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, 2006




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





New
      York
      Stock Exchange




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




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




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




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




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




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




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




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




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







Explanatory
      Note




This
      Amendment No. 1 to our Annual Report on Form 10-K for the fiscal year ended
      December 31, 2006 is being filed for the purpose of adding to or clarifying
      our
      Significant Accounting Policies, financial statements, footnotes, item 7A
      disclosure, Management Discussion and Analysis, and adding key management
      contracts as exhibits to the financial statements. In regard to our Significant
      Accounting Policies we have included detail on our deferred compensation plan.
      We have also provided additional information on intangible assets to include
      the
      useful lives each type of intangible asset is being amortized over as well
      as
      additional information on how the Company tests for impairment. The Company
      has
      also clarified its revenue recognition policy.




Our
      Annual Report on Form 10-K for the year ended December 31, 2006 initially filed
      with the Securities and Exchange Commission on March 16, 2007 is being filed
      to
      reflect restatements of Medifast, Inc.’s Consolidated Balance Sheets as of
      December 31, 2006 and 2005, and the related Consolidated Statements of Income,
      Cash Flows, and Stockholders’ Equity for each of the three years in the period
      ended December 31, 2006. These restatements reflect the adjustment detailed
      in
      Note 16 to the Consolidated Financial Statements relating to amortization
      expense on a customer list acquired in December of 2004.




The
      Statement of Income has been restated to include stock compensation expense
      and
      the loss on Consumer Choice Systems, Inc. as part of selling, general, and
      administrative expenses. Previously, the expenses were included on the Statement
      of Income as other expense.




In
      the
      footnotes, the Company has included segment reporting footnote disclosure per
      Financial Accounting Standards Board Statement No. 131, “Disclosures about
      Segments of an Enterprise and Related Information.” The Company has added
      additional segment information to include two reportable operating segments:
      Medifast and All Other. The Medifast reporting segment consists of the following
      distribution channels: Medifast Direct, Take Shape for Life, and Doctors and
      Clinics. The All Other reporting segments consist of Hi-Energy and Medifast
      Weight Control Centers, the Company’s parent company operations, as well as the
      Consumer Choice Systems, Inc. division which was sold in January of
      2006.




The
      Company added Item 7A, “Quantitative and Qualitative Disclosures about Market
      Risk” to provide disclosure of the interest rate risk associated with our debt
      instruments. Item 7, “Management Discussion and Analysis” has been updated to
      include additional detail on selling, general, and administrative expenses
      changes for the years ended December 31, 2004, 2005 and 2006.




The
      following sections of this report have been revised to reflect above
      restatements: 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




**Table
      of Contents**


**Page****PART
                  I**Item
                  1.
              Business
              
              3Item
                  1A.
              Risk
                  Factors
              
              9Item
                  1B.
              Unresolved
                  Staff Comments
              
              10Item
                  2.
              Properties
              
              11Item
                  3.
              Legal
                  Proceedings
              
              11Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              
              11**PART
                  II**Item
                  5.
              Market
                  for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                  Purchases of Equity Securities
              
              11Item
                  6.
              Selected
                  Financial Data
              
              12Item
                  7.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              
              12Item
                  7A
              Quantitative
                  and Qualitative Disclosures about Market Risk
              
              19Item
                  8.
              Financial
                  Statements and Supplementary Data
              
              19Item
                  9.
              Changes
                  in and Disagreements with Accountants on Accounting and Financial
                  Disclosure
              
              19Item
                  9A.
              Controls
                  and Procedures
              
              19Item
                  9A.
              Controls
                  and Procedures
              
              21**PART
                  III**Item
                  10.
              Directors,
                  Executive Officers and Corporate Governance
              
              22Item
                  11.
              Executive
                  Compensation
              
              26Item
                  12.
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters
              
              36Item
                  13.
              Certain
                  Relationships and Related Transactions, and Director
                  Independence
              
              37Item
                  14.
              Principal
                  Accounting Fees and Services
              
              37**PART
                  IV**Item
                  15.
              Exhibits,
                  Financial Statement Schedules
              
              43


3





**PART
      I**





**ITEM
      1. BUSINESS.**





**SUMMARY**





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





**MARKETS**





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





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





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




**Distribution
      Channels**





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





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





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


4


**Medifast
      Physicians and Clinics** - Many
      Medifast physicians have implemented the Medifast program within their practice.
      These physicians carry an inventory of Medifast products and resell them to
      patients. They also provide appropriate medical monitoring, testing, and support
      for patients on the program. Medifast also offers Medifast physicians a home
      delivery program “Lifestyles” for their patients. The Lifestyles Program is a
      network of health care professionals who support patients on the Medifast
      program. Medifast offers physicians a dedicated website landing page and
      patients order products directly from the company online or through the call
      center. The Lifestyles medical practitioner ensures that each patient receives
      personalized attention throughout the weight loss program. Management estimates
      that more than 15,000 physicians nationwide have recommended Medifast as a
      treatment for their overweight patients since 1980, and over an estimated 1
      million patients have used its’ products to lose and maintain their weight.





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





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





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




**THE
      MEDIFAST® BRAND**





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





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





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





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




**Clinical
      Research Overview**





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





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





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


5





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





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





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





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





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





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





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





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





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





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





The
      results of this study will be released in 2007.


6


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




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





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





**COMPETITION**




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




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





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





**PRODUCTS**




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




Medifast
      nutritional products are formulated with high-quality, low-calorie, low-fat
      ingredients. Many Medifast products are soy based and contain 24 vitamins and
      minerals, as well as other nutrients essential for good health. The Company
      uses
      Solae® brand soy protein, which is a high-quality complete protein derived from
      soybeans.




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


7


**NEW
      PRODUCTS**




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




**MARKETING**





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





Online
      advertising began in 2004 and included keyword search, banner ads, affiliate
      programs, and targeted direct email campaigns. The online advertising has been
      supported by Medifast's well designed, user-friendly website, which provides
      a
      wealth of information and customer support for easy ordering functionality.
      In
      2006, the online community, meal planner and library, “My Medifast” was added as
      a free service to all customers. Also in 2006, the Company began sponsoring
      customer blogs on its website where customers can interact with other customers
      and ask questions before starting a Medifast program as well as to track their
      success on the Medifast program.





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





**SALES**





The
      Company’s Sales division handles three primary areas:





Physician
      and Clinic Sales— The sales team is responsible for prospecting larger medical
      accounts, clinics, hospitals, and HMOs. During 2006, the sales team attended
      a
      number of medical professional trade shows, which expanded Medifast's
      penetration of the clinical business segment.





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





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





**MANUFACTURING**





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





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





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


8


**GOVERNMENTAL
      REGULATION HISTORY**





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





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





**PRODUCT
      LIABILITY AND INSURANCE**





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





**EMPLOYEES**





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





**INFORMATION
      SYSTEMS INFRASTRUCTURE**





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





**AVAILABLE
      INFORMATION**





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





**EXECUTIVE
      OFFICERS OF THE COMPANY**


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


9





**Bradley
      T. MacDonald**




Mr.
      MacDonald became Chairman of the Board and Chief Executive Officer of Medifast,
      Inc. on January 28, 1998. Mr. MacDonald was previously employed by the Company
      as its Chief Executive Officer from September 1996 to August 1997. In 2006,
      Mr.
      MacDonald was named “Entrepreneur of the Year” in consumer products for the
      State of Maryland. Prior to joining the Company, he was appointed as Program
      Director of the U.S. Olympic Coin Program of the Atlanta Centennial Olympic
      Games. From 1991 through 1994, Colonel MacDonald returned to active duty to
      be
      Deputy Director and Chief Financial Officer of the Retail, Food, Hospitality
      and
      Recreation Businesses for the United States Marine Corps. Prior thereto, Mr.
      MacDonald served as Chief Operating Officer of the Bonneau Sunglass Company,
      President of Pennsylvania Optical Co., Chairman and CEO of MacDonald and
      Associates, which had major financial interests in a retail drug, consumer
      candy, and pilot sunglass companies. Mr. MacDonald was national president of
      the
      Marine Corps Reserve Officers Association and retired from the United States
      Marine Corps Reserve as a Colonel in 1997, after 27 years of service. He has
      been appointed to the Defense Advisory Board for Employer Support of the Guard
      and Reserve (ESGR). Mr. MacDonald serves on the Board of Directors of the
      Wireless Accessories Group (OTCBB: WIRX). He is also on the Board of Directors
      of the Marine Corps Reserve Toys for Tots Foundation and is a Foundation Trustee
      of the Marine Reserve Association.




**Michael
      S. McDevitt**




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





**Leo
      Williams**




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





**Margaret
      MacDonald, MBA**




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





**Brendan
      N. Connors, CPA**




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





**ITEM
      1A. RISK FACTORS**





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





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





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





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





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





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





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


10


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





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





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





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





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





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





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





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








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





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





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




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




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




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




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





**ITEM
      1B. UNRESOLVED STAFF COMMENTS**





None


11


**ITEM
      2. DESCRIPTION OF PROPERTY**





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





**ITEM
      3. LEGAL PROCEEDINGS.**





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





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





Not
      applicable





**PART
      II**





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





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





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











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





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





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





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


12





**ITEM
      6. SELECTED FINANCIAL DATA**




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





2006
            
            2005
            
            2004
            
            2003
            
            2002Revenue
            
            
            74,086,000
            
            
            40,129,000
            
            
            27,340,000
            
            
            25,379,000
            
            
            12,345,000Operating
                income
            
            
            7,381,000
            
            
            3,549,000
            
            
            3,004,000
            
            
            3,598,000
            
            
            1,752,000Income
                from continuing operations
            
            
            7,463,000
            
            
            3,405,000
            
            
            2,906,000
            
            
            3,558,000
            
            
            1,698,000EPS -
                basic
            
            
            0.41
            
            
            0.17
            
            
            0.16
            
            
            0.25
            
            
            0.36EPS -
                diluted
            
            
            0.38
            
            
            0.17
            
            
            0.14
            
            
            0.22
            
            
            0.30Total
                assets
            
            
            36,677,000
            
            
            30,120,000
            
            
            25,968,000
            
            
            24,230,000
            
            
            9,888,000current
                portion of long-term debt and revolving credit facilities
            
            
            1,804,000
            
            
            1,194,000
            
            
            827,000
            
            
            819,000
            
            
            395,000Total
                long-term debt
            
            
            3,509,000
            
            
            3,977,000
            
            
            4,256,000
            
            
            4,564,000
            
            
            2,701,000Weighted
                average shares outstandingBasic
            
            
            12,699,066
            
            
            12,258,734
            
            
            10,832,360
            
            
            9,305,731
            
            
            6,722,505Diluted
            
            
            13,482,894
            
            
            12,780,959
            
            
            12,413,424
            
            
            10,952,367
            
            
            8,737,292





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





**FORWARD
      LOOKING STATEMENTS**





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





**Critical
      Accounting Policies and Estimates**





Our
      consolidated financial statements are prepared in accordance with U.S. generally
      accepted accounting principles. Our significant accounting policies are
      described in Note 2 of the consolidated financial statements.





The
      preparation of these financial statements requires management to make estimates
      and assumptions that affect the reported amounts of assets and liabilities,
      the
      disclosure of contingent assets and liabilities at the date of the financial
      statements, and the reported amounts of revenue and expenses during the
      reporting period. Management develops, and changes periodically, these estimates
      and assumptions based on historical experience and on various other factors
      that
      are believed to be reasonable under the circumstances. Actual results may differ
      from these estimates under different assumptions or conditions. Management
      considers the following accounting estimates to be the most critical in
      preparing our consolidated financial statements. These critical accounting
      estimates have been discussed with our audit committee.


13





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





*Impairment
      of Fixed Assets and Intangible Assets.* We
      continually assess the impairment of long-lived assets whenever events or
      changes in circumstances indicate that the carrying value of the assets may
      not
      be recoverable. Judgments regarding the existence of impairment indicators
      are
      based on legal factors, market conditions and our operating performance. Future
      events could cause us to conclude that impairment indicators exist and the
      carrying values of fixed and intangible assets may be impaired. Any resulting
      impairment loss would be limited to the value of net fixed and intangible
      assets.




*Income
      Taxes* .
      In the
      preparation of consolidated financial statements, the Company estimates income
      taxes based on diverse legislative and regulatory structures that exist in
      jurisdictions where the company conducts business. Deferred income tax assets
      and liabilities represent tax benefits or obligations that arise from temporary
      differences due to differing treatment of certain items for accounting and
      income tax purposes. The Company evaluates deferred tax assets each period
      to
      ensure that estimated future taxable income will be sufficient in character
      amount and timing to result in their recovery. A valuation allowance is
      established when management determines that it is more likely than not that
      a
      deferred tax asset will not be realized to reduce the assets to their realizable
      value. Considerable judgments are required in establishing deferred tax
      valuation allowances and in assessing probable exposures related to tax matters.
      The Company’s tax returns are subject to audit and local taxing authorities that
      could challenge the company’s tax positions. The Company believes it records
      and/or discloses such potential tax liabilities as appropriate and has
      reasonably estimated its income tax liabilities and recoverable tax
      assets.




*Allowance
      for doubtful accounts* .
      In
      determining the adequacy of the allowance for doubtful accounts, we consider
      a
      number of factors including the aging of the receivable portfolio, customer
      payment trends, and financial condition of the customer, industry conditions
      and
      overall credibility of the customer. Actual amounts could differ significantly
      from our estimates.





**CONSOLIDATED
      RESULTS OF OPERATIONS**


**2006
      COMPARISON WITH 2005**





**OPERATING**





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





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





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


14


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





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





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





Aside
      from the increase in advertising expense, selling, general, and administrative
      expenses increased by approximately $11.5 million. A few major expense
      categories attributed to the majority of the increase in expenses and were
      all
      directly related to our dramatic sales growth in 2006. Salaries and benefits
      increased by $3 million to support the 85% increase in sales. In addition,
      Take
      Shape for Life sales increased by 46% year-over-year which led to increased
      commission expense of $3.4 million that is completely variable in relation
      to
      sales growth. Another variable expense that rose by $800,000 with our sales
      growth was credit card processing fees. Currently, over 95% of the Company’s
      transactions are processed via credit card. Additional increases included an
      increase in office expense of $800,000, an increase in operating costs of
      $300,000, and an increase in sales expense of $400,000. Other expenses increased
      by $1.8 million, which included items such as depreciation, amortization, stock
      compensation expense, charitable contributions, and property taxes. To handle
      increased call volume, the Company began using an outsourced call center in
      April of 2006 which led to $1 million in additional expense as compared to
      prior
      year.





Other
      Income/Expense: Other income increased from $15,000 in 2005 to $276,000 in
      2006
      primarily as a result of increased gains on the sale of equity investments,
      interest payments received on the CCS note receivable, and state income tax
      refunds related to 2005 overpayments.





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





Income
      taxes: In the third quarter of 2006, the Company had a $1 million federal tax
      refund receivable. A portion of this refund was factored into the Company’s
      income tax provision, which lowered the estimated tax rate for 2006 **.** **** **** In
      2006,
      the Company recorded $2.3 million in income tax expense, which represents an
      annual effective rate of 31%. In 2005, we recorded income tax expense of $1
      million, which reflected an estimated annual effective tax rate of 29.4 %.
      The
      Company anticipates a tax rate of approximately 36-39% in 2007. The benefit
      the
      Company received in 2006 from a large income tax refund receivable as a result
      a
      cost segregation study performed on our fixed assets is not expected to benefit
      future periods.





