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, 2009




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    ̈
            
            Accelerated filerx
            
            Non-accelerated
      filer   ̈




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, 2009, based upon the closing price of $11.46 per
share on the New York Stock Exchange on that date, was
$151,000,000.




As of
March 26, 2010, the Registrant had 15,398,941 shares of Common Stock
outstanding.







Explanatory
Note




This
Amendment No. 1 on Form 10-K/A (“Amendment”) amends and restates the Annual
Report on Form 10-K of Medifast, Inc. (the “Company”) for the fiscal year ended
December 31, 2009 (“Fiscal 2009”), filed with the Securities and Exchange
Commission (“Commission”) on March 30, 2010 (the “Original Report”). The Company
is filing this Amendment in order to address comments received from the staff of
the Securities and Exchange Commission relating to the Original
Report.




In this
Amendment we have revised the following:




Item 1.
Business. We have included additional information regarding our Take Shape for
Life distribution channel, Medifast Weight Control Center franchisee arrangement
terms, clinical studies in the “Clinical Research Overview”, and provided
additional information in the “Marketing” and “Manufacturing”
sections.





Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations. We have included additional disclosure on the
following:





·
            Added
      an overview section to enhance an investor’s understanding of the Medifast
      business


·
            Provided
      additional metrics and information on the Take Shape for Life distribution
      channel


·
            Provided
      additional detail on changes in gross margin and cost of sales for the
      period ended December 31, 2009 compared to the period ended December 31,
      2008


·
            Clarified
      the nature of doctors’ services to Medifast, the products they sell, and
      how they are compensated for their
services.





Item 9A.
Controls and Procedures We have included additional disclosure under the section
“Changes in our Internal Control” to note that there were changes in our
internal controls over financial reporting and  we provided additional
detail on the changes in internal controls designed to remediate a material
weakness.





Item 11.
(a)(1). Executive Compensation


·
            Provided
      additional information on our Peer group and the general industry in which
      Medifast operates.





Item
15(b). Exhibits, Financial Statement Schedules.


·
            Included
      a new Report of Independent Registered Public Accounting Firm from our
      predecessor auditor, Bagell, Josephs, Levine, and Company, LLC to comply
      with the requirements of Article 2 of Regulation
  S-X.


·
            “Index
      to Exhibits” - referenced Exhibit 10.5 – 10.8 to previous SEC filings.
      Added Exhibit 21.1 to include a list of Medifast, Inc’s
      subsidiaries.





Except as
set forth above, the Original Report has not been amended, updated or otherwise
modified. This Amendment includes information contained in the Original Report,
and we have made no attempt in the Amendment to modify or update the disclosures
presented in the Original Report, except as identified above. The disclosures in
this Amendment continue to speak as of the date of the Original Report, and do
not reflect events occurring after the filing of the Original Report.
Accordingly, this Amendment should be read in conjunction with our other filings
made with the Securities and Exchange Commission subsequent to the filing of the
Original Report, including any amendments to those filings, as information in
such filings may update or supersede certain information contained in the
Original Report and this Amendment. The filing of this Amendment shall not be
deemed to be an admission that the Original Report, when made, included any
untrue statement of a material fact or omitted to state a material fact
necessary to make a statement not misleading.





In
addition, in connection with filing this Amendment and pursuant to the rules of
the Commission, the Company’s Chief Executive Officer and Chief Financial
Officer have reissued their certifications pursuant to section 302 of the
Sarbanes-Oxley Act of 2002 (“SOX”), attached as Exhibits 31.1 and 31.2 to this
Amendment, and their certifications pursuant to Section 906 of SOX, attached as
Exhibits 32.1 and 32.2 to this Amendment.


2





Table
of Contents





PagePART
      IItem
      1.
                          
                          Business
                          
                          4Item
      1A.
                          
                          Risk
      Factors
                          
                          18Item
      1B.
                          
                          Unresolved
      Staff Comments
                          
                          21Item
      2.
                          
                          Properties
                          
                          21Item
      3.
                          
                          Legal
      Proceedings
                          
                          21Item
      4.
                          
                          Submission
      of Matters to a Vote of Security Holders
                          
                          21PART
      IIItem
      5.
                          
                          Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                          
                          22Item
      6.
                          
                          Selected
      Financial Data
                          
                          23Item
      7.
                          
                          Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                          
                          24Item
      7A
                          
                          Quantitative
      and Qualitative Disclosures about Market Risk
                          
                          34Item
      8.
                          
                          Financial
      Statements and Supplementary Data
                          
                          34Item
      9.
                          
                          Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                          
                          34Item
      9A.
                          
                          Controls
      and Procedures
                          
                          34PART
      IIIItem
      10.
                          
                          Directors,
      Executive Officers and Corporate Governance
                          
                          37Item
      11.
                          
                          Executive
      Compensation
                          
                          50Item
      12.
                          
                          Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                          
                          59Item
      13.
                          
                          Certain
      Relationships and Related Transactions, and Director
      Independence
                          
                          60Item
      14.
                          
                          Principal
      Accounting Fees and Services
                          
                          61PART
      IVItem
      15.
                          
                          Exhibits,
      Financial Statement Schedules
                          
                          62




3





PART
I





ITEM
1. BUSINESS.





SUMMARY





Medifast,
Inc. (the "Company” or “Medifast”) is a Delaware corporation, incorporated in
1993. 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 vitamins primarily manufactured in its modern,
FDA approved facility in Owings Mills, Maryland.





MARKETS




Over the
past 30 years, obesity in the United States has dramatically increased. The
obesity epidemic shows no signs of slowing down, with the condition worsening as
American waistlines continue expanding. Throughout the world, approximately 1.7
billion people are overweight. The United States leads the way, having the
highest percentage of overweight adults worldwide with nearly 70% of all
Americans falling within the overweight or obese categories.




Obesity
is defined as a Body Mass Index (BMI) of 30 kg/m2 or
greater, whereas overweight is defined as a BMI ranging between 25 and 30
kg/m2.
According to a recent study conducted by the Centers for Disease Control and
Prevention in 2006, only four (4) states in the U.S.A. had a prevalence of
obesity less than twenty percent (20%). Twenty–two states showed a prevalence
equal to or greater than twenty-five percent (25%), and two of those states had
a prevalence of obesity equal to or greater than thirty percent
(30%).




Supported
by a recent study published in April 2006 in the Journal of American Medical
Association entitled, “Prevalence of Obesity and Overweight in the United
States”, almost 7 out of 10 adults in the U.S. are overweight or obese, with 60
million (or about thirty percent) American adults suffering from obesity. This
raises concern among Americans because of the health implications associated
with obesity, including conditions such as type 2 diabetes, coronary heart
disease, hypertension and stroke, sleep apnea and respiratory problems,
gallbladder disease, depression and certain forms of cancer.




Obesity
is not an age-specific condition; the Centers for Disease Control and Prevention
show children and adolescents are also affected. According to the CDC, the
prevalence of obesity in children and adolescents has tripled since 1976.
Overweight and obese children are at an increased risk of developing health
problems such as high blood pressure, high cholesterol and type 2
diabetes.





According
to the study, “Projection of diabetes burden through 2050: impact of change
demography and disease prevalence in the U.S.”, published 2001 in Diabetes Care,
type 2 diabetes is expected to increase by 165% between 2000 and 2050. A 2007
study published by the CDC shows children are now also being affected by type 2
diabetes. Obese children suffering from type 2 diabetes are at increased risk of
suffering significant morbidities as adults in the form of amputations, kidney
problems, and blindness.





The
primary factors contributing to obesity are well-known and
preventable:  unhealthy food choices and physical inactivity. It is
estimated that poor nutrition and physical inactivity account for more than
300,000 premature deaths per year in the U.S. According to the United States
Department of Health and Human Services, only 25% of adults and even fewer
teenagers consume the suggested 5 or more servings of vegetables and fruits a
day. More than half of American adults fail to engage in the suggested amount of
physical activity; more than one third of young Americans fail to regularly
engage in any vigorous physical activity at all.





The
United States Department of Health and Human Services states Americans spend
$117 billion in costs associated with overweight and obesity, with direct
medical and healthcare costs totaling $93 billion. The U.S. weight loss market
is estimated to be a $55 billion per year industry. This includes consumer
spending on diet foods, drinks and low-calorie sweeteners; health clubs and
workout videos; medically supervised and commercial weight loss programs;
children’s weight loss camps; diet books; appetite suppressants and
more.





Distribution
Channels





Medifast Direct –In the
direct to consumer channel, customers order Medifast product directly through
the Company’s website, www.choosemedifast.com,
or our in-house call center. The product is shipped directly to the customer’s
home. This business is driven by an aggressive multi-media customer acquisition
strategy that includes print, radio, web advertising, direct mail and television
as well as public relations and social media initiatives. The Medifast Direct
division focuses on targeted marketing initiatives and provides customer support
through its in-house call center and nutrition support team of registered
dieticians to better serve its customers. In addition, Medifast also continues
to promote its use of leading web technology featuring customized meal planning
and web community components. MyMedifast is a robust online community which
provides a library of support articles, support forums, meal planning tools and
social media functions,


4





Take Shape for LifeTM - Take
Shape for Life is the direct selling division of Medifast.  Take Shape
for Life is lead by its co-founder, a physician with a background in critical
care. The network consists of independent contractor health coaches, who are
trained to provide coaching and support to clients on Medifast weight loss
programs. Health coaches are conduits to give clients the encouragement and
mentoring to assist them to successfully reach a healthy weight. Take Shape For
Life programs provide a road map to empower the individual to take control of
their health through better habits. Take Shape for Life offers the exclusive
proprietary BeSlim® philosophy, which encourages long-term weight maintenance.
Take Shape for Life also moves beyond the scope of weight loss to teach
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 that have been proven safe and effective in clinical
studies described on page 8 under “Clinical Research Overview.” The products are
high quality because of the ingredients used which are specified to be a certain
quality. Health coaches and their clients follow the Habits of Health book and
companion workbook written by the Take Shape for Life co-founder to create a
lifelong health optimization program. In addition to the encouragement and
support of a health coach, clients of Take Shape for Life are offered a
bio-network of support including website information, scheduled program support
calls and access to registered dieticians via toll free telephone, email and web
chats.





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 required to become qualified based upon testing of
their knowledge on Medifast products and programs. Health Coaches may also
become certified by The Health Institute, a proprietary training program
developed by Medifast professionals.





Take
Shape for Life health coaches earn compensation on product sales by referring
clients to their replicated Take Shape for Life website or to the Company’s
in-house call center to purchase product. The client purchases all Medifast
product directly from the Company which is shipped directly to the client. Our
health coaches do not handle payment and are not required to hold inventory for
resale to clients. In addition, our health coaches pay the same price for
product as their clients.  Our health coaches provide coaching and
support to their clients throughout the weight loss and weight maintenance
process. Most new health coaches are recruited by an existing health coach. The
vast majority of our new health coaches started as weight loss clients of a
health coach, had success on the Medifast product and program, and become a
health coach to help others through the weight loss process and receive a
commission on any product sales they refer to the Company.  In
addition, in the Take Shape for Life network approximately 20% of active health
coaches are health care providers.





Take
Shape for Life health coaches are independent contractors who are paid
compensation on product sales referred to the Company. Health coaches can earn
compensation in two ways:





·
            Commissions
      – The primary way a health coach is compensated is through earning
      commissions on product sold. Health coaches earn commissions by referring
      product sales through their own replicated website or through the
      Company’s in-house call center. The clients of health coaches are
      responsible for ordering and paying for product, and their order is
      shipped directly from the Company to the client’s home or designated
      address. Health coaches are not required to purchase or store product in
      order to receive a commission. In addition, health coaches do not receive
      a commission on their product orders for their personal use. The Company
      pays retail commissions on a weekly
basis.





·
            Bonuses
      – health coaches are offered several bonus opportunities, including growth
      bonuses, generation bonuses, elite leadership bonuses, rolling consistency
      bonuses, client acquisition bonuses, and customer assist bonuses. The
      purposes of these bonuses are to reward health coaches for successfully
      referring product sales to the Take Shape for Life network and to
      incentivize health coaches to further develop health coaches within their
      network. The Company pays bonuses on a monthly
  basis.





o
            Growth
      bonuses are paid to health coaches that have at least five ordering
      clients   per month and that have generated over $1,000 in
      product sales per month. Monthly growth bonuses are incremental bonuses
      that enable health coaches to earn income on product orders placed by
      clients or health coaches within their
network.


o
            Generation
      bonuses are paid to health coaches that have one or more health coaches in
      their business that have achieved the rank of executive director. An
      executive director is a health coach that either generates $6,000 a month
      in frontline product sales to either clients or personally sponsored
      health coaches or personally sponsors five senior health coaches. A senior
      health coach is a health coach that generates at least  $1,000 a
      month  in group product sales from a combination of at least
      five personally enrolled, ordering clients, and/or health coaches, health
      coach teams, or a combination of
both.


o
            Elite
      leadership bonuses are paid to health coaches that have three or more
      health coaches in their business that have achieved the rank of executive
      director.


o
            Rolling
      consistency bonuses are paid to health coaches that display frontline
      product sales order consistency month after month. Health coaches that
      generates at least $2,000 or more in frontline product sales for three
      consecutive months are paid a rolling consistency
  bonus.


o
            Client
      acquisition bonuses are paid out to new health coaches that within their
      first 30 calendar days in Take Shape for Life develop five clients and
      $1,000 in frontline product
sales.


5


o
            The
      assist bonuses are paid to health coaches that assist a new health coach
      in their business attain the client acquisition
  bonus.





Health
coaches do not earn a commission or bonus when they recruit a new health coach
into the Take Shape for Life network. Fees paid by new health coaches for
start-up materials are at the Company’s approximate cost and no commissions are
paid thereon.





Take
Shape for Life is a member of the Direct Selling Association (DSA), a national
trade association representing over 200 direct selling companies doing business
in the United States. To become a member of the DSA Take Shape for Life, like
other active DSA member companies, underwent a comprehensive and rigorous
one-year company review by DSA legal staff that included a detailed analysis of
its company business plan materials. This review is designed to ensure that a
company’s business practices do not contravene DSA’s Code of Ethics. Compliance
with the requirements of the Code of Ethics is paramount to become and remain a
member in good standing of DSA. Accordingly, Membership in DSA by Take Shape for
Life demonstrates its commitment to the highest standards of ethics and a pledge
not to engage in any deceptive, unlawful, or unethical business practices.
 Among those Code of Ethics proscriptions are pyramid schemes or endless
chain schemes as defined by federal, state, or local laws. Moreover, Take Shape
for Life, like other DSA member companies in good standing, has pledged to
provide consumers with accurate and truthful information regarding the price,
grade, quality, and performance of the products Take Shape for Life
markets.





Medifast Weight Control Centers
– The Medifast Weight Control Center is the brick and mortar clinic
channel of Medifast located in Texas, Florida and Maryland.  In 2009,
the Company opened seven new Medifast Weight Control Centers and had a total of
twenty – seven locations in operation at year-end. The centers offer a
high-touch model including comprehensive Medifast programs for weight loss and
maintenance, customized patient counseling, and Inbody TM
composition analysis. Medifast Weight Control Centers conduct local advertising
including radio, print, television and web initiatives. The centers also benefit
from the nationally advertised brand which encourages walk-ins and referrals
from other Medifast business channels.





In 2008,
the Company began offering the clinic model as a franchise opportunity. The
Company currently has franchisee centers located in Alabama, Arizona, California
and Minnesota. At December 31, 2009, eighteen franchise locations were in
operation.





Medifast currently
offers the Medifast Weight Control Center franchise opportunity in all States
except Hawaii, N. Dakota, S. Dakota, and Wisconsin under an approved franchise
disclosure document (FDD). The FDD requires a successful applicant to develop a
minimum of three Medifast Centers within a defined geographic area in the time
frame set forth in the Area Development Agreement.





Our
franchise strategy depends upon on our franchisees’ active involvement in and
management of Medifast Weight Control Center operations. Candidates are reviewed
for appropriate operational experience and financial stability, including
specific net worth and liquidity requirements. Upon franchisee approval they
shall promptly select a site for the Center and shall request Franchisor’s
approval of such selection based on guidelines, terms, and conditions. On
December 31, 2009 the Company had 18 franchise centers in operation in Alabama,
Arizona, California and Minnesota.





A
franchisees initial fee covers the cost of Company resources provided to train
applicant and staff,  and determine territory for development. If a
successful applicant desires to open more than three centers in the designated
territory, there is an additional fee for each location over the three to be
developed. The Company provides initial investment estimates in the FDD and
cautions applicants considering the franchise opportunity that their actual
expenses may vary from the estimates given. Legal disclosures are given and the
applicant cannot sign the Agreement until he/she has had 14 days to consider the
FDD.





Prior to
the opening of each Medifast® Center established under the development agreement
the company will provide the following initial services:


i.
designate the Center’s Protected Territory,


ii. if
the company has not already approved a site that the franchisee has selected
before signing the Franchise Agreement, designate the area within which the
franchisee will locate the Center and approve the site the franchisee has
selected for the location of the Center.


iii. if
the company has not already approved a site before signing the Franchise
Agreement, review and approve the franchisee lease or purchase agreement for the
site for the Approved Location.


iv. the
company will provide the franchisee with standard plans and specifications for
the build-out of the Center along with a list of equipment and improvements
which the franchisee is required to purchase and install.


v. the
company will provide an initial training program.


vi. the
company will provide the franchisee on-site assistance and guidance for
approximately three (3) to five(5) days during or close to the opening of the
Center.


vii. the
company will provide the franchise with online access to a password-protected,
electronic version of theMedifast Weight Control Centers® Operations
Manual.





No
products or equipment are provided at a bargain purchase price.  In
addition, the Company does not offer direct or indirect financing. We do not
guarantee franchisee’s notes, leases or obligations





The
Company does not currently have a purchase option included in the franchise
agreement. The company does have the right of first refusal to acquire a center
if the Franchisee wishes to sell or defaults in his/her/ or its
obligations


6





Medifast Physicians–Medifast
physicians have implemented the Medifast program within their practice or clinic
since 1980. 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. Management estimates that more than 20,000
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. Many Medifast physicians
prefer not to carry inventory and resell products in their offices and take
advantage of the Medifast Direct or the Take Shape for Life program
to  support their patient base.





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





THE
MEDIFAST® BRAND


Medifast
enriches lives by providing innovative choices for lasting health through
products and programs. Medifast has been recommended by 20,000 physicians since
1980. Medifast is clinically proven product 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.





The
Medifast program is suitable for individuals with type 2 diabetes and offers
products with a nutritionally complete and low glycemic formulation 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.





Medifast
Distribution channels also offer a line of Essential 1® brand supplements
addressing specific health issues such as heart and digestive
health.




Clinical
Research Overview





Medifast
relies upon both clinical research studies that have been completed over the
span of the last two decades and retrospective analysis data from its Medifast
clinics to support its “clinically proven” claim. In each study conducted by
Medifast, the examiner follows the scientifically recognized and approved
protocols set by the Institutional Review Board (“IRB”), a committee formally
designated to approve, monitor, and review biomedical and behavioral research
involving humans with the aim to protect the rights and welfare of research
subjects,  prior to initiating the study. Those protocols deal with
the study parameters and determination of a statistically valid sample of study
participants. Upon conclusion of the study, the examiner presents the proposed
study conclusions with study results to IRB for independent third party review
and approval for future publication or peer review. The following abstracts
include both peer-reviewed research (consisting of prospective controlled
clinical trials and retrospective studies) and in-house clinical data (studies 7
& 8).





For each
of the below peer-reviewed publications, the reviewers were chosen by the
publishing journal, and except in the case of publication #1, were not disclosed
to Medifast. Each reviewer is independent and has no association with Medifast
or its affiliates.





Sample
sizes for the studies described below varied from 14 to 1,445 participants. The
smallest study was a statistical review of patient charts, while the largest
study was a retrospective review of patient charts from a weight loss clinic,
which we believe allows for greater generalization of the protocol used in the
clinic as an effective weight management program for those seeking weight loss.
The remaining studies had sample sizes ranging from 30 to 217
participants.





Each
study included a wide range of individuals as part of the study populations. All
of the studies included both male and female participants, except for study no.
8 below, which included a sample of females only. Additionally, race or
ethnicity was not exclusory for any of the studies and the age-range for
inclusion across the studies included children, adolescents, and adults allowing
for adequate generalization and support for the study conclusions. Each
peer-reviewed publication included as part of its study design a sample size and
power calculation to detect statistically significant and clinically meaningful
differences. Moreover, well-established statistical analyses, such as Paired and
Student’s T-tests; Wilcoxon signed-rank tests; Random Effects Logistic
Regression; descriptive statistics (means and standard deviations) at the time
of publication were used as part of the methodology and were vetted as part of
the peer-review process. Conclusions drawn from the study results were further
evaluated and approved as part of the peer-review process.





As a
whole, commonality of results from the studies do allow general conclusions for
each study’s findings principally regarding Medifast products and programs as
safe and effective weight loss with improvements in blood pressure and blood
lipids for otherwise healthy, obese individuals.


Study
1


Reference


Davis LM,
Coleman CD, Kiel J, Rampolla J, Hutchisen T, Ford L, Anderson WS, Hanlon-Mitola
A. “Efficacy of a meal replacement diet plan compared to a food-based diet plan
after a period of weight loss and weight maintenance: A randomized controlled
trial.” Nutritional Journal 2010, 9:11.


7





Purpose


To
examine the effect of Medifast’s meal replacement program (MD) on body weight,
body composition, and biomarkers of inflammation and oxidative stress among
obese individuals following a period of weight loss and weight maintenance
compared to an isocaloric, food-based diet (FB).





Research
Methods


The
baseline sample consisted of 90 participants (64 women, 26 men). Participants
were obese (BMI >30.0 kg/m2 <50.0
kg/m2) men and women aged 18-65 who were interested in weight loss, but not
actively involved in a weight loss program or losing weight. Participants with
known allergies to soy, wheat, gluten and nuts were excluded from the study
because some Medifast meal replacements contain these ingredients. To limit the
effect of alcohol on calorie intake and its potential effect on compliance,
participants were enrolled in the study if they consumed <14 alcoholic
beverages per week and agreed to avoid alcohol intake during the study.
Participants were not currently using appetite-affecting medications [e.g
selective serotonin reuptake inhibitors (SSRIs), steroids, Ritalin], and were
not pregnant or lactating. Participants were required to have a normal
electrocardiogram (EKG) and lab work within the past year as well as the
permission of their primary care provider to enroll in the study. Subjects were
recruited using flyers, newspaper advertisements, and Craigslist.





Exclusion
criteria included individuals that were actively dieting; had chronic
uncontrolled health problems (not including obesity or diabetes); had a
pacemaker or other internal electronic medical device; reported schizophrenia,
history of bipolar disorder, or a current Major Depressive Disorder; had
dependence on alcohol or sedative-hypnotic drugs (e.g. benzodiazepines); had a
cognitive impairment severe enough to preclude informed consent; or who were
currently taking weight loss or appetite affecting medications. Major eating
disorders were screened using the Eating Attitudes Test (EAT). A score of >
30 was exclusionary.





Results


Weight
loss at 16 weeks was significantly better in the Medifast group (MD) versus the
food-based group (FB) (12.3% vs. 6.9%), and while significantly more weight was
regained during weight maintenance on MD versus FB, overall greater weight loss
was achieved on MD versus FB. Significantly more of the MD participants lost ≥5%
of their initial weight at week 16 (93% vs. 55%) and week 40 (62% vs. 30%).
There was no difference in satiety observed between the two groups during the
weight loss phase. Significant improvements in body composition were also
observed in MD participants compared to FB at week 16 and week 40. At week 40,
both groups experienced improvements in biochemical outcomes and other clinical
indicators.





The
biochemical outcome used to measure inflammation in this study was C-reactive
protein (CRP). The Both the Medifast and food-based group experienced a
significant improvement in C-reactive protein (CRP) at week 40. However, when a
dichotomous variable was used to characterize baseline CRP levels as low or
high, the only sub-group to experience a significant decrease over the 40 weeks
was the Medifast group with high baseline CRP levels. The conclusion regarding
reduction (i.e. improvement) in inflammation was based on these
results.





The
biochemical outcome used to measure oxidative stress in this study was urine
lipid peroxides (ULP). The Medifast group experienced a significant decrease in
ULP at week 40 whereas the food-based group did not. Additionally, when
regression analysis was used to further examine the relationship between ULP at
week 40, there was a significant mean decrease over time in the Medifast group
that was not found for the food-based group. The conclusion regarding reduction
(i.e. improvement) in oxidative stress was based on these results.





Conclusion:


Our data
suggest that the meal replacement diet plan evaluated was an effective strategy
for producing robust initial weight loss and for achieving improvements in a
number of health-related parameters during weight maintenance, including
inflammation and oxidative stress, two key factors more recently shown to
underlie our most common chronic diseases.





This
research was funded by Medifast, Inc., Owings Mills, MD.





The 16
week results of this study were presented at Experimental Biology, 2009.The 40
week results were presented at the Food and Nutrition Conference and Expo,
2009.





Journal
Description:


Nutrition
Journal is an open access, peer-reviewed, online journal that considers
manuscripts within the field of human nutrition. The assumed viewer base is
nutrition professionals and researchers. The audience size is not
available.


Study
2


Reference


Cheskin
LJ, et al. “Efficacy of meal replacements versus a standard food-based diet for
weight loss in type 2 diabetes: A controlled clinical trial.” The Diabetes
Educator. 34(1):118-127; Jan/Feb 2008.


8





Purpose


To
compare the efficacy of a portion-controlled meal-replacement diet (PCD) to a
standard diet (SD) (based on recommendations by the American Diabetes
Association) in achieving and maintaining weight loss among 119 obese men and
women with type 2 diabetes mellitus.





Research
Methods


Participants
were men and women aged 18 to 70, diagnosed by standard criteria with type 2
diabetes at least 3 months prior to enrollment, and were overweight or obese,
with a BMI of 25 to 40 kg/m2. If they were currently taking medications to
control diabetes, a stable dose for at least 3 months prior to randomization was
required. Participants needed the permission of their primary care provider and
a normal EKG or abnormalities that were deemed medically
acceptable.





Individuals
with uncontrolled health problems (aside from obesity and diabetes), type 1
diabetes, bulimia nervosa, laxative/substance abuse, alcohol intake > 10
drinks per week, or an uncontrolled psychiatric disorder (e.g., major
depression, bipolar disorder) were excluded. Depression was assessed using the
Beck Depression Inventory; a score of >15 was exclusionary. Major eating
disorders were screened using the Eating Attitudes Test (EAT). A score of >30
was exclusionary. Use of appetite-affecting medications (e.g., certain
antidepressants, steroids) unless on a stable dose for >3 months or weight
loss drugs were excluded, as were women who were lactating, pregnant, or seeking
pregnancy.





One
hundred twenty-six overweight or obese adults with type 2 diabetes desiring
weight loss were recruited by poster and newspaper announcements and screened
during 2002 and 2003. One hundred nineteen individuals (53 men, 66 women) were
enrolled, stratified by gender and BMI (≥25 and <30, ≥30 and <35, and ≥35
and <40), then randomized using block sequences chosen by a random-number
generator (with allocation revealed when the participants were assigned to a
group by the study coordinator). Seven participants withdrew immediately
following screening, for a final sample of 112 (49 men, 63 women).





Results


Using
intention-to-treat analyses, weight loss at 34 weeks and weight maintenance at
86 weeks was significantly better on PCD versus SD. Approximately 40% of the PCD
participants lost >5% of their initial weight compared with 12% of those on
the SD. Significant improvements in biochemical and metabolic measures were
observed at 34 weeks in both groups. The retention rate and self-reported ease
of adherence in the PCD group were significantly higher throughout the
study.





Of the
112 participants who began the diet, 48 completed the 34-week active weight loss
phase (31 of 54 from the PCD group and 17 of 58 from the SD group: 57.4% vs.
29.3%). After the 34-week active phase, weight loss amongst completers was 6.84%
(7.3 ± 6.2 kg) on the PCD vs. 3.70% (3.7 ± 3.2 kg) on the SD. Nineteen of 31
(61.3%) PCD participants lost ≥5% of their initial body weight vs. 4 of 17
(23.5%) SD participants. Nine of 31 (29.03%) PCD participants lost ≥10% vs. 1 of
17 (5.88%) SD participants. BMI was significantly reduced in both groups at 34
weeks, but the change in BMI was significantly greater in the PCD vs. SD
group.





Significantly
more PCD participants were able to reduce their use of medications to control
type 2 diabetes after 34 weeks. Of those participants beginning the study using
medications for blood glucose control, 7 of 29 (24.1%) PCD participants reduced
their use of medications compared to 0 of 13 (0%) SD participants.





Conclusion:


Participants
using meal replacements lost twice the amount of weight and were more likely to
complete the program than SD participants. Approximately 25% of the PCD
participants reduced their blood glucose-lowering medications after the initial
weight loss phase, while no participants in the SD group achieved
this.





This
study was published in the January/February 2008 issue of The Diabetes Educator.
The peer-reviewed journal is the official journal of the American Association of
Diabetes Educators. The study was also presented at the American Diabetes
Association’s 65th Annual Scientific Session, 2005.





Journal
Description:


The
Diabetes Educator (TDE) is the official journal of the American Association of
Diabetes Educators (AADE). It is a peer-reviewed journal intended to serve as a
reference source for the science and art of diabetes management. TDE publishes
original articles that relate to aspects of patient care and education, clinical
practice and/or research, and the multidisciplinary profession of diabetes
education as represented by nurses, dietitians, physicians, pharmacists, mental
health professionals, podiatrists, and exercise physiologists.





Thomson
Reuters 2008 Journal Citation Reports®


2008
Ranking: 77/93 in Endocrinology & Metabolism


2008
Impact Factor: 1.761


Study
3


Reference


Haddock
CK, Poston WSC, Foreyt JP, DiBartolomeo JJ. “Effectiveness of Medifast
supplements combined with obesity pharmacotheraphy: A clinical program
evaluation.” Eating and Weight Disorders. 13:95-101; 2008.


9





Purpose


To
evaluate the long-term impact of Medifast meal-replacement supplements (MMRS)
combined with appetite-suppressant medication (ASM) among participants who
received 52 weeks of treatment as part of a medically supervised weight-control
program.





Research
Methods


This
study provides a systematic clinical program evaluation of weight loss data from
a medically-supervised weight control clinic. Data were obtained from clinic
medical charts. The objective was to determine the clinical outcomes of a
combined diet and medication protocol using Medifast Meal Replacement
Supplements (MMRS) in conjunction with Appetite Suppressant Medications (ASM)
under medical supervision. De-identified data were analyzed by researchers from
the University of Missouri - Kansas City (UMKC). The protocol for this study was
approved by the Social Sciences Institutional Review Board at UMKC.





Participants
were part of a fee-based medical clinic for the purpose of losing weight using a
diet-medication protocol. Exclusion criteria from this study included enrollment
in treatment for less than 12 weeks, less than 18 years of age, current use of
MAO inhibitors, cardiac disease, severe hypertension, kidney disease, renal
failure, asthma, liver disease, cancer therapy and eating disorders. All
exclusion criteria were assessed during the initial patient’s history and
physical exam and recorded in their chart. All clinical exams were conducted by
a physician or nurse practitioner. Clinical and weight loss data were derived
from a total of 1,445 patient medical charts that were not excluded based on the
criteria previously presented from a total sampling pool of approximately 9,948
records. Data were extracted by trained research assistants and only relevant
clinical data and limited demographic information were collected in a manner so
as to protect the identity of patients. Characteristics of the resulting sample
of patients are presented below.





