS





In
      December 2004, the FASB issued Financial Accounting Standards No. 123 (revised
      2004) (FAS 123R), “Share-Based Payment, “ FAS 123R replaces FAS No. 123,
“Accounting for Stock-Based Compensation”, and supersedes APB Opinion No. 25,
“Accounting for Stock Issued to Employees.” FAS 123R requires compensation
      expense, measured as the fair value at the grant date, related to share-based
      payment transactions to be recognized in the financial statements over the
      period that an employee provides service in exchange for the award. The Company
      intends to adopt FAS 123R using the “modified prospective” transition method as
      defined in FAS 123R. Under the modified prospective method, companies are
      required to record compensation cost prospectively for the unvested portion,
      as
      of the date of adoption, of previously issued and outstanding awards over the
      remaining vesting period of such awards. FAS 123R is effective January 1, 2006.
      The Company is evaluating the impact of FAS 123R on its’ results and financial
      position.





In
      November 2004, the FASB issued Financial Accounting Standards No. 151 (FAS
      151),
“Inventory Costs – an amendment of ARB No. 43, Chapter 4”. FAS 151
      clarifies the accounting for abnormal amounts of idle facility expense, freight,
      handling costs and spoilage. In addition, FAS 151 requires companies to base
      the
      allocation of fixed production overhead to the costs of conversion on the normal
      capacity of production facilities. FAS 151 is effective for fiscal years
      beginning after June 15, 2005. FAS 151 did not have a material impact on its
      results or financial statements.




[16]
      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.





[17]
      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. The Company, in its
      acquisitions, recognized $893,850 of goodwill. The Company performs its annual
      impairment test for goodwill at year-end. As of December 31, 2005, the Company
      has determined that there is no impairment of its goodwill.





F-15





MEDIFAST,
      INC. AND SUBSIDIARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
      31, 2005, 2004, AND 2003





NOTE
      B -
      SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





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





[18]
      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.





[19]
      RECLASSIFICATIONS





Certain
      amounts for the years ended December 31, 2004 and 2003 have been reclassified
      to
      conform to the presentation of the December 31, 2005 amounts. The
      reclassifications have no effect on net income for the years ended December
      31,
      2004 and 2003.





NOTE
      C -
      INVENTORY





Inventory
      consists of the following at December 31, 2005 and 2004:




2005
            
            2004Raw
                materials
            
            $
            1,906,000
            
            $
            1,085,000Packaging
            
            
            1,142,000
            
            
            958,000Finished
                goods
            
            
            2,427,000
            
            
            2,208,000$
            5,475,000
            
            $
            4,251,000





F-16




MEDIFAST,
      INC. AND SUBSIDIARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
      31, 2005, 2004, AND 2003





NOTE
      D -
      PREPAID EXPENSES AND OTHER CURRENT ASSETS




Prepaid
      expense and other current assets as of December 31, 2005 and 2004, consist
      of
      the following:


2005
              
              2004Marketing
                  and advertising
              
              
              800,000
              
              
              478,000Taxes
              
              
              779,000
              
              
              25,000Commissions
              
              
              792,000
              
              
              -Supplies
              
              
              393,000
              
              
              -Insurance
              
              
              294,000
              
              
              273,000Services
              
              
              50,000
              
              
              73,000Other
              
              
              165,000
              
              
              230,0003,273,000
              
              
              1,079,000





NOTE
      E -
      PROPERTY, PLANT AND EQUIPMENT





Property,
      plant and equipment as of December 31, 2005 and 2004, consist of the
      following:





2005
            
            2004Land
            
            $
            650,000
            
            $
            650,000Building
                and building improvements
            
            
            6,871,000
            
            
            6,728,000Equipment
                and fixtures
            
            
            5,583,000
            
            
            4,062,000Vehicle
            
            
            19,000
            
            
            11,00013,123,000
            
            
            11,451,000Less
                accumulated depreciation and amortization
            
            
            3,588,000
            
            
            2,753,000Property,
                plant and equipment - net
            
            $
            9,535,000
            
            $
            8,698,000





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





Depreciation
      expense for the years ended December 31, 2005, 2004, and 2003 were $835,000,
      $804,000 and $421,000, respectively.