Net
      income: Net income increased to $5.2 million in 2006 as compared to $2.1 million
      in 2005, which reflected an increase of 144% or $3.1 million. The increase
      in
      net income is due to an increase in sales offset by increased selling, general,
      and administrative expenses, that primarily consist of increased advertising,
      commissions paid to Take Shape for Life health advisors, outsourced call center
      reps, and new employees.


15


**SEGMENT
      RESULTS OF OPERATIONS**





**Net
                Sales by Segment as of December 31,****2006**
            
            **2005**
            
            **2004****Segments**
            
            **Sales**
            
            **%
                of Total**
            
            **Sales**
            
            **%
                of Total**
            
            **Sales**
            
            **%
                of Total**Medifast
            
            
            71,049,000
            
            
            96
            %
            
            37,980,000
            
            
            95
            %
            
            25,686,000
            
            
            94
            %All
                Other
            
            
            3,147,000
            
            
            4
            %
            
            2,311,000
            
            
            6
            %
            
            1,654,000
            
            
            6
            %Eliminations
            
            
            (110,000
            )
            
            0
            %
            
            (162,000
            )
            
            0
            %
            
            -Total
                Sales
            
            
            74,086,000
            
            
            100
            %
            
            40,129,000
            
            
            100
            %
            
            27,340,000
            
            
            100
            %





**2006
      vs. 2005**





Medifast
      Segment: The Medifast reporting segment consists of the sales of Medifast
      Direct, Take Shape for Life, and Doctors and Clinics. As this represents the
      majority of our business this is referenced to the “Consolidated Results of
      Operations” management discussion for 2006 vs. 2005 above.





All
      Other
      Segment: The All Other reporting segment consists of the sales of Hi-Energy
      and
      Medifast Weight Control Centers. Sales increased by $836,000 year-over year
      as a
      result of an increase in Hi-Energy and Medifast Weight Control Centers sales
      of
      1,736,000. This was offset by a decrease in Consumer Choice Systems sales of
      $900,000 as the division was sold in January of 2006. The increase in the
      Hi-Energy and Medifast Weight Control Centers sales were due to spending
      increases for advertising, increased advertising effectiveness, improved closing
      rates on walk-in sales, as well as the hiring of more experienced clinic
      operators to manage the clinics. In addition, new programs were developed that
      extended the lifetime value of each customer.





**2005
      vs. 2004**





Medifast
      Segment: The Medifast reporting segment consists of the sales of Medifast
      Direct, Take Shape for Life, and Doctors and Clinics. As this represents the
      majority of our business this is referenced to the “Consolidated Results of
      Operations” management discussion for 2005 vs. 2004 above.





All
      Other
      Segment: The All Other reporting segment consists of the sales of Hi-Energy
      Weight Control Centers. Sales increased year-over-year by $657,000 due to a
      $1,197,000 increase in Hi-Energy Weight Control Clinic sales. This was offset
      by
      a $540,000 decrease in Consumer Choice Systems sales. The increase in Hi Energy
      sales was as a result of the clinics being start-ups in 2004. Additional clinics
      were opened in late 2004 and throughout 2005 which led to the increased sales
      growth. Consumer Choice Systems sales decreased due to heavy product returns
      from large retail pharmacies to which the Women’s Well Being products were being
      distributed. The largest sales-volume product was reformulated which led to
      heavy returns of all the existing products on the retail shelves with the old
      formula.





**Net
                Profit by Segment as of December 31,****2006**
            
            **2005**
            
            **2004****Segments**
            
            **Profit**
            
            **%
                of Total**
            
            **Profit**
            
            **%
                of Total**
            
            **Profit**
            
            **%
                of Total**Medifast
            
            
            6,652,000
            
            
            129
            %
            
            4,632,000
            
            
            193
            %
            
            3,463,000
            
            
            200
            %All
                Other
            
            
            (1,386,000
            )
            
            -27
            %
            
            (2,067,000
            )
            
            -86
            %
            
            (1,734,000
            )
            
            -100
            %Eliminations
            
            
            (110,000
            )
            
            -2
            %
            
            (162,000
            )
            
            -7
            %
            
            -Total
                Sales
            
            
            5,156,000
            
            
            100
            %
            
            2,403,000
            
            
            100
            %
            
            1,729,000
            
            
            100
            %


16


**2006
      vs. 2005**





Medifast
      Segment: The Medifast reporting segment consists of the profits of Medifast
      Direct, Take Shape for Life, and Doctors and Clinics. As this represents the
      majority of our business this is referenced to the “Consolidated Results of
      Operations” management discussion for 2006 vs. 2005 above. See footnote 17,
“Business Segments” for a detailed breakout of expenses




All
      Other
      Segment: The All Other reporting segment consists of the losses of Hi-Energy
      and
      Medifast Weight Control Centers, Consumers Choice Systems, and corporate
      expenses related to the parent company operations. Year-over-year, the loss
      in
      the All Other segment improved by $681,000. The sale of Consumer Choice Systems
      in January of 2007 had the largest impact as it led to a $489,000 increase
      in
      income as compared to 2005. In addition, decreased selling, general, and
      administrative expenses of the Corporate operation, which includes auditors
      fees, attorneys fees, board of director expenses, investor relations, corporate
      consulting, education and training, and corporate outings, led to improvement
      of
      $186,000. The Hi-Energy and Medifast Weight Control Centers showed an immaterial
      improvement year-over-year due to expenses associated with expanding the clinic
      model. See footnote 17, “Business Segments” for a detailed breakout of
      expenses.





**2005
      vs. 2004**





Medifast
      Segment: The Medifast reporting segment consists of the profits of Medifast
      Direct, Take Shape for Life, and Doctors and Clinics. As this represents the
      majority of our business this is referenced to the “Consolidated Results of
      Operations” management discussion for 2006 vs. 2005 above. See footnote 17,
“Business Segments” for a detailed breakout of expenses.




All
      Other
      Segment: The All Other reporting segment consists of the losses of Hi-Energy
      Weight Control Centers, Consumer Choice Systems, and corporate expenses related
      to the parent company operations. Year-over-year, the loss in the All Other
      segment increased by $333,000. The primary reason for the increased loss was
      attributed to parent company operations and Consumer Choice Systems which had
      increased losses combining to approximately $704,000. Corporate expenses
      increased due to the increased scale of the business in 2005 vs. 2004. Consumer
      Choice Systems profits feel due to heavy product returns from large retail
      pharmacies to which the Women’s Well Being products were being distributed. The
      largest sales-volume product was reformulated which led to heavy returns of
      all
      the existing products on the retail shelves with the old formula. The increased
      losses were offset by improvement in the Hi-Energy Weight Control Clinic loss.
      In 2004, the entity was in start-up entity that had minimal sales in relation
      to
      the expenses incurred to improve operations of the clinics. See footnote 17,
      “Business Segments” for a detailed breakout of expenses.





**Contractual
      Obligations and Commercial Commitments**





As
      of
      December 31, 2006, our principal commitments consisted of obligations for
      variable and fixed rate loans detailed in Note 12 of the financial statements,
      operating leases for corporately owned Medifast Weight Control Centers detailed
      in Note 9 of the financial statements, and copier equipment contracts for our
      printing operation that supports our marketing efforts.




The
        Company has the following contractual obligations as of December 31,
        2006




**Payments
                due by period****2007**
            
            **2008**
            
            **2009**
            
            **2010**
            
            **2011**
            
            **Thereafter**
            
            **Total****Contractual
                Obligations**Total
                Debt
            
            
            548,000
            
            
            404,000
            
            
            386,000
            
            
            386,000
            
            
            386,000
            
            
            1,947,000
            
            
            4,057,000Operating
                Leases
            
            
            253,000
            
            
            221,000
            
            
            215,000
            
            
            110,000
            
            
            70,000
            
            
            -
            
            
            869,000Copier
                Equipment Service Contracts
            
            
            509,000
            
            
            509,000
            
            
            467,000
            
            
            
            
            
            
            
            
            
            
            
            1,485,000Total
                contractual obligations
            
            
            1,310,000
            
            
            1,134,000
            
            
            1,068,000
            
            
            496,000
            
            
            456,000
            
            
            1,947,000
            
            
            6,411,000


17





**LIQUIDITY
      AND CAPITAL RESOURCES**





The
      Company had stockholders’ equity of $27,916,000 and working capital of
      $9,612,000 on December 31, 2006 compared with $21,697,000 and $9,996,000 at
      December 31, 2005, respectively. The $6.2 million net increase in stockholder’s
      equity reflects the increased profitability of the Company. The Company’s cash
      and cash equivalents position decreased from $1.5 million at December 31, 2005
      to $1.1 at December 31, 2006. The decrease is due to increased cash outlays
      for
      infrastructure to include the new ERP system and new production lines and
      blender, as well as inventory build-up for the first quarter of 2007. In
      addition, prepaid advertisements for January and payments to our third party
      call center were uses of cash. On December 31, 2006 the Company’s current ratio
      was 3 to 1.





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




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




In
      the
      year ended December 31, 2006, net cash used in investing activities was
      $6,747,000, which primarily consisted of the purchase of intangible assets
      and
      purchases of property and equipment. The increase in intangible assets relates
      to the acquisition of customer lists in 2006 which are used in direct response
      marketing campaigns. These campaigns consist of postcards and e-mails that
      are
      sent to customers with a special offer or discount coupon to order on our
      website, choosemedifast.com, or through our call center. In addition, the
      Company acquired trademarks in preparation for future international ventures
      as
      well as incurred fees in developing patents on our diabetic lines. The increase
      in property and equipment relates to the building of a large amount of
      infrastructure in 2006. This included a new Enterprise Resource Planning system,
      two new state of the art manufacturing lines, larger capacity blender and
      improvements at our distribution facility as well as the build out of our new
      Medifast Weight Control Centers.




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




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





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




**2005
      COMPARISON WITH 2004**





**OPERATING**





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





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


18


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 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 increased by approximately $1.4 million.





In
      2005,
      the Company experienced income from operations of $3,549,000. This compares
      with
      income from operations of $3,004,000 in 2004, an increase of 18%. The increase
      in income is primarily due to higher gross profit from increased revenue offset
      by higher general and administrative expenses.





Income
      Taxes: In 2005, the Company realized a tax expense of $1,002,000, 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.





Net
      Income: 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 $9,995,000, an
      increase of $2,531,000 from the $7,464,000 net working capital balance at
      December 31, 2004. Cash and investment securities at December 31, 2005 were
      $6,959,000. In November 2005, Medifast, Inc.’s wholly owned subsidiary Jason
      Pharmaceuticals, Inc. renewed its $5,000,000 Secured Line of Credit from
      Mercantile Safe-Deposit and Trust of Baltimore, Maryland. The line of credit
      is
      at LIBOR plus 1.3 percent. The increased line may be used to finance equipment,
      inventory, and receivables of Medifast, Inc. The Company currently has no
      off-balance sheet arrangements.




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




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




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




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





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




**SEASONALITY**





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





**INFLATION**





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


19


**ITEM
      7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK**




Market
      risk is the potential loss arising from adverse changes in market rates and
      prices, such as interest rates and a decline in the stock market. The Company
      does not enter into derivatives, foreign exchange transactions or other
      financial instruments for trading or speculative purposes. The Company has
      limited exposure to market risks related to changes in interest rates. The
      principal risks of loss arising from adverse changes in market rates and prices
      to which the Company and its subsidiaries are exposed relate to interest rates
      on debt. Since nearly all of our debt is variable rate based, any changes in
      market interest rates will cause an equal change in our net interest expense.
      At
      December 31, 2006, there was $4 million of variable interest loans outstanding
      which is subject to interest rate risk. Interest rates on our variable rate
      loans ranged from 7.1% to 7.85% for the year ended December 31, 2006. Each
      100
      basis point increase in the bank’s LIBOR rates relative to these borrowings
      would impact interest expense by $40,000 over a 12-month period.





**ITEM
      8. FINANCIAL STATEMENTS.**





The
      information required by this item is set forth on pages 41 to 65 hereto and
      incorporated by reference herein.





**ITEM
      9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING** **AND
      FINANCIAL DISCLOSURES.**





There
      were no disagreements with the Company’s independent auditors, regarding
      accounting and financial disclosures for the fiscal year ending December 31,
      2006.





**ITEM
      9A. CONTROLS AND PROCEDURES**





**Evaluation
      of Disclosure Controls and Procedures**





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





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




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, 2006, 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,
      2006 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, 2006 that has materially affected, or is reasonably
      likely to materially affect, our internal control over financial reporting.


20


**Management’s
      Annual Report on Internal Control over Financial Reporting (As
      Restated)**





Management
      is responsible for establishing and maintaining effective internal control
      over
      financial reporting of the Corporation. This system is designed to provide
      reasonable assurance regarding the reliability of financial reporting and the
      preparation of financial statements for external purposes in accordance with
      accounting principles generally accepted in the United States of America.




The
      Corporation’s internal control over financial reporting includes those policies
      and procedures that (i) pertain to the maintenance of records that, in
      reasonable detail, accurately and fairly reflect the transactions and
      dispositions of the assets of the Corporation; (ii) provide reasonable
      assurance that transactions are recorded as necessary to permit preparation
      of
      financial statements in accordance with generally accepted accounting
      principles, and that receipts and expenditures of the Corporation are being
      made
      only in accordance with authorizations of management and directors of the
      Corporation; and (iii) provide reasonable assurance regarding prevention or
      timely detection of unauthorized acquisition, use, or disposition of the
      Corporation’s assets that could have a material effect on the financial
      statements.




A
      material weakness is a significant deficiency or a combination of significant
      deficiencies that result in a more than remote likelihood than a material
      misstatement of the annual or interim financial statements will not be prevented
      or detected.




In
      connection with the aforementioned restatement of financial statements, our
      management has reassessed the effectiveness of our internal control over
      financial reporting as of December 31, 2006. In making its assessment,
      management has utilized the criteria set forth by the Committee of Sponsoring
      Organizations (COSO) of the Treadway Commission in Internal Control—Integrated
      Framework. Our management has concluded that based on its assessment, our
      internal controls over financial reporting were not effective as of
      December 31, 2006 because we did not maintain effective controls over the
      accounting for amortization expense on a customer list. Our management’s
      assessment of the effectiveness of our internal control over financial reporting
      as of December 31, 2006 has been audited by Bagell, Josephs, Levine &
Co, an independent registered public accounting firm, has issued an audit report
      on our management’s revised
      assessment of our internal control over financial reporting as of December
      31,
      2006.




In
      the
      Original Filing and prior to our discovery of the error relating to amortization
      expense on a customer list, our management had previously concluded that our
      internal controls over financial reporting were effective as of
      December 31, 2006.




**Limitations
      on the Effectiveness of Controls**




Our
      management, including our CEO and CFO, does not expect that our disclosure
      controls or our internal controls will prevent or detect all errors and all
      fraud. A control system, no matter how well designed and operated, can provide
      only reasonable, not absolute, assurance that the control system’s objectives
      will be met. Further, the design of a control system must reflect the fact
      that
      there are resource constraints, and the benefits of controls must be considered
      relative to their costs. Because of the inherent limitations in all control
      systems, no evaluation of controls can provide absolute assurance that all
      control issues and instances of fraud, if any, within Medifast,
      Inc. have been detected. These inherent limitations include the realities
      that judgments in decision-making can be faulty, and that breakdowns can occur
      because of simple error or mistake. Controls can also be circumvented by the
      individual acts of some persons, by collusion of two or more people, or by
      management override of the controls. The design of any system of controls is
      based in part upon certain assumptions about the likelihood of future events,
      and there can be no assurance that any design will succeed in achieving its
      stated goals under all potential future conditions. Over time, controls may
      become inadequate because of changes in conditions or deterioration in the
      degree of compliance with associated policies or procedures. Because of the
      inherent limitations in a cost-effective control system, misstatements due
      to
      error or fraud may occur and not be detected.


