**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**FORM
      10-Q**




**x**
            **QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**




For
      the
      quarterly period ended June 30, 2007




OR




**o**
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**




For
      the
      transition period from  to




Commission
      file number 0-23016




**MEDIFAST,
      INC.**


**(Exact
      name of registrant as specified in its charter)**




**Delaware**
            
            **13-3714405****(State
                or other jurisdiction**
              **of
                organization)**
            
            **(I.R.S.
                employer**
              **identification
                no.)**


**11445
      Cronhill Drive**


**Owings
      Mills, MD 21117**


**Telephone
      Number (410) 581-8042**




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




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




Indicate
      by checkmark whether the Registrant is a shell company (as defined in Rule
      12b-2
      of the Exchange Act).




Yes  o No  x




Indicate
      the number of shares outstanding of each of the issuer’s classes of common
      stock, as of the latest practicable date.


**Class**
            
            **Outstanding at
                August 7, 2007**Common
                stock, $.001 par value per share
            
            13,669,098
                shares








Index




**Part
                I****Financial
                Information:**Condensed
                Consolidated Balance Sheets -June
                30, 2007 (unaudited) and December 31, 2006 (audited)
            3Condensed
                Consolidated Statements of Income -Three
                and Six Months Ended June 30, 2007 and 2006 (unaudited)
            4Condensed
                Consolidated Statements of Cash Flows -Six
                Months Ended June 30, 2007 and 2006 (unaudited)
            5Notes
                to Condensed Consolidated Financial Statements
            7Management
                Discussion and Analysis of Financial Conditionand
                Results of Operations
            14**Part
                II**Exhibits
            21****
            EX
                31.1EX
                31.2EX
                32.1





2


**MEDIFAST,
        INC. AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED BALANCE SHEETS**
  (Unaudited)
              
              (Audited)(Restated)June
                  30, 2007
              
              December
                  31, 2006**ASSETS****Current
                  assets:**Cash
                  and cash equivalents
              
              $
              2,923,000
              
              $
              1,085,000Accounts
                  receivable-net of allowance for doubtful accounts
              
              
              416,000
              
              
              448,000of
                  $100,000Inventory
              
              
              8,483,000
              
              
              8,255,000Investment
                  securities
              
              
              1,571,000
              
              
              1,540,000Deferred
                  compensation
              
              
              837,000
              
              
              673,000Prepaid
                  expenses and other current assets
              
              
              3,301,000
              
              
              2,599,000Note
                  receivable - current
              
              
              174,000
              
              
              174,000Current
                  portion of deferred tax asset
              
              
              101,000
              
              
              90,000**Total
                  current assets**
              
              
              **17,806,000**
              
              
              **14,864,000**Property,
                  plant and equipment - net
              
              
              14,862,000
              
              
              14,020,000Trademarks
                  and intangibles - net
              
              
              5,516,000
              
              
              5,874,000Deferred
                  tax asset, net of current portion
              
              
              681,000
              
              
              517,000Note
                  receivable, net of current assets
              
              
              1,282,000
              
              
              1,355,000Other
                  assets
              
              
              79,000
              
              
              47,000**TOTAL
                  ASSETS**
              
              **$**
              **40,226,000**
              
              **$**
              **36,677,000****LIABILITIES
                  AND STOCKHOLDERS' EQUITY****Current
                  liabilities:**Accounts
                  payable and accrued expenses
              
              $
              4,185,000
              
              $
              2,913,000Income
                  taxes payable
              
              
              -
              
              
              535,000Line
                  of credit
              
              
              407,000
              
              
              1,256,000Current
                  maturities of long-term debt
              
              
              790,000
              
              
              548,000**Total
                  current liabilities**
              
              
              **5,382,000**
              
              
              **5,252,000****Other
                  liabilities and deferred credits**Long-term
                  debt, net of current portion
              
              
              4,452,000
              
              
              3,509,000**Total
                  liabilities**
              
              
              **9,834,000**
              
              
              **8,761,000****Stockholders'
                  Equity:**Preferred
                  stock, $.001 par value (1,500,000 authorized, no shares issued
                  and
                  outstanding)
              
              
              -
              
              
              -Common
                  stock; par value $.001 per share; 20,000,000 shares
                  authorized;13,669,098
                  and 13,631,898 shares issued and outstanding
              
              
              14,000
              
              
              14,000Additional
                  paid-in capital
              
              
              26,728,000
              
              
              26,629,000Accumulated
                  other comprehensive income
              
              
              386,000
              
              
              334,000Retained
                  earnings
              
              
              8,263,000
              
              
              5,981,000**35,391,000**
              
              
              **32,958,000**Less:
                  cost of 249,184 and 210,902 shares of common stock in
                  treasury
              
              
              (1,971,000
              )
              
              (1,686,000
              )Less:
                  Unearned compensation
              
              
              (3,028,000
              )
              
              (3,356,000
              )**Total
                  stockholders' equity**
              
              
              **30,392,000**
              
              
              **27,916,000****TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY**
              
              **$**
              **40,226,000**
              
              **$**
              **36,677,000**




See
      accompanying notes to condensed consolidated financial statements.





3


**MEDIFAST,
        INC. AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF INCOME**
 **(Unaudited)**
  **Three
                  Months Ended June 30,**
              
              **Six
                  Months Ended June 30,****2007**
              
              **2006**
              
              **2007**
              
              **2006**(Restated)
              
              
              
              (Restated)Revenue
              
              $
              22,041,000
              
              $
              19,954,000
              
              $
              42,130,000
              
              $
              39,137,000Cost
                  of sales
              
              
              5,363,000
              
              
              4,853,000
              
              
              10,421,000
              
              
              9,631,000**Gross
                  Profit**
              
              
              **16,678,000**
              
              
              **15,101,000**
              
              
              **31,709,000**
              
              
              **29,506,000**Selling,
                  general, and administration
              
              
              15,233,000
              
              
              12,751,000
              
              
              28,350,000
              
              
              24,196,000**Income
                  from operations**
              
              
              1,445,000
              
              
              2,350,000
              
              
              3,359,000
              
              
              5,310,000Other
                  income/(expense)Interest
                  expense
              
              
              (102,000
              )
              
              (92,000
              )
              
              (197,000
              )
              
