**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 September 30, 2008




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  xNo  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 xNon-accelerated
      filer  o




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




Yes  oNo  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**
              **November
                6, 2008**Common
                stock, $.001 par value per share
            
            14,332,210
                shares





Index




**Part
                I****Financial
                Information:**Condensed
                Consolidated Balance Sheets – September 30, 2008 (unaudited) and December
                31, 2007 (audited)
            3Condensed
                Consolidated Statements of Income – Three and Nine Months Ended September
                30, 2008 and 2007 (unaudited)
            4Condensed
                Consolidated Statements of Cash Flows – Nine Months Ended September 30,
                2008 and 2007 (unaudited)
            5Notes
                to Condensed Consolidated Financial Statements (unaudited)
            6Management
                Discussion and Analysis of Financial Condition And Results of
                Operations
            14**Part
                II**Exhibits
            21EX
                31.1EX
                31.2EX
                32.1


2





**MEDIFAST,
      INC AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**





September 30, 2008
            
            December 31, 2007(Unaudited)
            
            (Audited)**ASSETS****Current
                assets:**Cash
                and cash equivalents
            
            $
            2,091,000
            
            $
            2,195,000Accounts
                receivable-net of allowance for doubtful accounts of
                $100,000
            
            
            482,000
            
            
            493,000Inventory
            
            
            11,755,000
            
            
            9,181,000Investment
                securities
            
            
            1,139,000
            
            
            1,439,000Deferred
                compensation
            
            
            687,000
            
            
            814,000Prepaid
                expenses and other current assets
            
            
            2,884,000
            
            
            2,727,000Prepaid
                income tax
            
            
            757,000
            
            
            -Note
                receivable - current
            
            
            180,000
            
            
            180,000Deferred
                tax asset
            
            
            100,000
            
            
            100,000**Total
                Current Assets**
            
            
            **20,075,000**
            
            
            **17,129,000**Property,
                plant and equipment - net
            
            
            20,969,000
            
            
            17,031,000Trademarks
                and intangibles - net
            
            
            5,972,000
            
            
            7,356,000Deferred
                tax asset, net of current portion
            
            
            897,000
            
            
            897,000Note
                receivable, net of current portion
            
            
            1,113,000
            
            
            1,212,000Other
                assets
            
            
            350,000
            
            
            99,000**TOTAL
                ASSETS**
            
            **$**
            **49,376,000**
            
            **$**
            **43,724,000****LIABILITIES
                AND STOCKHOLDERS' EQUITY****Current
                liabilities**Accounts
                payable and accrued expenses
            
            $
            4,592,000
            
            $
            4,279,000Income
                taxes payable
            
            
            -
            
            
            592,000Line
                of credit
            
            
            3,131,000
            
            
            1,599,000Current
                maturities of long-term debt
            
            
            257,000
            
            
            264,000**Total
                Current liabilities**
            
            
            **7,980,000**
            
            
            **6,734,000**Long-term
                debt, net of current liabilities
            
            
            4,377,000
            
            
            4,570,000**Total
                liabilities**
            
            
            **12,357,000**
            
            
            **11,304,000****Stockholders'
                equity:**Common
                stock; par value $.001 per share; 20,000,000 authorized; 14,332,210
                and
                13,709,098 shares issued and outstanding, respectively
            
            
            14,000
            
            
            14,000Additional
                paid-in capital
            
            
            29,870,000
            
            
            26,953,000Accumulated
                other comprehensive income (loss)
            
            
            (209,000
            )
            
            321,000Retained
                earnings
            
            
            14,304,000
            
            
            9,818,000**43,979,000**
            
            
            **37,106,000**Less:
                cost of 286,478 and 270,534 shares of common stock in treasury,
                respectively
            
            
            (2,013,000
            )
            
            (1,971,000
            )Less:
                unearned compensation
            
            
            (4,947,000
            )
            
            (2,715,000
            )**Total
                Stockholders' Equity**
            
            
            **37,019,000**
            
            
            **32,420,000****TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY**
            
            **$**
            **49,376,000**
            
            **$**
            **43,724,000**





See
      accompanying notes to condensed consolidated financial
      statements.