21




REPORT
      OF
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





Board
      of
      Directors


Medifast,
      Inc. and subsidiaries


Owing
      Mills, Maryland




We
      have
      audited management’s assessment, included in Item 9A of Medifast, Inc.’s
      Annual Report on Form 10-K/A under the heading Management’s Annual Report on
      Internal Control over Financial Reporting (As Restated), that Medifast, Inc.’s,
      (the “Company”) did not maintain effective internal control over financial
      reporting as of December 31, 2006, because of the effect of the Company’s
      material weakness relating to its internal controls over the accounting for
      amortization expense on a customer list, based on criteria established in
      Internal Control — Integrated Framework issued by the Committee of
      Sponsoring Organizations of the Treadway Commission (the COSO criteria).
      Medifast, Inc.’s management is responsible for maintaining effective internal
      control over financial reporting and for its assessment of the effectiveness
      of
      internal control over financial reporting. Our responsibility is to express
      an
      opinion on management’s assessment and an opinion on the effectiveness of
      Medifast, Inc.’s internal control over financial reporting based on our audit.




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




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




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




In
      our
      report dated March 15, 2007 we expressed an unqualified opinion on management’s
      previous assessment that Medifast, Inc. maintained effective internal control
      over financial reporting as of December 31, 2006 and an unqualified opinion
      that Medifast, Inc. maintained, in all material respects, effective internal
      control over financial reporting as of December 31, 2006, based upon the
      COSO criteria. Management has subsequently determined that a deficiency in
      controls relating to the accounting for amortization expense on a customer
      list
      existed as of the previous assessment date, and has further concluded that
      such
      deficiency represented a material weakness as of December 31, 2006. As a
      result, management revised its assessment, as presented in Item 9A of the
      Company’s Annual Report on Form 10-K/A under the heading Management’s Annual
      Report on Internal Control over Financial Reporting (As Restated), to conclude
      that the Company’s internal control over financial reporting was not effective
      as of December 31, 2006. Accordingly, our present opinion on the
      effectiveness of the Company’s internal control over financial reporting as of
      December 31, 2006, as expressed herein, is different from that expressed in
      our previous report.




A
      material weakness is a control deficiency, or combination of control
      deficiencies, that results in more than a remote likelihood that a material
      misstatement of the annual or interim financial statements will not be prevented
      or detected. The following material weakness has been identified and included
      in
      management’s assessment. The Company identified a material weakness related to
      its internal control over the accounting for its customer lists under Statement
      of Financial Accounting Standards No. 142, “Goodwill and Other Intangible
      Assets.” The material weakness resulted in the restatement of the Company’s
      consolidated financial statements as of December 31, 2006 and 2005, and the
      interim financial information for each of the quarters in 2006, commencing
      with
      the quarter ended March 31, 2006. This material weakness was considered in
      determining the nature, timing, and extent of audit tests applied in our audit
      of the 2006 consolidated financial statements, and this report does not affect
      our report dated March 15, 2007, except for Note 16, as to which the date
      is September 6, 2007, on those consolidated financial statements (as restated).




In
      our
      opinion, management’s assessment that Medifast, Inc. did not maintain effective
      internal control over financial reporting as of December 31, 2006, is
      fairly stated, in all material respects, based on the COSO criteria. Also,
      in
      our opinion, because of the effect of the material weakness described above
      on
      the achievement of the objectives of the control criteria, Medifast, Inc. has
      not maintained effective internal control over financial reporting as of
      December 31, 2006, based on the COSO criteria.




Bagell,
      Josephs, Levine, and Co.


Gibbsboro,
      NJ


March
      15,
      2007, except for the effects


of
      the
      material weakness described in


the
      sixth
      paragraph of this report, as to which


the
      date
      is September 6, 2007





22




**PART
      III**





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





The
      Board
      of Directors currently consists of 9 persons. The directors, their ages, and
      the
      year in which they first became director are provided in the table
      below:





**Name
                and Experience**
            
            **Director**
                  **Since****Joseph
                D. Calderone**,
                age 58, 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 recently retired as a Captain in the US Navy Reserves.
                He
                served as the Wing Chaplain for the 4th Marine Aircraft Wing.
            
            2003**Charles
                P. Connolly, age 58,**is
                currently an independent director focusing on bank relationships,
                debt
                refinancing, merger and acquisition strategy and executive compensation
                design. Mr. Connolly spent 29 years at First Union Corp. that merged
                with
                Wachovia Bank in 2001. He retired in 2001 as the President and CEO
                of
                First Union Corp. Mr. Connolly serves on the Boards of numerous non-profit
                organizations. He holds an MBA from the University of Chicago and
                AB from
                Villanova University.
            
            2006**Bradley
                T. MacDonald,**age
                59, is the Chairman of the Board of Medifast, Inc.   Mr.
                MacDonald has been Chairman of the Board of Medifast, Inc. since
                January
                1998 and was also Chief Executive officer until March of 2007.  He
                was the principal architect of the turnaround of Medifast and formulated
                the “Direct to Consumer” business models that are the primary drivers of
                Revenue to this day. He also was the co-founder of Take Shape for
                Life and
                acquired the Clinic operations in 2002. During his time as CEO, he
                managed
                the company to 29 consecutive quarters of profits and improved
                shareholders equity from negative $4 million to over $27 million
                in less
                than seven years. He also increased the Company’s market cap from less
                than $1 million to over $100 million and listed the company on the
                NYSE.
                In 2006, Mr. MacDonald received the prestigious and audited Ernst
                and
                Young award of “Entrepreneur of the Year” for the state of Maryland in the
                consumer products category.  Also, he helped lead the Company to
                national recognition in Forbes Magazine ranking Medifast 28thof
                the top 200 small companies in America.Mr.
                MacDonald was previously employed by the Company as its Chief Executive
                Officer from September 1996 to August 1997. From 1991 through 1994,
                Colonel MacDonald returned to active duty to be Deputy Director and
                Chief
                Financial Officer of the Retail, Food, Hospitality and Recreation
                Businesses for the United States Marine Corps.  Prior thereto, Mr.
                MacDonald served as Chief Operating Officer of the Bonneau Sunglass
                Company, President of Pennsylvania Optical Co., Chairman and CEO
                of
                MacDonald and Associates, which had major financial interests in
                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 also serves on the Board of Directors of the
                Marine
                Corps Reserve Toys for Tots Foundation and is on the Board of Trustees
                of
                Villa Julie College of Stevenson, Maryland and the Institute of Notre
                Dame, the oldest Catholic girl’s urban high school in Maryland, located in
                Baltimore. Mr. MacDonald is the father of Margaret MacDonald who
                performs
                the role of President and Chief Operating Officer at Medifast, Inc.
                Mr.
                Michael C. MacDonald is the brother of Mr. Bradley T.
                MacDonald.
            
            1996**Michael
                C. MacDonald, age 53**,
                is president of global accounts and marketing operations for Xerox
                Corporation, Stamford, Conn. He was named to this position in October
                2004
                and was appointed a corporate senior vice president in July 2000.
                Mac
                Donald is responsible for directing the company’s largest global accounts,
                improving the customer experience, corporate marketing, xerox.com,
                advertising, worldwide public relations and marketing communications.
                Most
                recently, Mac Donald was president, North American Solutions Group
                responsible for all products, services and solutions sold by Xerox
                direct
                sales force in the United States and Canada. Prior to that, he served
                as
                the group’s senior vice president of marketing and chief of staff. Mac
                Donald is on the board of directors of the Rochester Institute of
                Technology, PAETEC, and the Jimmy V Foundation. He is also a board
                member
                of the CMO Council North American Advisory Board. Mr. MacDonald completed
                executive business and management programs at Columbia University
                in 1992
                and the International Senior Management Program at Harvard University
                in
                1998
            
            1998**Dennis
                M. McCarthy*****,***age
                62, practiced law for 21 years as a civil litigator in tort and contract
                cases. He was the founding member and managing partner of a Columbus,
                Ohio
                based law firm. Additionally, he served active duty in the U.S. Marine
                Corps for 23 years and served 18 years in reserve service. Mr. McCarthy
                retired from the Marine Corps in 2005 in the grade of Lieutenant
                General
                after four years in command of all Marine Reserve forces. Mr. McCarthy
                is
                currently the Executive Director of the Reserve Officers Association,
                a
                congressionally chartered association devoted to national defense.
                In
                addition to Medifast, he is a member of the Board of Directors of
                Rivada
                Networks.
            
            2006




23





**Michael
                J. McDevitt,**age
                58, 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. Mr. McDevitt is the father
                of
                Michael S. McDevitt who performs the role of Chief Executive Officer
                and
                Chief Financial Officer at Medifast, Inc. Mr. McDevitt is the father
                of
                Michael S. McDevitt who performs the role of Chief Executive and
                Chief
                Financial Officer at Medifast, Inc.
            
            2002**Donald
                F. Reilly, OSA**,age
                59, 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, and is Board Member of Prayer Power. Fr. Reilly
                was
                recently re-elected Provincial of the Augustinian Order at Villanova,
                PA.
                He oversees more than 220 Augustinian Friars and their service to
                the
                Church, teaching at universities and high schools, ministering to
                parishes, serving as chaplain in the Armed Forces and hospitals,
                ministering to AIDS victims, and serving missions in Japan and South
                America.
            
            1998**Mary
                T. Travis,**age 56, 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.
            
            2002




**ADDITIONAL
      INFORMATION ABOUT THE BOARD OF DIRECTORS AND COMMITTEES**




**Director
      Independence**




The
      Board
      consists of 9 members of which 8 are non-management directors. Determination
      as
      to the qualifications of an independent directors are determined under
      section 303A.02 of the New York Stock Exchange, or the NYSE, Listed Company
      Manual and the Company’s Categorical Standards of Independence. The NYSE’s
      independence guidelines and the Company’s categorical standards include a series
      of objective tests, such as the director is not an employee of the Company
      and
      has not engaged in various types of business dealings involving the Company,
      which would prevent a director from being independent. The Board of Directors
      has affirmatively determined that none of the Company’s independent directors
      had any relationships with the Company.





The
      Board, in applying the above referenced standards has affirmatively determined
      the Company’s current independent directors are: Joseph Calderone, Charles P.
      Connolly, George Lavin, Jr. Esq., Dennis M. McCarthy, Donald F. Reilly, and
      Mary
      Travis.


24


**Board
      Meetings**




For
      the
      fiscal year ended December 31, 2006 (“Fiscal 2006”), the Board of Directors held
      four meetings. All Board members attended at least 75% of the aggregate number
      of Board meetings and applicable committee meetings held while such individuals
      were serving on the Board of Directors, or such committees. Under the
      Company’s *Principles of Corporate Governance* ,
      which
      is available on the Company’s website *www.choosemedifast.com* , by
      following the link through
      “Investor Relations” to “Corporate Governance,”each
      director is expected to dedicate sufficient time, energy and attention to ensure
      the diligent performance of his or her duties, including attending meetings
      of
      the shareholders of the Company, the Board of Directors and committees of which
      he or she is a member.
      Six
      directors attended the 2006 annual general meeting.




**Committees
      of the Board**




Our
      Board
      of Directors has a standing audit committee, nominating and corporate governance
      committee, compensation committee, and executive committee.




***Audit
      Committee***




Our
      audit
      committee consists of Joseph Calderone, Charles Connolly, George Lavin, and
      Mary
      Travis, each of whom are independent as discussed above under “— Director
      Independence.” As required by Rule 303A.07 of the NYSE Listed Company
      Manual, the Board of Directors has affirmatively determined that each audit
      committee member is financially literate, and that Mr. Connolly is an
“audit committee financial expert,” as defined in Item 407(d)(5) of
      Regulation S-K.


The
      principal duties of the audit committee are as follows:





Ÿ
            have
                the sole authority and responsibility to hire, evaluate and, where
                appropriate, replace the independent auditors;




Ÿ
            meet
                and review with management and the independent auditors the interim
                financial statements and the Company’s disclosures under Management’s
                Discussion and Analysis of Financial Condition and Results of Operations
                prior to the filing of the Company’s Quarterly Reports on Form 10-Q;




Ÿ
            meet
                and review with management and the independent auditors the financial
                statements to be included in the Company’s Annual Report on Form 10-K
                (or the annual report to shareowners) including (i) their judgment
                about the quality, not just acceptability, of the Company’s accounting
                principles, including significant financial reporting issues and
                judgments
                made in connection with the preparation of the financial statements;
                (ii) the clarity of the disclosures in the financial statements; and
                (iii) the Company’s disclosures under Management’s Discussion and
                Analysis of Financial Condition and Results of Operations, including
                critical accounting policies;




Ÿ
            review
                and discuss with management, the internal auditors and the independent
                auditors the Company’s policies with respect to risk assessment and risk
                management;




Ÿ
            review
                and discuss with management, the internal auditors and the independent
                auditors the Company’s internal controls, the results of the internal
                audit program, and the Company’s disclosure controls and procedures, and
                quarterly assessment of such controls and procedures;




Ÿ
            establish
                procedures for handling complaints regarding accounting, internal
                accounting controls and auditing matters, including procedures for
                confidential, anonymous submission of concerns by employees regarding
                accounting and auditing matters; and




Ÿ
            review
                and discuss with management, the internal auditors and the independent
                auditors the overall adequacy and effectiveness of the Company’s legal,
                regulatory and ethical compliance programs.




Our
      Board
      of Directors has adopted a written charter for the audit committee which is
      available on the Company’s website at *www.choosemedifast.com* by
      following the links through “Investor Relations” to “Corporate
      Governance.” I n
      fiscal
      2006, the audit committee met five times.


***Nominating
      and Corporate Governance Committee***




The
      nominating and corporate governance committee consists of Joseph Calderone,
      Donald F. Reilly, and George Lavin, all of whom are independent as discussed
      above under “— Director Independence.”




The
      principal duties of the nominating and corporate governance committee are as
      follows:





25




•
            to
                recommend to our Board of Directors proposed nominees for election
                to the
                Board of Directors both at annual general meetings and to fill vacancies
                that occur between general meetings; and•
            to
                make recommendations to the Board of Directors regarding the Company’s
                corporate governance matters and
                practices.




Our
      Board
      of Directors has adopted a written charter for the nomination and corporate
      governance committee which is available on the Company’s website at *www.choosemedifast.com* by
      following the links through “Investor Relations” to “Corporate
      Governance.” I n
      fiscal
      2006, the nomination and corporate governance committee met four
      times.





Our
      Board
      of Directors has adopted a written charter for the nominating and corporate
      governance committee, which is available on the Company’s website at *www.choosemedifast.com* by
      following the links through “Investor Relations” to “Corporate Governance” or in
      print to any shareholder who requests it as set forth under “Additional
      Information — Annual Report, Financial and Additional Information.” In
      fiscal 2006, the nominating and corporate governance committee met four
      times.