Results


Participants
who completed 52 weeks of treatment experienced substantial weight losses at 12
(-9.4 ± 5.7kg), 24 (-12.0 ± 8.1kg), and 52 weeks (12.4 ± 9.2kg), and all
measures were significantly different from baseline weight (p<0.001 for all
contrasts) for both true completers (n=324) and for ITT analysis (n=1,351).
Fifty percent of patients remained in the program at 24 weeks and nearly 25%
were still participating at one year.





Conclusions


The
combination of Medifast meal replacements and appetite suppressant medication
produced weight loss results that were better that those typically reported for
obesity pharmacotherapy in both short- and long-term studies, and also better
than those reported for partial meal-replacement programs.





This
study was published in the June 2008 issue of Eating and Weight Disorders.
Results of this study were presented at the American Society of Bariatric
Physicians’ annual meeting in May 2007.





Journal
Description:


Eating
and Weight Disorders - Studies on Anorexia, Bulimia and Obesity is a scientific
journal whose main purpose is to create an international forum devoted to the
several sectors of eating disorders and obesity and the significant relations
between them.


Study
4


Reference


Davis LM,
Coleman CD, Andersen WS, Cheskin LJ. “The effect of metabolism-boosting
beverages on 24-hr energy expenditure.” The Open Nutrition Journal. 2:37-41;
2008.





Purpose


To test
the effect of thermogenic meal-replacement beverages (TMRB) containing 90 mg of
EGCG and 100 mg of caffeine on resting energy expenditure (REE).





Research
Methods


Thirty
adults (19 women, 11 men between the ages of 18 and 65 years) were stratified
into 3 groups: lean (n=10, BMI 21.5 ± 2.1); overweight/obese (OW) (n=10, BMI
29.8 ± 2.7); or weight maintainers (WM) (n=10, BMI 28.8 ± 4.0). WM had
maintained a weight loss of  >5% for at least a 3-month period.
Following an overnight fast, baseline measurements, including REE via indirect
calorimetry, were performed. Exclusion criteria included current cigarette
smoking, consuming >14 alcoholic beverages per week (or any the day prior to
study days), chronic uncontrolled health problems (not including obesity or
diabetes); drug or alcohol dependence, mental illness (schizophrenia, bipolar
disorder, current major depressive disorder), taking medications that would
affect appetite or metabolism (e.g. steroids, Ritalin); active dieting;
pregnancy or lactation; and allergy to wheat, gluten, soy or nuts.





REE was
repeated at 30, 60, 90, and 120 minutes after consuming a TMRB. Appetite was
assessed via visual analogue scale at baseline, 30 minutes, and 120 minutes
after consuming the TMRB.





Results


Mean
24-hour REE was increased 5.9 ± 2.5% overall (p=0.000), 5.7 ± 3.1% among lean
subjects (p=0.0002), 5.3 ± 1.4% among OW subjects (p=0.000), and 6.8 ± 2.7%
among WM subjects (p=0.0007). Appetite was significantly reduced 30 minutes
after consuming the TMRB (p=0.0002).


10





Conclusion:


The study
results show that ingestion of thermogenic meal-replacement beverages increase
resting energy metabolism and decreases appetite. The findings strongly suggest
TMRBs are a promising weight-control tool. These decreases in energy intake and
increases in energy expenditure may translate into more sustainable weight loss
and weight maintenance in both the short- and long-term.





This
study was presented as a poster session at Experimental Biology,
2008.





Journal
Description:


The Open
Nutrition Journal is an Open Access online journal, which publishes research
articles, reviews, and letters in all areas of experimental and clinical
nutrition research. The articles printed in this journal are accessible to
anyone and everyone.


Study
5


Reference


Cheskin
LJ, et al. “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.” Johns Hopkins Bloomberg School of Public Health, Center for
Human Nutrition, Department of International Health.





Purpose


To
compare the safety and efficacy of supplemental Medifast portion-controlled meal
replacements (MRs) to a USDA Food Guide Pyramid-based diet among children
dieting alone or with a parent.





Research
Methods


80
overweight (BMI > 95th percentile on BMI-for-age growth charts) boys and
girls between the ages of 8 and 15 years and 40 parents were recruited from the
Greater Baltimore area by newspaper ad to participate in an 18 mos. randomized
controlled trial with a 6-month weight loss phase and a 1-year maintenance phase
to compare the safety and efficacy of Medifast MRs to a standard diet without
MRs. Both weight-loss diets (MR and USDA) were 20% energy-restricted (~500 kcal
deficit). Those randomized to the MR diet incorporated 3 MRs/d during
the  active weight loss phase and 2 MRs/d during the maintenance
phase. Subjects were further randomized to dieting alone or with a
parent.





Results


By ITT
analysis, dieting alone vs. with a parent or food vs. MR made no difference in
weight outcome. However, following initial weight loss (6 mos) and 1 yr
maintenance (18 mos), significant benefits were seen in the MR group in BMI%ile
(0 mos=98.8 ± 1.0, 6 mos=96.6 ± 3.2, 18 mos=96.4 ± 3.4); body fat ( 5.9% @ 6
mos, 5.3% @ 18 mos); total cholesterol ( 6.7% @ 6 mos, 5.6% @ 18 mos); LDL (
19.8% @ 6 mos, 7.9% @ 18 mos); and triglycerides ( 23.6% @ 6 mos, 22.3% @ 18
mos). No significant between-group differences, differences in growth rates, or
adverse events were observed.





Conclusions


Among
overweight 8 – 15 y.o. children, dieting with or without a parent, meal
replacements were as safe and effective as a USDA food-based diet for weight
loss and maintenance. BMI percentile in children on the meal replacement (MR)
diet decreased 2.2% at 6 months and 2.4% at 18 months. Body fat in children on
the MR diet decreased 5.9% at 6 months and 5.3% at 18 months. The study results
for children on the food-based (FB) diet saw comparable decreases in BMI
percentile and body fat percentage. Similar results were seen with other
anthropometrics studied. Dieting with a parent also made no difference in weight
outcomes. The safety of an MR diet in children was determined by the absence of
adverse events in the children during the entire 18 month period of the study.
It was determined from these data that an MR diet in children was both safe and
efficacious.





This
study was presented as a poster session at Experimental Biology,
2007.





Journal
Description:


Founded
in 1912, the Federation of American Societies for Experimental Biology (FASEB)
was originally created by three independent scientific organizations to provide
a forum in which to hold educational meetings, develop publications, and
disseminate biological research results. FASEB publishes its own journal as well
as helps other non-profit organizations publish their own journals. FASEB aims
to provide a wealth of information not just to scientific organizations, but
also to the general public, so that more people remain informed about the issues
and policies affecting the advancement of biological and biomedical
sciences.


Study
6


Reference


Matalon
V. “An evaluation of weight loss following a carbohydrate and fat restricted
diet with appetite suppressant and dietary supplementation.” The Bariatrician.
10-13; 2000.





Purpose


To assess
the safety and effectiveness of a weight-loss regimen consisting of a
carbohydrate- and fat restricted diet supplemented with an appetite suppressant,
a dietary supplement, and a liquid protein drink (Medifast) in an open label
trial.





Research
Methods


A total
of 47 subjects were enrolled in the study. Patients were considered eligible for
the trial if they were over the age of 18, and were considered overweight or
obese based on body mass index (BMI) > 25.0 kg/m2.


11





Results


Of 47
patients enrolled, 24 (51%) completed six months using the dietary regimen
prescribed. Data was analyzed for all patients who were treated with the diet,
as well as for the subset of patients who completed the entire study period.
Baseline and 6-mos evaluations of body weight (lbs), body fat (%), BMI (kg/m2),
lean body mass, water weight, and blood pressure were performed. At 6 mos,
statistically significant differences were found for body weight (p<0.001),
percent body fat (p<0.001), BMI (p<0.001), lean body mass (p<0.001),
water weight (p=0.01), and body systolic (p=0.003) and diastolic (p<0.001)
blood pressure.





Conclusions


The study
demonstrated that a carbohydrate- and fat restricted program supplemented by a
natural appetite suppressant can lead to progressive weight loss of comparable
value to prescribed pharmacologic agents at the time of study. Patients
experienced statistically significant decreases in overall body weight, percent
body fat, BMI, lean body mass, total body water, and both systolic and diastolic
blood pressure.





Journal
Description:


American
Society of Bariatric Physicians (ASBP) is a leading national professional
organization providing physicians and other health professionals with education
in the medical management of weight loss and related medical
conditions.


Study
7


Reference


Crowell
MD, Cheskin LJ. “Multicenter evaluation of health benefits and weight loss on
the Medifast weight management program.” The Johns Hopkins University School of
Medicine.





Purpose


To
retrospectively evaluate the efficacy of a medically supervised,
protein-supplemented modified program (Medifast) for weight reduction and to
evaluate the impact of weight reduction on coexisting health
problems.





Results/Conclusions


The
results of the study concluded that medically supervised, protein-sparing
meal-replacement programs 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 total
cholesterol and triglycerides, systolic and diastolic blood pressure, and
normalized blood pressure in hypertensive patients.





A
statistical review of patient charts, unpublished data on file.
1993.


Study
8


Reference


Davis LM,
Cheskin LJ. “Dietary intervention using Medifast meal replacements in
pre-bariatric surgery patients.” Johns Hopkins Weight Management Center;
2006.





Purpose


N=14
severely obese patients—13 females (11 African Americans, 2 Caucasians) and 1
male (Caucasian)—with a mean BMI of 64.14 kg/m2 (range 40.2kg/m2 to 91.7kg/m2)
entered a 6-month weight-control program at the Johns Hopkins Weight Management
Center. All patients were Medicaid (Priority Partners) recipients. The program
provided a comprehensive approach to weight control focused on diet, behavior,
and physical activity. Portion-controlled meal replacements (MRs) supplied by
Medifast were utilized as part of the dietary-behavior intervention. All
subjects met with a licensed dietitian and were prescribed a 1,000-1,200
kcal/day diet plan incorporating up to 6 MRs/day. Only 1 subject chose not to
incorporate meal replacements as part of a low-calorie diet plan. The average
intake of meal replacements was 2.5-3 per day through the duration of the
study.





Results/Conclusions


After 6
months on the program, patients lost an average of 26.73 lbs (-2.86kg/m2) and
6.96% body weight, and reported a high level of satisfaction with their diet
plan. Program completers at 1 month were N=13, at 3 months N=12, and 6 months
N=10.





A
statistical review of patient charts, unpublished data on file.
2006.


Study
9


Reference


Tchernof
A, Starling R, Turner A, et al. “Impaired capacity to lose visceral adipose
tissue during weight reduction in obese postmenopausal women with the Trp64Arg
B3-adrenoceptor gene variant.” Diabetes. 49:1709-1713; 2000.





Purpose


To
examine the effect of the Trp64Arg gene variant on total and visceral adipose
tissue loss, and cardiovascular risk factors in response to weight reduction
among 24 obese women (age 57 ± 4 yrs) in a 13 ± 3 mos weight reduction program
of 1,200 kcal with or without the inclusion of Medifast.





Research
Methods


Obese,
postmenopausal Caucasian women in the greater Burlington, Vermont area were
recruited by local advertisement. A total of 491 obese women were screened, of
which 38 were heterozygotes for the Trp64Arg variant (allele frequency 0.10). Of
this initial cohort, 24 obese women (1 Arg64Arg homozygote, 10 Trp64Arg
heterozygotes, and 13 normal homozygotes) completed the weight loss program.
Inclusion criteria were the cessation of menstruation for at least 1 year, a BMI
>27 kg/m2, and physical inactivity. Women also had to be nonsmokers and
nondiabetic. Other exclusion criteria included atherosclerosis, hypertension
(diastolic blood pressure >90 mmHg), orthopedic limitations or history of
fractures, weight loss/gain over the previous 6 months, or thyroid or pituitary
disease. Screening for the presence of the Trp64Arg variant was performed after
subjects gave their informed consent.


12





Results


No
baseline differences were noted in adiposity measurements, glucose disposal, and
lipid profiles among carriers and noncarriers of the variant allele. Whether
women were carriers or noncarriers of the Trp64Arg allele, significant weight
loss (-16.4 ± 5.0kg vs. -14.1 ± 6.2kg, NS) and reductions in body fat (-10.0 ±
5.2 vs. -11.5 ± 3.9kg, NS) were observed in response to a calorie-restricted
program with or without Medifast.


However,
loss of visceral adipose tissue was 43% lower in carriers of the Trp64Arg allele
compared with noncarriers (–46 ± 27 vs. –81 ± 51 cm2, P = 0.05). Furthermore,
there was less improvement in the total cholesterol–to–HDL cholesterol ratio
(–0.18 ± 0.54 vs. -0.72 ± 0.56, P = 0.04) in carriers compared with noncarriers
of the allele. Although glucose disposal improved in both groups, there was no
difference in the magnitude of improvement between carriers and noncarriers of
the variant allele.





Conclusion:


Older
women carrying the Trp64Arg B3-adrenoceptor gene variant have an impaired
capacity to lose visceral adipose tissue in response to a calorie-restricted
diet.





Journal
Description:


Diabetes
publishes original research about the physiology and pathophysiology of diabetes
mellitus. Submitted manuscripts can report any aspect of laboratory, animal, or
human research. Emphasis is on investigative reports focusing on areas such as
the pathogenesis of diabetes and its complications, normal and pathologic
pancreatic islet function and intermediary metabolism, pharmacological
mechanisms of drug and hormone action, and biochemical and molecular aspects of
normal and abnormal biological processes.





Scientific
Advisory Board





In
September 2008, Medifast announced the formation of its Scientific Advisory
Board.





The role
of the Board is to continually review the effectiveness, safety, and nutritional
benefits of Medifast’s products and programs. The team of specialists will also
assist in the development of new Meals and supplements, as well as weight-loss
approaches for specific medical needs (i.e., patients with heart disease) or
lifestyles (vegetarians, etc.).





The work
of this cross-disciplinary group builds on Medifast’s heritage of medically
sound approaches to weight loss, and the incorporation of leading-edge clinical
research into the company’s products and programs.





Medifast
Scientific Advisory Board - 2009-2010


Lawrence
Cheskin, M.D., F.A.C.P.


Director
of the Johns Hopkins Weight Management Center in Baltimore, MD





Miriam
Cohen, M.D., F.A.C.C.


Cardiologist
and Assistant Professor at the University of Maryland Medical
School





Varsha
Vaidya, M.D.


Assistant
Professor of Psychiatry and General Internal Medicine at Johns Hopkins
University School of Medicine, Director of the Obesity Psychiatry program at
Johns Hopkins Bayview Medical Center





Alison
Duncan, Ph.D., RD


Associate
Professor, Department of Human Health and Natural Sciences at University of
Guelph, Functional Foods Expert





Debra L.
Miller, Ph.D.


Director
of Nutrition at the Hershey Company





David
Allison, Ph.D.


Professor
and Head of the University of Alabama at Birmingham





Kerry
Stewart, Ed.D., FAHA, FAACVPR, FACSM, FSGC


Professor
of Medicine and Director of the Clinical and Research Exercise Physiology
Program at the Johns Hopkins University School of Medicine.





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.
Medifast’s identified peers and competitors in the general health and wellness
diet industry are NutriSystem Inc., eDiets.com, Herbalife Ltd., USANA Health
Sciences, Nu Skin Enterprises, NBTY Inc., and Weight Watchers International
Inc.


13





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, the
Medifast products  have been safely and effectively used by customers
and recommended by physicians for over 30 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 supervised and structured model for
customers who prefer more accountability and personalized counseling on the
program. 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 Momentum Drinks,  Momentum
Flavor Infusers,  Antioxidant Shakes,  Antioxidant Flavor
Infusers,  Super Omega 3, Medifast® Maintenance
Bars,  Medifast Crispy Bars, Medifast® Creamy Soups, Medifast® Chicken
Noodle Soup, Medifast® Chicken & Wild Rice 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,
and Medifast® Crackers.




Medifast
nutritional products are formulated with high-quality, low-calorie, and 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 also compliments its offerings with several whey-based
products. Regardless of the protein source used to make Medifast products (soy
or whey), it  is of the highest quality with a PDCAAS score of 1.0.
Most Medifast Products are Orthodox Union Kosher which denotes a quality
standard that is above most products in its class. Many of the Medifast Products
are also designated “Halal” by the American Islamic Council of
America.




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 Bloomberg School of Public Health.. 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, meal replacement bars, crackers, soy crisps and omega 3
capsules.





NEW PRODUCTS





In 2009,
the Company expanded the Medifast product line by introducing a new category of
products with our Pretzel Sticks and Cheese Puffs. These unique products offer a
new twist on familiar products and offer more on-the-go, portable options to the
product line. They also fulfill the ‘crunchy’ mouth feel that some of our
customers request while they are on the Medifast program. While these products
look remarkably similar to pretzels and cheese puffs found at grocery stores,
they are uniquely formulated to provide11g of protein, 4g of fiber, with only 3g
or less of fat, 15g or less of carbohydrates and 110 Calories. These new items
are fully interchangeable with our program and can be enjoyed as a full meal
(not a snack.)   These new products are available in Chili Nacho
Cheese, White Cheddar Cheese, Honey Mustard Pretzel and Cinnamon Pretzel
Sticks.




Medifast
also launched another product aimed at optimizing health- Essential1: Digestive
Health. This product can be used as a companion product for those on the
Medifast 5 & 1 Plan, Transition, Maintenance, and beyond. The Essential 1
Digestive Health is a dietary supplement pack that contains a custom probiotic
capsule and a natural enzyme blend tablet in one convenient, daily pack. This
product was developed to help improve digestive tract health which has been
linked to improving your bodies’ ability to lose weight effectively. This
product also contains ingredients which aid in the absorption of certain
nutrients and can help boost your immune system.


14





MARKETING





In 2009,
the Medifast Direct channel continued to build and leverage its core Medifast
brand through multiple marketing strategies to its target audiences. Customer
acquisition strategies include national advertising in print magazines,
television commercials, web advertising, direct mailings, radio commercials, and
DJ testimonials. In addition, the Company executed strategic public relations
efforts to secure local and national editorial placements to raise brand
awareness.  These mediums were used to target new customers by
stressing Medifast's quick, easy and safe approach to weight management. The
Company invested in two celebrity contracts with preliminary marketing and media
campaigns launching in late 2007 and extending into 2009, and added a third
celebrity in 2009 running through 2010. Direct mail campaigns, e-mail
newsletters and outbound calling programs were utilized to reactivate, encourage
and support existing customers. Medifast continued to enhance the Medifast
website including adding features in the “My Medifast” community which
offers meal planning, community message boards, blogs and a robust library of
information. The Company also continued to feature customer blogs on the website
for potential customers to interact with loyal Medifast customers. Late in 2007,
the Company launched an auto ship loyalty program where customers receive
discounts and rewards with automatic shipments of Medifast Meals on a monthly
basis. Both the MyMedifast community enhancements and Auto-ship programs
contribute to the retention of Medifast customer through improved compliance
with the program.





The
Company also distributes its products through the Take Shape for Life network of
independent health coaches, which is a form of person-to-person direct selling.
Take Shape for Life health coaches refer clients to their replicated website or
to the Company’s in-house call center to purchase product. The client purchases
the Medifast product and it is shipped directly to their home or designated
address. Our health coaches do not handle payment and are not required to hold
inventory for resale. In addition, our health coaches pay the same price for
product as their clients. There are no special product discounts for health
coaches. The concept of network marketing is based on the strength of personal
recommendations from friends, co-workers, neighbors, or close acquaintances who
frequently have successfully utilized the Medifast weight loss
program.  Our health coaches provide coaching and support to their
clients throughout the weight loss and weight maintenance process while the
client remains on the Program.





SALES





The
Company’s Sales division handles two primary areas:





Physician
Sales - The sales team is responsible for prospecting medical accounts, clinics,
hospitals, and HMOs. During 2009, the sales team attended a number of medical
professional trade shows, which expanded Medifast's penetration of the medical
weight loss business segment.





Medifast
Weight Control Centers/Franchises - 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.
Franchise sales seek qualified partners to develop defined market territories.





MANUFACTURING





Jason
Pharmaceuticals, Inc., the Company’s wholly owned manufacturing subsidiary,
produces over 65% 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 have significantly
improved the Company's production capability, while also improving its overall
efficiencies. The remaining 35% of our products are manufactured by third party
vendors in accordance with Medifast proprietary formulas and utilizing
prescribed ingredients.





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 $300 million
in sales.





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





GOVERNMENTAL
REGULATION HISTORY





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


15





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, 2009, the Company employed 365 full-time employees, of whom 210
were engaged in manufacturing, warehouse management, and shipping, and 155 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





Our
website, which is based on internally developed software and other third party
software, is hosted in Baltimore, Maryland at DataPoint (www.datapoint.com)
co-location facility. This facility provides redundant network connections,
uninterruptible power supplies, physical and fire security and diesel generated
power back up for the equipment on which our website rely upon. Our servers and
our network are monitored 24 hours a day, seven days a week.




We use a
variety of security techniques to protect our confidential customer data. When
our customers place an order or access their account information, we use a
secure server (SSL) to transfer information. Our secure server software encrypts
all information entered before it is sent to our server. We have a secondary
firewall layer of security between our customer facing websites and the
databases which house their information. All customer data is protected against
unauthorized access. We use PayPal, VeriSign, Chase Paymentech and HackerSafe
software to secure our credit card transactions.





OTHER
MATTERS





An
Independent Committee of the Board of Directors of Medifast was constituted to
review the public allegations of a third party "Convicted Felon" on his website
pertaining to alleged illegal activities of Take Shape for Life, a
Direct Selling Subsidiary of Medifast Inc. Other public Direct Selling Companies
have been attacked by this individual and his network of associates using the
same blueprint of allegations. These public allegations were made in mid-
February and were immediately followed by significant short selling and short
selling option puts that negatively impacted the Market Capitalization of
Medifast. The company has demanded that this third party take down its
website information containing false information or be subject to appropriate
legal action which it did on February 15, 2010 for four days. The company has
filed a formal complaint with the Securities and Exchange commission and the
Maryland Securities Commissioner. After an additional attack in January of 2010,
the company filed a Complaint with the United States District Court in San
Diego, California.





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 atwww.ChooseMedifast.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/A. The Company will furnish
without charge a copy of the Company’s Annual Report on Form 10-K/A,
including the financial statements and schedules thereto, to any person
requesting in writing and stating that he or she is the beneficial owner of
Common Shares of the Company.


16




Requests
and inquiries should be addressed to:




Investor
Relations


Medifast,
Inc.


11445
Cronhill Dr.


Owings
Mills, MD  21117





CERTIFICATIONS





The
Company’s Chief Executive Officer and Chief Financial Officer have filed their
certifications as required by the Securities and Exchange Commission (the “SEC”)
regarding the quality of the Company’s public disclosure for each of the periods
ended during the Company’s fiscal year ended December 31, 2009 and the
effectiveness of internal control over financial reporting as of December 31,
2009 and 2008. Further the Company’s Chief Executive Officer has certified to
the New York Stock Exchange (“NYSE”) that he is not aware of any violation by
the Company of the NYSE corporate governance listing standards, as required by
Section 303A.12(a) of the NYSE listing standards.





EXECUTIVE
OFFICERS OF THE COMPANY





Name
                                          
                                          Age
                                          
                                          PositionBradley
      T. MacDonald
                                          
                                          62
                                          
                                          Executive
      Chairman of the Board of DirectorsMichael
      S. McDevitt
                                          
                                          32
                                          
                                          Chief
      Executive Officer and Chief Financial OfficerLeo
      V. Williams
                                          
                                          62
                                          
                                          Executive
      Vice PresidentMargaret
      Sheetz
                                          
                                          32
                                          
                                          Chief
      Operating Officer and PresidentBrendan
      N. Connors
                                          
                                          32
                                          
                                          Vice
      President of
Finance





Bradley
T. MacDonald


Mr.
MacDonald became Chairman of the Board of Medifast, Inc. on January 28, 1998.
Mr. MacDonald was previously employed by the Company as its Chief Executive
Officer from September 1996 to March 2007. 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 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 28 years of service. He was appointed and served on the
Defense Advisory Board for Employer Support of the Guard and Reserve (ESGR.) for
three years.    Mr. MacDonald serves on the Board of
Directors of Stevenson University in Maryland, and the Catholic Family
Foundation Board of the Archdiocese of Baltimore,. He is also the Vice-Chairman
of the Board of Directors of the Marine Corps Reserve Toys for Tots
Foundation.





Michael
S. McDevitt


Mr. McDevitt the Chief Executive
Officer of Medifast, Inc. Prior to joining the company in June, 2002, he was a
Senior Analyst for the Blackstone Group, a private equity group in New York
City.


Medifast
has continued to excel under Mr. McDevitt’s leadership, demonstrated by the
company’s recent report of its 41st consecutive quarter of profitability for the
fourth quarter, 2009. Medifast continues to see strong year over year growth,
most recently experiencing 57% top line growth and over 114% profitability
growth, versus the same time period last year. Since Mr. McDevitt has assumed
the role of Chief Executive Officer, the Company has increased its market
capitalization to over $300 million and enjoyed having Medifast named number 16
on Forbes’ list of America’s Best Small Companies, a jump from 85 one year ago.
Additionally, Medifast was number 28 on the 2008 Fortune Small Business list of
fastest-growing small public companies, up from number 47 in 2007. Mr. McDevitt
volunteers as a big brother for Big Brothers Big Sisters of Central Maryland,
fully supporting the organization’s mission of helping boys and girls grow up to
be confident, caring young adults. He is a member of the board of directors for
the American Heart Association’s Baltimore region. Additionally, Mr. McDevitt
supports the efforts of the American Diabetes Association and the Toys For Tots
Foundation. He is on the board of directors of the Augustinian Press and works
with several organizations of fellow CEOs.  Mr. McDevitt holds a
Bachelor degree in Business Administration with a concentration in Finance from
James Madison University.


17





Leo
V. 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 served as
the Vice-Chairman of the Board, Marine Corps Toys for Tots Foundation.
Currently, he serves on the Board of Directors of the Direct Selling
Association, U.S. Naval Academy Foundation, Maryland Chapter of the American
Diabetes Association, Naval Academy Alumni Association Board of Trustees, Board
of Trustees for the University of the District of Columbia, and on the Navy
Mutual Aid Association Board.





Margaret
Sheetz, MBA


Ms. Sheetz is the President and Chief
Operating Officer of Medifast. Inc. Prior to joining the company in 2000, she
was a legal assistant with the firm of Carrington, Coleman, Sloman and
Blumenthal in Dallas, Texas. As Medifast continues to see strong year over year
growth, Ms. Sheetz has provided the leadership to drive increased operational
capabilities, building a strong infrastructure of distribution, manufacturing,
information systems and human resource operations necessary to support rapid
business growth. Since 2000, she has been instrumental in building the supply
chain systems that have supported the rapid growth of Medifast. Her operational,
leadership and organizational skills have contributed to the improved
productivity and professalism of the Medifast support staff. She is actively
involved in the efforts of the American Diabetes Association, the American Heart
Association and the Toys For Tots Foundation. Ms. Sheetz is also very active
with several organizations of Maryland executives. She holds a Bachelor of Arts
degree from Villanova University and received an Executive MBA from Loyola
University.





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 spent 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 againstsuch 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.





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.
several years ago and had an impact on many weight loss companies. Another fad
diet could sweep the nation or consumer preferences could change. Our failure to
adapt or respond quickly enough to these changes could 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.


18





Our
ability to compete could be negatively affected in the event we fail to protect
our brand names, trademarks or other intellectual property




Because
our business relies heavily on direct to consumer models, brand awareness is an
important factor in our sales strategy. Failure to protect our brand or maintain
an image of good standing with the public could result in a negative effect on
our operations. Additionally, failure to protect our intellectual property could
result in the arrival of a similar competitor which could reduce our competitive
edge or decrease our market share.





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.





Any deficiencies or shortcomings in
our information technology could prevent an efficient execution of routine
business procedures





We rely
heavily on our IT infrastructure to support major business components. Any
disruption to the integrity of this support structure including but not limited
to; software, telecommunications, Electronic Resource Platform, or the
Information Technology architecture as a whole could severely limit our ability
to provide customers and vendors with adequate service and operating responses.
In addition, our financial reporting is directly correlated with our
company-wide software Microsoft Navision 4.0. Any compromise in the veracity of
this system could severely alter the accuracy of our tracking, volumes, and
general reporting including financial statements.





A
disruption in the supply of raw materials or the inability of third party
manufacturing for certain products could affect operating results





We rely
heavily on our vendors to provide quality raw materials for us to utilize in our
on-site manufacturing processes. Any disruption in the availability of these
materials could potentially interrupt our ability to provide certain products to
customers in a timely manner. Also certain products are currently manufactured
through a third party. The availability of these products is prone to
fluctuations dependent on the manufacturer’s ability to secure and produce a
quality product that satisfies our satisfaction standards.





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.





Since
we cannot  exert the same level of influence or control over our
independent health coaches as we could were they our own employees, our health
coaches could fail to comply with our policies and procedures, which could
result in claims against us that could harm our financial condition and
operating results.





Our
health coaches are independent contractors and, accordingly, we are not in a
position to directly provide the same direction, motivation and oversight as we
would if health coaches were our own employees. As a result, there can be no
assurance that our health coaches will participate in our marketing strategies
or plans, accept our introduction of new products, or comply with our health
coach policies and procedures.





We
can provide no assurances that the number of independent health coaches will
increase or remain constant or that their productivity will increase. We
experienced a 76% increase in active independent health coaches during 2009. The
number of active independent health coaches may not increase and could decline
in the future.  Independent health coaches may terminate their
services at any time, and, like most direct selling companies, we experience
turnover among new independent health coaches from year to year. We cannot
accurately predict any fluctuation in the number and productivity of independent
health coaches because we primarily rely upon existing independent health
coaches to sponsor and train new independent health coaches and to motivate new
and existing independent health coaches. Our operating results could be
adversely affected if we and our existing independent health coaches do not
generate sufficient interest in our business to successfully retain existing
independent health coaches and attract new independent health
coaches.





Extensive
federal, state and local laws regulate our business, products and direct selling
program.  While we have implemented health coach policies and
procedures designed to govern their conduct and to protect the trademarks and
brand of the Company it can be difficult to enforce these policies and
procedures because of the large number of health coaches and their independent
status. Violations by our independent health coaches of applicable law or of our
policies and procedures in dealing with customers could reflect negatively on
our products and operations and harm our business reputation. In addition, it is
possible that a court could hold us civilly or criminally accountable based on
vicarious liability because of the actions of our independent health
coaches.


19


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.





Adverse
publicity associated with our products, ingredients, or sales channels, or those
of similar companies, could harm our financial condition, operating results, and
stock price.





Adverse
publicity, whether or not accurate, relating to the Company, our products or our
operations, our sales channels and independent health coaches could adversely
impact the Company’s financial condition, operating results, and stock
price.  In addition, it could lead to lawsuits or other legal
challenges and could negatively impact our reputation, the market demand for our
products, or our general business.





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.





The
loss of key personnel could adversely affect our ability to operate and result
in a negative financial condition





Certain
members of our Company oversee integral components of our
Company.  Although we do not anticipate the departure of any key
employees including but not limited to the executive management team, we cannot
guarantee their tenure indefinitely in the future.