F-17





MEDIFAST,
      INC. AND SUBSIDIARIES




NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
      31, 2005, 2004, AND 2003




NOTE
      F -
      TRADEMARKS AND INTANGIBLES





**As
                of December 31, 2005**
            
            **As
                of December 31, 2004**(Restated)
            
            (Restated)**Gross Carrying**
            
            **Accumulated**
            
            **Gross Carrying**
            
            **Accumulated****Amount**
            
            **Amortization**
            
            **Amount**
            
            **Amortization**Customer
                lists
            
            $
            4,356,000
            
            $
            1,398,000
            
            $
            4,355,000
            
            $
            394,000Non-compete
                agreements
            
            
            840,000
            
            
            566,000
            
            
            840,000
            
            
            248,000Trademarks
                and patents
            
            
            1,979,000
            
            
            121,000
            
            
            1,703,000
            
            
            12,000Goodwill
            
            
            894,000
            
            
            -
            
            
            894,000
            
            
            -Total
            
            $
            8,069,000
            
            $
            2,085,000
            
            $
            7,792,000
            
            $
            654,000





**Amortization
      expense for the years ended December 31, 2005, 2004 and 2003 was as
      follows:**





(Restated)2005
            
            
            2004
            
            
            2003Customer
                lists
            
            $
            1,004,000
            
            $
            244,000
            
            $
            127,000Non-compete
                agreements
            
            
            369,000
            
            
            162,000
            
            
            86,000Trademarks
                and patents
            
            
            58,000
            
            
            -
            
            
            14,000Total
                trademarks and intangibles
            
            $
            1,431,000
            
            $
            406,000
            
            $
            227,000




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





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




For
                  the years ending December 31,
              
              
              Amount2006
              
              $
              1,125,0002007
              
              
              755,0002008
              
              
              640,0002009
              
              
              462,0002010
              
              
              462,000





F-18





MEDIFAST,
      INC. AND SUBSIDIARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
      31, 2005, 2004, AND 2003




NOTE
      G -
      ACCOUNTS PAYABLE AND ACCRUED EXPENSES





Accounts
      payable and accrued expenses as of December 31, 2005 and 2004 consist of the
      following:





2005
            
            
            2004Trade
                payables
            
            $
            1,695,000
            
            $
            343,000Accrued
                expenses and other
            
            
            -
            
            
            116,000Accrued
                payroll and related taxes
            
            
            314,000
            
            
            215,000Sales
                commissions payable
            
            
            254,000
            
            
            266,000Total
            
            $
            2,263,000
            
            $
            940,000




NOTE
      H -
      OPERATING LEASES





The
      Company leases office space for its eleven corporately owned Hi-Energy Weight
      Control Clinics under lease terms ranging from one to five year with leases
      commencing 2004 and 2005. Monthly payments under the leases range in price
      from
      $1,120 to $2,695. The Company is required to pay property taxes, utilities,
      insurance and other costs relating to the leased facilities.





The
      following is a schedule by years of future minimum rental payments required
      under operating lease that have initial or remaining non-cancelable lease terms
      in excess of one year as of December 31, 2005:





For
                the Years EndingDecember
                31,2006
            
            $
            227,0002007
            
            
            191,0002008
            
            
            147,0002009
            
            
            142,6642010
            
            
            53,000Total
                minimum payments required
            
            $
            760,664





F-19





MEDIFAST,
      INC. AND SUBSIDIARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
      31, 2005, 2004, AND 2003





NOTE
      I -
      INCOME TAXES




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


(Restated)2005
              
              2004
              
              2003Current:Federal
              
              $
              631,000
              
              $
              600,000
              
              $
              973,000State
              
              
              181,000
              
              
              90,000
              
              
              175,000Total
                  Current
              
              
              812,000
              
              
              690,000
              
              $
              1,148,000Deferred:Federal
              
              $
              157,000
              
              $
              408,000
              
              $
              -State
              
              
              33,000
              
              
              61,000
              
              
              -Total
                  deferred
              
              
              190,000
              
              
              469,000
              
              
              -Income
                  tax expense
              
              $
              1,002,000
              
              $
              1,159,000
              
              $
              1,148,000




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:




(Restated)2005
              
              2004
              
              2003Provision
                  at the U.S. federal statutory rate
              
              $
              1,102,000
              
              $
              1,087,000
              
              $
              973,000State
                  taxes, net of federal benefit
              
              
              170,000
              
              
              145,000
              
              
              175,000Intangible
                  assets
              
              
              (156,000
              )
              
              (73,000
              )
              
              -Other
                  temporary differences
              
              
              (98,000
              )
              
              -
              
              
              -Permanent
                  differences
              
              
              (16,000
              )
              
              -
              
              
              -Income
                  tax expense
              
              $
              1,002,000
              
              $
              1,159,000
              
              $
              1,148,000
  F-20




MEDIFAST,
      INC. AND SUBSIDIARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
      31, 2005, 2004, AND 2003




NOTE
      I -
      INCOME TAXES (CONTINUED)





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





(Restated)2005
            
            2004Deferred
                tax assetsNet
                operating loss carryforwards
            
            $
            -
            
            $
            -Intangible
                assets
            
            
            100,000
            
            
            110,000Accounts
                receivable
            
            
            -
            
            
            -Inventory
                overhead and write downs
            
            
            -
            
            
            -Section
                263A
            
            
            -
            
            
            -Total
                deferred tax assets
            
            $
            100,000
            
            $
            110,000Deferred
                Tax LiabilitiesIntangible
                assets
            
            
            
            
            $
            -Accounts
                receivable
            
            
            (37,000
            )
            
            -Inventory
                overhead and write downs
            
            
            (53,000
            )
            
            -Total
                deferred tax liabilities
            
            $
            (90,000
            )
            $
            -





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





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.





The
      2003
      effective income tax rate differed from the federal statutory rate due to state
      taxes.




F-21


MEDIFAST,
      INC. AND SUBSIDIARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
      31, 2005, 2004, AND 2003





NOTE
      J-
      LONG-TERM DEBT AND LINE OF CREDIT





Long-term
      debt as of December 31, 2005 and 2004, consist of the following:





2005
            
            2004$2,850,000
                fifteen year term loan secured by the building and land at a variable
                rate
                which was 7.13% at December 31, 2005
            
            $
            2,201,000
            
            $
            2,391,000$1,760,000
                ten-year reducing revolver line of credit rate at LIBOR plus 220
                bps ,
                which was 6.58% on December 31, 2005
            
            
            1,506,000
            
            
            1,623,000$186,976
                three-year term loan secured by 20,000 restricted common shares variable
                rate which was 10.25% at December 31, 2005
            
            
            59,000
            
            
            111,000$200,000
                five-year term loan secured by equipment fixed rate was 3% at December
                31,
                2005
            
            
            90,000
            
            
            130,000$475,000
                seven-year loan secured by the building and land at a variable rate
                at
                LIBOR plus 250 bps, which was 6.885% on December 31, 2005
            
            
            428,000
            
            
            459,000$366,000
                three-year term loan secured by certain assets at LIBOR plus 250
                basis
                points, which was at 6.885% at December 31, 2005
            
            
            254,000
            
            
            -$100,000
                unsecured note payable at a fixed rate of 3%, discounted to an incremental
                borrowing rate of 12%
            
            
            -
            
            
            -Note
                payable over 3 years secured by vehicle at a fixed rate of
                12.25%
            
            
            -
            
            
            -$550,000
                agreement three years secured by certain assets of the Company variable
                rate, which was prime floating at December 31, 2004.
            