3





**MEDIFAST,
      INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF INCOME**


**(Unaudited)**





**Three Months Ended September 30,**
            
            **Nine Months Ended September 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**Revenue
            
            $
            27,281,000
            
            $
            21,846,000
            
            $
            79,987,000
            
            $
            63,975,000Cost
                of sales
            
            
            6,522,000
            
            
            5,523,000
            
            
            19,299,000
            
            
            15,944,000**Gross
                Profit**
            
            
            **20,759,000**
            
            
            **16,323,000**
            
            
            **60,688,000**
            
            
            **48,031,000**Selling,
                general, and administration
            
            
            18,363,000
            
            
            14,766,000
            
            
            53,820,000
            
            
            43,116,000**Income
                from operations**
            
            
            2,396,000
            
            
            1,557,000
            
            
            6,868,000
            
            
            4,915,000Other
                income/(expense)Interest
                expense, net
            
            
            (50,000
            )
            
            (159,000
            )
            
            (159,000
            )
            
            (284,000
            )Other
                income/(expense)
            
            
            5,000
            
            
            2,000
            
            
            (1,000
            )
            
            90,000(45,000
            )
            
            (157,000
            )
            
            (160,000
            )
            
            (194,000
            )**Income
                before provision for income taxes**
            
            
            **2,351,000**
            
            
            **1,400,000**
            
            
            **6,708,000**
            
            
            **4,721,000**Provision
                for income tax (expense)
            
            
            (802,000
            )
            
            (446,000
            )
            
            (2,222,000
            )
            
            (1,486,000
            )**Net
                income**
            
            **$**
            **1,549,000**
            
            **$**
            **954,000**
            
            **$**
            **4,486,000**
            
            **$**
            **3,235,000**Basic
                earnings per share
            
            $
            0.12
            
            $
            0.07
            
            $
            0.34
            
            $
            0.25Diluted
                earnings per share
            
            $
            0.11
            
            $
            0.07
            
            $
            0.32
            
            $
            0.24Weighted
                average shares outstanding -Basic
            
            
            13,179,527
            
            
            12,982,730
            
            
            13,139,520
            
            
            12,939,562Diluted
            
            
            14,178,031
            
            
            13,683,809
            
            
            14,138,024
            
            
            13,640,641





See
      accompanying notes to condensed consolidated financial
      statements.


4





**MEDIFAST,
      INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**





Nine Months Ended September 30,2008
            
            2007(Unaudited)
            
            (Unaudited)Cash
                flows from operating activities:Net
                income
            
            $
            4,486,000
            
            $
            3,235,000Adjustments
                to reconcile net income to net cash provided by operating activities
                from
                continuing operations:Depreciation
                and amortization
            
            
            3,417,000
            
            
            2,536,000Realized
                loss on investment securities
            
            
            307,000
            
            
            43,000Common
                stock issued for services
            
            
            116,000
            
            
            21,000Stock
                options vested during period
            
            
            -
            
            
            77,000Stock
                options cancelled during period
            
            
            (77,000
            )
            
            -Excess
                tax benefits from share-based payment arrangements
            
            
            -
            
            
            (30,000
            )Vesting
                of unearned compensation
            
            
            574,000
            
            
            492,000Net
                change in other comprehensive (loss) income
            
            
            (530,000
            )
            
            33,000Deferred
                income taxes
            
            
            -
            
            
            (291,000
            )Changes
                in assets and liabilities:Decrease
                in accounts receivable
            
            
            8,000
            
            
            23,000(Increase)
                in inventory
            
            
            (2,574,000
            )
            
            (216,000
            )(Increase)
                in prepaid expenses & other current assets
            
            
            (157,000
            )
            
            (609,000
            )(Increase)
                decrease in deferred compensation
            
            
            126,000
            
            
            (157,000
            )(Increase)
                in prepaid taxes
            
            
            (757,000
            )
            
            -(Increase)
                in other assets
            
            
            (251,000
            )
            
            (37,000
            )(Decrease)
                increase in accounts payable and accrued expenses
            
            
            313,000
            
            
            (108,000
            )(Decrease)
                in income taxes payable
            
            
            (592,000
            )
            
            (434,000
            )**Net
                cash provided by operating activities**
            
            
            **4,409,000**
            
            
            **4,578,000**Cash
                Flow from Investing Activities:(Purchase)
                sale of investment securities, net
            
            
            (4,000
            )
            
            30,000(Purchase)
                of property and equipment
            
            
            (5,970,000
            )
            
            (3,551,000
            )(Purchase)
                of intangible assets
            
            
            -
            
            
            (844,000
            )**Net
                cash (used in) investing activities**
            
            
            **(5,974,000**
            **)**
            
            **(4,365,000**
            **)**Cash
                Flow from Financing Activities:Issuance
                of common stock, options and warrants
            
            
            30,000
            
            
            216,000(Repayment)
                of long-term debt, net
            
            
            (200,000
            )
            
            (138,000
            )Increase
                in line of credit
            
            
            1,532,000
            
            
            900,000Decrease
                in note receivable
            
            
            99,000
            
            
            105,000Excess
                tax benefits from share-based payment arrangements
            
            
            -
            
            
            30,000(Purchase)
                of treasury stock
            
            
            -
            
            
            (309,000
            )**Net
                cash provided by financing activities**
            