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




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





Our
Business is subject to regulatory and legislative restrictions




A number of laws and regulations
govern our production, operation, and advertising.  The FTC and
certain states regulate advertising, disclosures to consumers, privacy, consumer
pricing or billing arrangements, and other consumer matters. Our direct selling
distribution channel is subject to risk of interpretation of certain laws
pertaining to the prevention of “pyramid” or “chain sale”
schemes.  Although we believe we are in full compliance, should the
governing body alter or enforce the law in an unanticipated way, there may be a
negative result on the company’s operations. The Company’s financial reporting
is subject to various laws and regulations as well, specifically, the
Sarbanes-Oxley Act of 2002 and the SEC. These requirements demand the Company
disclose certain information and maintain specific controls to ensure fair and
legal accounting practices as outlined therein. The Company has taken
substantial measures to ensure compliance through routine internal and external
audits. Failure to correct any flaws in internal controls may constitute a
public notification of weakness and could have an adverse effect on our stock
price. Additionally, the Company is required to maintain a position of good
standing in regards to taxation on both a Federal and State level. Failure to
comply with federal and state regulations could result in additional taxes,
fines, or interest due that could financially strain the company. Future laws
and regulations could be unforeseen and potentially have a material negative
impact on the Company. Failure to comply with any regulations of current or
future authoritative entities could have a detrimental effect on the Company’s
financial standing or operating results




We are subject to risks associated with
our reliance upon information technology systems.




Our
success is dependent on the accuracy, reliability, and proper use of information
processing systems and management information technology. Our information
technology systems are designed and selected in order to facilitate order entry
and customer billing, maintain health coach  and Preferred Customer
records, accurately track purchases and incentive payments, manage accounting,
finance, and manufacturing operations, generate reports, and provide customer
service and technical support. Although off-site data back-up is maintained, it
is possible that an interruption in these systems could have a material adverse
effect on our business, financial condition, or results of
operations.




As a manufacturer, we may be subject to
product liability claims.




As a
manufacturer and a distributor of products for human consumption and topical
application, we could become exposed to product liability claims and litigation.
Additionally, the manufacture and sale of these products involves the risk of
injury to consumers due to tampering by unauthorized third parties or product
contamination. To date, we have not been a party to any product liability
litigation We are aware of no instance in which any of our products are or have
been defective in any way that could give rise to material losses or
expenditures related to product liability claims. Although we maintain product
liability insurance, which we believe to be adequate for our needs, there can be
no assurance that we will not be subject to such claims in the future or that
our insurance coverage will be adequate.




20


Our manufacturing
activity is subject to certain risks.




We
manufacture approximately 65% of the products sold to our customers. As a
result, we are dependent upon the uninterrupted and efficient operation of our
manufacturing facility in Owings Mills, Maryland. Those operations are subject
to power failures, the breakdown, failure, or substandard performance of
equipment, the improper installation or operation of equipment, natural or other
disasters, and the need to comply with the requirements or directives of
government agencies, including the FDA. There can be no assurance that the
occurrence of these or any other operational problems at our facility would not
havea material adverse effect on
our business, financial condition, or results of operations. We are subject to a
variety of environmental laws relating to the storage, discharge, handling,
emission, generation, manufacture, use and disposal of chemicals, solid and
hazardous waste, and other toxic and hazardous materials. Our manufacturing
operations presently do not result in the generation of material amounts of
hazardous or toxic substances. Nevertheless, complying with new or more
stringent laws or regulations, or more vigorous enforcement of current or future
policies of regulatory agencies, could require substantial expenditures by us
that could have a material adverse effect on our business, financial condition,
or results of operations. Environmental laws and regulations require us to
maintain and comply with a number of permits, authorizations, and approvals and
to maintain and update training programs and safety data regarding materials
used in our processes. Violations of those requirements could result in
financial penalties and other enforcement actions and could require us to halt
one or more portions of our operations until a violation is cured. The combined
costs of curing incidents of non-compliance, resolving enforcement actions that
might be initiated by government authorities, or of satisfying new legal
requirements could have a material adverse effect on our business, financial
condition, or results of operations.




ITEM
1B.  UNRESOLVED STAFF COMMENTS





None




ITEM
2. DESCRIPTION OF PROPERTY





The
Company owns a 49,000 square-foot facility in Owings Mills, Maryland, which
contains its Corporate Headquarters and manufacturing plant.  In 2003,
the Company purchased a state-of-the-art 119,000 square-foot distribution
facility in Ridgely, Maryland.  The facility gives the Company the
ability to distribute over $300 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
twenty-seven leases for its corporately owned Medifast Weight Control clinics
throughout Florida,Texas and Maryland.  In addition, the Company
leases a building in Owings Mills, MD for corporate offices.  The
leases range in terms from one to six years.





ITEM
3. LEGAL PROCEEDINGS





Medifast, Inc. filed a civil complaint
on February 17, 2010 in the U.S. District Court (SD, Cal) against Barry Minkow,
his Fraud Discovery Institute, Inc., its subsidiary iBusiness Reporting, its
editor William Lobdell, Tracy Coenen, her Sequence, Inc., “Zee Yourself”, and
Robert L. Fitzpatrick for defamation, violations of California Corporation Code
Sections 25400 et seq, and 17200 et seq alleging a scheme of market manipulation
of  Medifast, Inc. stock by damaging the business reputation of Medifast,
Inc. (MED-NYSE) and its meal replacement weight loss products and organization
for Defendants monetary gain. Bradley T. MacDonald, Executive Chairman,
Medifast, Inc. who is also a large shareholder joined the lawsuit individually.
The suit seeks at least $270 Million in compensatory damages, punitive damages,
and ancillary relief. Medifast, Inc. also continues to pursue its pending
complaints filed in March, 2009 with the SEC, Maryland Securities Commissioner,
and the U.S. Attorney against most of these same named
Defendants.


The
Chapter 7 Bankruptcy Trustee for Go Fig, Inc et al Debtors filed in early 2010
an adversary civil proceeding in the US Bankruptcy Court (ED, Missouri) against
Jason Pharmaceuticals, Inc., a subsidiary of Medifast, Inc. (MED-NYSE) and other
unrelated entities seeking to recover as to each alleged preferential payments.
Jason sold product received by the Debtors and has previously filed a pending
claim in the same bankruptcy. Medifast, Inc. disputes the Trustee’s allegations
and intends to vigorously defend through its local counsel. Medifast, Inc
believes any likely result would not materially affect its
operations.





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





Not
applicable


21





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 2009 and 2008:





2009Low
                          
                          
                          HighQuarter
      Ended March 31, 2009
                          
                          
                          4.09
                          
                          
                          
                          7.77Quarter
      Ended June 30, 2009
                          
                          
                          4.15
                          
                          
                          
                          11.46Quarter
      Ended September 30, 2009
                          
                          
                          9.89
                          
                          
                          
                          22.31Quarter
      Ended December 31, 2009
                          
                          
                          19.42
                          
                          
                          
                          35.35





2008Low
                          
                          
                          HighQuarter
      Ended March 31, 2008
                          
                          
                          3.68
                          
                          
                          
                          4.99Quarter
      Ended June 30, 2008
                          
                          
                          4.35
                          
                          
                          
                          6.68Quarter
      Ended September 30, 2008
                          
                          
                          4.80
                          
                          
                          
                          8.85Quarter
      Ended December 31, 2008
                          
                          
                          3.52
                          
                          
                          
                          6.79





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





(c) There
were approximately 176 record holders of the Company's Common Stock as of March
26, 2010.   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, 2009.





(d) No
dividends on common stock were declared by the Company during 2009 or
2008.  The Company does not plan to declare a
dividend   in 2010.





On June
3, 2004, our Board of Directors authorized the repurchase of up to 500,000
shares of our common stock.  Depending upon market conditions, shares
may be repurchased from time to time at prevailing market prices through open
market or privately negotiated transactions.





We are
not obligated to purchase any shares.  Subject to applicable
securities laws repurchases may be made at such times and in such amounts, as
our management deems appropriate.  The share repurchase program may be
discontinued or terminated at any time and we have not established a date for
completion of the share repurchase program.  The repurchases will be
funded from our available cash.   As of December 31, 2009, we had
purchased 135,000 shares as treasury stock through the repurchase program noted
above.  On March 26, 2009 the Company repurchased 25,000 shares of
common stock at an average price of $4.09 as detailed in the table
below.


22





The
following is a summary of our stock purchases during the year ended December 31,
2009, as required by Regulation S-K, Item 703.





Period
                        
                        Total Number ofShares
                          Purchased
                        
                        
                        Average PricePaid
                          per Share
                        
                        
                        Total Number of Shares
                          Purchased as Part ofPublicly
                          Announced Plansor Programs
                        
                        
                        Maximum Number ofShares
                          that May Yet BePurchased
                          Under thePlans or ProgramsJanuary
      1 - December 31, 2009
                        
                        
                        25,000
                        
                        
                        $
                        4.09
                        
                        
                        
                        25,000
                        
                        
                        
                        365,000




ITEM
6.  SELECTED FINANCIAL DATA


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





Restated2009
                                        
                                        
                                        2008
                                        
                                        
                                        2007
                                        
                                        
                                        2006
                                        
                                        
                                        2005(In
      thousands, except per share data)Revenue
                                        
                                        
                                        165,618
                                        
                                        
                                        
                                        105,445
                                        
                                        
                                        
                                        83,779
                                        
                                        
                                        
                                        74,086
                                        
                                        
                                        
                                        40,129Operating
      Income
                                        
                                        
                                        19,366
                                        
                                        
                                        
                                        8,199
                                        
                                        
                                        
                                        5,715
                                        
                                        
                                        
                                        7,381
                                        
                                        
                                        
                                        3,549Income
      from Continuing Operations
                                        
                                        
                                        19,293
                                        
                                        
                                        
                                        7,850
                                        
                                        
                                        
                                        5,543
                                        
                                        
                                        
                                        7,463
                                        
                                        
                                        
                                        3,405EPS
      - Basic
                                        
                                        
                                        0.89
                                        
                                        
                                        
                                        0.37
                                        
                                        
                                        
                                        0.26
                                        
                                        
                                        
                                        0.36
                                        
                                        
                                        
                                        0.14EPS
      - Diluted
                                        
                                        
                                        0.81
                                        
                                        
                                        
                                        0.34
                                        
                                        
                                        
                                        0.25
                                        
                                        
                                        
                                        0.34
                                        
                                        
                                        
                                        0.14Total
      Assets
                                        
                                        
                                        63,162
                                        
                                        
                                        
                                        50,317
                                        
                                        
                                        
                                        43,087
                                        
                                        
                                        
                                        36,375
                                        
                                        
                                        
                                        30,259Current
      Portion of long-term debt and revolving creditfacilities
                                        
                                        
                                        796
                                        
                                        
                                        
                                        3,421
                                        
                                        
                                        
                                        1,863
                                        
                                        
                                        
                                        1,804
                                        
                                        
                                        
                                        1,194Total
      long-term Debt
                                        
                                        
                                        5,444
                                        
                                        
                                        
                                        4,313
                                        
                                        
                                        
                                        4,570
                                        
                                        
                                        
                                        3,509
                                        
                                        
                                        
                                        3,977Weighted
      average shares outstandingBasic
                                        
                                        
                                        13,772
                                        
                                        
                                        
                                        13,126
                                        
                                        
                                        
                                        12,961
                                        
                                        
                                        
                                        12,669
                                        
                                        
                                        
                                        12,259Diluted
                                        
                                        
                                        14,736
                                        
                                        
                                        
                                        14,329
                                        
                                        
                                        
                                        13,644
                                        
                                        
                                        
                                        13,483
                                        
                                        
                                        
                                        12,781


23




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.





The
following discussion should be read in conjunction with the financial
information included elsewhere in this Annual Report on Form 10-K




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.





Revenue
Recognition.  Revenue is recognized net of discounts, rebates,
promotional adjustments, price adjustments, and returns 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
estima


24





Background:





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 meal replacements and
vitamins.   Our products and services are sold to weight loss program
participates primarily via the Internet, telephone, and brick and mortar
clinics.   Customers of our health coaches in the Take Shape for
Life person-to-person direct sales channel are directed to order our products
through either the Internet or through the Company’s in-house call
center.  Our meal replacement food items have accounted for 95% of our
revenues for each of the years ended December 31, 2009 and 2008 and 96% in
2007. Program sales in our Medifast Weight Control Center channel accounted for
2.6% of revenues in 2009 and 2008 and 1.9% in 2007.  No other product or
service has accounted for more than 1% of consolidated revenue in any of the
last three years.




Revenue
consists primarily of meal replacement food sales. For the year ended December
31, 2009,total  revenue increased to $165.6 million  as
compared to $105.4 million in 2008, an increase of $60.2 million or 57%. The
Take Shape for Life sales channel accounted for 61% of total revenue, direct
response marketing 28%, Medifast Weight Control Centers 10%, and Doctors
1%.




We review
and analyze a number of key operating and financial metrics to manage our
business, including revenue to spend in the Medifast Direct channel, number of
active health coaches and average revenue per health coach per month in the Take
Shape for Life channel, and average same store sales improvement  for
the Medifast Weigh Control Center channel.




In 2009
we continued to see very strong growth and improvement in: Take Shape for Life;
Medifast Direct, and Medifast Weight Control Centers.  Take Shape for Life
revenue increased 101% to $100.4 million compared with $49.8 million in
2008.   Growth in revenues for the segment was driven by
increased customer product sales as a result of an increase in active health
coaches.   The number of active health coaches during 2009
increased to approximately 6,000 compared with 3,400 during the period a year
ago, an increase of 76%. The number of active health coaches represents the
number of health coaches receiving income from a product sale in the last month
of the quarter. In addition, the average revenue per health coach per month
increased from approximately $1,510 in 2008 to $1,725 in 2009, an increase of
14%.  As the number of active health coaches increase, the Company
receives additional sales proceeds from product referrals, approximately $1,725
in product referrals per month for the average coach in 2009




The
Medifast Direct Sales division sales increased 7% to $47 million as compared
with $44 million in 2008, and increase of $3 million.  Due to a more
effective advertising message, more targeted advertising through extensive
analytical analysis, and improved call center closing rates, the company
experienced a 2.7 to 1 return on advertising spend during 2009 as compared to
2.5 to 1 in 2008.





The
Medifast Weight Control Centers experienced revenue growth of 93% versus the
same time period last year.  Revenue increased due to the opening of
seven new centers throughout 2009, a 20% increase in the same store sales for
Centers open for greater than one year, and the launch of the franchise
opportunity.  The Company is continuing to focus on improved
advertising effectiveness, improved closing rates on walk-in sales, as well as
the hiring of more experienced clinic personnel




As all of
our sales divisions continue to grow, there will be increasing demands on our
infrastructure.  The increased demands 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 product sales growth exceeded our production
capacity.  In order to mitigate these risks, a key focus for Medifast in
2010 and 2011 will be investing in infrastructure to ensure that the Company can
support the revenue growth of each of our sales divisions. This will include a
new Distribution Center to better service our West Coast customers and increase
the maximum number of orders the Company can ship daily, new machinery to
increase our production capacity to support sales growth, an improved web
platform for all our sales divisions, and expansion to an additional call center
location to handle additional call volume.


25





CONSOLIDATED
RESULTS OF OPERATIONS


2009
COMPARISON WITH 2008





OPERATING





Sales


Revenue
increased to $165.6 million in 2009 as compared to $105.4 million in 2008, an
increase of $60.2 million or 57%. The Take Shape for Life sales channel
accounted for 61% of total revenue, Medifast Direct Channel 28%, Medifast Weight
Control Centers, brick-and-mortar clinics 10%, and and Doctors
1%.  Take Shape for Life sales, which are fueled by person-to-person
direct selling and successful health coaches building their networks and
supporting increased sales of $50.5 million or 101%
year-over-year.   The Company’s Medifast Weight Control Center
clinic division, increased sales $7.8 million or 93% compared to
2008.  Same store sales increased by 20% for Centers open greater than
one year.   The Medifast Direct sales channel, which is fueled
primarily by consumer advertising, increased revenues $3 million or 7% year-over
year on $400,000 less advertising spend.





Take
Shape for Life revenue increased 101% to $100.4 million compared with $49.8
million in 2008.   Growth in revenues for the segment was driven
by increased customer product sales as a result of an increase in active health
coaches.   The number of active health coaches during 2009
increased to approximately 6,000 compared with 3,400 during the period a year
ago, an increase of 76%.  The number of active health coaches
represents the number of health coaches receiving income from a product sale in
the last month of the quarter In addition, the average revenue per health coach
per month increased from approximately $1,510 in 2008 to $1,725 in 2009, an
increase of 14%.  As the number of active health coaches increase, the
Company receives additional sales proceeds from product referrals, approximately
$1,725 in product referrals per month for the average coach in 2009. We continue
to see the benefits of a physician-lead network of coaches that are able to
support their clients in their weight-loss efforts.   In today’s
environment where trust and personal recommendations are becoming a more
important component in consumer purchasing decisions, the Take Shape for Life
model of health coaches helping others to lose weight as a result of one-on-one
communication and support continues its rapid growth. Take Shape for Life
customers who have utilized the Medifast products and programs and successfully
have addressed their body weight and health issues are increasingly choosing to
become active health coaches.   Becoming a health coach is a
business opportunity that has a low start up cost, does not require the holding
of inventory as all orders are shipped from the company to the end
consumer.   In the current economic environment, many people are
looking for supplemental income to assist in paying the car payment or mortgage,
and becoming a health coach allows for supplemental income in the form of
commission compensation on product sales. In addition the health coach supports
customer needs by providing education on the program and assisting customers in
selecting the right products and programs using clinically proven Medifast
products and protocols. Take Shape for Life has assisted thousands of overweight
and obese customers regain their health and wellbeing while creating a national
bionetwork of activist health coaches who are combating the epidemic of Obesity
in America.





The
Medifast Weight Control Centers, which represent approximately 10% of the
Company’s overall revenues, are currently operating in twenty seven corporate
locations in Florida, Maryland, and Texas, and eighteen franchise
locations.  In 2009, the Company experienced revenue growth of 93%
versus the same time period last year.  Throughout 2010, the Company
anticipates opening an additional 13-15 corporately owned Medifast Weight
Control Centers.





The
Medifast Direct  channel sales increased 7% to $47 million as compared
with $44 million in 2008, and increase of $3 million.  Due to a more
effective advertising message, more targeted advertising through extensive
analytical analysis, and improved call center closing rates the company
experienced a 2.7 to 1 return on advertising spend during 2009 as compared to
2.5 to 1 in 2008.  This resulted in $400,000 less advertising spend
driving an additional $3 million in sales as compared to prior
year.  This improvement in advertising effectiveness was a key
profitability driver in 2009.





Cost of Goods
Sold


Cost of
revenue increased $15 million to $40.3 million in 2009 from $25.3 million in
2008.  As a percentage of sales, cost of goods sold increased slightly
to 24.3% from 24% in 2008.  The 0.3% decrease in gross margin in 2009 as
compared to 2008 resulted in a $497,000 decline in gross margin based on 2009
sales volume of $165.6 million.  The gross margin decline was the result of
improved labor and overhead absorption of $180,000 offset by the annual standard
cost update which reduced the cost of finished goods due to reduced raw
material and packaging costs, and negatively impacted gross margin by $677,000.
   Cost of sales as a percentage of net sales for the twelve
month period ended December 31, 2009 remained relatively constant as a result of
our fixed cost of manufacturing being spread over the number of units
sold.




The cost of each unit sold will improve
gross margin in the upcoming year, if sales continue to increase and we leverage
our ability to increase output with minimal increase in fixed cost.  We
have the capacity and ability to significantly increase production with our
current infrastructure.  In addition, we have increased a focus on
improving our labor, and production efficiencies.




26





Operating
Expenses


Selling, general and administrative
expenses increased by $34.0 million or 47% to $105.9 million in 2009 compared to
$71.9 million in 2008.  As a percentage of sales, selling, general and
administrative expense decreased to 64% in 2009 from 68.2% in
2008.   Take Shape for Life commission expense, which is
completely variable based upon revenue, increased by $22.4 million as the
Company showed sales growth of 101% as compared to 2008. Take Shape for Life
health coaches are independent contractors that are paid commissions on product
sales referred to the Company.    Health coaches earn
commissions by referring product sales through their own replicated website or
through the Company’s in-house call center.  The clients of health
coaches are responsible for order and payment of product and their order is
shipped directly to their home or designated address.  Health coaches
are not required to purchase product in order to receive a
commission.  In addition, health coaches do not receive a commission
on their personal product orders.   Salaries and benefits
increased by approximately $4.7 million in 2009. The increase includes the
hiring of additional expertise in critical areas such as Take Shape for Life and
the Medifast Weight Control Centers to support the strong growth in 2009 and
beyond.  In addition, the opening of seven new corporately owned
clinics also required the hiring of additional center managers and support
staff.  Areas that also experienced additional staffing due to the 57%
sales growth in 2009 include manufacturing, distribution, call center, and IT.
Advertising expense in 2009 was approximately $17.4 million compared to
approximately $17.8 million for the same period last
year, a decrease of $400,000. Communication expense increased by
$300,000.  Office expenses increased by $1.3 million and stock
compensation expense increased by $1.3 million as additional restricted shares
were issued to key executives and Board members in the third and fourth quarters
of 2008.  Operating expenses increased by $1.9 million which primarily
resulted from additional printing expense for our direct to consumer postcard
mailings, printed materials included in each product shipment, as well as
maintenance, repairs, and supplies for our manufacturing and distribution
facilities.  Other operating expenses increased by $2.6 million which
included items such as depreciation, amortization, credit card processing fees,
charitable contributions, and property taxes.





Other
Income/Expense


Other
income/expense decreased from a $349,000 in 2008 to $73,000 at December 31,
2009.  The main driver of the decrease was a reduction in interest
expense of $0.2 million.





Income
taxes


In 2009, the Company recorded $7.3
million in income tax expense, which represents an annual effective rate of
38.0%.   For 2008, we recorded income tax expense of $3 million
which reflected an estimated annual effective tax rate of 38.4%.  The
Company anticipates a tax rate of approximately 39-40% in 2010.  The
Company restated  income tax expense and deferred tax accounts for the
year-ended December 31, 2008  due to an error in the Company’s SFAS
No. 109, “Accounting for Income Taxes” calculation. See Footnote 17 “Restatement
of Financial Statements” for a detailed description of the restatement and
management discussion on the restatement below.





Management Discussion on
Restatement and Restatement Impact





We are
restating earnings for the years ended December 31, 2006, 2007, and 2008 due to
an error in the SFAS No. 109, “Accounting for Income Taxes”
calculation.   In general, under SFAS No. 109, deferred tax
assets and liabilities are recorded to reflect the future tax consequences
attributable to the effects of differences between the carrying amounts of
assets and liabilities for financial reporting and for income tax
purposes.   Due  to the Company’s growth in past years,
major infrastructure investments were made to include building purchases for
manufacturing, corporate offices  and distribution, high speed
manufacturing equipment and blenders, a state of the art printing center
operation, and IT systems including infrastructure and hardware.  For
financial statement purposes, these assets are depreciated over the assets
useful life. However, for tax purposes, the depreciation can be accelerated
which results in lower taxable income and potential tax refunds which were
realized for the years in which accelerated tax depreciation was elected for the
Company. The lower taxable income and tax refunds impacted the Company’s cash
position positively and allowed for the further investment in the vertically
integrated Company infrastructure build. The resulting timing difference should
have resulted in a deferred tax liability and additional income tax provision
expense in the year’s restated.





The
restatements had no effect on 2009 revenues, operating income, pre-tax income,
net income or cash-flows.  The restatements have no impact on the
Company's tax returns in any year.





During
the audit of the Company’s financial statement for the year-ended December 31,
2009, Management of Medifast, Inc. was first advised by Friedman, LLP, the
Company’s independent registered public accounting firm, that an error existed
in its deferred tax account balances due to timing differences resulting between
depreciation expense for tax purposes versus financial statement purposes. Those
tax returns prepared by the tax divisions of the audit firms responsible for the
financial statement opinion in a given year, Bagell Josephs, Levine &
Company, LLC, resulted in reduced taxes for Medifast, Inc. for the pertinent
years.





Management
performed a detailed reconciliation of deferred tax accounts and the related
provision for income taxes for all tax years beginning in 2001 in order to
quantify the potential balance adjustments. The Company’s Management upon being
advised by its Independent Auditor of the SFAS No. 109 calculation issue, as
part of its Sarbanes Oxley policy regarding internal controls regarding
financial reporting, immediately reported this issue to the Audit Committee
which promptly initiated and conducted its review. That review on March 16,
2010 concluded i) that Bagell, Josephs, Levine & Company, LLP (“BJL”) had
merged with Friedman, LLP effective January 1, 2010. ii) that neither Management
nor the Audit Committee had  been   previously  notified
 of  this  audit concern by its auditors BJL either during those
audits nor while preparing the quarterly reports and tax returns with BJL Tax
Accountant Services for the pertinent years iii.) that the Company from the time
of its restructuring in 1999 did not have a normalized tax rate due to the carry
forward of a substantial net operating loss iiii.) that Company management is
responsible for the internal controls over the preparation and review process
for the calculation of the income tax provision which was inadequate, and led to
errors in the computation of deferred tax assets, deferred tax liabilities, and
related income tax provision.


27





On March
29, 2010 management and the Audit Committee reviewed management’s findings and
the Audit Committee concluded that restating the consolidated financial
statements for the years ended December 31, 2006, 2007, and 2008 is required.
The Company is restating for errors identified in its deferred tax accounts
pertaining to (i) differences between the income tax basis and the financial
reporting basis of long-lived assets that were not reconciled to the deferred
tax balances (ii) to properly apply a net operating loss to our deferred tax and
provision for income taxes for the years ended December 31, 2001, 2002, 2003,
2004, and 2005.   The effects of these restatements are included
in this Annual Report on Form 10-K for the fiscal year ended December 31,
2009.





The
correction of the errors noted in (i) above reduced 2008, 2007, and 2006 net
income by $601,000 (.04 per diluted share), $411,000 ($.03 per diluted share),
and $583,000 (.04 per diluted share), respectively.  The corrections
noted in number (ii) above increased beginning of 2006 accumulated deficit by
$1,358,000.





See
Footnote 17 “Restatement of Financial Statements” for a detailed description of
the restatement.





The
cumulative affect of the restatements for years December 31, 2006, 2007, and
2008 do not have a material impact on the financial condition of the Company in
the opinion of Management and the Audit Committee as illustrated by key balance
sheet ratios on the December 31, 2009 balance sheet as presented
below:


Consolidated
      Balance Sheet
                                
                                (Unaudited)
                                
                                
                                (Audited)For
      the Year Ended December 31, 2009
                                
                                As
      Previously
                                  Reported
                                
                                
                                As
      RestatedTotal
      Current Assets
                                
                                
                                34,967,000
                                
                                
                                
                                34,730,000Total
      Assets
                                
                                
                                64,140,000
                                
                                
                                
                                62,755,000Total
      Current Liabilities
                                
                                
                                5,764,000
                                
                                
                                
                                6,183,000Total
      Liabilities
                                
                                
                                11,208,000
                                
                                
                                
                                13,180,000Total
      Stockholder's Equity
                                
                                
                                52,932,000
                                
                                
                                
                                49,575,000Total
      Liabilities and Shareholder's Equity
                                
                                
                                64,140,000
                                
                                
                                
                                62,755,000Key
      Balance Sheet Financial RatiosFor
      the Year Ended December 31, 2009Current
      Ratio
                                
                                6.1
      to 1
                                
                                
                                5.6
      to 1Quick
      Ratio
                                
                                4.1
      to 1
                                
                                
                                3.8
      to 1Debt
      to Equity Ratio
                                
                                .12
      to 1
                                
                                
                                .12
      to 1Return
      on Equity
                                
                                22.6%
                                
                                
                                24.0%Return
      on Assets
                                
                                18.7%
                                
                                
                                19.0%





Net
income


Net income was $12.0 million in
2009 as compared to $4.8 million in 2008, an increase of
147%.    The improved profitability in 2009 is due to sales
growth in the Take Shape for Life division Medifast Weight Control Centers, and
Medifast Direct sales channel as well as improved advertising effectiveness in
the Medifast Direct sales channel, gross margin improvement as well as
leveraging the fixed costs associated with our vertically-integrated support
structure.


28





SEGMENT
RESULTS OF OPERATIONS





Net Sales by Segment as of December 31,2009
                                                        
                                                        
                                                        2008
                                                        
                                                        
                                                        2007Segments
                                                        
                                                        Sales
                                                        
                                                        
                                                        % of Total
                                                        
                                                        
                                                        Sales
                                                        
                                                        
                                                        % of Total
                                                        
                                                        
                                                        Sales
                                                        
                                                        
                                                        % of TotalMedifast
                                                        
                                                        
                                                        150,037,000
                                                        
                                                        
                                                        
                                                        91
                                                        %
                                                        
                                                        
                                                        97,116,000
                                                        
                                                        
                                                        
                                                        92
                                                        %
                                                        
                                                        
                                                        78,861,000
                                                        
                                                        
                                                        
                                                        94
                                                        %All
      Other
                                                        
                                                        
                                                        15,581,000
                                                        
                                                        
                                                        
                                                        9
                                                        %
                                                        
                                                        
                                                        8,329,000
                                                        
                                                        
                                                        
                                                        8
                                                        %
                                                        
                                                        
                                                        4,918,000
                                                        
                                                        
                                                        
                                                        6
                                                        %Eliminations
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        0
                                                        %
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        0
                                                        %
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        0
                                                        %Total
      Sales
                                                        
                                                        
                                                        165,618,000
                                                        
                                                        
                                                        
                                                        100
                                                        %
                                                        
                                                        
                                                        105,445,000
                                                        
                                                        
                                                        
                                                        100
                                                        %
                                                        
                                                        
                                                        83,779,000
                                                        
                                                        
                                                        
                                                        100
                                                        %





2009
vs. 2008


Medifast
Segment:  The Medifast reporting segment consists of the sales of
Medifast Direct, Take Shape for Life, and Doctors.  As this represents
the majority of our business this is referenced to the “Consolidated Results of
Operations” management discussion for 2009 vs. 2008 above.





All Other
Segment:  The All Other reporting segment consists of the sales of
Medifast Weight Control Corporate Centers, and Medifast Weight Control Franchise
Centers.  Sales increased by $7.3 million, or 87% year-over year due
to the opening of seven new centers throughout 2009,  a 20% increase
in the same store sales for Centers open for greater than one year, and the
launch of the franchise opportunity in 2009.  The Company is
continuing to focus on improved advertising effectiveness, improved closing
rates on walk-in sales, as well as the hiring of more experienced clinic
personnel.  At the end of 2009, there were twenty seven corporately
owned centers opened as compared to twenty centers at the end of
2008.  The company has eighteen franchise centers in
operation.  In 2010, the Company plans on opening an additional 13-15
corporately owned Medifast Weight Control Centers.





2008
vs. 2007





Medifast
Segment:  The Medifast reporting segment consists of the sales of
Medifast Direct, Take Shape for Life, and Doctors.  As this represents
the majority of our business this is referenced to the “Consolidated Results of
Operations” management discussion for 2008 vs. 2007 above.





All Other
Segment:  The All Other reporting segment consists of the sales of
Medifast Weight Control Corporate Centers, and Medifast Weight Control Franchise
Centers Sales increased by $3,411,000 year-over year due to the opening of ten
new centers throughout 2008, including eight centers in Houston, TX and two
centers in Dallas, TX.   The Dallas, TX market continues to
mature with the average clinic generating approximately $50,000 per month in
sales.   The Company is continuing to focus on improved
advertising effectiveness, improved closing rates on walk-in sales, as well as
the hiring of more experienced clinic.  At the end of 2008, there were
twenty corporately owned centers opened as compared to ten centers at the end of
2007.  In addition, the Company began franchising the Medifast Weight
Control Center model in 2008.  At the end of 2008, there were five
franchise centers in operation.