              (181,000
              )Interest
                  income
              
              
              39,000
              
              
              56,000
              
              
              72,000
              
              
              89,000Other
                  income
              
              
              37,000
              
              
              18,000
              
              
              88,000
              
              
              161,000(26,000
              )
              
              (18,000
              )
              
              (37,000
              )
              
              69,000**Income
                  before provision for income taxes**
              
              
              **1,419,000**
              
              
              **2,332,000**
              
              
              **3,322,000**
              
              
              **5,379,000**Provision
                  for income tax (expense)
              
              
              (510,000
              )
              
              (884,000
              )
              
              (1,040,000
              )
              
              (1,921,000
              )**Net
                  income**
              
              
              **909,000**
              
              
              **1,448,000**
              
              
              **2,282,000**
              
              
              **3,458,000**Basic
                  earnings per share
              
              $
              0.07
              
              $
              0.11
              
              $
              0.18
              
              $
              0.27Diluted
                  earnings per share
              
              $
              0.07
              
              $
              0.11
              
              $
              0.17
              
              $
              0.25Weighted
                  average shares outstanding -Basic
              
              
              12,933,559
              
              
              12,618,379
              
              
              12,917,400
              
              
              12,603,903Diluted
              
              
              13,699,721
              
              
              13,615,708
              
              
              13,683,562
              
              
              13,601,232


See
        accompanying notes to condensed consolidated financial statements.
 4
 **MEDIFAST,
        INC. AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS**
 **(Unaudited)**
  Six
                  Months Ended June 30,2007
              
              2006(Restated)Cash
                  flows from operating activities:Net
                  income
              
              $
              2,282,000
              
              $
              3,458,000Adjustments
                  to reconcile net income to net cashprovided
                  by operating activities fromcontinuing
                  operations:Depreciation
                  and amortization
              
              
              1,655,000
              
              
              1,070,000Realized
                  (gain) loss on investment securities
              
              
              71,000
              
              
              (49,000
              )Loss
                  on sale of Consumer Choice Systems
              
              
              -
              
              
              323,000Common
                  stock issued for services
              
              
              21,000
              
              
              49,000Stock
                  options vested during period
              
              
              77,000
              
              
              18,000Excess
                  tax benefits from share-based payment arrangements
              
              
              (30,000
              )
              
              (6,000
              )Vesting
                  of unearned compensation
              
              
              328,000
              
              
              181,000Net
                  change in other comprehensive (loss)
              
              
              52,000
              
              
              (143,000
              )Deferred
                  income taxes
              
              
              (175,000
              )
              
              (643,000
              )Changes
                  in assets and liabilities:Decrease
                  in accounts receivable
              
              
              32,000
              
              
              137,000(Increase)
                  in inventory
              
              
              (228,000
              )
              
              (1,581,000
              )(Increase)
                  decrease in prepaid expenses & other current assets
              
              
              (702,000
              )
              
              488,000(Increase)
                  in deferred compensation
              
              
              (163,000
              )
              
              (42,000
              )(Increase)
                  in prepaid taxes
              
              
              -
              
              
              (311,000
              )(Increase)
                  in other assets
              
              
              (32,000
              )
              
              (55,000
              )Increase
                  in accounts payable and accrued expenses
              
              
              1,272,000
              
              
              1,217,000(Decrease)
                  in income taxes payable
              
              
              (535,000
              )
              
              (899,000
              )Net
                  cash provided by operating activities
              
              
              3,925,000
              
              
              3,212,000Cash
                  Flow from Investing Activities:Sales
                  of investment securities
              
              
              (102,000
              )
              
              (25,000
              )(Purchase)
                  of property and equipment
              
              
              (1,856,000
              )
              
              (1,737,000
              )(Purchase)
                  of intangible assets
              
              
              (283,000
              )
              
              (409,000
              )Net
                  cash (used in) investing activities
              
              
              (2,241,000
              )
              
              (2,171,000
              )Cash
                  Flow from Financing Activities:Issuance
                  of common stock, options and warrants
              
              
              24,000
              
              
              254,000Repayment
                  of long-term debt, net
              
              
              (314,000
              )
              
              (276,000
              )Increase
                  in line of credit, net
              
              
              650,000
              
              
              (18,000
              )Decrease
                  in note receivable
              
              
              73,000
              
              
              -Excess
                  tax benefits from share-based payment arrangements
              
              
              30,000
              
              
              6,000(Purchase)
                  of treasury stock
              
              
              (309,000
              )
              
              -Net
                  cash provided by (used in) financing activities
              
              
              154,000
              
              
              (34,000
              )**NET
                  INCREASE IN CASH AND****CASH
                  EQUIVALENTS**
              
              
              1,838,000
              
              
              1,007,000Cash
                  and cash equivalents - beginning of the period
              
              
              1,085,000
              
              
              1,484,000Cash
                  and cash equivalents - end of period
              
              $
              2,923,000
              
              $
              2,491,000Supplemental
                  disclosure of cash flow information:Interest
                  paid
              
              $
              197,000
              
              $
              181,000Income
                  taxes
              
              $
              1,403,000
              
              $
              2,977,000Supplemental
                  disclosure of non cash activity:Common
                  stock issued to executives over 6-year vesting period
              
              $
              -
              
              $
              3,373,000Common
                  shares issued for options and warrants
              
              $
              -
              
              $
              384,000Options
                  vested during period
              
              $
              77,000
              
              $
              18,000Common
                  stock issued for services
              
              $
              21,000
              
              $
              49,000Line
                  of credit converted to long-term debt
              
              $
              1,506,000
              
              $
              -
  See
        accompanying notes to condensed consolidated financial
        statements.