            
            -
            
            
            -4,538,000
            
            
            4,714,000Less
                current portion
            
            
            561,000
            
            
            458,000$
            3,977,000
            
            $
            4,256,000




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





2006
            
            $
            561,0002007
            
            
            503,0002008
            
            
            356,0002009
            
            
            339,0002010
            
            
            339,000Thereafter
            
            
            2,440,000$
            4,538,000




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. Effective January
      17, 2004, $650,000 of the line of credit was converted to a note payable secured
      by all assets of Jason Pharmaceuticals excluding trademarks at a variable rate
      at libor plus 250 basis points which was 6.38% on December 31, 2005. The
      outstanding balance on this line was $633,000 and $369,000 at December 31,
      2005
      and 2004, respectively.





F-22





MEDIFAST,
      INC. AND SUBSIDIARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
      31, 2005, 2004, AND 2003





NOTE
      K -
      EMPLOYMENT AGREEMENTS





The
      CEO
      of Medifast, Inc., Bradley T. MacDonald, has a two-year employment agreement
      for
      an aggregate annual base salary of $225,000 with a bonus potential of 50% of
      base salary provided the Company makes its profit plan per the Board approved
      forecast. This contract has been extended to December 31, 2007. Due to the
      inequities of funding a retirement plan in the 401K, and in recognition of
      the
      performance responsible for the turnaround of the Company, the Board of
      Directors approved a Selective Executive Retirement Compensation Plan funded
      by
      the form of deferred compensation. The Deferred Compensation Plan will be funded
      up to $350,000 by a dollar for dollar match program, having Mr. MacDonald defer
      $175,000, followed by a Company match of $175,000. In June 2004, the Board
      of
      Directors authorized an additional $50,000 to be deferred by Mr. MacDonald
      followed by a Company match of $50,000. In 2005, the Board of Directors approved
      the funding of $100,000 into Mr. MacDonald’s Selective Executive Retirement
      Compensation Plan. This brought the Selective Executive Retirement Compensation
      Plan total funded value to $550,000. Beginning January 1, 2006 the agreement
      was
      modified whereby the deferred compensation will be earned over a 5-year vesting
      period due January 1, 2011. Mr. MacDonald exercised 13,333 options at $2.67
      in
      July of 2005 and executed 2,000 warrants at $.35 in March 2005.





NOTE
      L -
      REDEEMABLE PREFERRED STOCK





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





NOTE
      M -
      SERIES “B” CONVERTIBLE PREFERRED STOCK





In
      January 2000, the Company was authorized to issue 600,000 Series “B” Convertible
      Preferred Stock (“Preferred Stock B”) par value $1.00 per share. Each share is
      entitled to a dividend of 10% of liquidation value $1.00 ($.10) per share and
      is
      to be converted on January 15, 2005 unless converted prior thereto. Each holder
      of Preferred Series “B” stock is entitled to four votes per share in all matters
      in which holders of the Company’s common stock are entitled to vote. On January
      15, 2005, 300,614  shares
      of
      Series “B” Convertible Preferred Stock were converted into 601,228 shares of
      Common Stock. Additionally, a 10% common stock dividend was paid out upon
      conversion that resulted in 521,158 shares being issued to the Series “B”
Convertible Preferred stock investors. As of December 31, 2005 there
      were  no
      shares
      of Series “B” Convertible Preferred Stock remaining.





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




F-23




MEDIFAST,
      INC. AND SUBSIDIARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
      31, 2005, 2004, AND 2003





NOTE
      M - SERIES
      “B” CONVERTIBLE PREFERRED STOCK (CONTINUED)




“B”
      preferred at $0.50 per share in common stock and eliminated the spiral
      conversion provision and reduced voting to 2 votes per share.





NOTE
      N -
      SERIES “C” PREFERRED CONVERTIBLE STOCK





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





On
      August
      2, 2005, 200,000 shares of Series “C” Preferred Convertible Stock were converted
      into 400,000 shares of Common Stock. As of December 31, 2005 there were no
      shares of Series “C” Preferred Convertible Stock remaining and no additional
      dividend payments are owed.