Net
      Profit by Segment as of December 31,(Restated)
                            
                            
                            (Restated)2009
                            
                            
                            2008
                            
                            
                            2007Segments
                            
                            Profit
                            
                            
                            %
      of Total
                            
                            
                            Profit
                            
                            
                            %
      of Total
                            
                            
                            Profit
                            
                            
                            %
      of TotalMedifast
                            
                            
                            13,275,000
                            
                            
                            
                            111
                            %
                            
                            
                            7,503,000
                            
                            
                            
                            155
                            %
                            
                            
                            5,526,000
                            
                            
                            
                            161
                            %All
      Other
                            
                            
                            (1,311,000
                            )
                            
                            
                            -11
                            %
                            
                            
                            (2,669,000
                            )
                            
                            
                            -55
                            %
                            
                            
                            (2,100,000
                            )
                            
                            
                            -61
                            %Eliminations
                            
                            
                            
                            
                            
                            
                            0
                            %
                            
                            
                            
                            
                            
                            
                            0
                            %
                            
                            
                            
                            
                            
                            
                            0
                            %Net
      Profit
                            
                            
                            11,964,000
                            
                            
                            
                            100
                            %
                            
                            
                            4,834,000
                            
                            
                            
                            100
                            %
                            
                            
                            3,426,000
                            
                            
                            
                            100
                            %


29





2009
vs. 2008





Medifast
Segment:  The Medifast reporting segment consists of the profits of
Medifast Direct, Take Shape for Life, and Doctors.  As this represents
the majority of our business this is referenced to the “Consolidated Results of
Operations” management discussion for 2009 vs. 2008 above.  See
footnote 16, “Business Segments” for a detailed breakout of
expenses.





All Other
Segment:   The All Other reporting segment consists of the profit
or loss of Medifast Weight Control Centers, Medifast Weight Control Franchise
Centers, and corporate expenses related to the parent company
operations.  Year-over-year, the loss in the All Other segment
decreased by $1.4 million.  The Medifast Weight Control Centers and
Franchise Centers showed an increase in net profitability year-over-year of $2.5
million.   The increase in profitability was due to opening of
ten new corporately owned centers in 2008, seven new centers in 2009, and
opening additional franchisee centers throughout 2009. The increase in the total
number of corporate clinics to twenty seven, eighteen operating franchise
centers, and improvements in same store sales year-over-year led to additional
sales and profitability.  Medifast Corporate expenses increased by
$1.1 year-over-year.  Corporate expenses include items such as
auditors’ fees, attorney’s fees, stock compensation expense and corporate
governance related to NYSE, Sarbanes Oxley, and SEC regulations.  See
footnote 16, “Business Segments” for a detailed breakout of
expenses.




2008
vs. 2007





Medifast
Segment:  The Medifast reporting segment consists of the profits of
Medifast Direct, Take Shape for Life, and Doctors.  As this represents
the majority of our business this is referenced to the “Consolidated Results of
Operations” management discussion for 2008 vs. 2007 above.  See
footnote 16, “Business Segments” for a detailed breakout of
expenses.





All Other
Segment:  The All Other reporting segment consists of the losses of
Hi-Energy, Medifast Weight Control Centers, and corporate expenses related to
the parent company operations.  Year-over-year, the loss in the All
Other segment increased by $569,000.   The Hi-Energy and Medifast
Weight Control Centers showed an increase in net profitability year-over-year of
$339,000.  The increase in profitability was due to improved
profitability in established centers.  During the year, ten new
centers were opened and should have a positive impact on 2009
earnings.   Medifast Corporate expenses increased by $908,000
year-over-year.  Corporate expenses include items such as auditors’
fees, attorney’s fees, Board of Director expenses, investor relations, corporate
consulting, and corporate outings.  In 2008, the Company had
additional legal expenses associated with the Sotomayor legal action that
resulted in a $200,000 one time charge to earnings in the fourth quarter of
2008.  In addition, the Company had an increase in realized losses on
equity securities in its investment account in the fourth quarter of 2008 due to
the weakness in the stock market.  See footnote 16, “Business
Segments” for a detailed breakout of expenses.





Contractual
Obligations and Commercial Commitments





As of
December 31, 2009, 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 support our marketing efforts.


The
Company has the following contractual obligations as of December 31,
2009





2010
                      
                      
                      2011
                      
                      
                      2012
                      
                      
                      2013
                      
                      
                      2014
                      
                      
                      ThereafterContractual
      ObligationsTotal
      Debt
                      
                      
                      796,000
                      
                      
                      
                      796,000
                      
                      
                      
                      796,000
                      
                      
                      
                      566,000
                      
                      
                      
                      257,000
                      
                      
                      
                      3,029,000Operating
      Leases
                      
                      
                      1,112,000
                      
                      
                      
                      1,085,000
                      
                      
                      
                      1,002,000
                      
                      
                      
                      553,000
                      
                      
                      
                      249,000
                      
                      
                      
                      294,000Copier
      Equipment Service Contracts
                      
                      
                      1,062,000
                      
                      
                      
                      1,031,000
                      
                      
                      
                      964,000
                      
                      
                      
                      758,000
                      
                      
                      
                      412,000
                      
                      
                      
                      -Total
      contractual obligations
                      
                      
                      2,970,000
                      
                      
                      
                      2,912,000
                      
                      
                      
                      2,762,000
                      
                      
                      
                      1,877,000
                      
                      
                      
                      918,000
                      
                      
                      
                      3,323,000


30





LIQUIDITY
AND CAPITAL RESOURCES





The Company had stockholders’ equity of
$49.6 million and working capital of $28.6 million on December 31, 2009 compared
with $35.2 million and $12.6 million at December 31, 2008,
respectively.  The $14.4 million net increase in stockholder’s equity
reflects $12.0 million in 2009 profits as well as equity transactions as
outlined in the “Consolidated Statement of Changes in Stockholders’ Equity and
accumulated other comprehensive income (loss).” The Company’s cash and cash
equivalents position increased from $1.8 million at December 31, 2008 to $12.7
million at December 31, 2009.  The $10.9 million increase was mainly
due to the increased profits of $12.0 million as well as a $2.6 million decrease
in inventory, and a reduction in capital spending.  These were offset
by a $3.2 million decrease in our line of credit.





The
Company currently has no off-balance sheet arrangements.




In the
year ended December 31, 2009 the Company generated cash flow of $20,313,000 from
operations, primarily attributable to higher operating income.  Net
changes in operating assets and liabilities increased cash flow by
$860,000.    The total use of cash from operations was $1.7
million. Uses of cash include an increase in prepaid expenses of $1,155,000,
increase in accounts receivable of $228,000, a decrease in accounts payable of
$162,000, a decrease in income taxes payable, and a increase in deferred
compensation and other assets of $110,000.  This was offset by sources
of cash during 2009 from a decrease in inventory by $2.6
million.  Inventory decreased due to increased inventory turns and a
reduction of our days on hand.




In the
year ended December 31, 2009, net cash used in investing activities was
$7,932,000, which primarily consisted of the purchase of property and
equipment.  The increase in property and equipment relates to the
building of a large amount of infrastructure in 2009 to support
growth.  This included the opening of seven new Medifast Weight
Control Center locations, development of a point-of-sale system for the Medifast
Weight Control Centers, continued development of a new web shopping platform for
the Medifast Direct  channel, new software system for our Take Shape
for Life division, ERP enhancements, IT infrastructure to support new systems,
phone system upgrades, and leasehold improvements to manufacturing and
distribution facilities to support future growth.




In the
year ended December 31, 2009, financing activities used $1,514,000 in cash
flow.  Sources of cash included an increase in long term debt $1.7
million, a decrease in notes receivable - $170,000, and issuance of common
stock, options and warrants - $214,000.  This was offset by a use of
cash in the repayment of the line of credit - $3.2 million, the purchase of
treasury stock - $102,000, and a fair value adjustment for stock compensation
tax benefit - $303,000.




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.





2008
COMPARISON WITH 2007





OPERATING





Revenue:


Revenue increased to $105.4 million in
2008 as compared to $83.8 million in 2007, an increase of $21.6 million or 26%.
The Take Shape for Life sales channel accounted for 47% of total revenue,
Medifast Direct channel 42%, Medifast Weight Control Centers, brick-and-mortar
clinics 10% and Doctors 1%.  Take Shape for Life sales, which are
fueled by person-to-person recruiting and support increased by 79%
year-over-year.   The Company’s Medifast Weight Control Center
clinic division , increased sales by 68% as compared to 2007 due to the opening
of new clinics in 2008.  The Medifast Direct  channel, which
is fueled primarily by consumer advertising, decreased revenues by approximately
6% year-over year on less advertising spend.  The Company’s doctor’s
sales decreased by 24% compared to 2007 due to certain doctors transitioning to
the professional division of Take Shape for Life.  In our Doctors
division, Doctors order Medifast product directly from the Company and
distribute to their patients as part of a weight loss program with doctor
oversight.  As Medifast has over 75 different products, a portion of
doctors and other health care providers are transitioning to the Take Shape for
Life division in which they refer patients to the Medifast program, the patient
orders either on the Take Shape for Life website or through the
Company’s  in-house call center, and the order is shipped directly to
the end consumer.  The Health Care provider receives a commission on
product orders referred in the Take Shape for Life network.  It should
be noted that doctors and health care providers receive the same compensation
that health coaches receive for any product orders referred in the Take Shape
for Life Network.


31




The Take
Shape for Life division grew 79% year-over-year.  This growth can
largely be attributed to the tools and training that led to an increase in the
ability of the division to both promote growth in recruiting of health coaches
and acquisition of clients, as well as better supporting this growth as it
occurs. This continued investment proved to be a large part of the current
growth trends in Take Shape for Life sales, as well as the number of active
health coaches and clients.  The growth in this segment correlates
directly to the increase in health coaches, which began to accelerate following
our National Convention in July 2008.  The number of active health
coaches grew 84% to 3,400 at the end of the fourth quarter of 2008 as compared
to 1,850 for the same time period in 2007.   The Company
completed our 2008 National Convention in Orlando, FL on July 26th, 2008
where approximately 750 health coaches participated, an increase of nearly 88%
from prior year.  The individuals that attended the event attended
workshops and heard lectures by accredited individuals in the areas of
recruiting, product and nutrition knowledge, and business skills.





The
Medifast Weight Control Centers, which represent approximately 8% of the
Company’s overall revenues, are currently operating in twenty locations in
Dallas, Houston, and Orlando.  In 2008, the Company experienced
revenue growth of 68% versus the same time period last year. The average monthly
revenue per clinic also witnessed growth of 6%, averaging $38,000 per clinic in
2008 as compared to $36,000 in 2007.   In the expanding Dallas,
TX market, the average monthly revenue per clinic is approximately $50,000. In
the estimated $40 billion weight loss and health living industry, the brick and
mortar clinic model has always made up a significant portion of overall
sales.  The recent growth in the Medifast Weight Control Centers has
proven that the model is in high demand from a select portion of the weight loss
consumers.  Throughout the year, the Company invested in the
infrastructure of its clinic model. The major aspects of the investment in this
division included an expanded support team, the creation of a point of sale
system, a robust customer data tracking system, and finalizing the franchise
opportunity documentation.   During 2008, the Company opened
eight additional corporately owned clinics in the Houston, TX market and two
additional centers in the Dallas, TX market.





On
February 18, 2008, the Company announced that it has sold its first franchise of
Medifast Weight Control Centers.  The Company sold the rights to open
four clinics in the Greater Baltimore Metropolitan Area.  The
franchisee also has the rights to open four additional Medifast Weight Control
Centers in the Baltimore area over the next two years, bringing the total to
eight locations.   On June 3, 2008 the Company announced that it
sold the rights to open four Medifast Weight Control Centers in Southern
California and three Medifast Weight Control Centers in Central California to
two different local business operators.  On October 8, 2008, the
Company announced the opening of its first franchise clinic in the Baltimore, MD
area. In December 2008, three Medifast Weight Control Center franchise locations
opened in Southern California and one location opened in Central
California.  At December 31, 2008, five franchise locations were in
operation.





Costs
and Expenses


Cost of revenue increased $3.9 million
to $25.3 million in 2008 from $21.5 million in 2007.  As a percentage
of sales, gross margin increased to 75.9% in 2008 from 74.4% in
2007.  The margin improved due to efficiencies gained from new
machinery purchases in prior year, new shipping rules that resulted in
additional shipping revenue from customers netting against shipping expense, as
well as a price increase on July 1, 2008.  Operating expenses
increased by $950,000 which primarily resulted from additional printing expense
for our direct to consumer postcard mailings and Take Shape for Life printed
material, as well as maintenance, repairs, and supplies for our manufacturing
and distribution facilities.





Operating
Expenses


Selling, general and administrative
expenses increased by $15.3 million as compared to 2007.   Take
Shape for Life commission expense, which is completely variable based upon
revenue, increased by approximately $10.1 million as the Company showed sales
growth of 79% as compared to 2007. Salaries and benefits increased by
approximately $2 million in 2008. The increase includes the hiring of additional
expertise in critical areas such as Take Shape for Life and the Medifast Weight
Control Centers to support the strong growth in 2008 and
beyond.  Also, additional personnel were hired in the call center
during the first and second quarters of 2008 as the Company brought the
outsourced Take Shape for Life call center in-house early in the second quarter
of 2008.   Going forward, savings will be realized on
communication expense as a result of bringing the call center
in-house.  The opening of eight new corporately owned clinics in the
Houston, TX market and two in the Dallas, TX market also required the hiring of
additional center managers and support
staff.     Advertising expense in 2008 was
approximately $17.8 million compared to approximately $18.4 million for the same
period last year, a decrease of $600,000.  Communication expense
decreased by $200,000 as a result of the Take Shape for Life call center moving
in-house during the second quarter of 2008.    Other
expenses increased by $2.4 million which included items such as depreciation,
amortization, credit card processing fees, charitable contributions, and
property taxes.  Office expenses increased by $300,000 and stock
compensation expense increased by $225,000 as additional restricted shares were
issued to key executives and Board members in the third and fourth quarters of
2008.





Other
Income/Expense


Other
expense increased from a $172,000 in 2007 to $349,000 at December 31,
2008.  The $177,000 increase in other expense resulted primarily from
realized losses of $216,000 on the Company’s equity investment portfolio managed
by Merrill Lynch due to the weakness of the stock market in
2008.  Other income/expense consists of interest expense on debt,
gains or losses on the sale of equity investments, dividends and interest on
equity and bond investments, and interest payments received on the CCS note
receivable.  In 2007, the Company also realized other income when it
exercised a stock warrant from a former business partner, and realized a loss on
disposal of assets relating to the closing of three Medifast Weight Control
Centers.





Income
taxes


In2008, we recorded $3
million in income tax expense which represents an effective rate of 38.4%.In 2007, we
recorded $2.1 million in income tax expense, which represents an annual
effective rate of 38.22%.   The Company
restated  income tax expense and deferred tax accounts for the
years-ended December 31, 2008 and 2007 due to an error in the Company’s SFAS No.
109, “Accounting for Income Taxes” calculation. In general, under SFAS No. 109,
deferred tax assets and liabilities are recorded to reflect the future tax
consequences attributable to the effects of differences between the carrying
amounts of assets and liabilities for financial reporting and for income tax
purposes.   Due  to the Company’s growth in past years,
major infrastructure investments were made to include building purchases for
manufacturing, corporate offices  and distribution, high speed
manufacturing equipment and blenders, a state of the art printing center
operation, and IT systems including infrastructure and hardware.  For
financial statement purposes, these assets are depreciated over the assets
useful life. However, for tax purposes, the depreciation can be accelerated
which results in lower taxable income and potential tax refunds which were
realized for the years in which accelerated tax depreciation was elected for the
Company. The resulting timing difference should have resulted in a deferred tax
liability and additional income tax provision expense in the year’s
restated.  See Footnote 17 “Restatement of Financial Statements” for a
detailed description of the restatement.


32




Net
income


Net income was $4.8 million in
2008 as compared to $3.4 million in 2007, an increase of
41%.   The improved profitability during 2008 is due to sales
growth in the Take Shape for Life division and Medifast Weight Control Centers,
and gross margin improvement.





LIQUIDITY
AND CAPITAL RESOURCES





The Company had stockholders’ equity of
$35.2 million and working capital of $12,.6 million on December 31, 2008
compared with $30.1 million and $8 million at December 31, 2007,
respectively.  The $5.1 million net increase in stockholder’s equity
reflects $4.8 million in 2008 profits as well as equity transactions as outlined
in the “Consolidated Statement of Changes in Stockholders’ Equity and
accumulated other comprehensive income (loss).” The Company’s cash and cash
equivalents position decreased from $2.2 million at December 31, 2007 to $1.8
million at December 31, 2008.  The decrease is due to large inventory
purchases in the fourth quarter of 2008 to include ten new meal replacement bars
as well as an increase in inventory levels in preparation for the “diet” season
beginning in January 2009.  In addition, the Company’s capital
expenditures increased by approximately $2.3 million in 2008 as compared to
2007.  In 2008, capital expenditures included the opening of ten new
Medifast Weight Control Centers, development of a point-of-sale system for the
Clinics, development of a new web shopping platform for the Medifast Direct
channel, new software system for our Take Shape for Life division, ERP
enhancements, and phone system upgrades.





In
September 2007, Medifast, Inc.’s wholly owned subsidiary Jason Pharmaceuticals,
Inc. increased its Secured Line of Credit from $5 million to $7.5 million and
moved the line of credit from Mercantile Safe-Deposit and Trust to Merrill
Lynch. The line of credit is at LIBOR plus 1.3 percent.  The increased
line may be used to finance fixed assets, advertising, and inventory of
Medifast, Inc. The Company currently has no off-balance sheet
arrangements.




In the
year ended December 31, 2008 the Company generated cash flow of $5,496,000 from
operations, primarily attributable to higher operating income.  This
was offset by net changes in operating assets and liabilities that decreased
cash flow by $4,889,000.    The total use of cash from
operations was $6,757,000. The largest use of cash was for the purchase of
inventory.  During 2008, inventory increased by $4.7
million.  Inventory increased due to our increased sales, introduction
of ten new meal replacement bars late in the fourth quarter of 2008 as well as
the typical fourth quarter inventory build-up in order to prepare for “diet
season” in the first quarter of 2009.  Additional uses of cash
included an increase in prepaid expenses and other current assets of 438,000,
increase in other assets of $251,000, and a reduction in income taxes payable of
$700,000.  This was offset by sources of cash from a decrease in
accounts receivable - $43,000,  decrease in deferred compensation -
$282,000, and an increase in accounts payable - $850,000.




In the
year ended December 31, 2008, net cash used in investing activities was
$7,313,000, which primarily consisted of the purchase of property and
equipment.  The increase in property and equipment relates to the
building of a large amount of infrastructure in 2008 to support
growth.  This included the opening of ten new Medifast Weight Control
Center locations, development of a point-of-sale system for the Medifast Weight
Control Centers, development of a new web shopping platform for the Medifast
Direct channel, new software system for our Take Shape for Life division, ERP
enhancements, IT infrastructure to support new systems, phone system upgrades,
and leasehold improvements to manufacturing and distribution facilities to
support future growth.




In the
year ended December 31, 2008, financing activities generated $1,463,000 in cash
flow.  Sources of cash included funds drawn from the line of credit -
$1.6 million, a decrease in notes receivable - $132,000, and issuances of
warrants and options exercised with cash - $32,000.  This was offset
by a use of cash in the repayment of long term debt - $264,000.




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





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





SEASONALITY





The
Company's weight management products and programs have historically been subject
to seasonality.  Traditionally the holiday season in November/December
of each year is considered poor for diet control products and
services.  January and February generally show increases in sales, as
these months are considered the commencement of the “diet
season.”  The Company did not experience the same degree of
seasonality in 2009.  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 well as the growth of our Take
Shape for Life division.  Our annual convention takes place in July of
each year and the division has experienced significant growth in the second half
of the year after the convention.  As consumers continue to increase
their association of nutritional weight loss programs with overall health,
seasonality will continue to decrease.


33




INFLATION





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





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, 2009, there was $6.2 million of variable
interest loans outstanding which is subject to interest rate
risk.  Interest rates on our variable rate loans ranged from 1.54% to
2.74% for the year ended December 31, 2009.  Each 100 basis point
increase in the bank’s LIBOR rates relative to these borrowings would impact
interest expense by $62,000 over a 12-month period.





ITEM
8. FINANCIAL STATEMENTS.





The
information required by this item is set forth on pages 54 to 76 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,
2009.





ITEM
9A.  CONTROLS AND PROCEDURES




Disclosure
Controls and Procedures


In
accordance with Exchange Act Rules 13a-15(e), we carried out an evaluation,
under the supervision and with the participation of management, including our
Chief Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as
of the end of the period covered by this report. Based on the material weakness
in our internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15-d-15(f)) described below, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures
were not effective as of December 31, 2009.




Management’s
Report on Internal Control over Financial Reporting


Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting for the Company. Internal control over
financial reporting is a process to provide reasonable assurance regarding the
reliability of our financial reporting for external purposes in accordance with
accounting principles generally accepted in the United States of America.
Internal control over financial reporting includes maintaining records that in
reasonable detail accurately and fairly reflect our transactions; providing
reasonable assurance that transactions are recorded as necessary for preparation
of our financial statements; providing reasonable assurance that receipts and
expenditures of company assets are made in accordance with management
authorization; and providing reasonable assurance that unauthorized acquisition,
use or disposition of company assets that could have a material effect on our
financial statements would be prevented or detected on a timely basis. Because
of its inherent limitations, internal control over financial reporting is not
intended to provide absolute assurance that a misstatement of our financial
statements would be prevented or detected.




Management
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this evaluation, our management concluded that the
Company’s internal control over financial reporting was not effective as of
December 31, 2009, due to the existence of a material weakness, as described
below.





34


In the
course of making our assessment of the effectiveness of internal control over
financial reporting, we identified a material weakness in our internal control
over financial reporting. The preparation and review process for the calculation
of the tax provision was inadequate, which led to errors in the computation of
deferred tax assets, deferred tax liabilities, and related income tax
provision.





As a
consequence of that determination, we have implemented a procedure designed to
detect or prevent this error from occurring in the future. In February 2010, the
Company hired a CPA in-house with extensive experience in financial reporting
and SFAS No. 109, “Accounting for Income Taxes.”  In addition, on a
quarterly basis the company will have an outside tax advisor review management’s
tax provision calculations. We have discussed this action with our audit
committee and believe that such enhanced procedure will prospectively mitigate
this material weakness.





The
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2009, was audited by Friedman, LLP, our independent registered
public accounting firm, as stated in their report appearing below.




Changes
in our Internal Control


There
were changes in the Company’s internal controls over financial reporting (as
such term is defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act)
during the last fiscal quarter to which this report relates that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting. We identified a material weakness in our
internal control over financial reporting and have described the changes to our
internal controls over financial reporting designed to remediate this material
weakness.  Additionally, as a consequence of that determination, we have
implemented a procedure designed to detect or prevent this error from occurring
in the future. In February 2010, the Company hired a CPA in-house with extensive
experience in financial reporting and ASC 740, “Accounting for Income
Taxes.”  In addition, on a quarterly basis the company will have an outside
tax advisor review management’s tax provision calculations. Management believes
that such enhanced procedure will prospectively mitigate this material
weakness.




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.


35




Report
of Independent Registered Public Accounting Firm





The Board
of Directors and Stockholders


Medifast,
Inc.


Owings
Mills, Maryland





We have
audited Medifast Inc.’s internal control over financial reporting as of December
31, 2009, 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,
included in the accompanying Item 9A, Management's Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on the
company's internal control over financial reporting based on our
audit.




We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included 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.




A
material weakness is a deficiency, or a combination of deficiencies, in internal
control such that there is a reasonable possibility that a material misstatement
of the company’s annual financial statements will not be prevented or
detected.  The following material weakness has been identified and
included in management’s assessment:




Accounting
for Income taxes




This
material weakness was considered in determining the nature, timing and extent of
audit tests applied in our audit of the 2009 consolidated financial statements
and the adjustments described in Note 17 that applied to restate the 2008 and
2007 financial statements.




In our
opinion, because of the effect of the aforementioned material weakness on the
achievement of the objectives of the control criteria, Medifast, Inc. and
subsidiaries, has not maintained effective internal control over financial
reporting as of December 31, 2009, based on the COSO criteria.




We also
have audited, in accordance with the standards of the Public Company Oversight
Board (United States), the consolidated balance sheet of Medifast, Inc. and
subsidiaries as of December 31, 2009 and the related consolidated statements of
operations, stockholders’ equity and other comprehensive income, and cash flows
for the year ended December 31, 2009 and our report dated March 29, 2010
expressed an unqualified opinion thereon.





/s/Friedman
LLP


Marlton,
New Jersey


March 29,
2010


36





PART
III





ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE





Medifast,
Inc. has recruited a Board of Directors who reflect the values and ethics of our
company and who can contribute to building long term shareholder value. Medifast
Directors are persons of integrity, business accomplishment, and
diverse   backgrounds able and willing to collaboratively work
together and provide their business experience and insight to guide and
oversight the strategic direction of the company. In addition, they provide
valuable input into the operational plans of the company to insure that it
successfully executes its business plan and maintains the core values which
protects its customers, employees and shareholders. in The selection of the
company’s directors is driven by the needs of the business and the specific
oversight skills needed to support the business objectives of
Medifast.





The
individual talents of the Directors chosen allow them to closely study the
aspect of Company operations and business model aligned with their area of
expertise to identify areas of potential risk to the Company. Then on Committees
they collectively draw on their extensive executive and business experience to
determine if any risk is material to the Company. Then, as a Board, they
determine what should be done to deal with the risk so it is not material to the
Company.





Directors
have been selected from many community organizations and networks in which the
company and or its executives participate. Medifast is privileged to have
qualified directors who were selected because of their business acumen,
experience and their academic accomplishments. In addition, some of our
Directors have a record of public service in the US Military, Government Service
or with a Non Profit Organization. Medifast has developed a Board that reflects
the diverse demographics of our customers and employees and our nation. Medifast
is  fortunate to have such distinguished Directors who have made
significant contributions to our community and nation to include a Congressional
Medal of Honor recipient, an Augustinian Friar who oversights a major
university, college, and two high schools and a seasoned  technology
and marketing executive who was one of the participants in the turnaround of the
Xerox Corporation.





Medifast
has selected 9 Independent Directors, 1 Outside Director and 3 Management
Directors who are qualified to guide the company in this era of financial reform
and massive technology changes. Most of them have guided the company through 41
quarters of consecutive profitability and we expect will continue to oversight
our operations and financial results with the same diligence exercised over the
past 10 years.





The Board
of Directors currently consists of 14 persons. They include 3 women, 11 males, 2
African Americans, 11 Caucasians, who reside in Maryland, Virginia,
Pennsylvania, Missouri, and Florida. The directors, their ages, basis for their
selection, and the year in which they first became director are provided in the
table below:


37





DirectorName
      and Experience
                        
                        SinceHarvey C. “Barney” Barnum,
      Jr., age 69, was sworn in as the Deputy Assistant Secretary of the
      Navy for Reserve Affairs on July 23, 2001. In this capacity he was
      responsible for all matters regarding the Navy and Marine Corps Reserve
      including manpower, equipment, policy and budgeting. On Jan. 20, 2009,
      Barnum was designated Acting Assistant Secretary of the Navy (Manpower and
      Reserve Affairs). Mr. Barnum was the fourth Marine to be awarded the
      nation’s highest honor, the Medal of Honor for valor in Vietnam. He
      retired from the Marine Corps as a Colonel in August 1989 after 27 and
      one-half years of service.   Barnum served multiple tours
      as an artilleryman with both the 3rd and 2nd Marine Divisions to include
      two tours in Vietnam; 2nd Marine Aircraft Wing; guard officer at Marine
      Barracks, Pearl Harbor, and operations officer, Hawaiian Armed Forces
      Police; weapons instructor at the Officer Basic School; four years at
      Marine Corps Recruit Depot, Parris Island, as commanding officer,
      Headquarters Company and the 2nd Recruit Training Battalion of the
      Training Regiment; Chief of Current Operations, US Central Command where
      he planned and executed the first U.S./Jordanian joint exercise staff as
      the commander of U.S. Forces and twice planned and executed Operation
      Bright Star spread over four southwest Asian countries involving 26,000
      personnel. Headquarters Marine Corps tours included: aide to the assistant
      commandant as a captain and deputy director Public Affairs, Director
      Special Projects Directorate and Military Secretary to the Commandant as a
      colonel. Upon retirement in 1989, Barnum served as the principal director,
      Drug Enforcement Policy, Office of the Secretary of Defense. Barnum’s
      personal medals and decorations include: the Medal of Honor; Defense
      Superior Service Medal; Legion of Merit; the Bronze Star Medal with Combat
      “V” and gold star in lieu of a second award; Purple Heart; Meritorious
      Service Medal; Navy Commendation Medal; Navy Achievement Medal with Combat
      “V”; Combat Action Ribbon; Presidential Unit Citation; Army Presidential
      Unit Citation; Joint Meritorious Unit Award; Navy Unit Citation; two
      awards of the Meritorious Unit Citation; the Vietnamese Cross of Gallantry
      (silver) and the Department of the Navy Distinguished Public Service
      Award. Barnum has attended The Basic School, U.S. Army Field Artillery
      School, Amphibious Warfare School, U.S. Army Command and General Staff
      College and the U.S. Naval War College. He is the past president of the
      Congressional Medal of Honor Society, Connecticut Man of the Year ’67,
      presented Honorary Legum Doctorem St Anselm College; Rotary Paul Harris
      Fellow; Abe Pollin Leadership Award ’03, Marine Corps League “Iron Mike”
      Award and Order of the Carabao Distinguished Service Award.
                          
                          Harvey
      C. “Barney” Barnum was first selected to be a Director in 2009 because of
      his extensive distinguished government service at the Department of the
      Navy Executive level and his distinguished military career which includes
      the Medal of Honor Award for bravery in Vietnam. Mr. Barnum will bring
      expertise to the Board in the area of Public Policy initiatives as it
      relates to his knowledge of the Executive and Legislative Branch of the US
      Government and his oversight of our Governmental Relations and Policy
      initiatives on Obesity related to Medifast products, protocols and
      clinical studies.
                        
                        2009Barry B. Bondroff, CPA,
      age 61, is an officer and director with Gorfine, Schiller & Gardyn,
      PA, a full-service certified public accounting firm offering a wide range
      of accounting and consulting services.    Previously,
      he was a Senior Managing Director with SMART. Bondroff brings over 35
      years of experience providing companies of all sizes and industries with
      practical and cost-effective accounting, assurance, tax, business,
      technology and financial advisory services. Prior to managing SMART,
      Bondroff was the Managing Director for Grabush, Newman & Co., P.A.,
      which combined with SMART in May 2003. Bondroff began his career with
      Grabush Newman in 1970, and in 1976 became Officer and was promoted to
      Managing Director in 1982. He earned his Bachelor of Science degree in
      Accounting from the University of Baltimore. Additionally, Bondroff serves
      on the Board of Directors for the publicly traded First Mariner Bank of
      Maryland, a NASDAQ listed SEC registrant. He is active with First Mariner
      serving on the Executive Committee, Loan Committee, Audit Committee and as
      Chairman of the Compensation Committee. In addition to his professional
      affiliations, Bondroff served on the Executive Committee for Israel Bonds
      and was a Director of Cycle Across Maryland. He has served the National
      Jewish Medical and Research Center, the Jewish Center for Business
      Development and has assisted the Baltimore Symphony Orchestra in its
      fundraising efforts. In addition, Barry was a past President and Treasurer
      of the Edward A. Meyerberg Northwest Senior Center, and also served as a
      Member of the Board of Directors for the Levindale Hebrew Geriatric Center
      and Hospital.  He currently serves as Treasurer for Special
      Olympics of Maryland, as a Trustee for Stevenson University in Maryland
      and a member of the Audit Committee of the Associated.
                        