5


**MEDIFAST,
        INC. AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.)**
  **(Unaudited)**
  Six
                  Months Ended June 30,2007
              
              2006(Restated)Supplemental
                  disclosure of non cash activity:Sale
                  of Consumer Choice SystemsInventory
              
              $
              -
              
              $
              358,000Accounts
                  Receivable
              
              
              -
              
              
              131,000Intangible
                  assets, net
              
              
              -
              
              
              1,337,000Note
                  receivable
              
              
              -
              
              
              (1,503,000
              )Loss
                  on sale of Consumer Choice Systems
              
              
              -
              
              
              (323,000
              )$
              -
              
              $
              -


See
        accompanying notes to condensed consolidated financial statements.
 6


**Notes
      to Condensed Consolidated Financial Statements**


**General**






1.
            Basis
                of Presentation





The
      condensed unaudited interim consolidated financial statements included herein
      have been prepared, without audit, pursuant to the rules and regulations of
      the
      Securities and Exchange Commission. The condensed consolidated financial
      statements and notes are presented as permitted on Form 10-Q and do not
      contain information included in the Company’s annual statements and notes.
      Certain information and footnote disclosures normally included in financial
      statements prepared in accordance with accounting principles generally accepted
      in the United States of America have been condensed or omitted pursuant to
      such
      rules and regulations, although the Company believes that the disclosures are
      adequate to make the information presented not misleading. It is suggested
      that
      these condensed consolidated financial statements be read in conjunction with
      the December 31, 2006 audited consolidated financial statements and the
      accompanying notes thereto. While management believes the procedures followed
      in
      preparing these condensed consolidated financial statements are reasonable,
      the
      accuracy of the amounts are in some respects dependent upon the facts that
      will
      exist, and procedures that will be accomplished by the Company later in the
      year.





These
      condensed unaudited consolidated financial statements reflect all adjustments,
      including normal recurring adjustments, which, in the opinion of management,
      are
      necessary to present fairly the operations and cash flows for the period
      presented.






2.
            Presentation
                of Financial Statements




The
      Company’s condensed consolidated financial statements include the accounts of
      Medifast, Inc. and its wholly-owned subsidiaries. All significant intercompany
      accounts and transactions have been eliminated.






3.
            Inventories




Inventories
      consist principally of finished packaged foods, packaging and raw materials
      held
      in either the Company’s manufacturing facility or distribution warehouse.
      Inventories are valued with cost determined using the first-in, first-out (FIFO)
      method.






4.
            Goodwill
                and Other Intangible Assets****




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





In
      addition, the Company has acquired other intangible assets, which include:
      customer lists, non-compete agreements, trademarks, patents, and copyrights.
      The
      non-compete agreements are being amortized over the legal life of the agreements
      ranging between 3 to 7 years. The customer lists are being amortized over a
      period ranging between 5 and 7 years based on management’s best estimate of the
      expected benefits to be consumed or otherwise used up. The costs of patents
      and
      copyrights are amortized over 5 and 7 years based on their estimated useful
      life, while trademarks representing brands with an infinite life, and are
      carried at cost and tested annually for impairment as outlined below. Goodwill
      and other intangible assets are tested annually for impairment in the fourth
      quarter, and are tested for impairment more frequently if events and
      circumstances indicate that the asset might be impaired. An impairment loss
      is
      recognized to the extent that the carrying amount exceeds the asset’s fair
      value. The Company assesses the recoverability of its goodwill and other
      intangible assets by comparing the projected undiscounted net cash flows
      associated with the related asset, over their remaining lives, in comparison
      to
      their respective carrying amounts. Impairment, if any, is based on the excess
      of
      the carrying amount over the fair value of those assets.







7


**As
                  of June 30, 2007**
              
              **As
                  of December 31, 2006**(Restated)
              
              (Restated)**Gross
                  Carrying**
              
              **Accumulated**
              
              **Gross
                  Carrying**
              
              **Accumulated****Amount**
              
              **Amortization**
              
              **Amount**
              
              **Amortization**Customer
                  lists
              
              $
              5,813,000
              
              $
              2,493,000
              
              $
              5,587,000
              
              $
              1,969,000Non-compete
                  agreements
              
              
              840,000
              
              
              840,000
              
              
              840,000
              
              
              840,000Trademarks,
                  patents, and copyrightsfinite
                  life
              
              
              1,614,000
              
              
              327,000
              
              
              1,557,000
              
              
              210,000infinite
                  life
              
              
              909,000
              
              
              -
              
              
              909,000
              
              
              -Total
              
              $
              9,176,000
              
              $
              3,660,000
              
              $
              8,893,000
              
              $
              3,019,000
  **Amortization
          expense for the six months ended June 30, 2007 and 2006 was as
          follows:**
  (Restated)2007
              
              2006Customer
                  lists
              
              $
              524,000
              
              
              386,000Non-compete
                  agreements
              
              
              -
              
              
              179,000Trademarks
                  and patents
              
              
              117,000
              
              
              59,000Total
                  Trademarks and Intangibles
              
              $
              641,000
              
              $
              624,000
  Amortization
        expense is included in selling, general and administrative
        expenses.






5.
            Fixed
                Assets





Fixed
      assets are stated at cost. Depreciation is provided using the straight-line
      method over the estimated useful lives of the related assets, which are
      generally three to seven years. Leasehold improvements and equipment under
      capital leases are amortized on a straight-line basis over the lesser of the
      estimated useful life of the asset or the related lease terms. Expenditures
      for
      repairs and maintenance are charged to expense as incurred, while major renewals
      and improvements are capitalized.






6.
            Note
                Receivable




Medifast
      realized a $1,503,000 note receivable as a result of the sale of Consumer Choice
      Systems on January 17, 2006 to a former board member. The note has a 10-year
      term with imputed interest of 4% collateralized by 50,000 shares of Medifast
      stock and all the assets of Consumer Choice Systems. The amount of principal
      to
      be collected over each of the next 5 years is $183,000 per year with the
      remaining amount collectible thereafter of $495,000.






7.
            Income
                Per Common Share





Basic
      income per share is calculated by dividing net income by the weighted average
      number of outstanding common shares during the year. Basic income per share
      excludes any dilutive effects of options, warrants and other stock-based
      compensation.





8




8.
                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.






9.
            Deferred
                Compensation Plans





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





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





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






10.
                Share
                    Based Payments





Stock-Based
      Compensation





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





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





Unearned
      compensation represents shares issued to executives that will be vested over
      a
      5-6 year period. These shares will be amortized over the vesting period in
      accordance with FASB 123(R). The expense related to the vesting of unearned
      compensation was $77,000 and $181,000 at June 30, 2007 and June 30, 2006,
      respectively.