***Compensation
      Committee***




The
      compensation committee currently consists of George Lavin, Jr., Esq, Dennis
      M.
      McCarthy, Esq., Donald F. Reilly, and Mary Travis, all of whom were independent
      as discussed above under “— Director Independence .”




The
      principal duties of the compensation committee are as follows:





Ÿ
            measure
                the Chief Executive Officer’s performance against his goals and objectives
                pursuant to the Company plans;




Ÿ
            determine
                the compensation of the Chief Executive Officer after considering
                the
                evaluation by the Board of Directors of his performance;




Ÿ
            review
                and approve compensation of elected officers and all senior executives
                based on their evaluations, taking into account the evaluation by
                the
                Chief Executive Officer;




Ÿ
            review
                and approve any employment agreements, severance arrangements, retirement
                arrangements, change in control agreements/provisions, and any special
                or
                supplemental benefits for each elected officer and senior executive
                of the
                Company;




Ÿ
            approve,
                modify or amend all non-equity plans designed and intended to provide
                compensation primarily for elected officers and senior executives
                of the
                Company;




Ÿ
            make
                recommendations to the Board regarding adoption of equity plans;
                and




Ÿ
            modify
                or amend all equity plans.




Our
      Board
      of Directors has adopted a written charter for the compensation committee which
      is available on the Company’s website at *www.choosemedifast.com* by
      following the links through “Investor Relations” to “Corporate Governance.” In
      fiscal 2006, the compensation committee met four  times.





***Executive
      Committee***





Messrs.
      Bradley T. MacDonald, Michael C. MacDonald, Michael J. McDevitt, and Dennis
      M.
      McCarthy, Esq. are members of the Executive Committee. The Executive Committee
      has all the authority of the Board of Directors, except with respect to certain
      matters that by statute may not be delegated by the Board of Directors. The
      Committee meets periodically during the year to develop and review strategic
      operational and management polices for the Company. The Committee
      held three meetings
      during fiscal 2006.




26


**ADDITIONAL
      INFORMATION**





**Section 16(a)
      Beneficial Ownership Reporting Compliance**




Section 16(a)
      of the Exchange Act requires the Company’s directors and executive officers and
      persons who beneficially own more than ten percent of a registered class of
      the
      Company’s equity securities to file with the SEC and the NYSE initial reports of
      ownership and reports of changes in ownership of equity securities of the
      Company. Directors, officers and greater-than-ten-percent beneficial owners
      are
      required by SEC regulations to furnish the Company with copies of all
      Section 16(a) forms filed by them. In 2006, To the Company’s knowledge,
      based solely on a review of the copies of such filings on file with the Company
      and written representations from the Company’s directors and executive officers,
      no Section 16(a) filing requirements were applicable to the Company’s
      directors, executive officers and greater-than-ten-percent beneficial owners
      in
      fiscal 2006.




**Codes
      of Business Conduct and Ethics and Corporate Governance
      Guidelines**




Our
      Board
      of Directors has adopted a corporate Code of Business Conduct and Ethics
      applicable to our directors, officers, including our principal executive
      officer, principal financial officer and principal accounting officer, and
      employees, as well as Corporate Governance Guidelines, in accordance with
      applicable rules and regulations of the SEC and the NYSE. Each of our Code
      of
      Business Conduct and Ethics and Corporate Governance Guidelines are available
      on
      our website at *www.choosemedifast.com* by
      following the links through “Investor Relations” to “Corporate
      Governance.”





Any
      amendment to, or waiver from, a provision of the Company’s Code of Business
      Conduct and Ethics with respect to the Company’s principal executive officer,
      principal financial officer, principal accounting officer or controller will
      be
      posted on the Company’s website, *www.choosemedifast.com.*




**ITEM
      11. EXECUTIVE COMPENSATION.**





**COMPENSATION
      DISCUSSION AND ANALYSIS**




**Overview
      of Compensation Program**




Our
      Compensation Committee of the Board of Directors has responsibility for
      establishing, implementing and continually monitoring adherence with the
      Company’s compensation philosophy. The Compensation Committee ensures that the
      total compensation paid to our named executive officers is fair, reasonable
      and
      competitive. Generally, the types of compensation and benefits provided to
      our
      named executive officers are similar to those provided to other officers and
      employees of the Company.




Throughout
      this discussion, the individuals who served as our CEO and CFO during Fiscal
      2006, as well as the other individuals included in the Summary Compensation
      Table on page 10, are referred to as the “named executive officers.”




**Objectives
      of Compensation Program**




The
      main
      objective of our executive compensation program is to create a competitive
      total
      rewards package based on the attainment of short-term performance objectives
      and
      long-term strategic goals. Accordingly, our executive compensation program
      consists of the following three principal elements: base salary, cash bonus
      and
      equity grants in the form of stock options and restricted stock, with an
      emphasis on incentive compensation rather than base salary. Our executives
      are
      also eligible to participate in employee benefit and retirement plans offered
      by
      the Company, which currently include defined contribution and 401(k) plans,
      and
      health care and other insurance programs. The benefit programs available to
      executives are the same as those available to all other eligible employees.




**Decision-Making;
      Role of Executive Officers in Compensation Decisions**




The
      Compensation Committee of our Board of Directors is comprised solely of
      non-affiliate independent Directors who meet the independence requirements
      of
      the NYSE. Our Compensation Committee makes all decisions regarding the
      compensation of our CEO, including establishing the performance goals and
      objectives for our CEO, evaluating our CEO’s performance in light of the goals
      and objectives that were set, and determining and recommending to our Board
      the
      CEO’s compensation based on that evaluation.




Our
      CEO
      makes recommendations to our Compensation Committee for the compensation of
      our
      CFO and all other named executive officers. Our Compensation Committee and
      Board
      may accept or adjust such recommendations as they determine in the best
      interests of the Company and its stockholders and has final approval over all
      such compensation decisions. To the extent not established by our Board of
      Directors, our Compensation Committee is also authorized to establish
      compensation and benefits for our Chairman and for new and existing
      non-affiliate independent Directors.




Our
      Chairman, CEO, and Vice President of Human Resources provide advice, analysis
      and recommendations to our Compensation Committee.


27




Elements
      of Executive Compensation




Our
      Compensation Committee also evaluates the achievement of corporate, individual
      and organizational objectives for each executive officer during the prior fiscal
      year. Each element of compensation is chosen in order to attract and retain
      the
      necessary executive talent, reward corporate performance and provide incentive
      for the attainment of long-term strategic goals. The allocation of each element
      of compensation is determined by our Compensation Committee for each executive
      based on the following factors:




•
            
            Performance
                against corporate, individual and organizational objectives for the
                fiscal
                year;




•
            
            Importance
                of particular skill sets and professional abilities to the achievement
                of
                long-term strategic goals; and




•
            
            Contribution
                as a leader, corporate representative and member of the senior management
                team.




These
      elements support our overall compensation philosophy by creating a balanced
      focus on shorter-term corporate performance and the achievement of longer-term
      business goals and stockholder value. While we believe in structuring executive
      compensation plans that give our executives incentive to deliver certain
      objective elements of corporate financial performance over specified time
      periods, we do not believe in a purely mechanical approach. Instead, part of
      our
      executive compensation philosophy includes an element of reward for
      non-quantitative achievements demonstrated by our executives in the actions
      and
      decisions they have taken throughout the year. When establishing our executive
      compensation plans for a given year, it is not possible to foresee all of the
      challenges and demands that will be made of our executives, both as a management
      team and in their areas of individual responsibility. We believe that by
      rewarding the quality of our decision-making and leadership, in addition to
      the
      achievement of quantifiable results, we are building a management team capable
      of creating stockholder value over the longer-term, while remaining disciplined
      in delivering shorter-term financial results. Accordingly, there is no
      pre-established policy or target for the allocation between either cash and
      non-cash or short-term and long-term incentive compensation. Rather, the
      Compensation Committee reviews information provided by its compensation
      consultant, industry surveys and peer company data to determine appropriate
      level and mix of incentive compensation. Income from such incentive compensation
      is realized as a result of the performance of the Company and the individual,
      depending on the type of award, compared to established goals.




Base
      Salary




Our
      base
      salary determinations principally reflect the skills and performance levels
      of
      individual executives, the needs of the Company, and pay practices of comparable
      public companies. It is not our policy to pay our executive officers at the
      highest base salary level. Instead, we establish executive base salaries
      conservatively at or below a midpoint level relative to an appropriate set
      of
      peers. We believe this policy sets a prudent and fiscally responsible tone
      for
      the Company’s overall base salary compensation programs.




Target
      Bonus




Cash
      bonuses principally reflect the Company’s financial performance and achievement
      of corporate objectives established by our Board prior to the fiscal year.
      The
      executive bonus plan is designed to reward our executives for the achievement
      of
      shorter-term financial goals, predominantly revenue growth and profitability,
      with cash flow and other operating ratios also considered. The allocation of
      the
      bonus pool among the employees, including senior executives, is at the
      discretion of the Compensation Committee. The Chief Executive Officer, Chief
      Financial Officer and other senior executives discuss and jointly develop
      recommended bonus allocations among the staff within the various functional
      areas of the Company. In addition, the Chief Executive Officer prepares an
      allocation of bonus payments among the senior executive group. In consultation
      with the Chief Executive Officer, the Compensation Committee evaluates, adjusts
      and approves the amount and allocation of the bonus pool. In determining the
      cash bonus allocation among senior executives, the Compensation Committee and
      the Chief Executive Officer consider each executive’s a) contribution to current
      and long-term corporate goals, and b) value in the labor
      market.


28




Equity
      Compensation




Stock
      option and restricted stock awards principally reflect the responsibilities
      to
      be assumed by each executive in the upcoming fiscal year, the responsibilities
      of each executive in prior periods, the size of awards made to each executive
      in
      prior years relative to the Company’s overall performance, available stock for
      issuance under our Option Plan, and potential grants in future years. The
      Committee believes that stock option and restricted stock grants (1) align
      the interests of executives with long-term stockholder interests, (2) give
      executives a significant, long-term interest in the Company’s success, and
      (3) help retain key executives in a competitive market for executive
      talent. The Company does not plan on issuing stock options as part of
      compensation in 2007 and beyond.





Equity
      Ownership by Executives




We
      do not
      currently have a formal equity ownership requirement for our executives.
      However, we encourage our executives to own equity in the Company on a voluntary
      basis. All of our named executive officers own stock, restricted stock and
      vested and unvested stock options. We periodically review the vested and
      unvested equity holdings of our executives and evaluate whether these holdings
      sufficiently align the interests of our executives with the long-term interests
      of our stockholders. We may consider adopting equity ownership requirements
      in
      the future.




29


**2006
      Summary Compensation Table**





The
      following table sets forth the annual and long-term compensation for the fiscal
      year ended December 31, 2006, of the Company’s Chief Executive Officer and
      Chief Financial Officer and each of the three other most highly compensated
      executive officers. These individuals, including the Chief Executive Officer
      and
      Chief Financial Officer are collectively referred to as the Named Executive
      Officers.





**Salary**
            
            **Stock
                Awards**
            
            **Option
                Awards**
            
            **Bonus**
            
            **Nonqualified
                Deferred Compensation Contributions**
            
            **All Other**
            
            **Total****Name
                and Pricipal Position**
            
            
            **Year**
            
            
            **($**)****
            
            
            **($)(1**)****
            
            
            **($)(1**)****
            
            
            **($)(2**)****
            
            
            **($**)****
            
            
            **($)(3**)****
            
            
            **($**)****Bradley
                T. MacDonald
            
            
            2006
            
            $
            225,000
            
            
            -
            
            
            -
            
            
            -
            
            $
            100,000
            
            $
            6,600
            
            $
            331,600Chairman,
                Chief Executive OfficerMichael
                S. McDevitt
            
            
            2006
            
            
            99,000
            
            
            289,000
            
            
            -
            
            
            27,500
            
            
            
            
            
            3,800
            
            
            419,300President,
                Chief Financial OfficerLeo
                Williams
            
            
            2006
            
            
            125,000
            
            
            -
            
            
            -
            
            
            25,000
            
            
            
            
            
            3,800
            
            
            153,800Executive
                Vice PresidentMargaret
                MacDonald
            
            
            2006
            
            
            81,000
            
            
            237,000
            
            
            -
            
            
            4,000
            
            
            
            
            
            2,400
            
            
            324,400Executive
                VP of OperationsBrendan
                N. Connors
            
            
            2006
            
            
            80,000
            
            
            47,000
            
            
            -
            
            
            4,000
            
            
            
            
            
            1,400
            
            
            132,400VP
                of Finance




(1)
            
            Amounts
                are calculated based on provisions of SFAS, No 123R, “Share Based
                Payments.” Seenote 1of
                the consolidated financial statements of the Company’s Annual Report on
                Form 10-K for the year ended December 31, 2006 regarding
                assumptions underlying valuation of equity awards.(2)
            
            Bonus
                amounts determined as more specifically discussed above under
                “—Compensation Discussion and Analysis”(3)
            
            The
                amounts represent the Company’s matching contributions under the 401(K)
                plan.




30


**2006
      Grants of Plan-Based Awards**




There
      were no grants of plan-based awards to the Named Executive Officers for the
      fiscal year ended December 31, 2006.




**Outstanding
      Equity Awards at Fiscal Year-End Table**





**Option Awards**
            
            **Stock Awards****Name**
            
            **Number of**
              **Securities**
              **Underlying**
              **Unexercised**
              **Options (#)**
            
            **Number of****Securities**
              **Underlying**
              **Unexercised**
              **Options (#)**
            
            **Option**
              **Exercise**
            
            **Option**
              **Expiration**
            
            **Number****Shares**
              **or****Units of**
              **Stock That**
              **Have Not**
              **Vested**
            
            **Market**
              **Value of**
              **Shares or**
              **Units of**
              **Stock that**
              **have not**
              **Vested**
            
            **EquityIncentive**
              **Plan**
              **Awards:**
              **Number of**
              **Unearned**
              **Shares, Units**
              **or Other**
              **rights**
            
            **Equity IncentivePlan Awards:**
              **Market orPayout Value ofUnearnedShares, Units orOther rightsThat Have NotVested****Exercisable**
            
            **Un-Exercisable**
            
            **Price ($)**
            
            **Date**
            
            **Vested(#)**
              **(1)**
            
            **($)
                (2)**
            
            **(#)**
            
            **($)**Bradley
                T. MacDonald
            
            
            -
            
            
            100,000
            
            $
            6.25
            
            
            2/8/2011
            
            
            -
            
            
            -
            
            
            -
            
            
            -Chief
                Executive OfficerMichael
                S. McDevitt
            
            
            100,000
            
            
            -
            
            
            2.87
            
            
            3/31/2010
            
            
            226,666
            
            
            2,849,191
            
            
            -
            
            
            -President,
                Chief Financial OfficerLeo
                Williams
            
            
            6,666
            
            
            3,333
            
            
            3.83
            
            
            10/28/2010
            
            
            -
            
            
            -
            
            
            -
            
            
            -Executive
                Vice PresidentMargaret
                MacDonald
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            185,000
            
            
            2,325,450
            
            
            -
            
            
            -Executive
                VP of OperationsBrendan
                N. Connors
            
            
            23,334
            
            
            
            
            
            2.87
            
            
            3/31/2010
            
            
            37,000
            
            
            465,090
            
            
            -
            
            
            -VP
                of Finance




Each
      option has a five year life and an exercise price per share equal to 100% of
      the
      estimated fair value of our common stock on the date of grant.