                        2008


38





Barry
      B Bondroff was first selected as a Director in 2008 because of his broad
      business experience as a CPA, corporate governance experience over more
      than 36 years. His current selection as a Director utilizes that
      experience as a financial expert and his elected position of Vice Chairman
      of the Board. His service on the Audit Committee and Nominating Committee
      and his availability as a local director in Baltimore provide for local
      oversight and practical consulting in the area of financial management,
      risk assessment and Sarbanes Oxley regulations. He has been appointed the
      Chairman of a special committee that investigated and found a convicted
      felon’s allegations against Medifast “false, misleading and without
      merit.” He also provides an extensive rolodex that assists Medifast’s
      management team to find the best talent in the market to assist in our
      growth and development.Charles P. Connolly, age
      60, 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. of Pennsylvania and Delaware. Mr. Connolly serves
      on the Boards of numerous profit and non-profit
      organizations.  He holds an MBA from the University of Chicago
      and AB from Villanova University.
              
              2006Charles
      P. Connolly was first selected as a Director in 2006 for his extensive
      executive experience and financial acumen derived from an executive
      banking resume. His current selection as Director leverages that
      background of reviewing the financials and performance of hundreds of
      companies in the public and private sector. He possesses a unique
      financial and risk assessment perspective into the operations and
      financial management of the company. He spends an extraordinary amount of
      time with our executive team providing guidance and consultation on key
      metrics and performance objectives that have served Medifast well in the
      past few years. As the Chairman of the Audit Committee he has served
      diligently to insure that the company maintains its high standards of
      accountability.Jason L. Groves Esq.,
      age 39, is the Assistant Vice President of Government Affairs for Verizon
      Maryland, since 2003.   Mr. Groves is also an Army
      veteran.  He was a direct commissioned Judge Advocate in the
      United States Army Judge Advocate General's Corps (JAG).  As a JAG
      Officer, he practiced law while stationed at Fort George G. Meade,
      Maryland.  He had the distinction of prosecuting criminal cases in
      the District Court of Maryland as a Special Assistant United States
      Attorney.  Over the course of three years, he received two Army
      Achievement Medals, and one Army Commendation Medal.  Mr.
      Groves is a graduate of the Disney University College Program for
      managers.  He received his Bachelor of Science degree, cum laude, in
      Business with a concentration in Hospitality Management from
      Bethune-Cookman College.  He also obtained his law degree from North
      Carolina Central University School of Law and is a member of the New
      Jersey and District of Columbia bars as well as several bar
      associations.
              
              2009Jason
      L. Groves, Esq. was first selected as a Director in 2009 based on his
      military, business and legal background. In addition he has extensive
      experience with governmental relations and knowledge of the healthcare and
      communications technology fields. He was a Federal and State prosecutor
      thus providing keen insight on the regulatory and legal issues the company
      faces in today’s business climate.  His service on the Audit
      Committee has provided timely oversight for all projects he has
      undertaken.George J. Lavin, Jr.,
      Esq., age 81, was the senior founding partner of Lavin, O’Neil,
      Ricci, Ceprone & Disipio. Mr. Lavin is a 1951 graduate of Bucknell
      University. He attended the University of Pennsylvania School of Law,
      receiving an LL.B. in 1956, and then served as a Special Agent, Federal
      Bureau of Investigation, United States Department of Justice, until 1959.
      Mr. Lavin is one of the dominant product liability defense attorneys in
      the nation. He has had regional responsibilities in several automotive
      specialty areas, and was called upon to try matters throughout the county
      on behalf of his clients. Mr. Lavin's practice and specialty emphasized
      his commitment to defending the automotive industry. Mr. Lavin is admitted
      to practice before the Supreme Court of Pennsylvania, the United States
      Court of Appeals for the Third Circuit and the United States District
      Courts for the Eastern and Middle Districts of Pennsylvania. He is a
      member of the Faculty Advisory Board of the Academy of Advocacy, the
      Association of Defense Counsel, The Defense Research Institute, The
      American Board of Trial Advocates, and the Temple University Law School
      faculty. He has also been elected a fellow of the American College of
      Trial Lawyers. On March 1, 1994, Mr. Lavin assumed the title of Counsel to
      The Firm.  Mr. Lavin is presently the General Counsel to the
      Augustinian order of Villanova, PA.
              
              2005




39





George
      J. Lavin, Esq. was first selected as a Director in 2005 for his
      prestigious demonstrated legal experience on behalf of major international
      businesses, management experience in his law firm and his extensive
      service with the FBI. His current selection as Director values his
      experiential oversight on legal matters as well as his service on the
      Audit Committee and mentoring talents.Bradley T. MacDonald,age 62, is the Executive 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. At the time the Board planned leadership succession occurred,
      the Board assigned Mr. MacDonald executive responsibilities in the
      following areas: legal affairs, treasury, banking relationships, M&A,
      strategic plan oversight, public policy oversight, and community relations
      in addition to Board responsibilities as Executive Chairman and as the
      formal Co-founder of Take Shape for Life.  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 28th
      of 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 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
      was appointed and served on the Defense Advisory Board for Employer
      Support of the Guard and Reserve (ESGR.) for three
      years.     Currently, Mr. MacDonald serves on the
      Board of Directors of Stevenson University in Maryland, and the Catholic
      Family Foundation of the Archdiocese of Baltimore. He is also the
      Vice-Chairman of the Board of Directors of the Marine Corps Reserve Toys
      for Tots Foundation.  Mr. MacDonald is the father of Margaret
      Sheetz 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.
              
              1996Bradley
      T. MacDonald was first selected as a Director in 1996, because of his
      executive and entrepreneurial experience in the businesses noted above. In
      addition he has held leadership positions of increasing responsibility in
      the United States Marine Corps attaining the rank of Colonel and attending
      service schools to include the Naval War College.  His current
      selection as Director is based on his successful turnaround of Medifast as
      CEO and successfully guiding the company under a new profitable business
      model. Having extensive experience on Wall Street, as  CEO of
      Medifast when he restructured the company in 1999 which has
      since  recorded  over 41 consecutive quarters of
      profitability, he is  able  to provide strategic
      guidance to the company. Upon reaching 60 years old with the advice and
      consent of the Board he was elected Executive Chairman of the Board to
      utilize his breadth of knowledge and experience regarding Medifast,
      Inc.




40





Michael C. MacDonald,
      age 57, is a retired Senior Corporate Officer.  His last
      position was Senior Vice President of World Wide Operational Effectiveness
      for Xerox Corporation.  He was named to this position in
      September 2008 and led a corporate initiative to review the company’s core
      functions including Sales, Marketing, Human Resources and other key areas
      to ensure maximum effectiveness of resources.  Before this
      position, he was the World Wide President of Marketing Operations,
      responsible for corporate marketing, Xerox.com, advertising, brand
      creation, public relations and corporate communications.  Prior
      to his corporate assignments, he was President of Xerox North America, a
      6.5 B Division responsible for all services, solutions and products sold
      and maintained in the United States and Canada.  This included a
      direct sales force of 4,000, a technical service staff of 25,000 and
      support staff of 6,000, a total of 35,000 employees.  Mr.
      MacDonald also held Vice Presidential positions leading the Northeast
      Region Sales and Technical Service organization, the North American
      Marketing organization, the North American Agent/Dealer organization and
      the North American Supplies organization.  A career described as
      sustained success and over achievement in revenue, profit and customer
      satisfaction.  His leadership profile is one of creativity,
      vision, high expectations and results with commensurate high levels of
      customer loyalty, employee development and satisfaction.  Mr.
      MacDonald also serves on the Board of Directors of Medifast, Inc., Paetec,
      Inc. and the Jimmy V Foundation.  In addition, he is also a
      board member of the North American Marketing Advisory Board and has been
      recognized on four occasions as one of the Top Twenty Marketing Executives
      of the Year by Business to Business Magazine.  Previous to 2009,
      he was a member of the Board of Directors of the U.S. Chamber of
      Commerce.
              
              1998Michael
      C. MacDonald was first selected as a Director in 1998 based on his broad
      based executive experience for Xerox. His current selection as Director is
      based on his tenured service with Xerox, and being a director of Paetec
      Inc. and Medifast Inc. through the restructuring of all the companies. He
      has a national reputation as an expert in Sales and Marketing in the high
      technology field. He has been instrumental in building the high technology
      platform that Medifast operates today through a period of continuous
      growth in the business. Because of his expertise and business acumen, the
      Board has elected him to the Executive Committee in recognition of his
      expertise in corporate governance.Sr. Catherine T. Maguire
      RSM,age 59, a Sister
      of Mercy, has served as Associate Executive Director at SILOAM, a Body,
      Mind, Spirit wellness center for the HIV/AIDS community, from 1997 -
      2010.  Prior to this Sr. Maguire worked in AIDS Ministry within
      the prison system in Washington DC., and served as vocation director for
      her religious community for 8 years.  She received a BS degree
      in Education/English in 1972, a MS degree in Library Science in 1974 both
      from Villanova University, and a MA degree in Theology with an emphasis in
      Pastoral Ministry & Spirituality in 1995 from St. Michael’s College in
      Vermont.  She served on the Board of the National Religious
      Vocation Conference from 1990-1992.
              
              2009Sister
      Catherine T. Maguire, RSM was first selected as a Director in 2009 for her
      extensive executive experience with not for profit human services
      organizations and her strong background in organizational ethics and human
      resources and personnel management. She has multiple advanced degrees and
      will assist in developing the “Women Executives” of Medifast. As a result
      of her extensive management and human resources background she was elected
      to the Nominations committee where she will assist in screening and
      evaluating potential Director Candidates and insure the corporate values
      related to diversity are implemented in the company and on the
      Board.John P. McDaniel, age
      66, is a seasoned healthcare executive with more than 36 years of
      experience as a chief executive officer, most recently at MedStar Health
      in Columbia, Maryland, one of the largest and most comprehensive
      healthcare delivery systems in the mid-Atlantic region with annual
      revenues exceeding $3 billion, encompassing 25,000 employees 5,000
      physicians and nine leading hospitals and other health related businesses.
      Mr. McDaniel has a degree in Business Administration from Wittenberg
      University, a MHA in Health Management and Policy from the University of
      Michigan, and an Honorary Doctorate of Humane Letters (LHD) from
      Wittenberg University. He is presently a Partner in The Hickory Ridge
      Group, an advisory, development and investment organization that focuses
      on emerging healthcare and technology entities.  He is also a
      member of the board of the Greater Baltimore Committee, the Greater
      Washington Board of Trade, Wittenberg University, First Mariner Bank Corp
      and the Washington Real Estate Trust (WRE).
              
              2009


41




John
      P. McDaniel was first selected a Director in 2009 for his extensive
      executive and entreprenurial experience. His extensive management and
      Board knowledge concerning the health care industry and health care policy
      will provide seasoned oversight on behalf of shareholders. Because of his
      experience and leadership experience as the Chairman of the Racing
      Commission of Maryland, Director of First Mariner Bank and former Chairman
      and CEO of Medstar Health Systems he is serving on the Executive and
      Compensation Committees to bring his business acumen and organizational
      knowledge to oversight the CompanyMichael S. McDevitt, age
      32, is the Chief Executive Officer of Medifast, Inc.  Prior to
      joining the company in June, 2002, he was a Senior Analyst for the
      Blackstone Group, a private equity group in New York City.
              
              2007Medifast
      has continued to excel under Mr. McDevitt’s leadership, demonstrated by
      the company’s recent report of its 41st consecutive quarter of
      profitability for the fourth quarter, 2009.  Medifast continues
      to see strong year over year growth, most recently experiencing 57% top
      line growth and over 114% profitability growth, versus the same time
      period last year. During his tenure as CEO/CFO of Medifast the company was
      named number 16 on Forbes’ 2009  list of America’s Best Small
      Companies, a jump from 85 one year ago.  Additionally, Medifast
      was ranked number 28 on the 2008 Fortune Small Business list of
      fastest-growing small public companies, up from number 47 in 2007. Mr.
      McDevitt volunteers as a big brother for Big Brothers Big Sisters of
      Central Maryland, fully supporting the organization’s mission of helping
      boys and girls grow up to be confident, caring young adults.  He
      is a member of the board of directors for the American Heart Association’s
      Baltimore region.  Additionally, Mr. McDevitt supports the
      efforts of the American Diabetes Association and the Toys For Tots
      Foundation. He is on the board of directors of the Augustinian Press and
      works with several organizations of fellow CEOs.   Mr.
      McDevitt holds a Bachelor degree in Business Administration with a
      concentration in Finance from James Madison University.Michael
      S McDevitt was first selected as a Management Director in 2007 after he
      had assumed the positions of Chief Executive Officer and Chief Financial
      Officer of Medifast, Inc. His prior and current executive experience has
      contributed to the dynamic growth of Medifast. He brings a strong
      successful financial and operational management perspective to the
      Executive Committee of the Board.Jeannette M. Mills, age
      43, currently serving as senior vice president with the Baltimore Gas and
      Electric Company, a subsidiary of Constellation Energy. A Baltimore, MD
      native, Mills earned her Bachelor of Science in Electrical Engineering
      from Virginia Polytechnic Institute & State University (Virginia Tech)
      and she currently serves on the Advisory Board of the Bradley Department
      of Electrical and Computer Engineering. In 2006, Mills earned her Masters
      of Business Administration from Loyola College. Ms. Mills also works in
      the community, serving on the Board of Directors for Voices for Children,
      Howard County's Court Appointed Special Advocate Program. Additionally,
      she serves on the Board of the Creative Alliance, a Program that builds
      communities by bringing together artists and audiences from diverse
      backgrounds to experience spectacular arts programs and engage in the
      creative process.
              
              2008Jeannette
      M. Mills was first selected as a Director in 2008 not only for her
      technical background but primarily for her high level of executive
      experience. Her service as Chairperson of the Compensation Committee has
      effectively utilized her talents to review and assess the operations and
      metrics used to evaluate key executives in the company. She has been
      instrumental in providing guidance and direction to ensure that all
      executives maintain the transparent high performance culture, and
      entreprenurial philosophy of executive compensation balanced with
      appropriate risk assessment analysis.2009Jerry D. Reece,age 69,
      is chief executive officer of Reece & Nichols:  Real Estate,
      Mortgage, Title Insurance.  The real estate arm of the company
      is the largest real estate brokerage in Greater Kansas City. With over 40
      years experience in real estate, Jerry Reece formed J.D. Reece Realtors in
      early 1987.  He sold the company in 2001 to Homeservices of
      America, Inc. a Berkshire Hathaway affiliate.   In addition
      to marketing resale homes as well as a broad range of new home
      subdivisions, the company specializes in the corporate transferee market.
      After graduating from the University of Oregon in 1963 with a B.S. in
      Finance, Jerry Reece joined the United States Marine Corps and served in
      Hawaii and Vietnam as a first lieutenant. Following active duty, he
      continued his service in the Marine Corps Reserve. His various assignments
      included the command of a rifle battalion and service as a member of the
      Secretary of the Navy's Marine Corps Reserve Policy Board at the Pentagon.
      Retired with the rank of colonel, he is a past member of the Board of
      Directors of the Marine Toys for Tots Foundation. His personal decorations
      include the Legion of Merit, The Navy Commendation Medal with Combat "V"
      and the Combat Action Ribbon.


42





Jerry
      D. Reece was first selected as a Director in 2009 for his executive,
      entrepreneurial and broad real estate expertise. He is a leader in his
      community in Kansas City and has served on many for profit and non profit
      Boards, He is a decorated Vietnam veteran who has both civil and military
      executive experience to provide oversight and be a resource for executive
      and real estate matters requiring Board and corporate governance
      oversight..Donald F. Reilly, OSA,
      age 62, 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, Staff at Villanova University, Personnel Director
      of the Augustinian Province of St. Thomas of Villanova, Provincial
      Counselor, Co-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.  He also serves on the Board
      of Trustees of Merrimack College, MA, St. Augustine Prep, NJ, and Malvern
      Prep, PA.  Fr. Reilly was Prior Provincial of the Augustinian
      Order at Villanova, PA from 2002 - 2010.  He oversaw 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, Peru, and South Africa.
                
                1998Very
      Rev.Donald F.
      Reilly, OSA was first selected as a Director in 1998 for his strong
      background in Personnel and Executive management with the Augustinian
      Community which serves the Catholic Church at Villanova University,
      Merrimack College, High Schools, Parishes and missions in Japan, South
      Africa and Peru.  His current selection as Director utilizes his
      extensive knowledge of the Company serving as a Director and participating
      in the restructuring of the company in 1999. He was also instrumental in
      developing the current business model in consultation with the Business
      School at Villanova University. As Chairman of the Nominations committee
      and being a Ph.D and nationally known academic he has been an invaluable
      asset providing guidance to the company and creating shareholder value. He
      also is the primary person on the Nomination Committee to identify and
      evaluate potential Director Candidates for character  necessary
      to perform  high performance, risk assessment and
      be  transparent which  are desirable characteristics
      for  all potential directors. This will ensure continuity in
      respect to the company’s corporate governance practices and
      philosophy.Margaret Sheetz, age 32,
      is the President and Chief Operating Officer of Medifast.
      Inc.  Prior to joining the company in 2000, she was a legal
      assistant with the firm of Carrington, Coleman, Sloman and Blumenthal in
      Dallas, Texas. As Medifast continues to see strong year over year growth,
      Ms. Sheetz has provided the operational and technical leadership that has
      resulted in Medifast providing the proper infrastructure to support the
      growth of the company to include making dramatic productivity improvement
      in the company’s operational capabilities, building a strong
      infrastructure of distribution, manufacturing, information systems and
      human resource operations necessary to support rapid business growth. She
      supports the efforts of the American Diabetes Association, the American
      Heart Association and the Toys For Tots Foundation.  Ms. Sheetz
      is also very active with several organizations of Maryland executives. She
      holds a Bachelor of Arts degree from Villanova University and received an
      Executive MBA from Loyola University.
                
                2008Margaret
      M. Sheetz was first selected as a Management Director in 2008 after she
      had assumed the positions of President and Chief Operating Officer of
      Medifast, Inc. She is the senior experienced operations executive who has
      built the operational structure of the company. In addition to her strong
      operational expertise she has strength in IT integration with operations
      and human resources managememt. She has an Executive MBA which has
      assisted her in the training development of her subordinates. She is the
      focused executive since 2000 who has been instrumental in building the
      manufacturing and distribution infrastructure with her team of
      professionals. Her leadership and oversight skills are recognized and she
      is recognized in the company as a detail oriented executive who builds
      high performance teams. The Board considers her the source person to get
      information pertinent to the oversight of Medifast’s
      operations.




43





CORPORATE
GOVERNANCE




Board
Involvement in Risk Oversight





The
Company takes a comprehensive approach to risk management. We believe risk can
arise in every decision and action taken by the Company, whether strategic or
operational. The Company, therefore, seeks to include risk management principles
in all of its management processes and in the responsibilities of its employees
at every level. Our comprehensive approach is reflected in the reporting
processes by which our management provides timely and comprehensive information
to the Board to support the Board’s role in oversight, approval and
decision-making.





The
Board of Directors closely monitors the information it receives from management
and provides oversight and guidance to our management team concerning the
assessment and management of risk. The Board approves the Company’s high level
goals, strategies and policies to set the tone and direction for appropriate
risk taking within the business. The Board and its committees then emphasize
this tone and direction in its oversight of management’s implementation of the
Company’s goals, strategies and policies.





Our
senior executives provide the Board and its committees with regular updates
about the Company’s strategies and objectives and the risks inherent within them
at Board and committee meetings and in regular reports. Board and committee
meetings also provide a venue for directors to discuss issues with management.
The Board and committees call special meetings when necessary to address
specific issues. In addition, our directors have access to Company management at
all levels to discuss any matters of interest, including those related to risk.
Those members of management most knowledgeable of the issues attend Board
meetings to provide additional insight into items being discussed, including
risk exposures.





The Board
has delegated oversight for matters involving certain specific areas of risk
exposure to its three committees. Each committee reports to the Board of
Directors at regularly scheduled Board meetings, and more frequently if
appropriate, with respect to the matters and risks for which the committee
provides oversight.





The Audit
Committee oversees the integrity of our financial statements, reporting process
and internal controls, the internal audit function, the independent auditors’
qualifications, independence and performance, and the Company’s corporate
finance matters including its capital structure. The Audit Committee also
provides oversight with respect to the Company’s risk management process,
including, as required by the NYSE, discussing with management the Company’s
significant financial risk exposures, steps management has taken to monitor,
control and report such exposures and our policies with respect to risk
assessment and risk management.





Our
Compensation Committee is responsible primarily for the design and oversight of
the Company’s executive compensation policies, plans and practices. A key
objective of the Compensation Committee is to ensure that the Company’s overall
executive compensation program appropriately links pay to performance and aligns
the interests of the Company’s executives with its stockholders. In furtherance
of this objective, the Compensation Committee evaluates the potential
compensation payable under the Company’s executive compensation plans based on
alternative performance scenarios. The Compensation Committee also monitors the
design and administration of the Company’s overall incentive compensation
programs to ensure that they include appropriate safeguards to avoid encouraging
unnecessary or excessive risk taking by Company employees. Elements of our
executive compensation program that mitigate excessive risk taking, such as our
combination of short and long-term incentives are described below under
“Compensation Discussion and Analysis.”





The
Nominating and Corporate Governance Committee oversees risks related to our
corporate governance, including Board and director performance, director
succession, director education and the Company’s Corporate Governance Guidelines
and other governance documents. The Nominating and Corporate Governance
Committee also oversees the Company’s quality and regulatory affairs operations
and the Company’s programs regarding ethics and compliance, and social and
environmental responsibility.





Pursuant
to Medifast Inc.’s bylaws and governance guidelines, the rules of the NYSE, and
the Chairman of the Board, the Nominations Committee along with the consent of
the Board of Directors determines the best committee structure for Medifast. The
Board elects the Officers of the company.  Since 2007 Medifast, Inc.
has had a separate Chairman of the Board and Chief Executive Officer. The
Chairman position is elected every three years and the Chief Executive Officer
CFO, President and Chief Operating Officer are elected annually by the Board.
Bradley T. MacDonald, Executive Chairman of the Board has executive
responsibilities and is responsible for the Legal Affairs and Treasury functions
of the company, the banking relationships, community relations, M&A
oversight and Strategic Planning. The Board of Directors is confident that the
current leadership structure of the company based on past performance is in the
Company’s best interest of creating shareholder value and building the Medifast
business for the future.  The Chief Executive Officer, CFO, President,
Chief Operating Officer and the Chairman of the Board have an excellent working
relationship and understand the roles and responsibilities of each executive
position.. Michael S. McDevitt, the CEO/CFO has the primary operational and
financial responsibility for Medifast. Margaret Sheetz reporting to the CEO, has
the primary responsibility for the internal operations of Medifast Inc.. The
current leadership structure also provides significant benefits that come from
Mr. MacDonald’s long tenure as Chairman of the Board and his prior
experience as Chief Executive Officer of Medifast, Inc. and Co-Founder of Take
Shape for Life.


44





Certain
Relationships and Related Transactions





The Board
of Directors of the Company has established a policy and certain procedures that
must be followed prior to any transaction, arrangement or relationship or series
of similar transactions, arrangements or relationships, including any
indebtedness or guarantee of indebtedness, with a related party. Under this
policy, the Nominating and Corporate Governance Committee monitors and reviews
issues involving potential conflicts of interest involving officers and
directors of the Company, including reviewing all related party
transactions.





Director
Independence





The Board
consists of 14 members of which 11 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:  Harvey C. Barnum,
Barry B. Bondroff, Charles P. Connolly, Jason L. Groves, George J. Lavin, Jr.
Esq., Catherine T. Maguire, John P. McDaniel, Jeannette M. Mills, Jerry D.
Reece, and Donald F. Reilly.





Board
Meetings





For the
fiscal year ended December 31, 2009 (“Fiscal 2008”), the Board of Directors held
five 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’sPrinciples of
Corporate Governance, which is available on the Company’s websitewww.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.  Twelve directors attended the 2009 annual
shareholder meeting.





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 atwww.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.





Committees
of the Board





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


45





Audit
Committee





Our
audit committee consists of , Charles P. Connolly Chairperson , Barry B.
Bondroff,  George J. Lavin, Jr. Esq., and Jason L. Groves,
Esq.  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




Ÿ
            Serve
      as a communication report to link under company Whistlerblower
      Policy




Our Board
of Directors has adopted a written charter for the audit committee which is
available on the Company’s website atwww.choosemedifast.com by
following the links through “Investor Relations” to “Corporate
Governance.”  In fiscal 2009, the audit committee met five
times.





Nominating
and Corporate Governance Committee





The
nominating and corporate governance committee consists of Very Rev. Donald F.
Reilly, Chairperson , Sister Catherine T. Maguire, and Barry B. Bondroff, , all
of whom are independent as discussed above under “— Director Independence.” The
Nominating and Corporate Governance Committee identifies and recommends to the
Board of Directors qualified candidates for election as Directors, recommends
Director Committee assignments, and recommends actions necessary for the proper
governance of Medifast, Inc., and for the evaluation of the performance of the
Board of Directors and Chief Executive Officer. With input from the Executive
Chairman of the Board and Chief Executive Officer, the Nominating and Corporate
Governance Committee recommends certain executive officers for annual election.
The Nominating and Corporate Governance Committee reviews issues and
developments related to corporate governance practices and makes recommendations
to the Board of Directors on changes in structure, rule or practice necessary
for compliance and for good corporate governance. The Nominations committee has
been tasked to assist the Chairman in selecting the most qualified and
appropriate directors to serve on the company’s separate Board
committees.





Medifast,
Inc.’s Nominating and Corporate Governance Committee Charter provides that the
skills and characteristics required generally of Directors include diversity,
age, business background and experience, accomplishments, experiences in
Medifast, Inc.’s business and a willingness to make the requisite commitment of
time and effort. Accordingly, the Board of Directors has not set minimum
standards for Director candidates. Rather, it seeks highly qualified individuals
with diverse backgrounds, business and life experiences that will enable them to
constructively review and guide management of Medifast, Inc. Medifast, Inc. has
successfully obtained diverse highly qualified candidates for Directors without
utilizing a paid outside consultant. The Corporate Governance Committee
considers and evaluates potential Director candidates and makes its
recommendations to the full Board of Directors. Any shareholder may submit a
recommendation for nomination to the Board of Directors by sending a written
statement of the qualifications of the recommended individual to the Corporate
Secretary, Medifast, Inc., 11445 Cronhill Dr., Owings Mills,
MD  21117. The Nominating andCorporate Governance Committee will
utilize the same process for evaluating all nominees, regardless of whether the
nominee recommendation is submitted by a shareholder or some other
source.


46





If a
shareholder wishes to nominate a candidate for election to the Board of
Directors, in order for the nomination to be properly made the shareholder must
give written notice to the Corporate Secretary of Medifast, Inc.Notice must be
received at Medifast, Inc.’s principal executive offices at least 90 days
before the date that is one year after the prior year’s regular meeting. The
notice must set forth: (i) the name and address of the shareholder who
intends to make the nomination and of the nominee or nominees, (ii) a
representation that the shareholder is a holder of record of shares of Medifast,
Inc. entitled to vote at the meeting and that the shareholder intends to appear
in person or by proxy at the meeting to nominate the person or persons specified
in the notice, (iii) a description of all arrangements or understanding
between the shareholder and each nominee and any other person or persons (naming
such person or persons) pursuant to which the nomination or nominations are to
be made by the shareholder, (iv) such other information regarding each
nominee proposed by the shareholder as would have been required to be included
in a proxy statement filed pursuant to the proxy rules of the SEC and the
Company Bylaws  had each nominee been nominated, or intended to be
nominated, by the Board of Directors, and (v) the consent of each nominee
to serve as a Director of Medifast, Inc. if so elected.





Our
Board of Directors has adopted a written charter for the nominating and
corporate governance committee, which is available on the Company’s website
atwww.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 2009, the nominating and corporate
governance committee met four times.





Compensation
Committee





The
compensation committee currently consists of Jeannette M. Mills, Chairperson ,
John P. McDaniel and Jerry D. Reece, 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.




Ÿ
            Review
      the executive compensation philosophy of the Company; and assess any risks
      which may be reasonably deemed material to the Company; and recommend to
      the Board any changes deemed necessary to the Company executive
      compensation plan; or any sales channel  compensation
      plan.




Our
Board of Directors has adopted a written charter for the compensation committee
which is available on the Company’s website atwww.choosemedifast.com by
following the links through “Investor Relations” to “Corporate
Governance.”  In fiscal 2009, the compensation committee met four
times.





Executive
Committee





Messrs.
Bradley T. MacDonald, Chairperson ,  Michael C. MacDonald, Michael S.
McDevitt,  John P. McDaniel and Jerry D. Reece 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 two meetings
during fiscal 2009.


47





DIRECTOR
COMPENSATION





The
non-employee Directors of Medifast, Inc. receive an annual stock grant for their
services as director. In 2009, each director received 4,000 shares of restricted
stock, with the exception of John P. McDaniel and Catherine T. Maguire who
received a pro-rata amount of 3,500 shares for their service. In 2009, Directors
did not receive a meeting fee for attending either committee or Board of
Director meetings.





2009
Director Compensation Table





The
table below summarizes the compensation paid by the Company to non-employee
directors for the fiscal year ended December 31, 2009.





Name
                  
                  Fees
      Earned or
                    Paid in
      Cash
                    ($)
                  
                  
                  Stock
      Awards
                    ($)(1)
                  
                  
                  Total ($)Barry
      B. Bondroff
                  
                  $
                  -
                  
                  
                  $
                  39,195
                  
                  
                  $
                  39,195Charles
      P. Connolly
                  
                  
                  16,000
                  
                  
                  
                  44,565
                  
                  
                  
                  60,565George
      Lavin, Jr., Esq.
                  
                  
                  -
                  
                  
                  
                  44,565
                  
                  
                  
                  44,565Michael
      C. MacDonald
                  
                  
                  -
                  
                  
                  
                  49,935
                  
                  
                  
                  49,935Catherine
      T. Maguire
                  
                  
                  
                  
                  
                  
                  28,280
                  
                  
                  
                  28,280John
      P. McDaniel
                  
                  
                  
                  
                  
                  
                  28,280
                  
                  
                  
                  28,280Jeannette
      M. Mills
                  
                  
                  
                  
                  
                  
                  39,195
                  
                  
                  
                  39,195Rev.
      Donald F. Reilly, OSA
                  
                  
                  -
                  
                  
                  
                  49,935
                  
                  
                  
                  49,935




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





Additional
fees are paid to the Audit Committee Chairman.  In 2009, the Chairman
received an additional $16,000 in cash compensation.





(1)
            Amounts
      are calculated based on the aggregate grant date fair value of these
      rewards compute in accordance with ASC Topic 718 “Stock Compensation”
      which excludes the effect of estimated forfeitures.  The
      assumptions and methodologies used to calculate these amounts are
      discussed in Note 2 to our Consolidated Financial Statements in the 2009
      Annual Report to Stockholders filed on Form 10-K with the Securities and
      Exchange Commission.  Under generally accepted accounting
      principles, compensation expense with respect to stock awards and option
      awards granted to our employees is recognized over the vesting periods of
      the applicable rewards.


48





The table
below summarizes the equity based awards held by the Company’s non-employee
directors as of December 31, 2009.