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





9


Three
                  Months Ended
              
              Six
                  Months Ended06/30/07
              
              06/30/06
              
              06/30/07
              
              06/30/06Net
                  income, as reported
              
              $
              909,000
              
              $
              1,448,000
              
              $
              2,282,000
              
              $
              3,458,000Add:  
                  Stock-based employee compensation expenseincluded
                  in reported net income, net of related tax effects
              
              
              -
              
              
              11,000
              
              
              77,000
              
              
              11,000Deduct: 
                  Total stock-based employee compensation
              
              
              -
              
              
              (11,000
              )
              
              (77,000
              )
              
              (11,000
              )expense
                  determined under fair value based methodfor
                  all awards, net of related tax effectsNet
                  income, pro forma
              
              $
              909,000
              
              $
              1,448,000
              
              $
              2,282,000
              
              $
              3,458,000Earning
                  per share:Basic,
                  as reported
              
              $
              0.07
              
              $
              0.11
              
              $
              0.18
              
              $
              0.27Basic,
                  pro forma
              
              $
              0.07
              
              $
              0.11
              
              $
              0.18
              
              $
              0.27Diluted,
                  as reported
              
              $
              0.07
              
              $
              0.11
              
              $
              0.17
              
              $
              0.25Diluted,
                  pro forma
              
              $
              0.07
              
              $
              0.11
              
              $
              0.17
              
              $
              0.25


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





Six
                Months EndedJune
                30, 2007
            
            June
                30, 2006Dividend
                yield
            0.0%
            
            0.0%Expected
                volatility
            0.70
            
            0.70Risk-free
                interest rate
            4.70%
            
            4.5%Expected
                life in years
            1-5
            
            1-5




The
      following summarizes the stock option activity for the Six Months ended June
      30,
      2007:




June
                  30, 2007Shares
              
              Weighted
                Average
                Exercise
                Price
              
              Weighted
                Average
                Contractual
                Term
                  (Years)Outstanding,
                  December 31, 2006
              
              
              321,579
              
              
              3.76Options
                  grantedOptions
                  reinstatedOptions
                  exercised
              
              
              (27,500
              )
              
              0.89Options
                  forfeited or expiredOutstanding
                  June 30, 2007
              
              
              294,079
              
              
              4.16
              
              
              2.57Options
                  exercisable, June 30, 2007
              
              
              204,077
              
              
              2.75
              
              
              2.33Options
                  available for grant at end of year
              
              
              928,421




10




10.
                Recent
                    Accounting
                    Pronouncements




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




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







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





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





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





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





11


In
      February, 2007 the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Liabilities,” including an amendment to SFAS No. 115,
“Accounting for Certain Investments in Debt and Equity Securities,” applicable
      to all entities with available-for-sale and trading securities. SFAS No. 159
      permits entities to measure many financial instruments and certain other items
      at fair value. Eligible items include recognized financial assets and
      liabilities other than investments or interests which an entity is required
      to
      consolidate, financial assets or liabilities recognized under leases, deposit
      liabilities of financial institutions, or financial instruments that are
      classified by the issuer as a component of shareholders’ equity. Also eligible
      are firm commitments that would otherwise not be recognized at inception and
      that involve only financial instruments, non-financial insurance contracts
      and
      warranties that the issuer can settle by paying a third party to provide those
      goods or services, and host financial instruments that result from separation
      of
      an embedded non-financial derivative instrument from a non-financial hybrid
      instrument. SFAS No. 159 is effective as of the beginning of an entity’s fiscal
      year that begins after November 15, 2007. This pronouncement has no effect
      on
      the Company at this time.







11.
                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.




12.
              Restatements
  The
        June
        30, 2006 financial statements have been restated to increase amortization
        expense on customer lists by $27,000. Net income for the quarter-ended June
        30,
        2006 decreased by $27,000 from $1,475,000 to $1,448,000 and retained earnings
        decreased from $4,301,000 to $4,274,000. The restatement decreased basic
        earnings per share by $.01 from $.12 to $.11. Diluted earnings per share
        remained unchanged at $.11.







13.
            Business
                Segments





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




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




12


The
      following tables present segment information for the three and six month periods
      ended June 30, 2007 and June 30, 2006:


**Three
                  Months Ended June 30, 2007****Medifast**
              
              **All
                  Other**
              
              **Consolidated**Revenues,
                  net
              
              
              20,929,000
              
              
              1,112,000
              
              
              22,041,000Cost
                  of Sales
              
              
              5,233,000
              
              
              130,000
              
              
              5,363,000Other
                  Selling, General and Adminstrative Expenses
              
              
              13,194,000
              
              
              1,136,000
              
              
              14,330,000Depreciation
                  and Amortization
              
              
              576,000
              
              
              290,000
              
              
              866,000Interest
                  (net)
              
              
              97,000
              
              
              (34,000
              )
              
              63,000Provision
                  for income taxes
              
              
              510,000
              
              
              -
              
              
              510,000Net
                  income (loss)
              
              
              1,319,000
              
              
              (410,000
              )
              
              909,000Segment
                  Assets
              
              
              23,341,000
              
              
              16,885,000
              
              
              40,226,000
  **Three
                  Months Ended June 30, 2006****Medifast**
              
              **All
                  Other**
              
              **Consolidated**Revenues,
                  net
              
              
              19,183,000
              
              
              771,000
              
              
              19,954,000Cost
                  of Sales
              
              
              4,741,000
              
              
              112,000
              
              
              4,853,000Other
                  Selling, General and Adminstrative Expenses
              
              
              10,851,000
              
              
              1,123,000
              
              
              11,974,000Depreciation
                  and Amortization
              
              
              317,000
              
              
              442,000
              
              
              759,000Interest
                  (net)
              
              
              71,000
              
              
              (35,000
              )
              
              36,000Provision
                  for income taxes
              
              
              884,000
              
              
              -
              
              
              884,000Net
                  income (loss)
              
              
              2,319,000
              
              
              (871,000
              )
              
              1,448,000Segment
                  Assets
              
              
              18,637,000
              
              
              15,250,000
              
              
              33,887,000
  **Six
                  Months Ended June 30, 2007****Medifast**
              
              **All
                  Other**
              
              **Consolidated**Revenues,
                  net
              
              
              40,210,000
              
              
              1,920,000
              
              
              42,130,000Cost
                  of Sales
              
              
              10,186,000
              
              
              235,000
              
              
              10,421,000Other
                  Selling, General and Adminstrative Expenses
              
              
              23,859,000
              
              
              2,748,000
              
              
              26,607,000Depreciation
                  and Amortization
              
              
              1,081,000
              
              
              574,000
              
              
              1,655,000Interest
                  (net)
              
              
              186,000
              
              
              (61,000
              )
              
              125,000Provision
                  for income taxes
              
              
              1,040,000
              
              
              -
              
              
              1,040,000Net
                  income (loss)
              