(1)
            The
                restricted stock grants vest over five and six years of service as
                described below under “Narrative
                Disclosure to Summary Compensation Table and Grants of Plan-Based
                Awards”





(2)
            The
                market value of shares of stock that have not vested is based on
                the
                closing price of our common stock on December 29, 2006, or $12.57
                per
                share.




31


**2006
      Option Exercises and Stock Vested Table**





The **** following
      table sets forth information regarding option exercises and stock vesting for
      the Named Executive Officers during 2006.





**Option
                Awards**
            
            **Stock
                Awards****Number
                of**
              **Shares****Acquired**
              **on****Exercise**
            
            **Value**
              **Realized
                on**
              **Exercise**
            
            **Number
                of**
              **Shares**
              **Acquired
                on**
              **Vesting**
            
            **Value**
              **Realized
                on**
              **Vesting****Name**
            
            **(#)**
            
            **($)(1)**
            
            **(#)**
            
            **($)(2)**Bradley
                T. MacDonald
            
            
            26,667
            
            $
            172,002
            
            
            -
            
            
            -Chief
                Executive Officer
            
            
            -
            
            
            -
            
            
            -
            
            
            -Michael
                S. McDevitt
            
            
            7,696
            
            
            149,553
            
            
            15,000
            
            
            81,000President,
                Chief Financial Officer
            
            
            -
            
            
            -
            
            
            33,333
            
            
            208,331Leo
                Williams
            
            
            -
            
            
            -
            
            
            -
            
            
            -Executive
                Vice PresidentMargaret
                MacDonald
            
            
            16,667
            
            
            126,669
            
            
            15,000
            
            
            81,000Executive
                VP of Operations
            
            
            -
            
            
            -
            
            
            25,000
            
            
            156,250Brendan
                N. Connors
            
            
            10,176
            
            
            183,473
            
            
            3,000
            
            
            16,200VP
                of Finance
            
            
            -
            
            
            -
            
            
            5,000
            
            
            31,250




(1)
            Represents
                the difference between the exercise price and the fair market value
                of the
                common stock on the date of exercise, multiplied by the number of
                options
                exercised.


(2)
            Represents
                the number of restricted shares vested, and the number of shares
                vested
                multiplied by the fair market value of the common stock on the vesting
                date.




**Equity
      Compensation Plan Information at Fiscal Year Ended December 31,
      2006**




**Plan
                category**
            
            **Number
                of**
              **securities to be**
              **issued
                upon**
              **exercise
                of**
              **outstanding**
              **options, warrants**
              **and
                rights**
            
            **Weighted**
              **average exercise**
              **price
                of**
              **outstanding**
              **options,**
              **warrants
                and**
              **rights**
            
            **Number
                of**
              **securities**
              **remaining available**
              **for
                future issuance**
              **under
                equity**
              **compensation**
              **plans
                (excluding**
              **securities
                reflected**
              **in
                column (a))****(a)**
            
            **(b)**
            
            **(c)****Equity
                compensation plans approved by security holders**
            
            
            524,079
                (1
            )
            $
            6.12
            
            
            928,421**Equity
                compensation plans not approved by security
                holders**
            
            
            -
            
            
            -
            
            
            -





(1)
            Consists
                of 321,579 shares of common stock issuable upon the exercise of
                outstanding options and 202,500 shares of common stock issuable upon
                the
                exercise of outstanding warrants.




32


**2006
      Non-Qualified Deferred Compensation Table**





The
      following table sets forth all non-qualified deferred compensation of the Named
      Executive Officers for the fiscal year ended December 31, 2006.





**Executive
                Contributions in Last FY**
            
            **Company
                Contributions in Last FY**
            
            **Aggregate
                Earnings in****Last
                FY**
            
            **Aggregate
                Withdrawals/**
              **Distributions**
            
            **Aggregate
                Balance at****Last
                FYE****($)**
            
            **($)(1)**
            
            **($)**
            
            **($)**
            
            **($)**Bradley
                T. MacDonald
            
            
            
            
            $
            100,000
            
            $
            80,120
            
            
            -
            
            $
            933,921Chairman,
                Chief Executive OfficerMichael
                S. McDevitt
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -President,
                Chief Financial OfficerLeo
                Williams
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Executive
                Vice PresidentMargaret
                MacDonald
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Executive
                VP of OperationsBrendan
                N. Connors
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -VP
                of Finance





(1)
            All
                amounts are reported in compensation on the “2006 Summary Compensation
                Table”




**Deferred
      Compensation Plans**




We
      maintain a non-qualified deferred compensation plan, effective September 10,
      2003, for Senior Executive management. Currently, Bradley MacDonald is the
      only
      participant in the plan. Under the deferred compensation plan that became
      effective in 2003, executive officers of the Company, including the Named
      Executive Officers, may defer a portion of their salary and bonus
      (performance-based compensation) annually. A participant may elect to receive
      distributions of the accrued deferred compensation in a lump sum or in
      installments upon retirement




Each
      participating officer may request that the deferred amounts be allocated among
      several available investment options established and offered by the Company.
      These investment options provide market rates of return and are not subsidized
      by the Company. The benefit payable under the plan at any time to a participant
      following termination of employment is equal to the applicable deferred amounts,
      plus or minus any earnings or losses attributable to the investment of such
      deferred amounts. The amount of compensation in any given fiscal year that
      is
      deferred by each Named Executive Officer is included in the Summary Compensation
      Table under the column headings “Salary” or “Non-Equity Incentive Plan
      Compensation”, as appropriate.




The
      Company has established a trust for the benefit of participants in the deferred
      compensation plan. Pursuant to the terms of the trust, as soon as possible
      after
      any deferred amounts have been withheld from a plan participant, the Company
      will contribute such deferred amounts to the trust to be held for the benefit
      of
      the participant in accordance with the terms of the plan and the trust.




Retirement
      payouts under the plan upon an executive officer’s retirement from the Company
      are payable either in a lump-sum payment or in annual installments over a period
      of up to ten years. Upon death, disability or termination of employment, all
      amounts shall be paid in a lump-sum payment as soon as administratively
      feasible.




In
      2006,
      the Company made a $100,000 contribution to Bradley MacDonald’s deferred
      compensation plan as a performance bonus.




**Narrative
      Disclosure to Summary Compensation Table and Grants of Plan-Based
      Awards**




We
      have
      entered into employment agreements with certain Named Executive Officers,
      certain terms of which are summarized below.





**Bradley
      T. MacDonald** .
      Mr.
      MacDonald entered into a five year employment agreement effective February
      8,
      2006. Mr. MacDonald was granted 100,000 options over a five year vesting period
      beginning on February 8, 2007 in consideration for his five year commitment
      and
      to align his interest with the interests of long-term shareholders. Upon
      termination of Mr. MacDonald’s employment by the Company without cause, or upon
      his resignation for good reason, he would be entitled to receive an amount
      equal
      to one and a half times the sum of his highest annualized salary payable in
      equal monthly installments 30 days after his termination of
      employment.





**Michael
      S. McDevitt.** Mr.
      McDevitt entered into a six year employment agreement effective February 8,
      2006. Mr. McDevitt was granted 200,000 shares of Medifast, Inc. restricted
      common stock over a six year vesting period beginning on February 8, 2006 in
      consideration for his six year commitment and to align his interests with the
      interests of long-term shareholders. Upon termination of Mr. McDevitt’s
      employment by the Company without cause, or upon his resignation for good
      reason, he would be entitled to receive an amount equal to one and a half times
      the sum of his highest annualized salary payable in equal monthly installments
      30 days after his termination of employment.




33


**Margaret
      MacDonald.** Ms.
      MacDonald entered into a six year employment agreement effective February 8,
      2006. Ms. MacDonald was granted 150,000 shares of Medifast, Inc. restricted
      common stock over a six year vesting period beginning on February 8, 2006 in
      consideration for his six year commitment and to align her interests with the
      interests of long-term shareholders. Upon termination of Ms. MacDonald’s
      employment by the Company without cause, or upon her resignation for good
      reason, she would be entitled to receive an amount equal to one and a half
      times
      the sum of his highest annualized salary payable in equal monthly installments
      30 days after her termination of employment.





**Brendan
      N. Connors.** Mr.
      Connors entered into a six year employment agreement effective February 8,
      2006.
      Mr. Connors was granted 30,000 shares of Medifast, Inc. restricted common stock
      over a six year vesting period beginning on February 8, 2006 in consideration
      for his six year commitment and to align his interests with the interests of
      long-term shareholders. Upon termination of Mr. Connors’ employment by the
      Company without cause, or upon his resignation for good reason, he would be
      entitled to receive an amount equal to one and a half times the sum of his
      highest annualized salary payable in equal monthly installments 30 days after
      his termination of employment.





**Potential
      Payments Upon Termination or Change in Control**





As
      of
      December 31, 2006, the Company had entered into employment agreements with
      each of the Named Executive Officers. As described in more detail above under
      “Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based
      Awards” The employment agreements with the Named Executive
      Officers generally provide for the payment of benefits if the executive’s
      employment with the Company is terminated either by the Company without Cause
      or
      by the executive for Good Reason. The employment agreements with the Named
      Executive Officers do not provide for any additional payments or benefits upon
      a
      termination of employment by the Company for Cause, upon the executive’s
      resignation other for Good Reason, as applicable, or upon the executive’s death
      or disability. Upon termination by the Company without cause, or upon his or
      her
      resignation for good reason, all of the Named Executive officers are entitled
      to
      receive an amount equal to one and a half times his or her highest annualized
      base salary payable in equal monthly installments 30 days after his or her
      termination of employment. If a named executive had been terminated without
      cause of December 31, 2006 they would have received the following
      amounts:




Bradley
                  T. MacDonald
              
              $
              337,500Michael
                  S. McDevitt
              
              $
              148,500Margaret
                  MacDonald
              
              $
              121,500Brendan
                  N. Connors
              
              $
              120,000


34


**2006
      Director Compensation**




The
      table
      below summarizes the compensation paid by the Company to non-employee directors
      for the fiscal year ended December 31, 2006.





**Name**
            
            **Fees
                Earned**
              **or
                Paid**
              **in****Cash**
              **($)**
            
            **Stock
                Awards**
              **($)(1)**
            
            **Option
                Awards**
              **($)**
            
            **Non-Equity
                Incentive Plan Compensation $)**
            
            **Change in Pension
                Value and Nonqualified Deferred Compensation Earnings
                ($)**
            
            **All
                other Compensation $)**
            
            **Total ($)**Joseph
                D. Calderone, OSA
            
            
            -
            
            $
            9,375
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            $
            9,375Charles
                P. Connolly
            
            
            -
            
            
            3,206
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            3,206George
                Lavin, Jr., Esq.
            
            
            -
            
            
            9,375
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            9,375Michael
                C. MacDonald
            
            
            -
            
            
            9,375
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            9,375Dennis
                M. McCarthy
            
            
            -
            
            
            3,206
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            3,206Michael
                J. McDevitt
            
            
            -
            
            
            9,375
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            9,375Rev.
                Donald F. Reilly, OSA
            
            
            -
            
            
            12,500
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            12,500Mary
                T. Travis
            
            
            -
            
            
            12,500
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            12,500





Employee
      Directors do not receive any additional compensation for their services as
      director.





Additional
      fees are paid to the Chairman of each committee which in fiscal 2006 amounted
      to
      an additional 500 shares of Medifast, Inc. stock granted to the Chairman of
      each
      committee.





(1)
            
            Amounts
                are calculated based on provisions of Statement of Financial Accounting
                Standards, or SFAS, No 123R, “Share Based Payments.” See note 1
                of the consolidated financial statement of the Company’s Annual Report on
                Form 10-K for the year ended December 31, 2006 regarding
                assumptions underlying valuation of equity
                awards.




35


The
      table
      below summarizes the equity based awards held by the Company’s non-employee
      directors as of December 31, 2006.





**Option
                Awards**
            
            **Stock
                Awards****Name**
            
            **Number
                of Securities Underlying Unexercised Options (#)**
            
            **Number
                of Securities Underlying
                Unexercised Options (#)**
            
            **Option**
              **Exercise**
            
            **Option**
              **Expiration**
            
            **Number**
              **Shares
                or**
              **Units
                of**
              **Stock
                That**
              **Have
                Not**
              **Vested**
            
            **Market****Value**
              **of****Shares or**
              **Units of**
              **Stock that**
              **have
                not**
              **Vested****Exercisable**
            
            **Un-Exercisable**
            
            **Price
                ($**)****
            
            **Date**
            
            **Vested (#**)****
            
            **($**)****Joseph
                D. Calderone
            
            
            2,500
            
            
            -
            
            $
            4.80
            
            
            4/4/2008
            
            
            -
            
            
            -Charles
                P. Connolly
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            -
            
            
            -George
                Lavin
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            -
            
            
            -Michael
                C. MacDonald
            
            
            2,500
            
            
            -
            
            
            4.80
            
            
            4/4/2008
            
            
            -
            
            
            -Dennis
                M. McCarthy
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            -
            
            
            -Michael
                J. McDevitt
            
            
            2,500
            
            
            -
            
            
            4.80
            
            
            4/4/2008
            
            
            -
            
            
            -Rev.
                Donald F. Reilly, OSA
            
            
            2,500
            
            
            -
            
            
            4.80
            
            
            4/4/2008
            
            
            -
            
            
            -Mary
                T. Travis
            
            
            2,500
            
            
            -
            
            
            4.80
            
            
            4/4/2008
            
            
            -
            
            
            -




**Compensation
      Committee Report**





We
      have
      reviewed and discussed with management certain Compensation Discussion and
      Analysis provisions to be included in this Form 10-K. Based on the reviews
      and
      discussions referred to above, we recommend to the Board of Directors that
      the
      Compensation Discussion and Analysis referred to above be included on the Form
      10-K/A for the year-ended December 31, 2006.





**COMPENSATION
      COMMITTEE OF THE BOARD OF DIRECTORS**




Donald
      F.
      Reilly, Chairman


George
      Lavin, Jr., Esq.


Dennis
      M.
      McCarthy, Esq.


Mary
      Travis


36


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




The
      following table shows as of December 31, 2006, the amount and percentage of
      our outstanding common stock beneficially owned by each person who is known
      by
      us to beneficially own more than 5% of our outstanding common stock.




**Name
                and Address of**
              **5%
                Beneficial Owner**
            
            **Shares**
              **Beneficially**
              **Owned (1)**
            
            **Percent****of**
              **Outstanding**
              **Common Stock**Bjurman,
                Barry & Associates (2)
              10100
                Santa Monica Blvd. Suite 1200
              Los
                Angeles, CA 90067
            
            
            739,538
            
            
            5.4
            %




The
      following table shows as of April 24, 2007 the amount and percentage of our
      outstanding common stock beneficially owned (unless otherwise indicated) by
      each
      of our (i) directors and nominees for directors, (ii) Named Execurtive Officers
      and (iii) our directors, nominees for director and executive officers as a
      group.