Option Awards
                
                
                Stock AwardsName
                
                Number of
                  Securities
                  Underlying
                  Unexercised
                  Options (#)
                
                
                Number of
                  Securities
                  Underlying
                  Unexercised
                  Options (#)
                
                
                Option
                  Exercise
                
                
                Option
                  Expiration
                
                
                Number
                  Shares or
                  Units of
                  StockThat
                  HaveNot
                  Vested
                
                
                MarketValue
                  ofShares or
                  Units of
                  Stock that
                  have not
                  VestedExercisable
                
                
                Un-Exercisable
                
                
                Price ($)
                
                
                Date
                
                
                Vested (#)
                
                
                ($)(1)Barry
      B. Bondroff
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                5,000
                
                
                
                152,900Charles
      P. Connolly
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                8,000
                
                
                
                244,640George
      Lavin, Jr., Esq.
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                8,000
                
                
                
                244,640Michael
      C. MacDonald
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                11,000
                
                
                
                336,380Catherine
      T. Maguire
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,500
                
                
                
                76,450John
      P. McDaniel
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,500
                
                
                
                76,450Jeannette
      M. Mills
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                5,000
                
                
                
                152,900Rev.
      Donald F. Reilly, OSA
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                11,000
                
                
                
                336,380





(1)
            The
      market value of shares of stock that have not vested is based on the
      closing price of our common stock on December 31, 2009, or $30.58 per
      share.





The
Medifast Board of Directors on July 24, 2008 approved restricted common stock
grants to Board members with a 5 year vesting period, beginning on the grant
date.  The grant was to tenured Board members that successfully
implemented the Senior Management Succession Plan over the last four years
through advice, counsel, and mentorship.  A total of 55,000 shares of
restricted common stock were granted to tenured Directors.





The
Medifast Board of Directors on November 24, 2008 approved restricted common
stock grants to key executives and Board members as a 2008 performance bonus for
exceeding internal sales and profit forecasts.   Non-management
Board members were each granted 5,000 shares of restricted common stock vesting
over two years, beginning on January 1, 2009.





The
Medifast Board of Directors on May 7, 2009 approved restricted common stock
grants to key executives and Board members with a 5 year vesting period,
beginning on the grant date.  Key executives were granted 460,000
shares of restricted common stock to retain their services over the next five
years and recognize continued sales and profit growth in accordance with targets
set by the Board of Directors.  The Board of Directors received a
total of 71,000 shares with a two year vesting period, beginning on the grant
date for their active participation in the strategic planning process and
guidance as it relates to Medifast’s strong performance and growth.





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 2009, 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 2009.


49





ITEM
11. EXECUTIVE COMPENSATION.





COMPENSATION
DISCUSSION AND ANALYSIS





Purpose
and Philosophy





The
Compensation Committee of the Board of Directors is responsible for developing
and recommending to the Board of Directors Medifast, Inc.’s executive
compensation program for the five named executive officers: (referred to in this
CD&A as the “executive officers”). Each of these executive officers is
included in the Summary Compensation Table and the related tables beginning on
page 17.





The
Compensation Committee is responsible for creation and periodic review of the
overall executive compensation philosophy of Medifast, Inc. ,
related  analysis and assessment  of  any material
risk to the Company related thereto,  and it outlines the components
of executive compensation for the executive officers. Medifast, Inc. believes
that strong, effective leadership is the cornerstone of its continued growth and
success. To be successful, Medifast, Inc. must be able to attract, retain, and
motivate highly qualified executive officers with the competencies needed to
excel in a rapidly changing marketplace and to understand issues relating to a
diverse group of companies in several different industries.





Executive
compensation at Medifast, Inc. is focused on executive performance keyed to
results. Medifast, Inc. provides fair and equitable compensation to its
executive officers by combining conservative base pay, annual cash incentive,
stock-based long-term incentive, and competitive health, dental and other
benefits. The Executive Cash Bonus Plan is designed to reward executives for
Medifast, Inc.’s current year financial success and recognize the
responsibilities of the executive officers for meeting Medifast, Inc.’s
financial performance goals. Stock-based incentives focus on long-term
performance by aligning the executive officers’ long-term financial interests
with Medifast, Inc.’s shareholders’ interest. Health, dental, vacation, and
other benefits are designed to be competitive with companies with whom Medifast,
Inc. competes for executive talent.




Total direct compensation which
includes base pay, annual cash incentive and stock-based long-term incentive is
measured against organizations the general industry. In general, there are
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 our competitors are substantially larger than we are,
and have considerably greater financial resources than we have. Our ability to
remain competitive depends, in significant part, on our success in recruiting
and retaining executive leadership with an attractive compensation package..
Medifast, Inc. targets total direct compensation for each executive officer near
median for organizations in the general industry. The mix of pay (base pay,
annual cash incentive and long-term incentive) is designed to reflect a strong
bias towards pay for performance by placing a majority of target compensation at
risk. The only element of total direct compensation that is not performance
based is base pay. Both annual cash incentive and long-term incentive are
performance based.




Elements
of Executive Compensation





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 within the general health and wellness diet
industry.  Medifast’s identified peers in the general health and
wellness diet industry are NutriSystem Inc., eDiets.com, Herbalife Ltd., USANA
Health Sciences, Nu Skin Enterprises, NBTY Inc., and Weight Watchers
International Inc. It is not our policy to pay our executive officers at the
highest base salary level. Instead, we establish executive base salaries below
the midpoint level relative to our peers. We believe this policy sets a prudent
and fiscally responsible tone for the Company’s overall base salary compensation
programs. Please refer to the discussion below under “Peer Group” for a more
detailed discussion of our use of peer group and general industry revenue
data.




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, profitability, and
cash flow. In consultation with the Chief Executive Officer, the Compensation
Committee evaluates, adjusts and approves the amount and allocation of the bonus
pool to each named executive officer. 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.


50





The financial targets for annual cash
incentive are premised upon the executive officers delivering on their financial
performance projections to Medifast, Inc. as reflected in part, in the annual
budget approved by the Board of Directors. In 2009 targeted annual incentive
compensation was tied to the annual budget approved by the Board of Directors.
The Compensation Committee set the target for pre-tax profit as a percentage of
sales at 10%, the target for corporate revenue at $135 million, and net increase
in cash and cash equivalents at $6 million. The target performance level is set
to promote solid performance. The financial targets for annual cash incentive
are divided into three components as follows:




1.
            Pre-Tax profit as a percentage
      of sales. Each executive officer receives 33.33% of the total
      target payout if Medifast, Inc. achieves the targeted pre-tax profit as a
      % of sales. Each officer receives a portion of the total target payout if
      Medifast, Inc. achieves the targeted performance level, and additional
      increments for performance above the target. For pre-tax earnings as a
      percentage of sales the target was 10%.  Medifast, Inc. was well
      above the threshold performance level for pre-tax earnings as a percentage
      of sales in 2009 at 11.7% compared to the target of
  10%.




2.
            Corporate Revenue. Each
      officer receives 33.33% of the total target payout if Medifast, Inc.
      achieves the targeted sales amount for the full year.  Each
      officer receives a portion of the total target payout if Medifast, Inc.
      achieves the targeted performance level, and additional increments for
      performance above the target. For corporate sales the target was $135
      million.   Medifast, Inc. was well above the targeted
      performance level for sales in 2009 finishing at $165.6 million, or $30.6
      million above the target set by the
Board.




3.
            Net increase in cash and cash
      equivalents. Each officer receives 33.33% of the total target
      payout if Medifast, Inc. achieves the targeted net cash increase for the
      full year.  Each officer receives a portion of the total target
      payout if Medifast, Inc. achieves the targeted performance level, and
      additional increments for performance above the target The net increase in
      cash and cash equivalents target was $6 million. Medifast, Inc. exceeded
      the maximum performance level for the net increase in cash and cash
      equivalents in 2009 by generating a $10.9 million net increase in cash and
      cash equivalents.




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 as the grants
vest over 5-6 years, (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 restricted stock awards
award the continuity of service of the executive officers since the restricted
stock awards vest over a period of 5-6 years and unvested, restricted stock
is forfeited upon voluntary termination. In addition, the value of shares
awarded increase or decrease with the value provided to
shareholders.





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.





Peer
Group





We
believe that it is appropriate to offer industry competitive cash and equity
compensation to our senior executives in support of our objective to assemble
and maintain a high performing management team. Our current level of
compensation for our executive officers was compared to compensation paid by an
industry peer group approved by the Committee. The criteria used to identify the
peer group were: (1) industry — we compete for talent with other healthy living
and wellness companies and general industry companies of similar and larger
size; and (2) financial scope — our management talent should be compensated
similar to that of companies of a similar and larger size in terms of revenues.
For 2009, the peer group was comprised of seven corporations identified under
Base Salary above. The peer group revenue range is from $20 million to $2.6
billion with a median revenue of $1.2 billion for 2009.  The peer group
revenue percent change ranged from a decline of 24.3% to an increase of 18.5%,
with a median revenue decline of 1.5% in 2009.


51





Report
of the Compensation Committee





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 for the year-ended December 31, 2009. Based upon  the
Compensation Committee  risk assessment , the Board does not believe
the Executive Compensation Plan or any distribution channel compensation
Plan   presents a material risk to the Company as structured
..





COMPENSATION
COMMITTEE OF THE BOARD OF DIRECTORS





Jeannette
      M. Mills, ChairmanJohn
      P. McDanielJerry
      D. Reece





2009
Summary Compensation Table





The
following table sets forth the annual and long-term compensation for the last
three fiscal years 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
                                            
                                            
                                            AllOther
                                            
                                            
                                            TotalName and Pricipal Position
                                            
                                            Year
                                            
                                            ($)
                                            
                                            
                                            ($)(1)
                                            
                                            
                                            ($)(1)
                                            
                                            
                                            ($)(2)
                                            
                                            
                                            ($)
                                            
                                            
                                            ($)(3)
                                            
                                            
                                            ($)Bradley
      T. MacDonald
                                            
                                            2009
                                            
                                            $
                                            225,000
                                            
                                            
                                            $
                                            331,000
                                            
                                            
                                            
                                            -
                                            
                                            
                                            $
                                            235,000
                                            
                                            
                                            
                                            
                                            
                                            $
                                            3,600
                                            
                                            
                                            $
                                            794,600Chairman
      of the Board
                                            
                                            2008
                                            
                                            
                                            225,000
                                            
                                            
                                            
                                            107,000
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            100,000
                                            
                                            
                                            
                                            6,700
                                            
                                            
                                            
                                            438,7002007
                                            
                                            
                                            225,000
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            100,000
                                            
                                            
                                            
                                            6,600
                                            
                                            
                                            
                                            331,600Michael
      S. McDevitt
                                            
                                            2009
                                            
                                            
                                            185,000
                                            
                                            
                                            
                                            639,000
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            410,000
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            5,800
                                            
                                            
                                            
                                            1,239,800Chief
      Executive and CFO
                                            
                                            2008
                                            
                                            
                                            135,000
                                            
                                            
                                            
                                            450,000
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            75,000
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            2,700
                                            
                                            
                                            
                                            662,7002007
                                            
                                            
                                            135,000
                                            
                                            
                                            
                                            289,000
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            75,000
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            2,500
                                            
                                            
                                            
                                            501,500Leo
      V. Williams
                                            
                                            2009
                                            
                                            
                                            135,000
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            85,000
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            4,600
                                            
                                            
                                            
                                            224,600Executive
      Vice President
                                            
                                            2008
                                            
                                            
                                            132,500
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            25,000
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            2,900
                                            
                                            
                                            
                                            160,4002007
                                            
                                            
                                            132,500
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            25,000
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            1,900
                                            
                                            
                                            
                                            159,400Margaret
      Sheetz
                                            
                                            2009
                                            
                                            
                                            155,000
                                            
                                            
                                            
                                            531,000
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            350,000
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            4,900
                                            
                                            
                                            
                                            1,040,900Chief
      Operating Officer, President
                                            
                                            2008
                                            
                                            
                                            100,000
                                            
                                            
                                            
                                            372,000
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            50,000
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            3,000
                                            
                                            
                                            
                                            525,0002007
                                            
                                            
                                            100,000
                                            
                                            
                                            
                                            237,000
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            50,000
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            2,900
                                            
                                            
                                            
                                            389,900Brendan
      N. Connors
                                            
                                            2009
                                            
                                            
                                            125,000
                                            
                                            
                                            
                                            167,000
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            117,000
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            3,900
                                            
                                            
                                            
                                            412,900VP
      of Finance
                                            
                                            2008
                                            
                                            
                                            99,000
                                            
                                            
                                            
                                            101,000
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            20,000
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            3,000
                                            
                                            
                                            
                                            223,0002007
                                            
                                            
                                            99,000
                                            
                                            
                                            
                                            47,000
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            20,000
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            2,900
                                            
                                            
                                            
                                            168,900




52





(1)
            Amounts shown represent the
      aggregate grant date fair value of the stock awards in the year indicated.
      For a discussion of the assumptions made in the valuation reflected in
      these columns, see Note 2 of Notes to Consolidated Financial Statements in
      our Annual Report on Form 10-K for the year ended December 31, 2009.
      The actual value that may be realized from an award is contingent upon the
      satisfaction of the conditions to vesting in that award on the date the
      award is vested. Thus, there is no assurance that the value, if any,
      eventually realized will correspond to the amount
      shown.


(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.





2009
Grants of Plan-Based Awards





The
Medifast Board of Directors on May 7, 2009 approved restricted common stock
grants to key executives and Board members with a 5 year vesting period,
beginning on the grant date.  Key executives were granted 460,000
shares of restricted common stock to retain their services over the next five
years and recognize continued sales and profit growth in accordance with targets
set by the Board of Directors.  The Board of Directors received a
total of 71,000 shares with a two year vesting period, beginning on the grant
date for their active participation in the strategic planning process and
guidance as it relates to Medifast’s strong performance and growth.





The
Medifast Board of Directors on November 24, 2008 approved restricted common
stock grants to key executives as a 2008 performance bonus for exceeding
internal sales and profit forecasts.  Key executives were granted
150,000 shares of restricted common stock over a five year vesting period,
beginning on January 1, 2009.





The
Medifast Board of Directors on July 24, 2008 approved restricted common stock
grants to the Named Executives with a 5 year vesting period, beginning on the
grant date.  Named Executive Officers were granted 425,000 shares of
restricted common stock to retain their services over the next five years,
reward their efforts in the participation of the successful succession and
transition of the company operations to the new senior management team, and
incentivize continued sales and profit growth in accordance with targets set by
the Board of Directors.





On
January 25, 2008, the Board of Directors modified Bradley T. MacDonald’s
compensation package for his role in the succession plan and business
development initiatives as outlined in the December 31, 2006
10-K.  The Board cancelled the 100,000 options granted to Mr.
MacDonald on February 8, 2006 and replaced them with a restricted stock grant of
42,000 shares.  The restricted shares will vest over a period of 3
years beginning on January 25, 2009.





Outstanding
Equity Awards at Fiscal Year-End Table





Option Awards
                                  
                                  Stock AwardsName
                                  
                                  Number of
                                    Securities
                                    Underlying
                                    Unexercised
                                    Options (#)
                                  
                                  
                                  Number of
                                    Securities
                                    Underlying
                                    Unexercised
                                    Options (#)
                                  
                                  
                                  Option
                                    Exercise
                                  
                                  Option
                                    Expiration
                                  
                                  NumberShares
                                    orUnits of
                                    Stock That
                                    Have Not
                                    Vested
                                  
                                  
                                  MarketValue
                                    ofShares or
                                    Units ofStock
                                    thathave not
                                    Vested
                                  
                                  
                                  Equityincentive
                                    Plan Awards:
                                    Number of
                                    Unearned
                                    Shares, Unitsor
                                    Otherrights
                                  
                                  
                                  Equity Incentive
                                    Plan Awards:
                                    Market orPayout
                                    Value ofUnearned
                                    Shares, Units or
                                    Other rightsThat
                                    Have NotVestedExercisable
                                  
                                  
                                  Un-Exercisable
                                  
                                  
                                  Price
      ($)
                                  
                                  Date
                                  
                                  Vested
      (#)(1)
                                  
                                  
                                  ($)(2)
                                  
                                  
                                  (#)
                                  
                                  
                                  ($)Bradley
      T. MacDonaldChairman
      of the Board
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  
                                  204,000
                                  
                                  
                                  
                                  6,238,320
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Michael
      S. McDevittChief
      Executive Officer, CFO
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  
                                  303,667
                                  
                                  
                                  
                                  9,286,137
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Leo
      V. WilliamsExecutive
      Vice President
                                  
                                  
                                  10,000
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  3.83
                                  
                                  10/28/2010
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Margaret  SheetzChief
      Operating Officer, President
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  
                                  252,000
                                  
                                  
                                  
                                  7,706,160
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Brendan
      N. ConnorsVP
      of Finance
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  91,000
                                  
                                  
                                  
                                  2,782,780
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -




53





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 31, 2009, or $30.58 per
      share.





2009
Option Exercises and Stock Vested Table





Thefollowing table sets
forth information regarding option exercises and stock vesting for the Named
Executive Officers during 2009 and the resulting value
realized.


54




Option Awards
                                                      
                                                      
                                                      Stock AwardsNumber of
                                                        Shares Acquired
                                                        on Exercise
                                                      
                                                      
                                                      Value Realized
                                                        on Exercise
                                                      
                                                      
                                                      Number of
                                                        Shares
                                                        Acquired on
                                                        Vesting
                                                      
                                                      
                                                      Value
                                                        Realized on
                                                        VestingName
                                                      
                                                      (#)
                                                      
                                                      
                                                      ($)(1)
                                                      
                                                      
                                                      (#)
                                                      
                                                      
                                                      ($)(2)Bradley
      T. MacDonald
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -Executive
      Chairman of the Board
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      20,000
                                                      
                                                      
                                                      
                                                      285,00014,000
                                                      
                                                      
                                                      
                                                      102,34020,000
                                                      
                                                      
                                                      
                                                      131,0009,000
                                                      
                                                      
                                                      
                                                      53,280Michael
      S. McDevitt
                                                      
                                                      
                                                      84,895
                                                      
                                                      
                                                      
                                                      1,369,356
                                                      
                                                      
                                                      
                                                      15,000
                                                      
                                                      
                                                      
                                                      88,800Chief
      Executive Officer, CFO
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      33,333
                                                      
                                                      
                                                      
                                                      243,66430,000
                                                      
                                                      
                                                      
                                                      427,50024,000
                                                      
                                                      
                                                      
                                                      157,2009,000
                                                      
                                                      
                                                      
                                                      53,280Leo
      V. WilliamsExecutive
      Vice President
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -Margaret
      Sheetz
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      15,000
                                                      
                                                      
                                                      
                                                      88,800Chief
      Operating Officer, President
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      25,000
                                                      
                                                      
                                                      
                                                      182,75025,000
                                                      
                                                      
                                                      
                                                      356,25020,000
                                                      
                                                      
                                                      
                                                      131,0008,000
                                                      
                                                      
                                                      
                                                      47,360Brendan
      N. Connors
                                                      
                                                      
                                                      19,805
                                                      
                                                      
                                                      
                                                      319,455
                                                      
                                                      
                                                      
                                                      3,000
                                                      
                                                      
                                                      
                                                      17,760VP
      of Finance
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      5,000
                                                      
                                                      
                                                      
                                                      36,55010,000
                                                      
                                                      
                                                      
                                                      142,5008,000
                                                      
                                                      
                                                      
                                                      52,4004,000
                                                      
                                                      
                                                      
                                                      23,680





(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.


55




Equity
Compensation Plan Information at Fiscal Year Ended December 31,
2009




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
                
                10,000
                (1)
                $
                3.83
                
                1,442,500Equity
      compensation plans not approved by security holders
                
                -
                
                
                -
                
                -





(1)
            Consists
      of 10,000 shares of common stock issuable upon the exercise of outstanding
      options





2009
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, 2009.





Executive
                                      Contributionsin
                                      Last FY
                                    
                                    
                                    Company
                                      Contributions
                                      in Last FY
                                    
                                    
                                    Aggregate
                                      Earnings inLast
                                      FY
                                    
                                    
                                    Aggregate
                                      Withdrawals/
                                      Distributions
                                    
                                    
                                    Aggregate
                                      Balance atLast
                                      FYE($)
                                    
                                    
                                    ($)(1)
                                    
                                    
                                    ($)
                                    
                                    
                                    ($)
                                    
                                    
                                    ($)Bradley
      T. MacDonald
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    247,000
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    1,040,000Chairman
      of the BoardMichael
      S. McDevitt
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Chief
      Executive Officer, CFOLeo
      V. Williams
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Executive
      Vice PresidentMargaret
      Sheetz
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Chief
      Operating Officer, PresidentBrendan
      N. Connors
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -VP
      of Finance





(1)
            All
      amounts are reported in compensation on the “2009 Summary Compensation
      Table”


56





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 2009,
there were no contributions made by the Company to Bradley T. MacDonald’s
deferred compensation plan.





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 On January 25, 2008, the Board of
Directors modified Bradley T. MacDonald’s compensation package for his role in
the succession plan and business development initiatives as outlined in the
December 31, 2006 10-K.  The Board cancelled the 100,000 options
granted to Mr. MacDonald on February 8, 2006 and replaced them with a restricted
stock grant of 42,000 shares.  The restricted shares will vest over a
period of 3 years beginning on January 25, 2009. 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 for a period of one
year.





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 for a period of one year.





Margaret
Sheetz.Ms. Sheetz entered into a six year employment
agreement effective February 8, 2006.  Ms. Sheetz 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. Sheetz’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 for a period of one year.





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 for a period of one year.


57





Potential
Payments upon Termination or Change in Control





As of
December 31, 2009, 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 than 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 on December 31, 2009 they
would have received the following amounts:





Severance ($) (1)Bradley
      T. MacDonald
                  
                  $
                  337,500Michael
      S. McDevitt
                  
                  $
                  277,500Margaret
      Sheetz
                  
                  $
                  232,500Brendan
      N. Connors
                  
                  $
                  187,500





(1) Based
on 2009 salary





If there
were a change in control, which is defined as a sale of the majority of the
assets of the company or a change of control of the Board of Directors as a
result of a third party shareholder acquiring or holding over 10% of the common
stock and attempting to nominate a majority of the Board of Directors in favor
of his/her shareholder block, the executives would have received the following
amounts as of December 31, 2009:





Severance
                    ($)(1)
                  
                  
                  Accelerated
                    Vesting of
                    StockAwards
                    ($)(2)
                  
                  
                  TotalBradley
      T. MacDonald
                  
                  $
                  337,500
                  
                  
                  $
                  6,238,320
                  
                  
                  $
                  6,575,820Michael
      S. McDevitt
                  
                  
                  277,500
                  
                  
                  
                  9,286,137
                  
                  
                  
                  9,563,637Margaret
      Sheetz
                  
                  
                  232,500
                  
                  
                  
                  7,606,160
                  
                  
                  
                  7,838,660Brendan
      N. Connors
                  
                  
                  187,500
                  
                  
                  
                  2,782,780
                  
                  
                  
                  2,970,280





(1)
            Based
      on 2009 salary.


(2)
            Accelerated
      vesting of stock awards were based on NYSE close price of the Common
      Shares on December 31, 2009 of $30.58 per
share.





Compensation
Polices and Risk





Medifast,
Inc. does not believe that its compensation policies and practices create risks
that are reasonably likely to have a material adverse effect on Medifast,
Inc.


58





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




The
following table shows as of December 31, 2009, 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 StockFMR,
      LLC
                            82
      Devonshire Street
                            Boston,
      MA  02109
                          
                          
                          1,185,000
                          
                          
                          
                          7.7
                          %Wellington
      Management Company, LLP
                            75
      State Street
                            Boston,
      MA  02109
                          
                          
                          835,832
                          
                          
                          
                          5.42
                          %




59


The
following table shows as of March 26, 2010 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 Executive Officers
and (iii) our directors, nominees for director and executive officers as a
group.





Name of Beneficial Owner
                    
                    Shares Beneficially
                      Owned (1)(2)
                    
                    
                    Shares
                      Acquirable
                      Within 60 days
                    
                    
                    Percent of
                      Outstanding
                      Common Stock(%)Bradley
      T. MacDonald (3)
                    
                    
                    797,050
                    
                    
                    
                    -
                    
                    
                    
                    5.18
                    %Michael
      S. McDevitt
                    
                    
                    420,012
                    
                    
                    
                    -
                    
                    
                    
                    2.73
                    %Margaret
      Sheetz
                    
                    
                    293,692
                    
                    
                    
                    -
                    
                    
                    
                    1.91
                    %Brendan
      N. Connors, CPA
                    
                    
                    108,484
                    
                    
                    
                    -
                    
                    
                    
                    *Donald
      F. Reilly
                    
                    
                    81,483
                    
                    
                    
                    -
                    
                    
                    
                    *Michael
      C. MacDonald
                    
                    
                    69,197
                    
                    
                    
                    -
                    
                    
                    
                    *Charles
      P. Connolly
                    
                    
                    37,575
                    
                    
                    
                    -
                    
                    
                    
                    *John
      P. McDaniel
                    
                    
                    24,500
                    
                    
                    
                    -
                    
                    
                    
                    *Catherine
      T. Maguire
                    
                    
                    8,500
                    
                    
                    
                    -
                    
                    
                    
                    *Leo
      V. Williams
                    
                    
                    16,000
                    
                    
                    
                    -
                    
                    
                    
                    *George
      J. Lavin, Jr., Esq.
                    
                    
                    24,200
                    
                    
                    
                    -
                    
                    
                    
                    *Barry
      B. Bondroff, CPA
                    
                    
                    17,000
                    
                    
                    
                    -
                    
                    
                    
                    *Jeannette
      M. Mills
                    
                    
                    12,500
                    
                    
                    
                    -
                    
                    
                    
                    *All
      directors, nominees for directors and executive officers as a group (13
      persons)
                    
                    
                    1,910,193
                    
                    
                    
                    -
                    
                    
                    
                    12.40
                    %





*
            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, March 30, 2010, 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)
            Unless
      otherwise noted, reflects the number of shares that could be purchased by
      exercise of options available at March 26, 2010, or within 60 days
      thereafter under our stock option
plans.


(3)
            The
      shares set forth as beneficially owned by Mr. Bradley T. MacDonald
      include 133,402 shares owned by his wife Shirley MacDonald, and 85,167
      shares owned by the MacDonald Family Trust.  His daughter,
      Margaret Sheetz, beneficially owns 293,692 shares which added to Bradley
      T. MacDonald’s 797,050 beneficially owned shares results in 1,090,742
      shares owned by the MacDonald
family.





ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS





As of December 31, 2009, there were no
related party transactions.


60


ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES





Fees
to Independent Registered Public Accountants for Fiscal 2009 and
2008




The
following services were provided by Friedman, LLP and Bagell, Josephs, Levine
& Co during fiscal 2009 and 2008:





2009 (3)
                        
                        
                        2008Audit
      Fees(1)
                        
                        $
                        184,000
                        
                        
                        $
                        154,000Tax
      fees(2)
                        
                        
                        43,000
                        
                        
                        
                        29,000All
      other fees
                        
                        
                        -
                        
                        
                        
                        -Total
                        
                        $
                        227,000
                        
                        
                        $
                        183,000




(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


(3)
            On
      January 1, 2010 Bagell, Josephs, Levine, and Co. merged with Friedman,
      LLP.  Friedman, LLP performed the audit for the year-ended
      December 31, 2009.


61


PART
IV





ITEM
15. EXHIBITS AND FINACIAL STATEMENT SCHEDULES





(a)
            1.
            Financial
      Statements





See Index
to the Consolidated Financial Statements on page 64 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 64 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.


62


MEDIFAST,
INC. AND SUBSIDIARIES





INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS





Reports
      of Independent Registered Public Accounting Firms
                64-65Consolidated
      Balance Sheets
                66Consolidated
      Statements of Income
                67Consolidated
      Statements of Stockholders’ Equity
                68Consolidated
      Statements of Cash Flows
                69Notes
      to Consolidated Financial Statements
                70




63


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





The Board
of Directors and Stockholders


Medifast,
Inc.


Owing
Mills, Maryland





We have
audited the accompanying consolidated balance sheet of Medifast, Inc. and
subsidiaries (the “Company”) as of December 31, 2009 and the related
consolidated statements of operations, stockholders’ equity and other
comprehensive income, and cash flows for the year then ended.  These
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on the financial statements based on our
audit.   The consolidated financial statements of Medifast, Inc.
and subsidiaries as of December 31, 2008 and for the each of the two years in
the period ended December 31, 2008 were audited by other auditors who have
ceased operations.  Those auditors expressed an unqualified opinion on
those financial statements in their report dated March 6, 2009.





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 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, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
financial statements and schedule. We believe that our audit provides a
reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Medifast, Inc. and
subsidiaries at December 31, 2009, and the results of its operations and
its cash flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.





As
discussed above, the consolidated financial statements of Medifast, Inc and
subsidiaries were audited by other auditors who have ceased
operations.  As discussed in Note 17, these financial statements have
been restated.  We audited the adjustments described in Note 17 that
were applied to restate the December 31, 2008 and 2007 consolidated financial
statements.  In our opinion, such adjustments are appropriate and have
been properly applied.  However, we were not engaged to audit, review,
or apply any procedures to the 2008 and 2007 consolidated financial statements
of the Company other than with respect to such adjustments and accordingly, we
do not express an opinion or any other form of assurance on the 2008 and 2007
consolidated financial statements taken as a whole.





We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Medifast, Inc. and subsidiaries internal
control over financial reporting as of December 31, 2009, based on criteria
established in Internal Control — Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO) and our
report dated March 29 , 2010 expressed an adverse opinion on the
effectiveness of the Company’s internal control over financial
reporting.





/s/
Friedman LLP


Marlton,
New Jersey


March 29,
2010


64


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To the
Board of Directors and




Stockholders
of Medifast, Inc.




Owing
Mills, Maryland 21117





We have
audited before the effects of the adjustment for the correction for the error
described in Note 17 the accompanying consolidated balance sheet of Medifast,
Inc. as of December 31, 2008, and the related consolidated statements of income,
changes in stockholders’ equity and accumulated other comprehensive income, and
cash flows for each of the years in the two-year period ended December 31,
2008.  Medifast, Inc.’s management is responsible for these financial
statements.  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.  The
company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting.  Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the company’s
internal control over financial reporting.  Accordingly, we express no
such opinion.  An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
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, except for the error described in Note 17, the consolidated financial
statements referred to above present fairly, in all material respects, the
financial position of Medifast, Inc. as of December 31, 2008, and the results of
its operations and its cash flows for each of the years in the two-year period
ended December 31, 2008 in conformity with accounting principles generally
accepted in the United States of America.





We were
not engaged to audit, review, or apply any procedures to the adjustments for the
correction of the error described in Note 17 and, accordingly, we do not express
an opinion or any other form of assurance about whether such adjustments are
appropriate and have been properly applied.  Those adjustments were
audited by Friedman, LLP.




Bagell,
Josephs, Levine & Company, L.L.C.