              
              3,858,000
              
              
              (1,576,000
              )
              
              2,282,000Segment
                  Assets
              
              
              23,341,000
              
              
              16,885,000
              
              
              40,226,000
  **Six
                  Months Ended June 30, 2006****Medifast**
              
              **All
                  Other**
              
              **Consolidated**Revenues,
                  net
              
              
              37,628,000
              
              
              1,509,000
              
              
              39,137,000Cost
                  of Sales
              
              
              9,404,000
              
              
              227,000
              
              
              9,631,000Other
                  Selling, General and Adminstrative Expenses
              
              
              20,436,000
              
              
              2,529,000
              
              
              22,965,000Depreciation
                  and Amortization
              
              
              698,000
              
              
              372,000
              
              
              1,070,000Interest
                  (net)
              
              
              154,000
              
              
              (62,000
              )
              
              92,000Provision
                  for income taxes
              
              
              1,921,000
              
              
              -
              
              
              1,921,000Net
                  income (loss)
              
              
              5,015,000
              
              
              (1,557,000
              )
              
              3,458,000Segment
                  Assets
              
              
              18,637,000
              
              
              15,250,000
              
              
              33,887,000




13


**Management
      Discussion and Analysis of**


**Financial
      Condition and Results of Operations**





*Except
      for the historical information contained herein, this Report on Form 10-Q
      contains certain forward-looking statements that involve substantial risks
      and
      uncertainties. When used in this Report, the words “anticipate,” “believe,”
“estimate,” “expect” and similar expressions, as they relate to Medifast, Inc.
      or its management, are intended to identify such forward-looking statements.
      The
      Company’s actual results, performance or achievements could differ materially
      from the results expressed in, or implied by, these forward-looking statements.
      Accordingly, there is no assurance that the results in the forward-looking
      statements will be achieved.*





**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, returns and other potential adjustments upon
      shipment and passing of risk to the customer and when estimates of are
      reasonably determinable, collection is reasonably assured and the Company has
      no
      further performance obligations.




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




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




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





14




**General**




**Six
      Months Ended June 30, 2007 and June 30, 2006**





Revenue:
      Revenue increased to $42.1 million for the first six months of 2007 as compared
      to $39.1 million for the first six months of 2006, an increase of $3,000,000
      or
      8%. The direct marketing sales channel accounted for 58% of total revenue,
      Take
      Shape for Life 30%, doctors 6%, and clinics 6%. As compared to the first six
      months of 2006, the direct response sales channel revenue increased by 4%.
      Direct response is fueled primarily by consumer advertising via print, TV,
      web,
      and radio, however, in the first quarter of 2006 it was also fueled largely
      by a
      substantial editorial placement in a major consumer publication at no cost
      to
      the Company. Take Shape for Life sales, which are fueled by person-to-person
      recruiting and support increased by 11% year-over-year. The Company’s doctor’s
      sales increased by 15% compared to the first six months of 2006. The Company’s
      clinic division which began operating under the Medifast Weight Control Center
      name in late 2006, increased sales by 16% as compared to the first six months
      of
      2006.





The
      Take
      Shape for Life division grew 11% 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, 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. The number of active health coaches
      grew to 1,600 at the end of the second quarter 2007 compared to 1,200 at the
      same time period in 2006, an increase of 33%. This recent growth in health
      coaches was recently observed in July of 2007, with over 80% attendance growth
      at the 2007 National Convention compared to the attendance at the 2006
      Convention. The company believes that the growth in health coach activity is
      a
      positive trend that should continue, and will lead to significant revenue growth
      in the near future





The
      Medifast Weight Control Centers, which represent approximately 6% of the
      Company’s overall revenues, are currently operating in 9 locations in Dallas and
      Orlando. In the first six months of 2007, the Company experienced revenue growth
      of 16% versus the same time period last year. The average monthly revenue per
      clinic also witnessed significant growth of 48%, averaging $34,000 per clinic
      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. Medifast has incorporated this model
      with
      the creation of the Medifast Weight Control Centers. The clinic division of
      Medifast offers an optional medical model where patients are over sighted by
      a
      doctor and nurse practitioner and have the ability to utilize appetite
      suppressant medications along with their Medifast program. The recent growth
      in
      this division has proven that the model is in high demand from a select portion
      of the weight loss consumers. The Company believes that with the recent industry
      launches of over-the-counter and anticipated launches of prescription appetite
      suppressant medications that this model will continue to grow. Therefore,
      throughout the 2nd quarter, the Company invested in the infrastructure of its
      medical clinic model. The major aspects of the investment in this division
      included an expanded executive team, the creation of a point of sale system,
      a
      robust customer data tracking system, finalizing the franchise opportunity
      documentation, and the beginning stages of expansion into several new locations.
      The Company believes this business will be a major driver of revenues and
      profits for the Medifast business as it continues to expand. The Company plans
      to continue the expansion of the Medifast Weight Control Centers with both
      additional corporate locations as well as offering the model through a franchise
      opportunity.




Overall,
      selling, general and administrative expenses increased by $4.2 million as
      compared to the first six months of 2006. The majority of the increase was
      due
      to investments in the Company’s future advertising campaigns, along with the
      necessary infrastructure support tools to allow the future campaigns to improve
      in effectiveness. Advertising expense for the first six months of 2007 was
      approximately $10 million compared to $7.5 million for the same period last
      year. In the prior year, the Company benefited from a substantial editorial
      placement in a major consumer publication at no cost to the Company. During
      2007, the Company has invested in multiple celebrity endorsement contracts
      as
      well as increased public relations expense to focus on increasing brand
      awareness that will benefit our future advertising campaigns. Salaries and
      benefits increased by approximately $800,000 for the six months ended June
      30,
      2007 as the Company hired additional expertise in critical areas in order to
      assist in future growth and meet regulatory needs. This primarily includes
      IT,
      nutrition and product development, marketing, Medifast Weight Control Centers,
      and Take Shape for Life. Take Shape for Life commission expense, which is
      completely variable based upon revenue, increased by approximately $500,000.
      Communication expense which includes outsourced call centers increased by
      $350,000 due to two outsourced call centers handling calls relating to TV,
      print, and Take Shape for Life sales. The Company has spent a significant amount
      of time and materials in the first half of 2007 building the future call center
      infrastructure with related technology and personnel. This investment will
      soon
      allow the call center to increase the percentage of advertising calls to be
      handled in-house. It is believed that this initiative will amount to significant
      savings and improved closing rates in the future. The reduction of the
      outsourced call center expenses will occur in stages throughout the remainder
      of
      2007 and early into 2008. Other expenses increased by $200,000, which included
      items such as depreciation, amortization, credit card processing fees,
      charitable contributions, and property taxes. Stock compensation expense
      increased by $208,000 as compared to the first six months of 2006 as stock
      awards vest over 5 and 6 year terms for executives. These increases were offset
      by an approximately $50,000 decrease in office expense and the absence of a
      $323,000 loss resulting from the sale of the Consumer Choice Systems division
      in
      the first quarter of 2006.