**Name
                of Beneficial Owner**
            
            **Shares Beneficially**
              **Owned (1)(3))**
            
            **Shares**
              **Acquirable**
              **Within 60 days**
              **(4)**
            
            **Percent
                of**
              **Outstanding**
              **Common Stock****(%)**Bradley
                T. MacDonald (5)
            
            
            829,550
            
            
            -
            
            
            6.09
            %Michael
                S. McDevitt
            
            
            264,118
            
            
            -
            
            
            1.94
            %Margaret
                MacDonald
            
            
            139,900
            
            
            -
            
            
            1.03
            %Donald
                F. Reilly
            
            
            58,350
            
            
            -
            
            
            *Michael
                C. MacDonald
            
            
            56,119
            
            
            -
            
            
            *Brendan
                Connors
            
            
            51,509
            
            
            -
            
            
            *Mary
                Travis
            
            
            20,200
            
            
            -
            
            
            *Michael
                J. McDevitt
            
            
            17,400
            
            
            -
            
            
            *Joseph
                D. Calderone, OSA
            
            
            9,200
            
            
            -
            
            
            *Leo
                Williams
            
            
            8,436
            
            
            -
            
            
            *Charles
                P. Connolly
            
            
            6,575
            
            
            -
            
            
            *George
                Lavin, Jr., Esq.
            
            
            3,200
            
            
            -
            
            
            *Dennis
                M. McCarthy, Esq.
            
            
            1,575
            
            
            -
            
            
            *All
                directors, nominees for directors and executive officers as a group
(13
                persons)
            
            
            1,466,132
            
            
            
            
            
            10.76
            %




*
            less
                than 1%.





(1)
            Beneficial
                ownership is determined in accordance with the rules of the Securities
                and
                Exchange Commission. Under those rules and for purposes of the table
                above
                (a) if a person has decision making power over either the voting or
                the disposition of any shares, that person is generally deemed to
                be a
                beneficial owner of those shares; (b) if two or more persons have
                decision making power over either the voting or the disposition of
                any
                shares, they will be deemed to share beneficial ownership of those
                shares,
                in which case the same shares will be included in share ownership
                totals
                for each of those persons; and (c) if a person held options to
                purchase shares that were exercisable on, or became exercisable within
                60
                days of, April 24, 2007, that person will be deemed to be the beneficial
                owner of those shares and those shares (but not shares that are subject
                to
                options held by any other stockholder) will be deemed to be outstanding
                for purposes of computing the percentage of the outstanding shares
                that
                are beneficially owned by that person. Information supplied by officers
                and directors.




(2)
            This
                information is based on Schedule 13G filed with the SEC on December
                27,
                2006.





(3)
            The
                shares set forth as beneficially owned by our executive officers
                and
                directors do not include the following outstanding options because
                they
                are not exercisable within 60 days of April 24, 2007: Mr. Bradley T.
                MacDonald (80,000); and Mr. Leo Williams (3,333);





(4)
            Unless
                otherwise noted, reflects the number of shares that could be purchased
                by
                exercise of options available at April 24, 2007, or within 60 days
                thereafter under our stock option plans.





(5)
            The
                shares set forth as beneficially owned by Mr. Bradley T. MacDonald
                include 396,402 shares owned by his wife Shirley MacDonald, and 46,447
                shares owned by the MacDonald Family Trust. His daughter, Margaret
                MacDonald, beneficially owns 139,900 shares which added to Bradley
                T.
                MacDonald’s 829,500 beneficially owned shares results in 969,450 shares
                owned by the MacDonald family.




37


**ITEM
      13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**





As
      of
      December 31, 2006, there were no related party transactions.




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





**Fees
      to Independent Registered Public Accountants for Fiscal 2005 and
      2006**




The
      following services were provided by Bagell, Josephs, Levine & Co during
      fiscal 2005 and 2006:





**2005**
            
            **2006**Audit
                Fees(1)
            
            $
            90,000
            
            $
            179,000Tax
                fees(2)
            
            
            10,000
            
            
            21,000All
                other fees
            
            
            -
            
            
            -Total
            
            $
            100,000
            
            $
            200,000




(1)
            
            Audit
                fees consist of fees for professional services rendered for the audit
                of
                the Company’s consolidated financial statements included in the Company’s
                Annual Report on Form 10-K, including the audit of internal controls
                required by Section 404 of the Sarbanes-Oxley Act of 2002, and the
                review of financial statements included in the Company’s Quarterly Reports
                on Form 10-Q, and for services that are normally provided by the
                auditor
                in connection with statutory and regulatory filings or
                engagements.(2)
            
            Tax
                fees were billed for tax compliance
                services




**Audit
      Committee Pre-Approval of Audit and Permissible Non-Audit Services of
      Independent Auditors**




The
      Audit
      Committee pre-approves all audit and permissible non-audit services provided
      by
      the independent auditors. These services may include audit services,
      audit-related services, tax services and other services. The Audit Committee
      has
      adopted a policy for the pre-approval of services provided by the independent
      auditors.




Under
      the
      policy, pre-approval is generally provided for work associated with the
      following:




Ÿ
            registration
                statements under the Securities Act of 1933 (for example, comfort
                letters
                or consents);




Ÿ
            due
                diligence work for potential acquisitions or dispositions;




Ÿ
            attest
                services not required by statute or regulation;




Ÿ
            adoption
                of new accounting pronouncements or auditing and disclosure requirements
                and accounting or regulatory consultations;




Ÿ
            internal
                control reviews and assistance with internal control reporting
                requirements;




Ÿ
            review
                of information systems security and controls;




Ÿ
            tax
                compliance, tax planning and related tax services, excluding any
                tax
                service prohibited by regulatory or other oversight authorities;
                expatriate and other individual tax services;
                and




Ÿ
            assistance
                and consultation on questions raised by regulatory agencies.




For
      each
      proposed service, the independent auditors are required to provide detailed
      back-up documentation at the time of approval to permit the Audit Committee
      to
      make a determination whether the provision of such services would impair the
      independent auditors’ independence.




The
      Audit
      Committee has approved in advance certain permitted services whose scope is
      routine across business units, including statutory or other financial audit
      work
      for non-U.S. subsidiaries that is not required for the 1934 Act audits.




38




**PART
      IV**




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





(a)
            1.
            Financial
                Statements





See
      Index
      to the Consolidated Financial Statements on page 43 of this Annual
      Report




2.
            Financial
                Statement Schedules





None,
      as
      all information required in these schedules is included in the Notes to the
      Consolidated Financial Statements.




3.
            Exhibits





Reference
      is made to the Exhibit Index on page 43 of this Annual Report for a list of
      exhibits required by Item 601 of Registration S-K to be filed as part of
      this Annual Report.




39




MEDIFAST,
      INC. AND SUBSIDIARIES





INDEX
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





Report
                of Independent Registered Public Accounting Firm
            44Consolidated
                Balance Sheets
            45Consolidated
                Statements of Operations
            46Consolidated
                Statements of Stockholders’ Equity
            47Consolidated
                Statements of Cash Flows
            49Notes
                to Consolidated Financial Statements
            51




40


**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




The
      Board
      of Directors and Stockholders of Medifast, Inc.




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




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




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





As
      discussed in Note 16 to the financial statements, the accompanying consolidated
      financial statements have been restated.







We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the effectiveness of Medifast Inc.’s internal
      control over financial reporting as of December 31, 2006, based on criteria
      established in Internal Control-Integrated Framework issued by the Committee
      of
      Sponsoring Organizations of the Treadway Commission and our report dated March
      15, 2007, except for the effects of the material weakness described in the
      sixth
      paragraph of that report, as to which the date is September 6, 2007, expressed
      an unqualified opinion on management’s assessment and an adverse opinion on the
      effectiveness of internal control over financial reporting





Bagell,
      Josephs, Levine & Company, LLC





Gibbsboro,
      New Jersey


March
      15,
      2007, except


for
      Note
      16 as to which the


date
      is
      September 6, 2007


41





**MEDIFAST,
      INC. AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**


**As
      of December 31, 2006 and 2005**





(Restated)
            
            (Restated)2006
            
            2005**ASSETS****Current
                assets:**Cash
                and cash equivalents
            
            $
            1,085,000
            
            $
            1,484,000Accounts
                receivable-net of allowance for doubtful accounts of
                $100,000
            
            
            448,000
            
            
            984,000Inventory
            
            
            8,255,000
            
            
            5,475,000Investment
                securities
            
            
            1,540,000
            
            
            2,700,000Deferred
                compensation
            
            
            673,000
            
            
            525,000Prepaid
                expenses and other current assets
            
            
            2,599,000
            
            
            3,273,000Note
                receivable - current
            
            
            174,000
            
            
            -Current
                portion of deferred tax asset
            
            
            90,000
            
            
            -**Total
                current assets**
            
            
            **14,864,000**
            
            
            **14,441,000**Property,
                plant and equipment - net
            
            
            14,020,000
            
            
            9,535,000Trademarks
                and intangibles - net
            
            
            5,874,000
            
            
            5,984,000Deferred
                tax asset, net of current portion
            
            
            517,000
            
            
            100,000Note
                receivable, net of current assets
            
            
            1,355,000
            
            
            -Other
                assets
            
            
            47,000
            
            
            60,000**TOTAL
                ASSETS**
            
            **$**
            **36,677,000**
            
            **$**
            **30,120,000****LIABILITIES
                AND STOCKHOLDERS' EQUITY****Current
                liabilities:**Accounts
                payable and accrued expenses
            
            $
            2,913,000
            
            $
            2,263,000Income
                taxes payable
            
            
            535,000
            
            
            899,000Line
                of credit
            
            
            1,256,000
            
            
            633,000Current
                maturities of long-term debt
            
            
            548,000
            
            
            561,000Deferred
                tax liability - current
            
            
            -
            
            
            90,000**Total
                current liabilities**
            
            
            **5,252,000**
            
            
            **4,446,000****Other
                liabilities and deferred credits**Long-term
                debt, net of current portion
            
            
            3,509,000
            
            
            3,977,000**Total
                liabilities**
            
            
            **8,761,000**
            
            
            **8,423,000****Stockholders'
                Equity:**Preferred
                stock, $.001 par value (1,500,000 authorized, no shares issued and
                outstanding) Common stock; par value $.001 per share; 20,000,000
                shares
                authorized; 13,631,898 and 12,782,791 shares issued and
                outstanding
            
            
            14,000
            
            
            13,000Additional
                paid-in capital
            
            
            26,629,000
            
            
            21,759,000Accumulated
                other comprehensive income
            
            
            334,000
            
            
            282,000Retained
                earnings
            
            
            5,981,000
            
            
            825,000**32,958,000**
            
            
            **22,879,000**Less:
                cost of 249,184 and 210,902 shares of common stock in
                treasury
            
            
            (1,686,000
            )
            
            (1,075,000
            )Less:
                Unearned compensation
            
            
            (3,356,000
            )
            
            (107,000
            )**Total
                stockholders' equity**
            
            
            **27,916,000**
            
            
            **21,697,000****TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY**
            
            **$**
            **36,677,000**
            
            **$**
            **30,120,000**





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


42





**MEDIFAST,
      INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF INCOME**





**Years
                Ended December 31,**(Restated)
            
            (Restated)**2006**
            
            **2005**
            
            **2004**Revenue
            
            $
            74,086,000
            
            $
            40,129,000
            
            $
            27,340,000Cost
                of sales
            
            
            (18,237,000
            )
            
            (10,161,000
            )
            
            (6,746,000
            )**Gross
                profit**
            
            
            **55,849,000**
            
            
            **29,968,000**
            
            
            **20,594,000**Selling,
                general, and administration
            
            
            (48,468,000
            )
            
            (26,419,000
            )
            
            (17,590,000
            )**Income
                from operations**
            
            
            **7,381,000**
            
            
            **3,549,000**
            
            
            **3,004,000****Other
                income (expense):**Interest
                expense
            
            
            (369,000
            )
            
            (317,000
            )
            
            (245,000
            )Interest
                income
            
            
            175,000
            
            
            158,000
            
            
            154,000Other
                income (expense)
            
            
            276,000
            
            
            15,000
            
            
            (7,000
            )82,000
            
            
            (144,000
            )
            
            (98,000
            )**Income
                before provision for income taxes**
            
            
            **7,463,000**
            
            
            **3,405,000**
            
            
            **2,906,000**Provision
                for income taxes
            
            
            (2,307,000
            )
            
            (1,002,000
            )
            
            (1,159,000
            )**Net
                income**
            
            
            **5,156,000**
            
            
            **2,403,000**
            
            
            **1,747,000**Less:
                Preferred stock dividend requirement
            
            
            -
            
            
            (291,000
            )
            
            (18,000
            )**Net
                income attributable to common shareholders**
            
            **$**
            **5,156,000**
            
            **$**
            **2,112,000**
            
            **$**
            **1,729,000**Basic
                earnings per share
            
            $
            0.41
            
            $
            0.17
            
            $
            0.16Diluted
                earnings per share
            
            $
            0.38
            
            $
            0.17
            
            $
            0.14Weighted
                average shares outstanding -Basic
            
            
            12,699,066
            
            
            12,258,734
            
            
            10,832,360Diluted
            
            
            13,482,894
            
            
            12,780,959
            
            
            12,413,424





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




43





**MEDIFAST,
      INC. AND SUBSIDIARIES**


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


**Years
      Ended December 31, 2006, 2005, and 2004**





Series
                B
            
            Series
                C
            
            (Restated)Preferred Stock
            
            Preferred Stock
            
            Common StockStated
            
            
            
            Stated
            
            
            
            Par Value
            
            AdditionalNumber
            
            Value
            
            Number
            
            Value
            
            Number
            
            $0.001
            
            Paid-In
            
            Retainedof Shares
            
            Amount
            
            of Shares
            
            Amount
            
            of Shares
            
            Amount
            
            Capital
            
            Earnings deficit)Balance,
                December 31, 2003
            
            
            403,734
            
            
            404,000
            
            
            267,000
            
            
            267,000
            
            
            10,482,609
            
            
            10,000
            
            
            20,120,000
            
            
            (3,016,000
            )Preferred
                converted to Common Stock
            
            
            (103,120
            )
            
            (103,000
            )
            
            (67,000
            )
            
            (67,000
            )
            
            340,240
            
            
            
            
            
            170,000Options
                exercised to Common Stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            47,221
            
            
            1,000
            
            
            34,000Warrants
                Converted to Common Stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            46,700
            
            
            
            
            
            125,000Conversion
                of debt to equity
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            55,400
            
            
            
            
            
            28,000Conversion
                of debt to equity out of Treasury
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            114,000Common
                stock issued to Consultants
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            15,500
            
            
            
            
            
            93,000Shares
                issued out of Treasury
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (135,000
            )Common
                Stock issued for Series “C” dividend
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            13,400
            
            
            
            
            
            7,000
            
            
            (7,000
            )Dividend
                paid in stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (11,000
            )Net
                Income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,747,000Balance,
                December 31, 2004
            
            
            300,614
            
            
            301,000
            
            
            200,000
            
            
            200,000
            
            
            11,001,070
            
            
            11,000
            
            
            20,556,000
            
            
            (1,287,000
            )Preferred
                converted to Common Stock
            
            
            (300,614
            )
            
            (301,000
            )
            
            (200,000
            )
            
            (200,000
            )
            
            1,001,228
            
            
            1,100
            
            
            500,000Warrants
                Converted to Common Stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,000
            
            
            -
            
            
            2,000Options
                excercised to common stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            138,335
            
            
            100
            
            
            190,000Common
                Stock issued for Series “C” dividend
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            38,000
            
            
            -
            
            
            19,000
            
            
            (19,000
            )Dividend
                paid in stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (11,000
            )Common
                stock issued for Series “B” dividend
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            521,158
            
            
            600
            
            
            260,000
            
            
            (261,000
            )Common
                stock issued to Employees
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            81,000
            