Marlton,
NJ 08053




March 6,
2009


65


MEDIFAST,
INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


As
of December 31, 2009 and 2008





(Restated)2009
                    
                    
                    2008ASSETSCurrent
      assets:Cash
      and cash equivalents
                    
                    $
                    12,708,000
                    
                    
                    $
                    1,841,000Accounts
      receivable-net of allowance for sales returns and doubtful accountsof $100,000
                    
                    
                    676,000
                    
                    
                    
                    448,000Inventory
                    
                    
                    11,232,000
                    
                    
                    
                    13,856,000Investment
      securities
                    
                    
                    3,594,000
                    
                    
                    
                    1,099,000Deferred
      compensation
                    
                    
                    1,040,000
                    
                    
                    
                    792,000Prepaid
      expenses and other current assets
                    
                    
                    5,334,000
                    
                    
                    
                    3,165,000Note
      receivable - current
                    
                    
                    46,000
                    
                    
                    
                    180,000Current
      portion of deferred tax asset
                    
                    
                    100,000
                    
                    
                    
                    100,000Total
      current assets
                    
                    
                    34,730,000
                    
                    
                    
                    21,481,000Property,
      plant and equipment - net
                    
                    
                    23,237,000
                    
                    
                    
                    21,709,000Trademarks
      and intangibles - net
                    
                    
                    4,104,000
                    
                    
                    
                    5,547,000Deferred
      tax asset, net of current portion
                    
                    
                    193,000
                    
                    
                    
                    150,000Note
      receivable, net of current assets
                    
                    
                    112,000
                    
                    
                    
                    1,080,000Other
      assets
                    
                    
                    379,000
                    
                    
                    
                    350,000TOTAL
      ASSETS
                    
                    $
                    62,755,000
                    
                    
                    $
                    50,317,000LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable and accrued expenses
                    
                    
                    4,966,000
                    
                    
                    
                    5,130,000Income
      taxes payable
                    
                    
                    22,000
                    
                    
                    
                    102,000Line
      of credit
                    
                    
                    -
                    
                    
                    
                    3,164,000Deferred
      compensation payable
                    
                    
                    399,000
                    
                    
                    
                    261,000Current
      maturities of long-term debt
                    
                    
                    796,000
                    
                    
                    
                    257,000Total
      current liabilities
                    
                    
                    6,183,000
                    
                    
                    
                    8,914,000Other
      liabilitiesLong-term
      debt, net of current portion
                    
                    
                    5,444,000
                    
                    
                    
                    4,313,000Deferred
      tax liability- non current
                    
                    
                    1,553,000
                    
                    
                    
                    1,869,000Total
      liabilities
                    
                    
                    13,180,000
                    
                    
                    
                    15,096,000Stockholders'
      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;15,438,941
      issued and 15,031,103 outstanding and 14,585,960 issued and 14,313,768
      shares outstanding
                    
                    
                    16,000
                    
                    
                    
                    15,000Additional
      paid-in capital
                    
                    
                    28,456,000
                    
                    
                    
                    25,250,000Accumulated
      other comprehensive income (loss)
                    
                    
                    159,000
                    
                    
                    
                    (389,000
                    )Retained
      earnings
                    
                    
                    24,264,000
                    
                    
                    
                    12,301,000Less:
      cost of 367,838 and 272,192 shares of common stock in
    treasury
                    
                    
                    (3,320,000
                    )
                    
                    
                    (1,956,000
                    )Total
      stockholders' equity
                    
                    
                    49,575,000
                    
                    
                    
                    35,221,000TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                    
                    $
                    62,755,000
                    
                    
                    $
                    50,317,000





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


66


MEDIFAST,
INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF INCOME


Years
Ended December 31,


(000's)





(Restated)
                
                
                (Restated)2009
                
                
                2008
                
                
                2007Revenue
                
                $
                165,618
                
                
                $
                105,445
                
                
                $
                83,779Cost
      of sales
                
                
                (40,293
                )
                
                
                (25,332
                )
                
                
                (21,464
                )Gross
      profit
                
                
                125,325
                
                
                
                80,113
                
                
                
                62,315Selling,
      general, and administration
                
                
                (105,959
                )
                
                
                (71,914
                )
                
                
                (56,600
                )Income
      from operations
                
                
                19,366
                
                
                
                8,199
                
                
                
                5,715Other
      income (expense):Interest
      expense
                
                
                (145
                )
                
                
                (366
                )
                
                
                (387
                )Interest
      income
                
                
                155
                
                
                
                149
                
                
                
                105Other
      income (expense)
                
                
                (83
                )
                
                
                (132
                )
                
                
                110(73
                )
                
                
                (349
                )
                
                
                (172
                )Income
      before provision for income taxes
                
                
                19,293
                
                
                
                7,850
                
                
                
                5,543Provision
      for income taxes
                
                
                (7,330
                )
                
                
                (3,016
                )
                
                
                (2,117
                )Net
      income attributable to common shareholders
                
                $
                11,963
                
                
                $
                4,834
                
                
                $
                3,426Basic
      earnings per share
                
                $
                0.89
                
                
                $
                0.37
                
                
                $
                0.26Diluted
      earnings per share
                
                $
                0.81
                
                
                $
                0.34
                
                
                $
                0.25Weighted
      average shares outstanding -Basic
                
                
                13,515,318
                
                
                
                13,126,534
                
                
                
                12,960,930Diluted
                
                
                14,736,639
                
                
                
                14,329,525
                
                
                
                13,644,149





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


67


MEDIFAST,
INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENT  OF CHANGES IN STOCKHOLDERS' EQUITY AND ACCUMULATED OTHER
COMPREHENSIVE INCOME


Years
Ended December 31, 2009, 2008 (As restated), and 2007 (As restated)





Par Value
                  
                  
                  Additional
                  
                  
                  
                  
                  
                  AccumulatedNumber
                  
                  
                  $0.001
                  
                  
                  Paid-In
                  
                  
                  Retained
                  
                  
                  other comp
                  
                  
                  Treasuryof Shares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Earnings
                  
                  
                  income/(loss)
                  
                  
                  Stock
                  
                  
                  TotalBalance
      at December 31, 2006, as previously reported
                  
                  
                  13,631,898
                  
                  
                  $
                  14,000
                  
                  
                  $
                  23,273,000
                  
                  
                  $
                  5,981,000
                  
                  
                  $
                  334,000
                  
                  
                  $
                  (1,686,000
                  )
                  
                  $
                  27,916,000Adjustments
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (1,941,000
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (1,941,000
                  )Balance,
      December 31, 2006, as restated
                  
                  
                  13,631,898
                  
                  
                  $
                  14,000
                  
                  
                  $
                  23,273,000
                  
                  
                  $
                  4,040,000
                  
                  
                  $
                  334,000
                  
                  
                  $
                  (1,686,000
                  )
                  
                  $
                  25,975,000Warrants
      converted to common stock
                  
                  
                  40,000
                  
                  
                  
                  100
                  
                  
                  
                  192,000
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  192,100Common
      stock issued to Directors
                  
                  
                  9,700
                  
                  
                  
                  100
                  
                  
                  
                  31,000
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  31,100Options
      excercised to common stock
                  
                  
                  27,500
                  
                  
                  
                  100
                  
                  
                  
                  24,000
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  24,100FASB
      123R vesting
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  101,000
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  101,000Vesting
      of unearned compensation
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  641,000
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  641,000Repurchase
      of treasury stock
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (309,000
                  )
                  
                  
                  (309,000
                  )Treasury
      shares issued to employees
                  
                  
                  
                  
                  
                  
                  (300
                  )
                  
                  
                  (24,000
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  24,000
                  
                  
                  
                  (300
                  )Net
      Loss- unrealized loss on investments
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (13,000
                  )
                  
                  
                  
                  
                  
                  
                  (13,000
                  )Net
      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3,427,000
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3,427,000Balance,
      December 31, 2007
                  
                  
                  13,709,098
                  
                  
                  $
                  14,000
                  
                  
                  $
                  24,238,000
                  
                  
                  $
                  7,467,000
                  
                  
                  $
                  321,000
                  
                  
                  $
                  (1,971,000
                  )
                  
                  $
                  30,069,000Common
      stock issued to Directors
                  
                  
                  37,000
                  
                  
                  
                  100
                  
                  
                  
                  152,000
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  152,100Options
      excercised to common stock
                  
                  
                  61,112
                  
                  
                  
                  100
                  
                  
                  
                  72,000
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (43,000
                  )
                  
                  
                  72,100Shares
      issued to Executives and Directors with 2 to 5 year
vesting
                  
                  
                  736,750
                  
                  
                  
                  700
                  
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  700Vesting
      of unearned compensation to executives and directors
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  851,000
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  851,000Cancellation
      of options and reissuance of restricted shares
                  
                  
                  42,000
                  
                  
                  
                  100
                  
                  
                  
                  (75,000
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (74,900
                  )Treasury
      shares issued in legal settlement
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  12,000
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  58,000
                  
                  
                  
                  12,000Net
      Loss- unrealized loss on investments
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (710,000
                  )
                  
                  
                  
                  
                  
                  
                  (710,000
                  )Net
      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  4,834,000
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  4,834,000Balance,
      December 31, 2008
                  
                  
                  14,585,960
                  
                  
                  $
                  15,000
                  
                  
                  $
                  25,250,000
                  
                  
                  $
                  12,301,000
                  
                  
                  $
                  (389,000
                  )
                  
                  $
                  (1,956,000
                  )
                  
                  $
                  35,221,000Common
      stock issued to Directors
                  
                  
                  49,000
                  
                  
                  
                  100
                  
                  
                  
                  207,000
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  207,100Options
      excercised to common stock
                  
                  
                  133,334
                  
                  
                  
                  100
                  
                  
                  
                  331,000
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (331,000
                  )
                  
                  
                  100Warrants
      converted to common stock
                  
                  
                  44,647
                  
                  
                  
                  100
                  
                  
                  
                  214,000
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  214,100Shares
      issued to Executives and Directors with 2 to 5 year
vesting
                  
                  
                  586,000
                  
                  
                  
                  700
                  
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  700Fair
      value adjustment for stock compensation tax benefit
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  303,000
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  303,000Vesting
      of unearned compensation to executives and directors
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2,151,000
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2,151,000Receipt
      of treasury stock as payment of note receivable
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (931,000
                  )
                  
                  
                  (931,000
                  )Purchase
      of treasury stock on open market
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (102,000
                  )
                  
                  
                  (102,000
                  )Net
      Gain- unrealized gain on investments
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  548,000
                  
                  
                  
                  
                  
                  
                  
                  548,000Net
      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  11,963,000
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  11,963,000Balance,
      December 31, 2009
                  
                  
                  15,398,941
                  
                  
                  $
                  16,000
                  
                  
                  $
                  28,456,000
                  
                  
                  $
                  24,264,000
                  
                  
                  $
                  159,000
                  
                  
                  $
                  (3,320,000
                  )
                  
                  $
                  49,575,000





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


68


MEDIFAST,
INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


Years
ended December 31,


(Restated)
                        
                        
                        (Restated)2009
                        
                        
                        2008
                        
                        
                        2007(Audited)
                        
                        
                        (Audited)
                        
                        
                        (Audited)Cash
      flows from operating activities:Net
      income
                        
                        $
                        11,963,000
                        
                        
                        $
                        4,834,000
                        
                        
                        $
                        3,426,000Adjustments
      to reconcile net income to net cash provided by operating activities from
      continuing operations:Depreciation
      and amortization
                        
                        $
                        5,267,000
                        
                        
                        $
                        4,574,000
                        
                        
                        
                        3,471,000Realized
      loss on investment securities
                        
                        
                        81,000
                        
                        
                        
                        216,000
                        
                        
                        
                        103,000Common
      stock issued for services
                        
                        
                        207,000
                        
                        
                        
                        152,000
                        
                        
                        
                        31,000Treasury
      stock issued in legal settlement
                        
                        
                        -
                        
                        
                        
                        70,000
                        
                        
                        
                        -Stock
      options vested during period
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        100,000Stock
      options cancelled during period
                        
                        
                        -
                        
                        
                        
                        (77,000
                        )
                        
                        
                        -Excess
      tax benefits from share-base payments arrangements
                        
                        
                        303,000
                        
                        
                        
                        -
                        
                        
                        
                        39,000Vesting
      of unearned compensation
                        
                        
                        2,151,000
                        
                        
                        
                        852,000
                        
                        
                        
                        641,000Net
      change in other comprehensive (loss) income
                        
                        
                        550,000
                        
                        
                        
                        (711,000
                        )
                        
                        
                        (13,000
                        )Deferred
      tax asset
                        
                        
                        (43,000
                        )
                        
                        
                        110,000
                        
                        
                        
                        (54,000
                        )Deferred
      tax liability
                        
                        
                        (316,000
                        )
                        
                        
                        365,000
                        
                        
                        
                        (766,000
                        )Changes
      in assets and liabilities:(Increase)
      Decrease in accounts receivable
                        
                        
                        (228,000
                        )
                        
                        
                        43,000
                        
                        
                        
                        (43,000
                        )(Increase)
      Decrease in inventory
                        
                        
                        2,624,000
                        
                        
                        
                        (4,675,000
                        )
                        
                        
                        (926,000
                        )(Increase)
      Decrease in prepaid expenses & other current assets
                        
                        
                        (452,000
                        )
                        
                        
                        693,000
                        
                        
                        
                        (128,000
                        )(Increase)
      Decrease in deferred compensation
                        
                        
                        (110,000
                        )
                        
                        
                        282,000
                        
                        
                        
                        (140,000
                        )(Increase)  in
      prepaid taxes
                        
                        
                        (1,413,000
                        )
                        
                        
                        (1,131,000
                        )
                        
                        
                        -(Increase)
      in other assets
                        
                        
                        (29,000
                        )
                        
                        
                        (251,000
                        )
                        
                        
                        (52,000
                        )Increase
      (Decrease) in accounts payable and accrued expenses
                        
                        
                        (162,000
                        )
                        
                        
                        850,000
                        
                        
                        
                        1,367,000Increase
      (Decrease) in income taxes payable
                        
                        
                        (80,000
                        )
                        
                        
                        (700,000
                        )
                        
                        
                        898,000Net
      cash provided by operating activities
                        
                        
                        20,313,000
                        
                        
                        
                        5,496,000
                        
                        
                        
                        7,954,000Cash
      Flow from Investing Activities:(Purchase)
      Sale of investment securities, net
                        
                        
                        (2,579,000
                        )
                        
                        
                        129,000
                        
                        
                        
                        (4,000
                        )(Purchase)
      of property and equipment
                        
                        
                        (5,118,000
                        )
                        
                        
                        (7,429,000
                        )
                        
                        
                        (5,151,000
                        )(Purchase)
      of intangible assets
                        
                        
                        (235,000
                        )
                        
                        
                        (13,000
                        )
                        
                        
                        (2,814,000
                        )Net
      cash (used in) investing activities
                        
                        
                        (7,932,000
                        )
                        
                        
                        (7,313,000
                        )
                        
                        
                        (7,969,000
                        )Cash
      Flow from Financing Activities:Issuance
      of common stock, options and warrants
                        
                        
                        214,000
                        
                        
                        
                        30,000
                        
                        
                        
                        216,000Proceeds
      (Repayment) of long-term debt, net
                        
                        
                        1,670,000
                        
                        
                        
                        (264,000
                        )
                        
                        
                        (586,000
                        )Increase
      (Decrease) in line of credit
                        
                        
                        (3,163,000
                        )
                        
                        
                        1,565,000
                        
                        
                        
                        1,706,000Decrease
      in note receivable
                        
                        
                        170,000
                        
                        
                        
                        132,000
                        
                        
                        
                        137,000Excess
      tax benefits from share-based payment arrangements
                        
                        
                        (303,000
                        )
                        
                        
                        -
                        
                        
                        
                        (39,000
                        )(Purchase)
      of treasury stock
                        
                        
                        (102,000
                        )
                        
                        
                        -
                        
                        
                        
                        (309,000
                        )Net
      cash provided by financing activities
                        
                        
                        (1,514,000
                        )
                        
                        
                        1,463,000
                        
                        
                        
                        1,125,000NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                        
                        
                        10,867,000
                        
                        
                        
                        (354,000
                        )
                        
                        
                        1,110,000Cash
      and cash equivalents - beginning of the period
                        
                        
                        1,841,000
                        
                        
                        
                        2,195,000
                        
                        
                        
                        1,085,000Cash
      and cash equivalents - end of period
                        
                        $
                        12,708,000
                        
                        
                        $
                        1,841,000
                        
                        
                        $
                        2,195,000Supplemental
      disclosure of cash flow information:Interest
      paid
                        
                        $
                        145,000
                        
                        
                        $
                        367,000
                        
                        
                        $
                        387,000Income
      taxes
                        
                        $
                        9,167,000
                        
                        
                        $
                        3,661,000
                        
                        
                        $
                        1,790,000Supplemental
      disclosure of non cash activity:Common
      shares issued for options or warrants
                        
                        $
                        -
                        
                        
                        $
                        30,000
                        
                        
                        $
                        -Treasury
      stock issued in legal settlement
                        
                        $
                        -
                        
                        
                        $
                        70,000
                        
                        
                        $
                        -Line
      of credit converted to long-term debt
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        2,156,000Treasury
      stock received in payment of note receivable
                        
                        $
                        931,500
                        
                        
                        $
                        -
                        
                        
                        $
                        -





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


69


Medifast,
Inc. and Subsidiaries


Notes
to Consolidated Financial Statements


December
31, 2009, 2008, 2007





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 six of its wholly
owned subsidiaries, Jason Pharmaceuticals, Inc. ("Jason"), Take Shape for Life,
Inc. (“TSFL”), Jason Enterprises, Inc., Jason Properties, LLC, Medifast
Franchise Systems, 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 Medifastâ 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 an original maturity of three months or less to be
cash equivalents.  At December 31, 2009, the Company had $3.8 million
in miscellaneous short-term investments through Merrill Lynch that are
considered cash equivalents due to terms of maturity, and $8.9 million in
operating checking accounts.





At December 31, 2008, the Company had
$923,000 in miscellaneous short-term investments through Merrill Lynch that are
considered cash equivalents due to terms of maturity, and $918,000 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.


70


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, 2009, 2008, and 2007, were $544,000, $557,000, and $1,014,000,
respectively.  Advertising expense for the years ended December 31,
2009, 2008, and 2007 amounted to $17,400,000, $17,800,000, and $18,400,000,
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 authoritative guidance on property, plant and equipment ASC 360,
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 ASC 740, 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 Share




Basic
earnings per share (“EPS”) computations are calculated utilizing the weighted
average number of common shares outstanding during the periods presented.
Diluted EPS is calculated utilizing the weighted average number of common shares
outstanding adjusted for the effect of dilutive common stock
equivalents.





The
following table sets forth the computation of basic and diluted EPS for the
fiscal years ended December 31:


71




(Restated)
                  
                  
                  (Restated)2009
                  
                  
                  2008
                  
                  
                  2007Numerator:Net
      income attributable to Medifast, Inc.
                  
                  $
                  11,963,000
                  
                  
                  $
                  4,834,000
                  
                  
                  $
                  3,426,000Denominator:Weighted
      average shares of common stock outstanding
                  
                  
                  13,515,318
                  
                  
                  
                  13,126,534
                  
                  
                  
                  12,960,930Effect
      of dilutive common stock equivalents
                  
                  
                  1,221,321
                  
                  
                  
                  1,202,991
                  
                  
                  
                  683,219Weighted
      average diluted common shares outstanding
                  
                  
                  14,736,639
                  
                  
                  
                  14,329,525
                  
                  
                  
                  13,644,149EPS
      attributable to Medifast, Inc.Basic
                  
                  $
                  0.89
                  
                  
                  $
                  0.37
                  
                  
                  $
                  0.26Diluted
                  
                  $
                  0.81
                  
                  
                  $
                  0.34
                  
                  
                  $
                  0.25





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.





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 $11,588,000 and $944,000 respectively.  The
Company securities at December 31, 2009 and 2008, include amounts deposited with
multiple financial institutions. The Company markets its products primarily to
medical professionals, clinics, and Internet medical sales and has no
substantial concentrations of credit risk in its trade receivables.





As of
December 31, 2009 the Company had one customer that individually represented 10%
of accounts receivable. In 2008, the Company had two customers that individually
represented over 10% of accounts receivable and in the aggregate, approximately
43% of the accounts receivable.





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


72


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 ASC
718 Compensation – Stock Compensation which establishes the accounting
for employee stock-based awards. Under the provisions of ASC 718, 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
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 ASC 718, and no cumulative
adjustments were recorded in the Company’s financial statements.





Recent
Accounting Pronouncements





In
November 2008, the FASB ratified an accounting pronouncement which clarifies how
to account for certain transactions involving equity method investments. The
initial measurement, decreases in value and changes in the level of ownership of
the equity method investment are addressed. The pronouncement was effective for
the Company beginning on January 1, 2009 and was applied prospectively. The
adoption of the pronouncement did not have a material impact on the Company’s
consolidated financial position and results of operations.





In June
2009, the FASB issued the Accounting Standards Codification as the source of
authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in
conformity with GAAP. The pronouncement is effective for interim and annual
periods ending after September 15, 2009. The adoption of the pronouncement
did not have any impact on the Company’s consolidated financial position and
results of operations.





Investments





In accordance with ASC 320, “Investments – 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 ASC 320.  Further, according to ASC 320 the
unrealized holding gains and losses for available-for-sales securities are
excluded from earnings and reported 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 FASB issued ASC
350 “Intangibles – Goodwill and Other”. 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.





In
addition, the Company has acquired other intangible assets, which include:
customer lists, non-compete agreements, trademarks, patents, and
copyrights.  The non-compete agreements were fully amortized as of
December 31, 2007.  The customer lists are being amortized over a
period ranging between 3 and 6 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 6 years based on their estimated
useful life, while trademarks representing brands with an infinite life, and are
carried at cost and tested annually for impairment as outlined
below.  Goodwill and other indefinite lived intangibles 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 indefinite lived 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.


73


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.





3.
CASH, CASH EQUIVALENTS AND MARKETABLE SECURITES





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





Cost
                
                
                Unrealized
                  Gains
                
                
                Unrealized
                  Losses
                
                
                Accrued interest
                
                
                Estimated Fair
                  ValueCash and
      cash equivalentsDemand
      deposits
                
                $
                3,826,000
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                3,826,000Money
      market accounts
                
                
                8,882,000
                
                
                
                
                
                
                
                
                
                
                
                -
                
                
                
                8,882,000December
      31, 2009
                
                $
                12,708,000
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                12,708,000Investment
      SecuritiesInvestment
      Securities
                
                $
                3,504,000
                
                
                $
                78,000
                
                
                $
                (10,000
                )
                
                $
                22,000
                
                
                $
                3,594,000December
      31, 2009
                
                $
                3,504,000
                
                
                $
                78,000
                
                
                $
                (10,000
                )
                
                $
                22,000
                
                
                $
                3,594,000Cash
      and cash equivalentsDemand
      deposits
                
                $
                918,000
                
                
                
                
                
                
                
                
                
                
                $
                -
                
                
                $
                918,000Money
      market accounts
                
                
                923,000
                
                
                
                
                
                
                
                
                
                
                
                -
                
                
                
                923,000December
      31, 2008
                
                $
                1,841,000
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                1,841,000Investment
      SecuritiesInvestment
      Securities
                
                $
                1,088,000
                
                
                
                
                
                
                
                
                
                
                $
                11,000
                
                
                $
                1,099,000December
      31, 2008
                
                $
                1,088,000
                
                
                $
                -
                
                
                $
                -
                
                
                $
                11,000
                
                
                $
                1,099,000





The
Company had a realized loss of $81,000, realized loss of $216,000 and realized
gain of $103,000 for the years ended December 31, 2009, 2008, and 2007,
respectively.





4.
INVENTORY





Inventory
consist of the following at December 31, 2009 and 2008





2009
                    
                    
                    2008Raw
      Materials
                    
                    $
                    3,900,000
                    
                    
                    $
                    2,810,000Packaging
                    
                    
                    2,628,000
                    
                    
                    
                    2,234,000Finished
      Goods
                    
                    
                    4,704,000
                    
                    
                    
                    8,812,000Total
                    
                    $
                    11,232,000
                    
                    
                    $
                    13,856,000




74


5.  PREPAID EXPENSES AND OTHER CURRENT
ASSETS




Prepaid
expense and other current assets as of December 31, 2009 and 2008, consist of
the following:


2009
                  
                  
                  2008Marketing
      and advertising
                  
                  $
                  1,832,000
                  
                  
                  $
                  1,531,000Supplies
                  
                  
                  745,000
                  
                  
                  
                  413,000Insurance
                  
                  
                  546,000
                  
                  
                  
                  90,000Taxes
                  
                  
                  2,211,000
                  
                  
                  
                  1,131,000$
                  5,334,000
                  
                  
                  $
                  3,165,000




6.  PROPERTY,
PLANT AND EQUIPMENT





Property,
plant and equipment as of December 31, 2009 and 2008, consist of the
following:





2009
                  
                  
                  2008Land
                  
                  $
                  650,000
                  
                  
                  $
                  650,000Building
      and building improvements
                  
                  
                  9,034,000
                  
                  
                  
                  8,603,000Equipment
      and fixtures
                  
                  
                  26,478,000
                  
                  
                  
                  21,810,000Vehicle
                  
                  
                  59,000
                  
                  
                  
                  43,000$
                  36,221,000
                  
                  
                  $
                  31,106,000Less
      accumulated depreciation and amortization
                  
                  
                  12,984,000
                  
                  
                  
                  9,397,000Property,
      plant and equipment - net
                  
                  $
                  23,237,000
                  
                  
                  $
                  21,709,000





Substantially
all of the Company's property, plant and equipment are pledged as collateral for
various loans (see Note 12).





Depreciation
expense for the years ended December 31, 2009, 2008, and 2007 were $3,634,000,
$2,751,000, and $2,139,000 , respectively.  In 2007, the Company
disposed of assets with an accumulated depreciation of $95,000 relating to the
closing of three corporately owned Medifast Weight Control
Centers.


75


7.  TRADEMARKS
AND INTANGIBLES


As of December 31, 2009
                    
                    
                    As of December 31, 2008Gross Carrying
                    
                    
                    Accumulated
                    
                    
                    Gross Carrying
                    
                    
                    AccumulatedAmount
                    
                    
                    Amortization
                    
                    
                    Amount
                    
                    
                    AmortizationCustomer
      lists
                    
                    $
                    8,567,000
                    
                    
                    $
                    6,086,000
                    
                    
                    $
                    8,332,000
                    
                    
                    $
                    4,649,000Non-compete
      agreements
                    
                    
                    840,000
                    
                    
                    
                    840,000
                    
                    
                    
                    840,000
                    
                    
                    
                    840,000Trademarks,
      patents, and copyrightsfinite
      life
                    
                    
                    1,622,000
                    
                    
                    
                    926,000
                    
                    
                    
                    1,622,000
                    
                    
                    
                    685,000infinite
      life
                    
                    
                    927,000
                    
                    
                    
                    -
                    
                    
                    
                    927,000
                    
                    
                    
                    -Total
                    
                    $
                    11,956,000
                    
                    
                    $
                    7,852,000
                    
                    
                    $
                    11,721,000
                    
                    
                    $
                    6,174,000
 
 Amortization
expense for the years ended December 31, 2009, 2008 and 2007 was as
follows:
 
 2009
                    
                    
                    2008
                    
                    
                    2007Customer
      lists
                    
                    $
                    1,392,000
                    
                    
                    $
                    1,584,000
                    
                    
                    $
                    1,096,000Non-compete
      agreements
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Trademarks,
      patents, and copyrights
                    
                    
                    241,000
                    
                    
                    
                    239,000
                    
                    
                    
                    236,000Total
      trademarks and intangibles
                    
                    $
                    1,633,000
                    
                    
                    $
                    1,823,000
                    
                    
                    $
                    1,332,000
 
 Amortization
expense is included in selling, general and administrative
expenses.
  The
estimated future amortization expense of trademarks and intangible assets is as
follows:





2010
                  
                  
                  1,182,0002011
                  
                  
                  1,181,0002012
                  
                  
                  746,0002013
                  
                  
                  63,0002014
                  
                  
                  5,000




8.  ACCOUNTS
PAYABLE AND ACCRUED EXPENSES





2009
                  
                  
                  2008Trade
      payables
                  
                  $
                  2,011,000
                  
                  
                  $
                  3,658,000Sales
      commissions payable
                  
                  
                  2,645,000
                  
                  
                  
                  1,303,000Accrued
      payroll and related taxes
                  
                  
                  312,000
                  
                  
                  
                  169,000Total
                  
                  $
                  4,968,000
                  
                  
                  $
                  5,130,000




76


9.  COMMITMENTS
AND CONTINGENCIES





The
Company leases office space for Corporate offices as well as twenty-seven
corporately owned Medifast Weight Control Centers under lease terms ranging from
three to five years with leases commencing in 2007, 2008 and
2009.  Monthly payments under the Medifast Weight Control Centers
leases range in price from $1,800 to $4,200.  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 sales channels.  The leases extend through December
2014.  The annual lease payments are $1,062,000, $1,031,000, $964,000,
and $758,000 for the years ended December 31, 2010, 2011, 2012, and 2013
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, 2009





For
      the Years EndingDecember
      31,2010
                                  
                                  
                                  2,174,0002011
                                  
                                  
                                  2,116,0002012
                                  
                                  
                                  1,966,0002013
                                  
                                  
                                  1,311,0002014
                                  
                                  
                                  661,000Thereafter
                                  
                                  
                                  294,000Total
      minimum payments required
                                  
                                  $
                                  8,522,000





Rent expense for the years ended
December 31, 2009, 2008, and 2007 was$1,256,000, $956,000, and $464,000
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.


77


10.  INCOME
TAXES





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





A reconciliation between the provisions
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, 2007, 2008 and 2009 are as follows:





2009
                        
                        
                        2008
                        
                        
                        2007Provision
      at the U.S. federal statutory rate
                        
                        
                        34.0
                        %
                        
                        
                        34.0
                        %
                        
                        
                        34.0
                        %State
      taxes, net of federal benefit
                        
                        
                        4.8
                        %
                        
                        
                        3.2
                        %
                        
                        
                        5.4
                        %Permanent
      differences
                        
                        
                        -0.8
                        %
                        
                        
                        1.2
                        %
                        
                        
                        -1.2
                        %Income
      tax expense
                        
                        
                        38.0
                        %
                        
                        
                        38.4
                        %
                        
                        
                        38.2
                        %





2009
                    
                    
                    2008
                    
                    
                    2007Current:Federal
                    
                    $
                    6,276,000
                    
                    
                    $
                    3,059,000
                    
                    
                    $
                    1,213,000State
                    
                    
                    695,000
                    
                    
                    
                    432,000
                    
                    
                    
                    84,000Total
      Current
                    
                    $
                    6,971,000
                    
                    
                    $
                    3,491,000
                    
                    
                    $
                    1,297,000Deferred:Federal
                    
                    $
                    283,000
                    
                    
                    $
                    (390,000
                    )
                    
                    $
                    672,000State
                    
                    
                    76,000
                    
                    
                    
                    (85,000
                    )
                    
                    
                    148,000Total
      deferred
                    
                    
                    359,000
                    
                    
                    
                    (475,000
                    )
                    
                    
                    820,000Income
      tax expense
                    
                    $
                    7,330,000
                    
                    
                    $
                    3,016,000
                    
                    
                    $
                    2,117,000


78


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:





2009
                        
                        
                        2008
                        
                        
                        2007Deferred
      tax assetsDeferred
      compensation
                        
                        $
                        250,000
                        
                        
                        $
                        208,000
                        
                        
                        
                        317,000Inventory
      overhead and write downs
                        
                        
                        43,000
                        
                        
                        
                        42,000
                        
                        
                        
                        43,000Total
      deferred tax assets
                        
                        $
                        293,000
                        
                        
                        $
                        250,000
                        
                        
                        
                        360,000Deferred
      Tax LiabilitiesDepreciation
      and Amortization
                        
                        $
                        (1,553,000
                        )
                        
                        $
                        (1,869,000
                        )
                        
                        
                        (1,506,000
                        )Total
      deferred tax liabilities
                        
                        $
                        (1,553,000
                        )
                        
                        $
                        (1,869,000
                        )
                        
                        $
                        (1,506,000
                        )





11.
Equity Instruments





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





2009
                
                
                2008
                
                
                2007Shares
                
                
                Weighted
                  Average
                  ExercisePrice
                
                
                Shares
                
                
                Weighted
                  Average
                  Exercise
                  Price
                
                
                Shares
                
                
                Weighted
                  Average
                  Exercise
                  PriceOutstanding
      at beginning of year
                
                
                143,334
                
                
                $
                3.00
                
                
                
                291,300
                
                
                $
                4.19
                
                
                
                321,579
                
                
                $
                3.88Options
      exercised
                
                
                (133,334
                )
                
                
                2.94
                
                
                
                (28,334
                )
                
                
                0.50
                
                
                
                (27,500
                )
                
                
                0.89Options
      forfeited or expired
                
                
                -
                
                
                
                0.00
                
                
                
                (119,632
                )
                
                
                6.39
                
                
                
                (2,779
                )
                
                
                1.60Outstanding
      at end of year
                
                
                10,000
                
                
                $
                3.83
                
                
                
                143,334
                
                
                $
                3.00
                
                
                
                291,300
                
                
                $
                4.19Options
      exercisable at year end
                
                
                10,000
                
                
                $
                3.83
                
                
                
                143,334
                
                
                $
                3.00
                
                
                
                211,300
                
                
                $
                3.35





No stock
options were granted in 2007 and 2008 or 2009.