NOTE
      O -
      WARRANTS




During
      2003, the Company issued 200,000 warrants to James Paradis and Anthony
      Burrascono, both affiliated with Villanova University and 200,000 warrants
      to
      Mr. David Scheffler, an investment banker, for advisory and consulting services
      provided to the Company. The warrants vest in five equal installments of 40,000
      warrants per year over a five-year period. These are five-year warrants to
      purchase common shares at an exercise price of $4.80 per share. These warrants
      may be cancelled, with a 90-day notice, if the consultants fail to perform
      to
      the satisfaction of the Company. During 2005, 120,000 unvested warrants issued
      to James Paradis and Anthony Burrascono were cancelled. In addition, the Company
      canceled 120,000 unvested warrants issued to David Scheffler.





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.





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





During
      2005, there were 2,000 warrants exercised at $.35.




F-24




MEDIFAST,
      INC. AND SUBSIDIARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
      31, 2005, 2004, AND 2003





NOTE
      O - WARRANTS
      (CONTINUED)




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




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





Exercise
            
            
            
            Years
                Ended
              December
                31,Price
            
            Expiration
                Date
            
            2005
            
            2004
            
            2003$0.35
            
            
            August,
                2004
            
            
            -
            
            
            -
            
            
            40,100$0.35
            
            
            March,
                2005
            
            
            -
            
            
            2,000
            
            
            -$0.63
            
            
            September,
                2004
            
            
            -
            
            
            -
            
            
            2,500$4.80
            
            
            April,
                2008
            
            
            160,000
            
            
            360,000
            
            
            400,000$10.00
            
            
            June,
                2006
            
            
            25,000
            
            
            25,000
            
            
            25,000$16.78
            
            
            July,
                2008
            
            
            82,500
            
            
            82,500
            
            
            82,500267,500
            
            
            469,500
            
            
            550,100Weighted
                average exercise price
            
            
            8.98
            
            $
            7.16
            
            $
            6.49





As
      of
      December 31, 2005, 267,500 of the warrants are exercisable.





NOTE
      P -
      COMMITMENTS, CONTINGENCIES AND OTHER MATTERS





The
      Company, like other manufacturers and distributors of products that are
      ingested, faces an inherent risk of exposure to product liability claims in
      the
      event that, among other things, the use of its products results in
      injury.




NOTE
      Q -
      LITIGATION





There
      was
      no material pending or threatened litigation against Medifast, Inc. or its
      subsidiaries as of December 31, 2005.





F-25




MEDIFAST,
      INC. AND SUBSIDIARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
      31, 2005, 2004, AND 2003




NOTE
      R -
      RESTATEMENTS





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





NOTE
      S-
      QUARTERLY RESULTS (Unaudited)




First Quarter
            
            Second Quarter
            
            Third Quarter
            
            Fourth
              Quarter**2005**Revenue
            
            $
            8,326,000
            
            $
            10,555,000
            
            $
            10,985,000
            
            
            10,263,000Gross
                Profit
            
            
            6,253,000
            
            
            7,932,000
            
            
            8,310,000
            
            
            7,473,000Operating
                Income
            
            
            781,000
            
            
            1,023,000
            
            
            1,135,000
            
            
            610,000Net
                Income
            
            
            426,000
            
            
            672,000
            
            
            526,000
            
            
            488,000Earnings
                per common share - diluted (1)
            
            
            0.03
            
            
            0.05
            
            
            0.04
            
            
            0.04**2004**Revenue
            
            
            6,817,000
            
            
            7,357,000
            
            
            7,268,000
            
            
            5,898,000Gross
                Profit
            
            
            5,467,000
            
            
            5,411,000
            
            
            5,382,000
            
            
            4,334,000Operating
                Income
            
            
            919,000
            
            
            982,000
            
            
            527,000
            
            
            576,000Net
                Income
            
            
            647,000
            
            
            656,000
            
            
            391,000
            
            
            35,000Earnings
                per common share - diluted (1)
            
            
            0.05
            
            
            0.06
            
            
            0.03
            
            
            0.00




(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.





F-26




NOTE
      T– SUBSEQUENT
      EVENT- 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





F-27