15





Costs
      and
      Expenses: Cost of revenue increased $790,000 to $10.4 million in the first
      six
      months of 2007 from $9.6 million in 2006. As a percentage of sales, gross margin
      remained at approximately 75% for the first six months of 2007 and 2006.





Income
      taxes **:** **** **** For
      the
      first six months of 2007, we recorded $1,040,000 in income tax expense, which
      represents an annual effective rate of 31.3%. For the first six months of 2006,
      we recorded income tax expense of $1,921,000 which reflected an estimated annual
      effective tax rate of 35.7%. The Company anticipates a tax rate of approximately
      36-38% in 2007.





Net
      income: Net income was $2.3 million in the first six months of 2007 as compared
      to $3.5 million in the first six months of 2006, which reflected a decrease
      of
      $1.2 million or 34%. The decrease was directly related to the initiatives of
      the
      Company to create its new advertising campaign and improve future capabilities
      to increase advertising effectiveness. Additionally, the Company did not have
      the benefit of the no cost editorial publication that occurred in the first
      quarter of 2006 that led to significant profits.








**Three
      Months Ended June 30, 2007 and June 30, 2006**





Revenue:
      Revenue increased to $22 million for the three months ended June 30, 2007 as
      compared to $20 million for the same period in 2006, an increase of $2.1 million
      or 10%. The direct marketing sales channel accounted for 58% of total revenue,
      Take Shape for Life 31%, doctors 5%, and clinics 6%. As compared to the three
      months ended June 30, 2006, the direct response sales channel revenue increased
      by 4%. Take Shape for Life sales, which are fueled by person-to-person
      recruiting and support increased by 16% year-over-year. Doctors sales increased
      13% as compared to prior year and the Company’s clinic division, which began
      operating under the Medifast Weight Control Center name in late 2006, increased
      sales by 28% as compared to the quarter-ended June 30, 2006.





Throughout
      the second quarter of 2007 the Company spent significant time and materials
      investing in the future growth capabilities of the Medifast business. This
      included building internal technical and personnel abilities, strategic
      alliances with industry leaders, and large investments in future advertising
      campaigns and awareness of the Medifast brand.





The
      Company believes that the expenses associated with investing in these necessary
      areas for future growth will be recognized in the near term and well into the
      future. Several of these expenses include two celebrity endorsement contracts
      for future advertising campaigns, investment in public relations efforts for
      building brand awareness, a state of the art in-house call center infrastructure
      to include a phone system and experienced call center personnel to make it
      effective, and investments in technical capabilities for several of the Medifast
      business models. The Company believes these expenses and improvements, which
      were largely associated with the future advertising campaign, will lead to
      a
      more effective advertising spend moving forward, and the ability to
      significantly increase the run rate of the advertising spend as the
      effectiveness is proven.





The
      Company believes that these expenses will prove to be the infrastructure
      building blocks of the future growth in the Medifast business. While building
      for the future, the Company spent significant time analyzing the current metrics
      of the business and the overall industry. The knowledge gained from this effort
      allow for significant tracking improvements in the Company’s core metrics as it
      moves forward. These metrics include but are not limited to, advertising
      response rates, customer closing rates via web and telephone, lifetime value
      of
      consumers, customer success statistics across our multiple channels and media
      costs. The Company made noteworthy advances in its ability to track these
      metrics, and is confident that with the investments it has placed in its future
      advertising campaigns and internal capabilities, that these metrics should
      continue to improve as it moves forward.





In
      the
      second quarter of 2007, the Company also continued to spend on the
      infrastructure necessary to meet the requirements of being a micro cap public
      company in today’s regulatory environment. In 2006, the Company was required to
      become Sarbanes-Oxley compliant, and successfully obtained an unqualified
      opinion from its auditors. In 2007, the Company has invested in both systems
      and
      personnel to maintain compliance and ensure the highest level of internal
      control over financial reporting.





In
      the
      second quarter of 2007 selling, general, and administrative expenses increased
      by $2.5 million as compared to Q2 of 2006. The majority of the increase was
      due
      to the category of advertising expense increasing by approximately $1.2 million
      as compared to the prior year. Advertising expense for Q2 of 2007 was
      approximately $5.7 million compared to $4.5 million for the same period last
      year. The primary reason for the increase in advertising expense was due to
      increased spending on future campaigns that include celebrity endorsement
      contracts, and the public relations and promotions associated with them, that
      the Company feels will increase sales and exposure of the Medifast brand.
      Salaries and benefits increased by approximately $500,000 in the quarter as
      the
      Company hired additional expertise in critical areas in order to assist in
      future growth. This primarily includes IT, nutrition and product development,
      marketing, Medifast Weight Control Centers, and Take Shape for Life. The
      salaries are attributed to the investing of internal abilities to improve
      capabilities of the Company moving forward. These internal teams were associated
      with the building of several areas to include the additional capabilities of
      the
      Company’s website and call center. One of these major initiatives was the mid
      June launch of the Company’s auto-ship program. The Company believes that this,
      along with the many other innovative updates completed, will significantly
      improve its customer retention strategies, while positively impacting the
      lifetime value of consumers and providing clearer future revenue expectations
      from reoccurring customers. Take Shape for Life commission expense, which is
      directly related to sales, increased by approximately $250,000. Communication
      expense which includes outsourced call centers increased by $350,000 due to
      two
      outsourced call centers handling calls relating to TV, print, and Take Shape
      for
      Life sales. Other expenses increased by $250,000, which included items such
      as
      depreciation, amortization, credit card processing fees, charitable
      contributions, and property taxes. These increases were offset by an
      approximately $50,000 decrease in office expense.