            
            100
            
            
            271,000Treasury
                shares issued to employees
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            100
            
            
            (39,000
            )Shares
                issued to officer with two year vesting periodVesting
                of unearned compensationTreasury
                shares repurchasedNet
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,403,000Balance,
                December 31, 2005
            
            
            0
            
            $
            0
            
            
            0
            
            $
            0
            
            
            12,782,791
            
            $
            13,000
            
            $
            21,759,000
            
            $
            825,000Warrants
                converted to common stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            142,810
            
            
            200
            
            
            762,000Common
                stock issued to Directors
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            10,750
            
            
            100
            
            
            69,000Common
                stock issued to consultants
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,500
            
            
            100
            
            
            17,000Dividend
                paid in stockOptions
                excercised to common stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            128,047
            
            
            100
            
            
            240,000Options
                granted to CEO
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            383,000FASB
                123R vesting
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            41,000Shares
                issued to executives with 5 & 6 year vesting period
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            565,000
            
            
            600
            
            
            3,374,000Treasury
                shares issued to employees
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (100
            )
            
            (16,000
            )Net
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            5,156,000Balance,
                December 31, 2006
            
            
            0
            
            $
            0
            
            
            0
            
            $
            0
            
            
            13,631,898
            
            $
            14,000
            
            $
            26,629,000
            
            $
            5,981,000





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


44





MEDIFAST,
      INC. AND SUBSIDIARIES


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





Years
      Ended December 31, 2006, 2005, and 2004





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


Common
                  StockAccumulated other
                comprehensive
                income (loss)
              
              (Restated)Total
              
              Treasury
                Stock
              
              Unearned
                CompensationBalance,
                  December 31, 2003
              
              
              (25,000
              )
              
              17,760,000
              
              
              (683,000
              )
              
              -Preferred
                  converted to Common StockOptions
                  exercised to Common Stock
              
              
              
              
              
              35,000
              
              
              (31,000
              )Warrants
                  Converted to Common Stock
              
              
              
              
              
              125,000
              
              
              (123,000
              )Conversion
                  of debt to equity
              
              
              
              
              
              28,000Conversion
                  of debt to equity out of Treasury
              
              
              
              
              
              114,000
              
              
              166,000Common
                  stock issued to Consultants
              
              
              
              
              
              93,000
              
              
              135,000Shares
                  issued out of Treasury
              
              
              
              
              
              (135,000
              )
              
              135,000Common
                  Stock issued for Series “C” dividendDividend
                  paid in stock
              
              
              
              
              
              (11,000
              )Net
                  Income
              
              
              (14,000
              )
              
              1,733,000Balance,
                  December 31, 2004
              
              
              (39,000
              )
              
              19,742,000
              
              
              (536,000
              )
              
              -Preferred
                  converted to Common Stock
              
              
              
              
              
              
              
              
              (124,000
              )Warrants
                  Converted to Common Stock
              
              
              
              
              
              2,000Options
                  excercised to common stock
              
              
              
              
              
              190,000Common
                  Stock issued for Series “C” dividendDividend
                  paid in stock
              
              
              
              
              
              (11,000
              )Common
                  stock issued for Series “B” dividendCommon
                  stock issued to Employees
              
              
              
              
              
              271,000Treasury
                  shares issued to employees
              
              
              
              
              
              (39,000
              )
              
              38,000Shares
                  issued to officer with two year vesting period
              
              
              
              
              
              
              
              
              
              
              
              (122,000
              )Vesting
                  of unearned compensation
              
              
              
              
              
              
              
              
              
              
              
              15,000Treasury
                  shares repurchased
              
              
              
              
              
              
              
              
              (453,000
              )Net
                  income
              
              
              321,000
              
              
              3,048,000Balance,
                  December 31, 2005
              
              $
              282,000
              
              $
              22,879,000
              
              $
              (1,075,000
              )
              $
              (107,000
              )Warrants
                  converted to common stock
              
              
              
              
              
              763,000
              
              
              (137,000
              )Common
                  stock issued to Directors
              
              
              
              
              
              69,000Common
                  stock issued to consultants
              
              
              
              
              
              17,000Dividend
                  paid in stockOptions
                  excercised to common stock
              
              
              
              
              
              241,000
              
              
              (490,000
              )Options
                  granted to CEO
              
              
              
              
              
              383,000
              
              
              
              
              
              (383,000
              )FASB
                  123R vesting
              
              
              
              
              
              41,000Shares
                  issued to executives with 5 & 6 year vesting period
              
              
              
              
              
              3,374,000
              
              
              
              
              
              (3,374,000
              )Vesting
                  of unearned compensation
              
              
              
              
              
              
              
              
              
              
              
              508,000Treasury
                  shares issued to employees
              
              
              
              
              
              (16,000
              )
              
              16,000Net
                  income
              
              
              52,000
              
              
              5,207,000Balance,
                  December 31, 2006
              
              $
              334,000
              
              $
              32,958,000
              
              $
              (1,686,000
              )
              $
              (3,356,000
              )


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


45


**MEDIFAST,
      INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOW**


**Years
      Ended December 31,**





(Restated)
            
            (Restated)2006
            
            2005
            
            2004**Cash
                flows from Operating Activities:**Net
                income
            
            $
            5,156,000
            
            $
            2,403,000
            
            $
            1,747,000**Adjustments
                to reconcile net income to net cash **provided by operating
                activities from operations:****Depreciation
                and amortization
            
            
            2,271,000
            
            
            2,266,000
            
            
            1,210,000Realized
                (gain) loss on investment securities
            
            
            (79,000
            )
            
            10,000
            
            
            19,000Loss
                on sale of Consumer Choice Systems
            
            
            323,000
            
            
            -
            
            
            -Common
                stock issued for services
            
            
            86,000
            
            
            150,000
            
            
            93,000Vesting
                of unearned compensation
            
            
            509,000
            
            
            15,000
            
            
            -Stock
                options vested during year
            
            
            40,000
            
            
            -
            
            
            -Excess
                tax benefits from share-based payment arrangements
            
            
            16,000
            
            
            -
            
            
            -Net
                change in other accumulated comprehensive income (loss)
            
            
            52,000
            
            
            321,000
            
            
            (14,000
            )Provision
                for bad debts
            
            
            -
            
            
            13,000
            
            
            -Deferred
                income taxes
            
            
            (597,000
            )
            
            100,000
            
            
            486,000**Changes
                in Assets and Liabilities:**Decrease
                (increase) in accounts receivable
            
            
            379,000
            
            
            65,000
            
            
            (422,000
            )(Increase)
                in inventory
            
            
            (3,138,000
            )
            
            (1,225,000
            )
            
            (1,263,000
            )(Increase)
                decrease in prepaid expenses and other current assets
            
            
            675,000
            
            
            (2,194,000
            )
            
            (143,000
            )(Increase)
                in deferred compensation
            
            
            (148,000
            )
            
            (204,000
            )
            
            -Decrease
                (increase) in other assets
            
            
            13,000
            
            
            10,000
            
            
            (25,000
            )Increase
                (decrease) in accounts payable and accrued expenses
            
            
            651,000
            
            
            1,323,000
            
            
            (460,000
            )Increase
                (decrease) in income taxes payable
            
            
            (364,000
            )
            
            160,000
            
            
            674,000**Net
                cash provided by operating activities**
            
            
            5,845,000
            
            
            3,213,000
            
            
            1,902,000**Cash
                Flows from Investing Activities:**Sale
                (purchase) of investment securities, net
            
            
            1,237,000
            
            
            (84,000
            )
            
            1,338,000Purchase
                of building
            
            
            -
            
            
            -
            
            
            (566,000
            )Purchase
                of property and equipment
            
            
            (5,557,000
            )
            
            (1,672,000
            )
            
            (1,490,000
            )Purchase
                of intangible assets
            
            
            (2,427,000
            )
            
            (276,000
            )
            
            (2,792,000
            )**Net
                cash (used in) investing activities**
            
            
            (6,747,000
            )
            
            (2,032,000
            )
            
            (3,510,000
            )**Cash
                Flows from Financing Activities:**Issuance
                of common stock, options and warrants
            
            
            795,000
            
            
            66,000
            
            
            7,000Increase
                in line of credit, net
            
            
            623,000
            
            
            561,000
            
            
            314,000Excess
                tax benefits from share-based payment arrangements
            
            
            (14,000
            )
            
            -
            
            
            -Purchase
                of treasury stock
            
            
            (420,000
            )
            
            (452,000
            )
            
            -Proceeds
                from long-term debt
            
            
            -
            
            
            -
            
            
            475,000Principal
                repayments of long-term debt
            
            
            (481,000
            )
            
            (473,000
            )
            
            (1,089,000
            )Dividends
                paid on preferred stock
            
            
            -
            
            
            (11,000
            )
            
            (11,000
            )**Net
                cash provided by (used in) financing activities**
            
            
            503,000
            
            
            (309,000
            )
            
            (304,000
            )**NET
                  INCREASE (DECREASE) IN CASH AND **CASH EQUIVALENTS****
            
            
            (399,000
            )
            
            872,000
            
            
            (1,912,000
            )Cash
                and cash equivalents - beginning of the year
            
            
            1,484,000
            
            
            612,000
            
            
            2,524,000Cash
                and cash equivalents - end of year
            
            $
            1,085,000
            
            $
            1,484,000
            
            $
            612,000**Supplemental
                disclosure of cash flow information:**Interest
                paid
            
            $
            369,000
            
            $
            317,000
            
            $
            245,000Income
                taxes
            
            $
            3,403,000
            
            $
            1,983,000
            
            $
            -**Supplemental
                disclosure of non cash activity:**Common
                stock issued to executives over 6-year vesting period
            
            $
            3,373,000
            
            $
            -
            
            $
            -Common
                shares issued for options and warrants
            
            $
            591,000
            
            $
            -
            
            $
            -Options
                vested during period
            
            $
            40,000
            
            $
            -
            
            $
            -Conversion
                of preferred stock B and C to common stock
            
            $
            -
            
            $
            501,000
            
            $
            170,000Common
                stock for services
            
            $
            86,000
            
            $
            150,000
            
            $
            93,000Conversion
                of debt to equity
            
            $
            -
            
            $
            -
            
            $
            307,000Preferred
                B and C Stock Dividends
            
            $
            -
            
            $
            287,000
            
            $
            7,000Line
                of credit converted to long-term debt
            
            $
            -
            
            $
            369,000
            
            $
            -Common
                stock issued for compensation to be earned upon vesting
            
            $
            -
            
            $
            122,000
            
            $
            -





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


46





**MEDIFAST,
      INC. AND SUBSIDIARIES**


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





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





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




47




**Medifast,
      Inc. and Subsidiaries**


**Notes
      to Consolidated Financial Statements**


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





**1.
      BACKGROUND**





**Nature
      of the Business**





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





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





**2.
      Summary of Significant Accounting Policies**





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





**Principles
      of Consolidation and Basis of Presentation**





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





**Cash
      and Cash Equivalents**





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





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





**Accounts
      Receivable and Allowance for Doubtful Accounts**





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





**Inventory**





Inventories
      consist principally of packaged meal replacements held in the Company’s
      warehouse. Inventory is stated at the lower of cost or market, utilizing the
      first-in, first-out method. The cost of finished goods includes the cost of
      raw
      materials, packaging supplies, direct and indirect labor and other indirect
      manufacturing costs. On a quarterly basis, management reviews inventory for
      unsalable or obsolete inventory. Obsolete or unsalable inventory write-offs
      has
      been immaterial to the financial statements as our products have useful lives
      ranging from 14-24 months.


48




**Advertising**





Advertising
      costs such as preparation, layout, design and production of advertising are
      deferred. They are expensed when the advertisement is first used, except for
      the
      costs of executory contracts, which are amortized as performance under the
      contract is received. Advertising
      costs deferred at December 31, 2006 and 2005, were $960,000 and $585,000
      respectively. Advertising expense for the years ended December 31, 2006 and
      2005
      amounted to $14,300,000 and $3,784,000, respectively





**Property,
      Plant, and Equipment**





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





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





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





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





**Income
      Taxes**





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





**Earnings
      Per Common Share**





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





**Revenue
      Recognition**





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





**Estimates**





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


49





**Fair
      Value of Financial Instruments**





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





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





**Concentration
      of Credit Risk**





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





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





**Deferred
      Compensation Plans**




We
      maintain a non-qualified deferred compensation plan for Senior Executive
      management. Currently, Bradley MacDonald is the only participant in the plan.
      Under the deferred compensation plan that became effective in 2003, executive
      officers of the Company may defer a portion of their salary and bonus
      (performance-based compensation) annually. A participant may elect to receive
      distributions of the accrued deferred compensation in a lump sum or in
      installments upon retirement




Each
      participating officer may request that the deferred amounts be allocated among
      several available investment options established and offered by the Company.
      These investment options provide market rates of return and are not subsidized
      by the Company. The benefit payable under the plan at any time to a participant
      following termination of employment is equal to the applicable deferred amounts,
      plus or minus any earnings or losses attributable to the investment of such
      deferred amounts. The Company has established a trust for the benefit of
      participants in the deferred compensation plan. Pursuant to the terms of the
      trust, as soon as possible after any deferred amounts have been withheld from
      a
      plan participant, the Company will contribute such deferred amounts to the
      trust
      to be held for the benefit of the participant in accordance with the terms
      of
      the plan and the trust.




Retirement
      payouts under the plan upon an executive officer’s retirement from the Company
      are payable either in a lump-sum payment or in annual installments over a period
      of up to ten years. Upon death, disability or termination of employment, all
      amounts shall be paid in a lump-sum payment as soon as administratively
      feasible.





**Stock-Based
      Compensation**





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





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




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


50





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





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





Years
                Ended December 312006
            
            2005
            
            2004Net
                income:
            
            
            (Restated)
            
            
            (Restated)As
                reported
            
            
            5,156,000
            
            
            2,403,000
            
            
            1,747,000Add:
                Stock-based employee compensation expense included in net income,
                net of
                related tax effects
            
            
            24,000Deduct:
                Total stock-based employee compensation determined under fair value
                based
                method for all awards, net of related tax effects
            
            
            (24,000
            )
            
            (291,000
            )
            
            (108,000
            )Net
                income, pro forma
            
            
            5,156,000
            
            
            2,112,000
            
            
            1,639,000Net
                income per share:as
                reported:Basic
            
            $
            0.41
            
            $
            0.17
            
            $
            0.16Diluted
            
            $
            0.38
            
            $
            0.17
            
            $
            0.14Pro
                forma:Basic
            
            $
            0.41
            
            $
            0.17
            
            $
            0.15Diluted
            
            $
            0.38
            
            $
            0.17
            
            $
            0.13





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





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





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




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


51




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




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





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





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





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


52


**Investments**





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





**Goodwill
      and Other Intangible Assets**





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





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





**Comprehensive
      Income (Loss)**





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





**Reclassifications**





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


53




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





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





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





**4.
      INVENTORY**





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




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





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




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




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




54




**6.
      PROPERTY, PLANT AND EQUIPMENT**





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





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





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





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




**7.
      TRADEMARKS AND INTANGIBLES**





**As
                of December 31, 2006**
            
            **As
                of December 31, 2005**(Restated)
            
            (Restated)
            
            (Restated)
            
            (Restated)**Gross Carrying**
            
            **Accumulated**
            
            **Gross Carrying**
            
            **Accumulated****Amount**
            
            **Amortization**
            
            **Amount**
            
            **Amortization**Customer
                lists
            
            $
            5,587,000
            
            $
            1,969,000
            
            $
            4,356,000
            
            $
            1,398,000Non-compete
                agreements
            
            
            840,000
            
            
            840,000
            
            
            840,000
            
            
            566,000Trademarks,
                patents, and copyrightsfinite
                life
            
            
            1,557,000
            
            
            210,000
            
            
            920,000
            
            
            121,000infinite
                life
            
            
            909,000
            
            
            -
            
            
            1,059,000
            
            
            -Goodwill
            
            
            -
            
            
            
            
            
            894,000
            
            
            -Total
            
            $
            8,893,000
            
            $
            3,019,000
            
            $
            8,069,000
            
            $
            2,085,000




**Amortization
        expense for the years ended December 31, 2006, 2005 and 2004 was as
        follows:**




(Restated)
            
            
            (Restated)2006
            
            
            2005
            
            
            2004Customer
                lists
            
            $
            774,000
            
            $
            1,004,000
            
            $
            244,000Non-compete
                agreements
            
            
            273,000
            
            
            369,000
            
            
            162,000Trademarks,
                patents, and copyrights
            
            
            152,000
            
            
            58,000
            
            
            -Total
                trademarks and intangibles
            
            $
            1,199,000
            
            $
            1,431,000
            
            $
            406,000




On
      January 17, 2006 the Consumer Choice Systems division of the Company was sold
      which included the sale of $1,601,000 in gross intangible assets and $265,000
      in
      accumulated amortization.