79


The
following table summarizes information about stock options outstanding and
exercisable at December 31, 2009:





Options Outstanding
                          
                          
                          
                          
                          
                          Options
                            ExercisableWeightedAverageContractual
                          
                          
                          Weighted
                          
                          
                          
                          
                          
                          WeightedRange
      of
                          
                          
                          
                          
                          Life
                          
                          
                          Average
                          
                          
                          
                          
                          
                          AverageExercise
                          
                          Number
                          
                          
                          Remaining
                          
                          
                          Exercise
                          
                          
                          Number
                          
                          
                          ExercisePrices
                          
                          Outstanding
                          
                          
                          (in Years)
                          
                          
                          Price
                          
                          
                          Exercisable
                          
                          
                          Price$
                          3.83
                          
                          
                          10,000
                          
                          
                          
                          0.83
                          
                          
                          $
                          3.83
                          
                          
                          
                          10,000
                          
                          
                          $
                          3.8310,000
                          
                          
                          
                          
                          
                          
                          $
                          3.83
                          
                          
                          
                          10,000
                          
                          
                          $
                          3.83




The
Company has issued restricted stock to employees generally with terms ranging
from three to six years. The fair value is equal to the market price of the
Company’s common stock on the date of grant. Expense for restricted stock is
amortized ratably over the vesting period. The following table summarizes the
restricted stock activity:





Shares
                          
                          
                          Weighed-Average
                            Grant Date FairValueOutstanding
      at January 1, 2009
                          
                          
                          1,019,835
                          
                          
                          $
                          4.42Granted
                          
                          
                          586,000
                          
                          
                          
                          6.33Vested
                          
                          
                          (401,457
                          )
                          
                          
                          5.36Forfeited
                          
                          
                          -
                          
                          
                          
                          -Outstanding
      at December 31, 2009
                          
                          
                          1,204,378
                          
                          
                          
                          5.57




The
weighted-average grant-date fair value of restricted stock grants was $6.33, and
$4.72 for the years ended December 31, 2009, 2008, respectively.  No
restricted shares were granted in 2007. The total fair value of restricted stock
grants vested during the years ended December 31, 2009, 2008, and 2007 was
$2,151,000, $852,000 and $641,000, respectively.


80




12.
LONG-TERM DEBT AND LINE OF CREDIT


Long-term
debt as of December 31, 2009 and 2008, consist of the following:





2009
                  
                  
                  2008$475,000
      seven-year loan secured by the building and land at a  variable
      rate at LIBOR plus 250 bps, which was 2.74% on  December 31,
      2009. Due 2011
                  
                  
                  301,000
                  
                  
                  
                  332,000$5,000,000
      revolving line of credit at the LIBOR rate plus 1.3%, which was 2.50% at
      December 31, 2009
                  
                  
                  -
                  
                  
                  
                  -$7,500,000
      revolving line of credit at the LIBOR rate plus 1.3%, which was 2.50% at
      December 31, 2009
                  
                  
                  -
                  
                  
                  
                  3,163,000$3,000,000
      ten-year term loan, with Merrill Lynch at LIBOR plus 1.3%, this was 1.54%
      at December 31, 2009. Due 2017
                  
                  
                  2,675,000
                  
                  
                  
                  2,825,000$1,500,000
      ten-year term loan, with Merrill Lynch at LIBOR plus 1.3%, this was 1.54%
      at December 31, 2009. Due 2017
                  
                  
                  1,338,000
                  
                  
                  
                  1,413,000$2,600,000
      3-year term loan, with Bank of America at Libor plus 200 bps, which was
      2.25% on December 31, 2009.  Due 2012.
                  
                  
                  1,926,000
                  
                  
                  
                  -6,240,000
                  
                  
                  
                  7,733,000Less
      current portion
                  
                  
                  796,000
                  
                  
                  
                  3,421,0005,444,000
                  
                  
                  
                  4,312,000





Future
      principal payments on long-term debt for the next 5 years are as
      follows:2010
                  
                  
                  796,0002011
                  
                  
                  796,0002012
                  
                  
                  796,0002013
                  
                  
                  566,0002014
                  
                  
                  257,000Thereafter
                  
                  
                  3,029,000$
                  6,240,000





The Company has established a $5.0
million revolving line of credit at LIBOR plus 1.75% with Bank of
America.  The outstanding balance on our line of credit was $0 and
$3,164,000 at December 31, 2009 and 2008, respectively.  Effective
September 27, 2007, the 10-year term loan with an original balance of
$3,539,000; the 3-year loan with an original balance of $366,000; and the line
of credit balance with Mercantile Safe Deposit and Trust Company was refinanced
by Merrill Lynch into two ten year term loans for $1,500,000 and $3,000,000.
These loans are at LIBOR plus 1.3%, which was 1.54% on December 31,
2009.  The term loans and line of credit held at Bank of America
contain customary covenants including covenants that, in certain circumstances,
restrict the Company’s ability to incur additional indebtedness, pay dividends
on and redeem capital stock, make other payments, including investments, sell
its assets and enter into consolidations, mergers and transfers of all or
substantially all of its assets. The loan agreements also require the Company to
maintain specified financial ratios and satisfy certain financial condition
tests. At December 31, 2009, the Company was in compliance with all of the
required financial ratios and also met all of the financial condition tests and
expects to continue to do so for the foreseeable future. All loans contain
customary events of default. Upon the occurrence of an event of default under
the term loans or line of credit, the lenders there under may cease making loans
and declare amounts outstanding to be immediately due and payable. The loans are
secured by two buildings, together with an assignment of rents and security
interest upon all fixtures now or hereafter located in the two
buildings.


81




13.  EMPLOYMENT
AGREEMENTS





The Board
of Directors of Medifast, Inc. implemented a management succession plan which
occurred over the last 36 months.  In doing so, they 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, Chief
Executive Officer and Chief Financial Officer, Margaret MacDonald, Chief
Operating Officer and President, and Brendan Connors, CPA, VP of Finance.
Bradley T. MacDonald, the Executive Chairman of the Board of Directors 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.   The Board of Directors cancelled the 100,000 options
granted to Mr. MacDonald on February 8, 2006 and replaced them with a restricted
stock grant of 42,000 shares.  The restricted shares will vest over a
period of 3 years beginning on January 25, 2009.





14.
WARRANTS





During
2009, 80,000 warrants were exercised.  The warrants were originally
issued to an investment banker for advisory and consulting services provided to
the Company.





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





Exercise
                        
                        
                        
                        
                        
                        
                        December 31,Price
                        
                        Expiration Date
                        
                        2009
                        
                        
                        2008
                        
                        
                        2007$
                        4.80
                        
                        January,
      2009
                        
                        
                        -
                        
                        
                        
                        80,000
                        
                        
                        
                        80,000$
                        16.78
                        
                        July,
      2008
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        82,500-
                        
                        
                        
                        80,000
                        
                        
                        
                        162,500Weighted
      average exercise price
                        
                        
                        -
                        
                        
                        
                        4.80
                        
                        
                        
                        10.88




82





15.  FAIR
VALUE MEASUREMENTS




On
January 1, 2008, the Company adopted SFAS No. 157 “Fair Value
Measurements” (“SFAS 157”). SFAS 157 defines fair value, provides a consistent
framework for measuring fair value under Generally Accepted Accounting
Principles and expands fair value financial statement disclosure requirements.
SFAS 157’s valuation techniques are based on observable and unobservable inputs.
Observable inputs reflect readily obtainable data from independent sources,
while unobservable inputs reflect our market assumptions. SFAS 157 classifies
these inputs into the following hierarchy:





Level 1
Inputs– Quoted prices for identical instruments in active markets.





Level 2
Inputs– Quoted prices for similar instruments in active markets; quoted prices
for identical or similar instruments    in markets that are
not active; and model-derived valuations whose inputs are observable or whose
significant value drivers are observable.





Level 3
Inputs– Instruments with primarily unobservable value drivers.





The
following table represents the fair value hierarchy for those financial assets
and liabilities measured at fair value on a recurring basis as of December 31,
2009.





Fair
Value Measurements on a Recurring Basis as of December 31, 2009





Assets
                    
                    Level
      I
                    
                    
                    Level II
                    
                    
                    Level III
                    
                    
                    TotalInvestment
      securities
                    
                    $
                    3,594,000
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    $
                    3,594,000Cash
      equivalents
                    
                    
                    12,708,000
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    12,708,000Total
      Assets
                    
                    $
                    16,302,000
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    16,302,000Liabilities
                    
                    
                    6,240,000
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    6,240,000Total
      Liabilities
                    
                    $
                    6,240,000
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    6,240,000




16.  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.  The All Other reporting segments consist of Medifast Weight
Control Centers and the Company’s parent company operations




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.


83




The
following tables’ present segment information for the years ended December 31,
2009, 2008, and 2007:





YearEndedDecember31,2009Medifast
                              
                              
                              AllOther
                              
                              
                              Eliminations
                              
                              
                              ConsolidatedRevenues,
      net
                              
                              $
                              150,037,000
                              
                              
                              $
                              15,581,000
                              
                              
                              
                              
                              
                              $
                              165,618,000Cost
      of Sales
                              
                              
                              37,046,000
                              
                              
                              
                              3,247,000
                              
                              
                              
                              
                              
                              
                              40,293,000Other
      Selling, General and Adminstrative Expenses
                              
                              
                              88,191,000
                              
                              
                              
                              12,584,000
                              
                              
                              
                              
                              
                              
                              100,775,000Depreciation
      and Amortization
                              
                              
                              4,266,000
                              
                              
                              
                              1,001,000
                              
                              
                              
                              
                              
                              
                              5,267,000Interest
      (net)
                              
                              
                              17,000
                              
                              
                              
                              (27,000
                              )
                              
                              
                              
                              
                              
                              (10,000
                              )Provision
      for income taxes
                              
                              
                              7,330,000
                              
                              
                              
                              -
                              
                              
                              
                              
                              
                              
                              7,330,000Net
      income (loss)
                              
                              $
                              13,187,000
                              
                              
                              $
                              (1,224,000
                              )
                              
                              
                              -
                              
                              
                              $
                              11,963,000Segment
      Assets
                              
                              $
                              32,829,000
                              
                              
                              $
                              29,926,000
                              
                              
                              
                              
                              
                              
                              $
                              62,755,000





(Restated)YearEndedDecember31,2008Medifast
                              
                              
                              AllOther
                              
                              
                              Eliminations
                              
                              
                              ConsolidatedRevenues,
      net
                              
                              $
                              97,116,000
                              
                              
                              $
                              8,329,000
                              
                              
                              
                              
                              
                              $
                              105,445,000Cost
      of Sales
                              
                              
                              23,611,000
                              
                              
                              
                              1,721,000
                              
                              
                              
                              
                              
                              
                              25,332,000Other
      Selling, General and Adminstrative Expenses
                              
                              
                              59,334,000
                              
                              
                              
                              8,138,000
                              
                              
                              
                              
                              
                              
                              67,472,000Depreciation
      and Amortization
                              
                              
                              3,613,000
                              
                              
                              
                              961,000
                              
                              
                              
                              
                              
                              
                              4,574,000Interest
      (net)
                              
                              
                              39,000
                              
                              
                              
                              178,000
                              
                              
                              
                              
                              
                              
                              217,000Provision
      for income taxes
                              
                              
                              3,016,000
                              
                              
                              
                              -
                              
                              
                              
                              
                              
                              
                              3,016,000Net
      income (loss)
                              
                              $
                              7,503,000
                              
                              
                              $
                              (2,669,000
                              )
                              
                              
                              -
                              
                              
                              $
                              4,834,000Segment
      Assets
                              
                              $
                              34,034,000
                              
                              
                              $
                              16,283,000
                              
                              
                              
                              
                              
                              
                              $
                              50,317,000





(Restated)YearEndedDecember31,2007Medifast
                              
                              
                              AllOther
                              
                              
                              Eliminations
                              
                              
                              ConsolidatedRevenues,
      net
                              
                              $
                              78,861,000
                              
                              
                              $
                              4,918,000
                              
                              
                              
                              
                              
                              $
                              83,779,000Cost
      of Sales
                              
                              
                              20,364,000
                              
                              
                              
                              1,100,000
                              
                              
                              
                              
                              
                              
                              21,464,000Other
      Selling, General and Adminstrative Expenses
                              
                              
                              48,250,000
                              
                              
                              
                              4,769,000
                              
                              
                              
                              
                              
                              
                              53,019,000Depreciation
      and Amortization
                              
                              
                              2,527,000
                              
                              
                              
                              944,000
                              
                              
                              
                              
                              
                              
                              3,471,000Interest
      (net)
                              
                              
                              77,000
                              
                              
                              
                              205,000
                              
                              
                              
                              
                              
                              
                              282,000Provision
      for income taxes
                              
                              
                              2,117,000
                              
                              
                              
                              -
                              
                              
                              
                              
                              
                              
                              2,117,000Net
      income (loss)
                              
                              $
                              5,526,000
                              
                              
                              $
                              (2,100,000
                              )
                              
                              
                              -
                              
                              
                              $
                              3,426,000Segment
      Assets
                              
                              $
                              25,386,000
                              
                              
                              $
                              17,701,000
                              
                              
                              
                              
                              
                              
                              $
                              43,087,000




84




17.  RESTATEMENT OF FINANCIAL
STATEMENTS





We are
restating earnings for the years ended December 31, 2006, 2007, and 2008 due to
an error in the SFAS No. 109, “Accounting for Income Taxes”
calculation.   In general, under SFAS No. 109, deferred tax
assets and liabilities are recorded to reflect the future tax consequences
attributable to the effects of differences between the carrying amounts of
assets and liabilities for financial reporting and for income tax
purposes.   Due  to the Company’s growth in past years,
major infrastructure investments were made to include building purchases for
manufacturing, corporate offices  and distribution, high speed
manufacturing equipment and blenders, a state of the art printing center
operation, and IT systems including infrastructure and hardware.  For
financial statement purposes, these assets are depreciated over the assets
useful life. However, for tax purposes, the depreciation can be accelerated
which results in lower taxable income and potential tax refunds which were
realized for the years in which accelerated tax depreciation was elected for the
Company. The lower taxable income and tax refunds impacted the Company’s cash
position positively and allowed for the further investment in the vertically
integrated Company infrastructure build. The resulting timing difference should
have resulted in a deferred tax liability and additional income tax provision
expense in the year’s restated.





The
restatements had no effect on 2009 revenues, operating income, pre-tax income,
net income or cash-flows.  The restatements have no impact on the
Company's tax returns in any year.





During
the audit of the Company’s financial statement for the year-ended December 31,
2009, Management of Medifast, Inc. was first advised by Friedman, LLP, the
Company’s independent registered public accounting firm, that an error existed
in its deferred tax account balances due to timing differences resulting between
depreciation expense for tax purposes versus financial statement
purposes.





Management
performed a detailed reconciliation of deferred tax accounts and the related
provision for income taxes for all tax years beginning in 2001 in order to
quantify the potential balance adjustments. The Company’s Management upon being
advised by its Independent Auditor of the SFAS No. 109 calculation issue, as
part of its Sarbanes Oxley policy regarding internal controls regarding
financial reporting, immediately reported this issue to the Audit Committee
which promptly initiated and conducted its review.





On March
29, 2010 management and the Audit Committee reviewed management’s findings and
the Audit Committee concluded that restating the consolidated financial
statements for the years ended December 31, 2006, 2007, and 2008 is required.
The Company is restating for errors identified in its deferred tax accounts
pertaining to (i) differences between the income tax basis and the financial
reporting basis of long-lived assets that were not reconciled to the deferred
tax balances (ii) to properly apply a net operating loss to our deferred tax and
provision for income taxes for the years ended December 31, 2001, 2002, 2003,
2004, and 2005.   The effects of these restatements are included
in this Annual Report on Form 10-K for the fiscal year ended December 31,
2009.





The
correction of the errors noted in (i) above reduced 2008, 2007, and 2006 net
income by $601,000 (.04 per diluted share), $411,000 ($.03 per diluted share),
and $583,000 (.04 per diluted share), respectively.  The corrections
noted in number (ii) above increased beginning of 2006 accumulated deficit by
$1,358,000.





The
following is a summary of the effects of these changes on the Company’s
consolidated balance sheets as of December 31, 2008, 2007, 2006, and 2005, as
well as the effect of these changes on the Company’s consolidated statements of
income and cash flows:


85





Consolidated Balance SheetsFor the Year Ended December 31, 2008
                  
                  AsPreviously
                    Reported
                  
                  
                  Adjustments
                  
                  
                  AsRestatedDeferred
      Tax Asset-non current
                  
                  
                  1,131,000
                  
                  
                  
                  (981,000
                  )
                  
                  
                  150,000Total
      Assets
                  
                  
                  51,037,000
                  
                  
                  
                  (981,000
                  )
                  
                  
                  50,056,000Deferred
      Tax Liability
                  
                  
                  -
                  
                  
                  
                  1,869,000
                  
                  
                  
                  1,869,000Income
      Taxes Payable
                  
                  
                  -
                  
                  
                  
                  101,000
                  
                  
                  
                  101,000Total
      Liabilities
                  
                  
                  12,864,000
                  
                  
                  
                  1,971,000
                  
                  
                  
                  14,835,000Retained
      Earnings (deficit)
                  
                  
                  15,253,000
                  
                  
                  
                  (2,952,000
                  )
                  
                  
                  12,301,000Total
      Stockholder's Equity
                  
                  
                  38,173,000
                  
                  
                  
                  (2,952,000
                  )
                  
                  
                  35,221,000Total
      Liabilities and Shareholder's Equity
                  
                  
                  51,037,000
                  
                  
                  
                  (981,000
                  )
                  
                  
                  50,056,000





For the Year Ended December 31, 2007
                  
                  AsPreviously
                    Reported
                  
                  
                  Adjustments
                  
                  
                  AsRestatedDeferred
      Tax Asset-non current
                  
                  
                  897,000
                  
                  
                  
                  (637,000
                  )
                  
                  
                  260,000Total
      Assets
                  
                  
                  43,724,000
                  
                  
                  
                  (637,000
                  )
                  
                  
                  43,087,000Deferred
      Tax Liability
                  
                  
                  -
                  
                  
                  
                  1,506,000
                  
                  
                  
                  1,506,000Income
      Taxes Payable
                  
                  
                  592,000
                  
                  
                  
                  211,000
                  
                  
                  
                  803,000Total
      Liabilities
                  
                  
                  11,304,000
                  
                  
                  
                  1,716,000
                  
                  
                  
                  13,020,000Retained
      Earnings (deficit)
                  
                  
                  9,818,000
                  
                  
                  
                  (2,352,000
                  )
                  
                  
                  7,466,000Total
      Stockholder's Equity
                  
                  
                  32,420,000
                  
                  
                  
                  (2,353,000
                  )
                  
                  
                  30,067,000Total
      Liabilities and Shareholder's Equity
                  
                  
                  43,724,000
                  
                  
                  
                  (637,000
                  )
                  
                  
                  43,087,000





For the Year Ended December 31, 2006
                  
                  AsPreviously
                    Reported
                  
                  
                  Adjustments
                  
                  
                  AsRestatedDeferred
      Tax Asset-non current
                  
                  
                  517,000
                  
                  
                  
                  (302,000
                  )
                  
                  
                  215,000Total
      Assets
                  
                  
                  36,677,000
                  
                  
                  
                  (302,000
                  )
                  
                  
                  36,375,000Deferred
      Tax Liability
                  
                  
                  -
                  
                  
                  
                  2,270,000
                  
                  
                  
                  2,270,000Income
      Taxes Payable
                  
                  
                  535,000
                  
                  
                  
                  (631,000
                  )
                  
                  
                  (96,000
                  )Total
      Liabilities
                  
                  
                  8,761,000
                  
                  
                  
                  1,639,000
                  
                  
                  
                  10,400,000Retained
      Earnings (deficit)
                  
                  
                  5,981,000
                  
                  
                  
                  (1,941,000
                  )
                  
                  
                  4,040,000Total
      Stockholder's Equity
                  
                  
                  27,916,000
                  
                  
                  
                  (1,941,000
                  )
                  
                  
                  25,975,000Total
      Liabilities and Shareholder's Equity
                  
                  
                  36,677,000
                  
                  
                  
                  (302,000
                  )
                  
                  
                  36,375,000




86


Consolidated
Statements of Operations





For the Year Ended December 31, 2008
                  
                  AsPreviously
                    Reported
                  
                  
                  Adjustments
                  
                  
                  AsRestatedProvision
      for income taxes
                  
                  
                  2,415,000
                  
                  
                  
                  601,000
                  
                  
                  
                  3,016,000Net
      income
                  
                  
                  5,435,000
                  
                  
                  
                  (601,000
                  )
                  
                  
                  4,834,000Basic
      Earnings Per Share
                  
                  
                  0.41
                  
                  
                  
                  (0.04
                  )
                  
                  
                  0.37Dilute
      Earnings Per Share
                  
                  
                  0.38
                  
                  
                  
                  (0.03
                  )
                  
                  
                  0.34





For the Year Ended December 31, 2007
                  
                  AsPreviously
                    Reported
                  
                  
                  Adjustments
                  
                  
                  AsRestatedProvision
      for income taxes
                  
                  
                  1,706,000
                  
                  
                  
                  411,000
                  
                  
                  
                  2,117,000Net
      income
                  
                  
                  3,837,000
                  
                  
                  
                  (411,000
                  )
                  
                  
                  3,426,000Basic
      Earnings Per Share
                  
                  
                  0.30
                  
                  
                  
                  (0.04
                  )
                  
                  
                  0.26Dilute
      Earnings Per Share
                  
                  
                  0.28
                  
                  
                  
                  (0.03
                  )
                  
                  
                  0.25





For the Year Ended December 31, 2006
                      
                      AsPreviously
                        Reported
                      
                      
                      Adjustments
                      
                      
                      AsRestatedProvision
      for income taxes
                      
                      
                      2,307,000
                      
                      
                      
                      583,000
                      
                      
                      
                      2,890,000Net
      income
                      
                      
                      5,156,000
                      
                      
                      
                      (583,000
                      )
                      
                      
                      4,573,000Basic
      Earnings Per Share
                      
                      
                      0.41
                      
                      
                      
                      (0.05
                      )
                      
                      
                      0.36Dilute
      Earnings Per Share
                      
                      
                      0.38
                      
                      
                      
                      (0.04
                      )
                      
                      
                      0.34




87





Consolidated Statement of Cash FlowsFor the Year Ended December 31, 2008
                  
                  AsPreviously
                    Reported
                  
                  
                  Adjustments
                  
                  
                  AsRestatedNet
      income
                  
                  
                  5,435,000
                  
                  
                  
                  (601,000
                  )
                  
                  
                  4,834,000Deferred
      Tax Asset
                  
                  
                  (234,000
                  )
                  
                  
                  (981,000
                  )
                  
                  
                  747,000Deferred
      Tax Liability
                  
                  
                  -
                  
                  
                  
                  1,869,000
                  
                  
                  
                  1,869,000Income
      Taxes Payable
                  
                  
                  (592,000
                  )
                  
                  
                  101,000
                  
                  
                  
                  (491,000
                  )





For the Year Ended December 31, 2007
                      
                      As Previously
                        Reported
                      
                      
                      Adjustments
                      
                      
                      As RestatedNet
      income
                      
                      
                      3,837,000
                      
                      
                      
                      (411,000
                      )
                      
                      
                      3,426,000Deferred
      Tax Asset
                      
                      
                      (390,000
                      )
                      
                      
                      (637,000
                      )
                      
                      
                      247,000Deferred
      Tax Liability
                      
                      
                      -
                      
                      
                      
                      1,506,000
                      
                      
                      
                      1,506,000Income
      Taxes Payable
                      
                      
                      57,000
                      
                      
                      
                      211,000
                      
                      
                      
                      268,000





For the Year Ended December 31, 2006
                  
                  As Previously
                    Reported
                  
                  
                  Adjustments
                  
                  
                  As RestatedNet
      income
                  
                  
                  5,156,000
                  
                  
                  
                  (583,000
                  )
                  
                  
                  4,573,000Deferred
      Tax Asset
                  
                  
                  (597,000
                  )
                  
                  
                  (302,000
                  )
                  
                  
                  (295,000
                  )Deferred
      Tax Liability
                  
                  
                  -
                  
                  
                  
                  2,270,000
                  
                  
                  
                  2,270,000Income
      Taxes Payable
                  
                  
                  (364,000
                  )
                  
                  
                  (631,000
                  )
                  
                  
                  (995,000
                  )




88





18.
QUARTERLY RESULTS (Unaudited)





First
      Quarter
                
                
                Second
      Quarter
                
                
                Third
      Quarter
                
                
                Fourth
      Quarter2009Revenue
                
                $
                33,693,000
                
                
                $
                40,699,000
                
                
                $
                45,006,000
                
                
                $
                46,220,000Gross
      Profit
                
                
                25,639,000
                
                
                
                30,948,000
                
                
                
                34,235,000
                
                
                
                34,503,000Operating
      Income
                
                
                4,028,000
                
                
                
                4,774,000
                
                
                
                5,563,000
                
                
                
                5,000,000Net
      Income
                
                
                2,498,000
                
                
                
                2,985,000
                
                
                
                3,434,000
                
                
                
                3,045,000Earnings
      per common share - diluted
                
                
                0.17
                
                
                
                0.20
                
                
                
                0.23
                
                
                
                0.21





2008
      (Restated)Revenue
                  
                  $
                  25,169,000
                  
                  
                  $
                  27,537,000
                  
                  
                  $
                  27,281,000
                  
                  
                  $
                  25,458,000Gross
      Profit
                  
                  
                  19,069,000
                  
                  
                  
                  20,860,000
                  
                  
                  
                  20,759,000
                  
                  
                  
                  19,425,000Operating
      Income
                  
                  
                  2,062,000
                  
                  
                  
                  2,409,000
                  
                  
                  
                  2,396,000
                  
                  
                  
                  1,332,000Net
      Income
                  
                  
                  1,252,000
                  
                  
                  
                  1,431,000
                  
                  
                  
                  1,448,000
                  
                  
                  
                  703,000Earnings
      per common share - diluted
                  
                  
                  0.09
                  
                  
                  
                  0.10
                  
                  
                  
                  0.10
                  
                  
                  
                  0.05





2007
      (Restated)Revenue
                
                $
                20,089,000
                
                
                $
                22,041,000
                
                
                $
                21,846,000
                
                
                $
                19,803,000Gross
      Profit
                
                
                15,031,000
                
                
                
                16,678,000
                
                
                
                16,323,000
                
                
                
                14,283,000Operating
      Income
                
                
                1,914,000
                
                
                
                1,445,000
                
                
                
                1,557,000
                
                
                
                799,000Net
      Income
                
                
                1,176,000
                
                
                
                877,000
                
                
                
                865,000
                
                
                
                508,000Earnings
      per common share - diluted
                
                
                0.09
                
                
                
                0.06
                
                
                
                0.06
                
                
                
                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.




89





INDEX
TO EXHIBITS





No.3.1
                
                Certificate
      of Incorporation of the Company and amendments thereto3.2
                
                By-Laws
      of the Company- Amended10.1
                
                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, 2006
      ***10.6
                
                Employment
      agreement with Michael S. McDevitt signed February 8, 2006
    ***10.7
                
                Employment
      agreement with Margaret MacDonald signed February 8, 2006
    ***10.8
                
                Employment
      agreement with Brendan N. Connors signed February 8,
      2006  ***21.1
                
                Subsidiaries
      of Medifast, Inc.31.1
                
                Certification
      of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation S-K,
      as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.31.2
                
                Certification
      of Chief Financial Officer pursuant to Item 601(b)(31) of Regulation S-K,
      as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.32.1
                
                Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to Section
      906 of the Sarbanes- Oxley Act of
2002







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




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




***
              Filed
      as an exhibit to 10-K/A, dated September 6, 2007, File No.
      001-31573





(b)
Reports on Form 8-K





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





June12,
2007, to announce the election of a new Board member





September
24, 2007, to announce the results of the Annual Meeting of Shareholders on
September 7, 2007





October
4, 2007, to announce updated full-year 2007 revenue and diluted earnings per
share guidance





December
26, 2007, to announce receipt of notice from New York Stock Exchange concerning
listing criteria





March 12,
2008, to announce financial results for the quarter and year ended December 31,
2007





May 9,
2008, to announce the election of a new Board member





June 25,
2008, to announce the election of a new Board member





December
17, 2008, to announce updated 2008 revenue guidance





February
19, 2009, Company response to false claims





March 5,
2009, to announce the election of two new Board members





March 12,
2009, to announce 2008 revenue and earnings and provided 2009 sales trending
YTD





March 30,
2009, to announce the authorization of a stock repurchase





May 13,
2009, to announce removal from New York Stock Exchange “watch list”





June 26,
2009, to announce independence review of certifying accountants





July 6,
2009, to announce creation of direct financial obligation


90





July 22,
2009, to announce departure of Board member





October
13, 2009, to announce election of new Board member





January
22, 2010, to announce reaffirmation with The Direct Selling
Association





January
25, 2010, to announce financial results for the quarter and year ended December
31, 2009





January
26, 2010, to announce changes in Certifying Accountant





March 4,
2010, to announce to announce financial results for the quarter and year ended
December 31, 2009




91





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:
      January 12, 2011MICHAEL S. MCDEVITTMichael
      S. McDevittChief
      Executive OfficerDated:
      January 12, 2011BRENDAN N. CONNORSBrendan
      N. ConnorsChief
      Financial OfficerDated:
      January 12, 2011




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/ BARRY B. BONDROFF, CPA
                
                Director
                
                January
      12, 2011Barry
      B. Bondroff, CPA/s/ CHARLES P. CONNOLLY
                
                Director
                
                January
      12, 2011Charles
      P. Connolly/s/ JASON L. GROVES
                
                Director
                
                January
      12, 2011Jason
      L. Groves/s/ GEORGE J. LAVIN, ESQ.
                
                Director
                
                January
      12, 2011George
      J. Lavin, Esq./s/ BRADLEY T. MACDONALD
                
                Chairman
      of the Board,
                
                January
      12, 2011Bradley
      T. MacDonald
                
                Director/s/ MICHAEL C. MACDONALD
                
                Director
                
                January
      12, 2011Michael
      C. MacDonald/s/ SR. CATHY T. MAGUIRE
RSM
                
                Director
                
                January
      12, 2011Sr.
      Cathy T. Maguire, RSM/s/ JOHN P. MCDANIEL
                
                Director
                
                January
      12, 2011John
      P. McDaniel


92




/s/
      MICHAEL S. MCDEVITT
                          
                          Director
                          
                          January
      12, 2011Michael
      S. McDevitt/s/
      JERRY D. REECE
                          
                          Director
                          
                          January
      12, 2011Jerry
      D. Reece/s/
      JEANNETTE M. MILLS
                          
                          Director
                          
                          January
      12, 2011Jeannette
      M. Mills/s/
      REV. DONALD F. REILLY, OSA
                          
                          Director
                          
                          January
      12, 2011Rev.
      Donald F. Reilly, OSA/s/
      MARGARET SHEETZ
                          
                          Director
                          
                          January
      12, 2011Margaret
      Sheetz




93