16


The
      Company has continued to invest in building the platform for the future growth
      of the business. The building of a seasoned Executive Team with extensive
      experience and capabilities, along with providing the internal resources
      required to utilize these capabilities was a core focus of the business
      throughout the second quarter. The Company believes that each investment has
      provided positive improvements, however the true effect of these investments
      will be in the near future as the company continues its long term growth plan.





Costs
      and
      Expenses: Cost of revenue increased $510,000 to $5.4 million in Q2 of 2007
      from
      $4.9 million in 2006. As a percentage of sales, gross margin remained at
      approximately 75% for the second quarter of 2007 and 2006.





Income
      taxes **:** **** **** In
      the
      second quarter of 2007, we recorded $510,000 in income tax expense, which
      represents an annual effective rate of 36%. In the second quarter of 2006,
      we
      recorded income tax expense of $1 million which reflected an estimated annual
      effective tax rate of 38%. The Company anticipates a tax rate of approximately
      36-38% in 2007.





Net
      income: Net income was $900,000 million in the second quarter of 2007 as
      compared to $1.4 million in the second quarter of 2006, which reflected a
      decrease of $539,000 or 37%. The decrease was directly related to the
      initiatives of the Company to create its new advertising campaign and improve
      future capabilities to increase advertising effectiveness through technology
      and
      personnel.








**SEGMENT
      RESULTS OF OPERATIONS**




**Net
                  Sales by Segment for the Three Months Ended June
                  30,****2007**
              
              **2006****Segments**
              
              Sales
              
              %
                  of Total
              
              Sales
              
              %
                  of TotalMedifast
              
              
              20,929,000
              
              
              95
              %
              
              19,183,000
              
              
              96
              %All
                  Other
              
              
              1,112,000
              
              
              5
              %
              
              771,000
              
              
              4
              %Eliminations
              
              
              0
              
              
              0
              %
              
              0
              
              
              0
              %Total
                  Sales
              
              
              22,041,000
              
              
              100
              %
              
              19,954,000
              
              
              100
              %
  **Net
                  Sales by Segment for the Six Months Ended June
                  30,****2007**
              
              **2006****Segments**
              
              Sales
              
              %
                  of Total
              
              Sales
              
              %
                  of TotalMedifast
              
              
              40,210,000
              
              
              95
              %
              
              37,628,000
              
              
              96
              %All
                  Other
              
              
              1,920,000
              
              
              5
              %
              
              1,509,000
              
              
              4
              %Eliminations
              
              
              0
              
              
              0
              %
              
              0
              
              
              0
              %Total
                  Sales
              
              
              42,130,000
              
              
              100
              %
              
              39,137,000
              
              
              100
              %






**Three
      Months Ended June 30, 2007 and June 30, 2006**





Medifast
      Segment: The Medifast reporting segment consists of the sales of Medifast
      Direct, Take Shape for Life, and Doctors and Clinics. As this represents the
      majority of our business this is referenced to the “Consolidated Results of
      Operations” management discussion for the three months ended June 30, 2007 and
      2006 above.





All
      Other
      Segment: The All Other reporting segment consists of the sales of Hi-Energy
      and
      Medifast Weight Control Centers. Sales increased by $341,000 year-over year
      as a
      result of an increase in Hi-Energy and Medifast Weight Control Centers sales
      to
      $1,112,000. The increase in the Hi-Energy and Medifast Weight Control Center’s
      sales was due to the opening of more clinics in Texas, the closing of less
      profitable centers, spending increases for advertising, increased advertising
      effectiveness, improved closing rates on walk-in sales, as well as the hiring
      of
      more experienced clinic operators to manage the clinics. In addition, new
      programs were developed that extended the lifetime value of each
      customer.





17




**Six
      Months Ended June 30, 2007 and June 30, 2006**





Medifast
      Segment: The Medifast reporting segment consists of the sales of Medifast
      Direct, Take Shape for Life, and Doctors and Clinics. As this represents the
      majority of our business this is referenced to the “Condensed Consolidated
      Results of Operations” management discussion for the six months ended June 30,
      2007 and 2006 above.





All
      Other
      Segment: The All Other reporting segment consists of the sales of Hi-Energy
      and
      Medifast Weight Control Centers. Sales increased by $411,000 year-over year
      as a
      result of an increase in Hi-Energy and Medifast Weight Control Centers sales
      to
      $1,920,000. The increase in the Hi-Energy and Medifast Weight Control Center’s
      sales were due to the opening of more clinics in Texas, the closing of less
      profitable centers, spending increases for advertising, increased advertising
      effectiveness, improved closing rates on walk-in sales, as well as the hiring
      of
      more experienced clinic operators to manage the clinics. In addition, new
      programs were developed that extended the lifetime value of each customer.
      The
“umbrella” effect of Medifast direct advertising has also had an impact on sales
      by increasing brand recognition as well as walk-in customers.




**Net
                  Profit by Segment for the Three Months Ended June 30,****2007**
              
              **2006****Segments**
              
              Profit
              
              %
                  of Total
              
              Profit
              
              %
                  of TotalMedifast
              
              
              1,319,000
              
              
              145
              %
              
              2,319,000
              
              
              160
              %All
                  Other
              
              
              (410,000
              )
              
              -45
              %
              
              (871,000
              )
              
              -60
              %Eliminations
              
              
              0
              
              
              0
              %
              
              0
              
              
              0
              %Total
                  Sales
              
              
              909,000
              
              
              100
              %
              
              1,448,000
              
              
              100
              %
  **Net
                  Profit by Segment for the Six Months Ended June 30,****2007**
              
              **2006****Segments**
              
              Profit
              
              %
                  of Total
              
              Profit
              
              %
                  of TotalMedifast
              
              
              3,858,000
              
              
              169
              %
              
              5,015,000
              
              
              145
              %All
                  Other
              
              
              (1,576,000
              )
              
              -69
              %
              
              (1,557,000
              )
              
              -45
              %Eliminations
              
              
              0
              
              
              0
              %
              
              0
              
              
              0
              %Total
                  Sales
              
              
              2,282,000
              
              
              100
              %
              
              3,458,000
              
              
              100
              %








**Three
      Months Ended June 30, 2007 and June 30, 2006**





Medifast
      Segment: The Medifast reporting segment consists of the profits of Medifast
      Direct, Take Shape for Life, and Doctors and Clinics. As this represents the
      majority of our business this is referenced to the “Condensed Consolidated
      Results of Operations” management discussion for the three months ended June 30,
      2007 and 2006 above. See footnote 13, “Business Segments” for a detailed
      breakout of expenses