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





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





55





**8.
      ACCOUNTS PAYABLE AND ACCRUED EXPENSES**





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





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





**9.
      COMMITMENTS AND CONTINGENCIES**





The
      Company leases office space for its eleven corporately owned Medifast Weight
      Control Centers under lease terms ranging from one to five years with leases
      commencing in 2004, 2005, 2006 and 2007. Monthly payments under the leases
      range
      in price from $1,200 to $3,500. The Company is required to pay property taxes,
      utilities, insurance and other costs relating to the leased facilities.





The
      Company leases large commercial printers for our printing operation that
      supports our direct response marketing efforts. The leases extend through
      November 2009. The annual lease payments are $509,000, $509,000, and $467,000
      for the years ended December 31, 2007, 2008, and 2009,
      respectively.





The
      following is a schedule by years of future minimum rental and lease payments
      required under operating lease that have initial or remaining non-cancelable
      lease terms in excess of one year as of December 31, 2006:





For
                the Years Ending December 31,2007
            
            $
            762,0002008
            
            
            730,0002009
            
            
            682,0002010
            
            
            110,0002011
            
            
            70,000Total
                minimum payments required
            
            $
            2,354,000





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





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


56


**10.
      INCOME TAXES**





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





(Restated)
            
            (Restated)2006
            
            2005
            
            2004Current:Federal
            
            $
            1,073,000
            
            $
            631,000
            
            $
            600,000State
            
            
            327,000
            
            
            181,000
            
            
            90,000Total
                Current
            
            $
            1,400,000
            
            $
            812,000
            
            $
            690,000Deferred:Federal
            
            $
            786,000
            
            $
            157,000
            
            $
            408,000State
            
            
            121,000
            
            
            33,000
            
            
            61,000Total
                deferred
            
            
            907,000
            
            
            190,000
            
            
            469,000Income
                tax expense
            
            $
            2,307,000
            
            $
            1,002,000
            
            $
            1,159,000





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)
            
            (Restated)2006
            
            2005
            
            2004Provision
                at the U.S. federal statutory rate
            
            $
            2,537,000
            
            $
            1,102,000
            
            $
            1,087,000State
                taxes, net of federal benefit
            
            
            371,000
            
            
            170,000
            
            
            145,000Intangible
                assets
            
            
            (297,000
            )
            
            (156,000
            )
            
            (73,000
            )Other
                temporary differences
            
            
            -
            
            
            (98,000
            )
            
            -Cost
                segregation study
            
            
            (275,000
            )
            
            -
            
            
            -Permanent
                differences
            
            
            (29,000
            )
            
            (16,000
            )
            
            -Income
                tax expense
            
            $
            2,307,000
            
            $
            1,002,000
            
            $
            1,159,000




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





(Restated)
            
            (Restated)2006
            
            2005Deferred
                tax assetsIntangible
                assets
            
            $
            480,000
            
            $
            100,000Accounts
                receivable
            
            
            37,000
            
            
            -Inventory
                overhead and write downs
            
            
            49,000
            
            
            -Deferred
                compensation
            
            
            41,000
            
            
            -Total
                deferred tax assets
            
            $
            607,000
            
            $
            100,000Deferred
                Tax LiabilitiesIntangible
                assets
            
            $
            -
            
            $
            -Accounts
                receivable
            
            
            -
            
            
            (37,000
            )Inventory
                overhead and write downs
            
            
            -
            
            
            (53,000
            )Total
                deferred tax liabilities
            
            $
            -
            
            $
            (90,000
            )




57


The
      2006
      effective income tax rate of 30.9% differed from the federal statutory rate
      of
      34% due to the amortization of intangible assets, a cost segregation study
      performed on fixed assets, as well as timing differences for other temporary
      and
      permanent differences, and state income taxes.





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.





**11.
      STOCK OPTION PLAN**





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





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





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





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





2006
            
            2005
            
            2004Shares
            
            Weighted
                Average
              Exercise
                Price
            
            Shares
            
            Weighted
                Average
              Exercise
              Price
            
            Shares
            
            Weighted
                Average
              Exercise
              PriceOutstanding
                at beginning of year
            
            
            359,727
            
            $
            2.71
            
            
            389,397
            
            $
            1.51
            
            
            439,455
            
            $
            1.76Options
                granted
            
            
            100,000
            
            
            6.25
            
            
            333,333
            
            
            2.64
            
            
            30,000
            
            
            8.60Options
                reinstated
            
            
            16,666
            
            
            6.36
            
            
            -
            
            
            0.00
            
            
            -
            
            
            0.00Options
                exercised
            
            
            (128,147
            )
            
            (2.11
            )
            
            (138,335
            )
            
            (1.83
            )
            
            (47,221
            )
            
            (1.19
            )Options
                forfeited or expired
            
            
            (26,667
            )
            
            (8.36
            )
            
            (224,668
            )
            
            (1.17
            )
            
            (32,837
            )
            
            (7.01
            )Outstanding
                at end of year
            
            
            321,579
            
            $
            3.88
            
            
            359,727
            
            $
            2.71
            
            
            389,397
            
            $
            1.51Options
                exercisable at year end
            
            
            211,577
            
            $
            2.77
            
            
            329,725
            
            $
            2.56
            
            
            350,336
            
            $
            1.11





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





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


58


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





Options
                Outstanding
            
            
            
            Options
                ExercisableRange
                of
              Exercise
              Prices
            
            NumberOutstanding
            
            Weighted
                Average Contractual
              Life
              Remaining
              (in
                Years)
            
            Weighted
              Average
              Exercise
              Price
            
            Number
              Exercisable
            
            Weighted
              Average
              Exercise
              Price$0.50
            
            
            50,000
            
            
            1.0
            
            $
            0.50
            
            
            50,000
            
            $
            0.50$1.60
            
            
            2,779
            
            
            .7
            
            $
            1.60
            
            
            2,779
            
            $
            1.60$2.87
            
            
            123,334
            
            
            3.3
            
            $
            2.87
            
            
            123,334
            
            $
            2.67$3.83
            
            
            23,334
            
            
            3.9
            
            $
            3.83
            
            
            13,332
            
            $
            3.83$4.80
            
            
            15,000
            
            
            1.3
            
            $
            4.80
            
            
            15,000
            
            $
            4.80$6.25
            
            
            100,000
            
            
            4.1
            
            $
            6.25
            
            
            -
            
            $
            6.25$11.12
            
            
            7,132
            
            
            1.4
            
            $
            11.12
            
            
            7,132
            
            $
            11.15321,579
            
            
            
            
            $
            3.88
            
            
            211,577
            
            $
            2.77





**12.
      LONG-TERM DEBT AND LINE OF CREDIT**





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





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




59





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





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





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





**13.
      EMPLOYMENT AGREEMENTS**





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




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





**14.
      WARRANTS**




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





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





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





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




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


60





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





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





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





**15.
      QUARTERLY RESULTS (Unaudited)**




First Quarter
            
            Second Quarter
            
            Third Quarter
            
            Fourth Quarter**2006**Revenue
            
            $
            19,183,000
            
            $
            19,954,000
            
            $
            19,642,000
            
            
            15,307,000Gross
                Profit
            
            
            14,405,000
            
            
            15,101,000
            
            
            14,937,000
            
            
            11,406,000Operating
                Income
            
            
            2,950,000
            
            
            2,350,000
            
            
            1,771,000
            
            
            310,000Net
                Income
            
            
            2,001,000
            
            
            1,448,000
            
            
            1,455,000
            
            
            252,000Earnings
                per common share - diluted (1)
            
            
            0.15
            
            
            0.11
            
            
            0.11
            
            
            0.02**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





(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.


61




**16.
      RESTATEMENT**




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.





The
      December 31, 2006 financial statements have been restated to decrease
      amortization expense on customer lists by $125,000. Pre-tax income increased
      by
      $125,000 from $7,338,000 to $7,463,000 for the year-ended December 31, 2006.
      Net
      income for the year ended December 31, 2006 increased by $74,000 from $5,082,000
      to $5,156,000 and retained earnings increased from $5,907,000 to
      $5,981,000.




**17.
      BUSINESS SEGMENTS**




Operating
      segments are components of an enterprise about which separate financial
      information is available that is regularly reviewed by the chief operating
      decision maker about how to allocate resources and in assessing performance.
      The
      Company has two reportable operating segments: Medifast and All Other. The
      Medifast reporting segment consists of the following distribution channels:
      Medifast Direct, Take Shape for Life, and Doctors and Clinics. The All Other
      reporting segments consist of Hi-Energy and Medifast Weight Control Centers,
      the
      Company’s parent company operations, as well as the Consumer Choice Systems,
      Inc. division which was sold in January of 2006.




The
      accounting policies of the segments are the same as those of the Company. The
      presentation and allocation of assets, liabilities and results of operations
      may
      not reflect the actual economic costs of the segments as stand-alone businesses.
      If a different basis of allocation were utilized, the relative contributions
      of
      the segments might differ, but management believes that the relative trends
      in
      segments would likely not be impacted.


62




The
      following tables present segment information for the years ended December 31,
      2006, 2005, and 2004:





**Year
                Ended December 31, 2006 (Restated)****Medifast**
            
            **All
                Other**
            
            **Eliminations**
            
            **Consolidated**Revenues,
                net
            
            
            71,049,000
            
            
            3,147,000
            
            
            (110,000
            )
            
            74,086,000Cost
                of Sales
            
            
            17,724,000
            
            
            513,000
            
            
            
            
            
            18,237,000Other
                Selling, General and Adminstrative Expenses
            
            
            42,418,000
            
            
            3,503,000
            
            
            
            
            
            45,921,000Depreciation
                and Amortization
            
            
            1,811,000
            
            
            460,000
            
            
            
            
            
            2,271,000Interest
                (net)
            
            
            146,000
            
            
            48,000
            
            
            
            
            
            194,000Provision
                for income taxes
            
            
            2,298,000
            
            
            9,000
            
            
            
            
            
            2,307,000Net
                income (loss)
            
            
            6,652,000
            
            
            (1,386,000
            )
            
            (110,000
            )
            
            5,156,000Segment
                Assets
            
            
            21,978,000
            
            
            14,949,000
            
            
            
            
            
            36,927,000




**Year
                Ended December 31, 2005 (Restated)****Medifast**
            
            **All
                Other**
            
            **Eliminations**
            
            **Consolidated**Revenues,
                net
            
            
            37,980,000
            
            
            2,311,000
            
            
            (162,000
            )
            
            40,129,000Cost
                of Sales
            
            
            9,012,000
            
            
            1,149,000
            
            
            
            
            
            10,161,000Other
                Selling, General and Adminstrative Expenses
            
            
            21,846,000
            
            
            2,583,000
            
            
            
            
            
            24,429,000Depreciation
                and Amortization
            
            
            1,629,000
            
            
            637,000
            
            
            
            
            
            2,266,000Interest
                (net)
            
            
            184,000
            
            
            (25,000
            )
            
            
            
            
            159,000Provision
                for income taxes
            
            
            968,000
            
            
            34,000
            
            
            
            
            
            1,002,000Net
                income (loss)
            
            
            4,341,000
            
            
            (2,067,000
            )
            
            (162,000
            )
            
            2,112,000Segment
                Assets
            
            
            15,985,000
            
            
            14,560,000
            
            
            
            
            
            30,545,000




**Year
                Ended December 31, 2004****Medifast**
            
            **All
                Other**
            
            **Eliminations**
            
            **Consolidated**Revenues,
                net
            
            
            25,686,000
            
            
            1,654,000
            
            
            
            
            
            27,340,000Cost
                of Sales
            
            
            6,292,000
            
            
            454,000
            
            
            
            
            
            6,746,000Other
                Selling, General and Adminstrative Expenses
            
            
            14,020,000
            
            
            2,385,000
            
            
            
            
            
            16,405,000Depreciation
                and Amortization
            
            
            662,000
            
            
            548,000
            
            
            
            
            
            1,210,000Interest
                (net)
            
            
            112,000
            
            
            (21,000
            )
            
            
            
            
            91,000Provision
                for income taxes
            
            
            1,137,000
            
            
            22,000
            
            
            
            
            
            1,159,000Net
                income (loss)
            
            
            3,463,000
            
            
            (1,734,000
            )
            
            
            
            
            1,729,000Segment
                Assets
            
            
            12,978,000
            
            
            12,990,000
            
            
            
            
            
            25,968,000




63




**18.
      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




64


**INDEX
      TO EXHIBITS**





No.3.1
            Certificate
                of Incorporation of the Company and amendments thereto*3.2
            By-Laws
                of the Company*10.1
            1993
                Stock Option Plan of the Company as amended*10.3
            Lease
                relating to the Company's Owings Mills, Maryland
                facility**10.4
            Employment
                agreement with Bradley T. MacDonald***10.5
            Employment
                agreement with Bradley T. MacDonald signed February 8,
                200610.6
            Employment
                agreement with Michael S. McDevitt signed February 8,
                200610.7
            Employment
                agreement with Margaret MacDonald signed February 8,
                200610.8
            Employment
                agreement with Brendan N. Connors signed February 8,
                200631.1
            Certification
                of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation
                S-K,
                as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.31.2
            Certification
                of Chief Financial Officer pursuant to Item 601(b)(31) of Regulation
                S-K,
                as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.32.1
            Certification
                of Chief Executive Officer and Chief Financial Officer pursuant to
                Section
                906 of the Sarbanes- Oxley Act of
                2002





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





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





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





(b)
      Reports on Form 8-K





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





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





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





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





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





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





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





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


65





**SIGNATURES**





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





MEDIFAST,
                INC.(Registrant)BRADLEY
                T. MACDONALDBradley
                T. MacDonaldExecutive
                Chairman of the BoardDated:
                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/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/s/
                CHARLES P. CONNOLLY
            
            Director
            
            September
                6, 2007Charles
                P. Connolly/s/
                DENNIS M. MCCARTHY
            
            Director
            
            September
                6, 2007Dennis
                M. McCarthy




66