            
            **1,461,000**
            
            
            **804,000****NET
                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS**
            
            
            (104,000
            )
            
            1,017,000Cash
                and cash equivalents - beginning of the period
            
            
            2,195,000
            
            
            1,085,000Cash
                and cash equivalents - end of period
            
            $
            2,091,000
            
            $
            2,102,000Supplemental
                disclosure of cash flow information:Interest
                paid
            
            $
            159,000
            
            $
            313,000Income
                taxes
            
            $
            3,661,000
            
            $
            1,435,000Supplemental
                disclosure of non cash activity:Common
                stock issued to Directors over 6-year vesting period
            
            $
            574,000
            
            $
            -Options
                vested during period
            
            $
            -
            
            $
            77,000Options
                cancelled during period
            
            $
            (77,000
            )
            $
            -Common
                stock issued for services
            
            $
            116,000
            
            $
            21,000Common
                shares issued for options or warrants
            
            $
            42,000
            
            $
            -Line
                of credit converted to long-term debt
            
            $
            -
            
            $
            2,156,000




See
      accompanying notes to condensed consolidated financial statements.


5


**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, 2007 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. Recent
      Accounting Pronouncements




In
      September 2006, the Financial Accounting Standards Board ("FASB") issued
      SFAS No. 157, "Fair Value Measurements" ("SFAS No. 157"), which
      clarifies the definition of fair value whenever another standard requires or
      permits assets or liabilities to be measured at fair value. Specifically, the
      standard clarifies that fair value should be based on the assumptions market
      participants would use when pricing the asset or liability, and establishes
      a
      fair value hierarchy that prioritizes the information used to develop those
      assumptions. SFAS No. 157 does not expand the use of fair value to any new
      circumstances, and must be applied on a prospective basis except in certain
      cases. The standard also requires expanded financial statement disclosures
      about
      fair value measurements, including disclosure of the methods used and the effect
      on earnings.




In
      February 2008, FASB Staff Position ("FSP") FAS No. 157-2, "Effective
      Date of FASB Statement No. 157" ("FSP No. 157-2") was issued. FSP
      No. 157-2 defers the effective date of SFAS No. 157 to fiscal years
      beginning after December 15, 2008, and interim periods within those fiscal
      years, for all nonfinancial assets and liabilities, except those that are
      recognized or disclosed at fair value in the financial statements on a recurring
      basis (at least annually). Examples of items within the scope of FSP
      No. 157-2 are nonfinancial assets and nonfinancial liabilities initially
      measured at fair value in a business combination (but not measured at fair
      value
      in subsequent periods), and long-lived assets, such as property, plant and
      equipment and intangible assets measured at fair value for an impairment
      assessment under SFAS No. 144.




The
      partial adoption of SFAS No. 157 on January 1, 2008 with respect to
      financial assets and financial liabilities recognized or disclosed at fair
      value
      in the financial statements on a recurring basis did not have a material impact
      on the Company's consolidated financial statements. See Note 12 for the
      fair value measurement disclosures for these assets and liabilities. The Company
      is in the process of analyzing the potential impact of SFAS No. 157
      relating to its planned January 1, 2009 adoption of the remainder of the
      standard.




On
      January 1, 2008 (the first day of fiscal 2008), the Company adopted SFAS
      No. 159, "The Fair Value Option for Financial Assets and Financial
      Liabilities, Including an amendment of FASB Statement No. 115" ("SFAS
      No. 159"). SFAS No. 159 permits entities to choose to measure many
      financial instruments and certain other items at fair value, which are not
      otherwise currently required to be measured at fair value. Under SFAS
      No. 159, the decision to measure items at fair value is made at specified
      election dates on an instrument-by-instrument basis and is irrevocable. Entities
      electing the fair value option are required to recognize changes in fair value
      in earnings and to expense upfront costs and fees associated with the item
      for
      which the fair value option is elected. The new standard did not impact the
      Company's Condensed Consolidated Financial Statements as the Company did not
      elect the fair value option for any instruments existing as of the adoption
      date. However, the Company will evaluate the fair value measurement election
      with respect to financial instruments the Company enters into in the future.


6




In
      December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
      Combinations" ("SFAS No. 141(R)"). SFAS No. 141(R) changes how an
      entity accounts for the acquisition of a business. While it retains the
      requirement to account for all business combinations using the acquisition
      method, the new rule will apply to a wider range of transactions or events
      and
      requires, in general, acquisition-date fair value measurement of identifiable
      assets acquired, liabilities assumed and non-controlling ownership interests
      held in the acquire, among other items. The Company is beginning to review
      the
      provisions of SFAS No. 141(R), which applies prospectively to business
      combinations with an acquisition date on or after the beginning of its 2009
      fiscal year.