All
      Other
      Segment: The All Other reporting segment consists of the losses of Hi-Energy
      and
      Medifast Weight Control Centers, and corporate expenses related to the parent
      company operations. Year-over-year, the loss in the All Other segment improved
      by $461,000. The decreased expenses was due to a restructuring of the Hi-Energy
      and Medifast Weight Control Centers management team, the opening of new
      profitable centers, while closing less profitable centers. The Hi-Energy and
      Medifast Weight Control Centers showed an improvement year-over-year of
      $194,000. Corporate expenses decreased in the second quarter of 2007 as compared
      to the prior year, which includes auditors fees, attorneys fees, board of
      director expenses, investor relations, corporate consulting, education and
      training, and corporate outings. See footnote 13, “Business Segments” for a
      detailed breakout of expenses.





18




**Six
      Months Ended June 30, 2007 and June 30, 2006**





Medifast
      Segment: The Medifast reporting segment consists of the profits of Medifast
      Direct, Take Shape for Life, and Doctors and Clinics. As this represents the
      majority of our business this is referenced to the “Condensed Consolidated
      Results of Operations” management discussion for the six months ended June 30,
      2007 and 2006 above. See footnote 13, “Business Segments” for a detailed
      breakout of expenses





All
      Other
      Segment: The All Other reporting segment consists of the losses of Hi-Energy
      and
      Medifast Weight Control Centers, and corporate expenses related to the parent
      company operations. Year-over-year, the loss in the All Other segment increased
      by $19,000. These segments include the selling, general, and administrative
      expenses of the corporate operation, which includes auditor fees, attorneys
      fees, board of director expenses, investor relations, corporate consulting,
      education and training, and corporate outings, and the Hi-Energy and Medifast
      Weight Control Centers. Expenses for the corporate operation increased due
      to an
      increase in accounting fees due to the Sarbanes Oxley compliance audit and
      stock
      compensation expense for corporate officers. The Hi-Energy and Medifast Weight
      Control Centers showed an improvement year-over-year of $213,000 associated
      with
      expanding the clinic model. See footnote 13, “Business Segments” for a detailed
      breakout of expenses





**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.” In 2007, seasonality has not been a
      significant factor. This is largely due to the increase in the consumer’s
      awareness of the overall health and nutritional benefits accompanied with the
      use of the Company’s product line. As consumers continue to increase their
      association of nutritional weight loss programs with overall health, seasonality
      will continue to decrease.





**Inflation**





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





**Item
      5. Other Information**


Litigation **:**





Leonard
      Z. Sotomeyer on December 30, 2003 filed an action in the Supreme Court of the
      State of New York, County of New York, against his former business partner,
      David Scheffler, and T-1 Holdings, LLC, and included Medifast, Inc., formerly
      Heathrite, Inc., as a Defendant, Case 604076-03, seeking monetary damages for
      failure of his former business partner to compensate him under several
      consulting agreements with Medifast, Inc. made with H-T Capital, Inc. and
      derivatively on behalf of T-1 Holdings, LLC. The Court dismissed on Defendants’
motions Sotomeyer’s complaint in its entirety by Order of September 30, 2004.
      Following an appeal, the Appellate Division, First Department, reinstated the
      first and second causes of action while affirming the dismissal of Plaintiff’s
      remaining derivative claims by its decision April 13, 2006. On March 2007 other
      motions to dismiss the remanded claims filed by Defendants are now pending
      in
      the Court awaiting the Court’s ruling. Medifast, Inc. intends to continue to
      vigorously defend against these claims and does not believe that any decision
      rendered would materially impact the ongoing operations of Medifast,
      Inc.





Earnings
      Per Share: The
      Company follows the provisions of Statement of Financial Accounting Standards
      No. 128, “Earnings Per Share.” The calculation of basic and diluted earnings per
      share (“EPS”) is reflected on the accompanying Consolidated Statement of
      Operations.





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





Trading
      Policy: In March
      2003, the Company implemented a Trading Policy whereby if a director, officer
      or
      employee has material non-public information relating to the Company, neither
      that person nor any related person may buy or sell securities of the Company
      or
      engage in any other action to take advantage of, or pass on to others, that
      information. Additionally, on October 16, 2006 the Board of Directors approved
      an updated trading policy in which insiders may purchase or sell MED securities
      if such purchase or sale is made 7 days after or 14 days before an earnings
      announcement to include the 10-K
      or
      10-Q in
      order
      to insure that investors have available the same information necessary to make
      investment decisions as insiders.





19


Internal
      Control Policy : As
      of
      June 30, 2007, the Company’s management, with the participation of the Chief
      Executive Officer and Chief Financial Officer, performed an evaluation of the
      effectiveness of the design and operation of the Company’s disclosure controls
      and procedures pursuant to Exchange Act Rule 13a-15. Based on that evaluation,
      the Chief Executive Officer and Chief Financial Officer have concluded that
      the
      design and operation of these disclosure controls and procedures were effective
      as of the end of the period covered by this report. In connection with this
      evaluation, no change in the Company’s internal control over financial reporting
      was identified that occurred during the period covered by this report that
      has
      materially affected, or is reasonably likely to affect the Company’s internal
      control over financial reporting.





Forward
      Looking Statements: Some of
      the information presented in this quarterly report constitutes forward-looking
      statements within the meaning of the private Securities Litigation Reform Act
      of
      1995. Statements that are not historical facts, including statements about
      management’s expectations for fiscal year 2003 and beyond, are forward-looking
      statements and involve various risks and uncertainties. Although the Company
      believes that its expectations are based on reasonable assumptions within the
      bounds of its knowledge, there can be no assurance that actual results will
      not
      differ materially from the Company’s expectations. The Company cautions
      investors not to place undue reliance on forward-looking statements which speak
      only to management’s experience on this data.





**SIGNATURES**





Pursuant
      to the requirements 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.**




BY:
            
            /S/
                MICHAEL S. MCDEVITT
            
            August
                9, 2007Michael
                S. McDevittChief
                Executive Officer and Chief Financial Officer(principal
                executive officer and principal financial officer)






20





Index
      to
      Exhibits





Exhibit
              Number
            Description
                of Exhibit





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





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





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







21