In
      December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in
      Consolidated Financial Statements: an amendment of ARB No. 51" ("SFAS
      No. 160"). SFAS No. 160 replaces the term minority interests with the
      newly-defined term of non-controlling interests and establishes this line item
      as an element of stockholders' equity, separate from the parent's equity. SFAS
      No. 160 also includes expanded disclosure requirements regarding the
      interests of the parent and its non-controlling interest. The Company is
      continuing to review the provisions of SFAS No. 160, which is effective the
      first quarter of fiscal 2009, and currently does not expect this new accounting
      standard to have a significant impact on the Consolidated Financial Statements.




In
      March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
      Instruments and Hedging Activities: an amendment of FASB Statement No. 133"
      ("SFAS No. 161"). SFAS No. 161 changes the disclosure requirements for
      derivative instruments and hedging activities. The Company is reviewing the
      provisions of SFAS No. 161, which is effective the first quarter of fiscal
      2009, and currently does not anticipate that this new accounting standard will
      have a significant impact on the Consolidated Financial Statements.




In
      May
      2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
      Accounting Principles” (SFAS No. 162). SFAS No. 162 identifies the sources of
      accounting principles and the framework for selecting principles used in the
      preparation of financial statements.  SFAS No. 162 is effective 60
      days following the SEC’s approval of the Public Company Accounting Oversight
      Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity
      with Generally Accepted Accounting Principles”. The implementation of this
      standard will not have a material impact onConsolidated
      Financial Statements.




In
      June 2008, the FASB issued FASB Staff Position (“FSP”) Emerging Issues
      Task Force (“EITF”) No. 03-6-1, “Determining Whether Instruments
      Granted in Share-Based Payment Transactions Are Participating Securities.” Under
      the FSP, unvested share-based payment awards that contain rights to receive
      nonforfeitable dividends (whether paid or unpaid) are participating securities,
      and should be included in the two-class method of computing EPS. The FSP is
      effective for fiscal years beginning after December 15, 2008 and for
      interim periods within those years The implementation of this standard will
      not
      have a material impact on Consolidated Financial Statements.




4. 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.





5.
            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 at cost determined using the first-in, first-out (FIFO)
      method.





6. 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.


7


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 fully amortized as of December 31, 2007. 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.





**As of September 30, 2008**
            
            **As of December 31, 2007****Gross Carrying**
            
            **Accumulated**
            
            **Gross Carrying**
            
            **Accumulated****Amount**
            
            **Amortization**
            
            **Amount**
            
            **Amortization**Customer
                lists
            
            $
            8,332,000
            
            $
            4,272,000
            
            $
            8,332,000
            
            $
            3,065,000Trademarks,
                patents, and copyrightsfinite
                life
            
            
            1,628,000
            
            
            625,000
            
            
            1,626,000
            
            
            446,000infinite
                life
            
            
            909,000
            
            
            -
            
            
            909,000
            
            
            -Total
            
            $
            10,869,000
            
            $
            4,897,000
            
            $
            10,867,000
            
            $
            3,511,000





**Amortization
      expense for the nine months ended September 30, 2008 and 2007 was as
      follows:**





2008
            
            2007Customer
                lists
            
            $
            1,207,000
            
            $
            791,000Trademarks
                and patents
            
            
            179,000
            
            
            178,000Total
                Trademarks and Intangibles
            
            $
            1,386,000
            
            $
            969,000




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





7. 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.





8.
            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.





9.
            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


10.
            Estimates





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





11.
            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.





12.
            Fair
                Value Measurements




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




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




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




Level
      3
      Inputs– Instruments with primarily unobservable value drivers.




The
      following table represents the fair value hierarchy for those financial assets
      and liabilities measured at fair value on a recurring basis as of September
      30,
      2008.




Fair
      Value Measurements on a Recurring Basis as of September 30, 2008





Assets
            
            Level
                I
            
            Level II
            
            Level III
            
            TotalInvestment
                securities
            
            $
            1,139,000
            
            
            -
            
            
            -
            
            $
            1,139,000Cash
                equivalents
            
            
            2,091,000
            
            
            -
            
            
            -
            
            
            2,091,000Total
                Assets
            
            $
            3,230,000
            
            $
            -
            
            $
            -
            
            $
            3,230,000Liabilities
            
            
            -
            
            
            -
            
            
            -
            
            
            -Total
                Liabilities
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -


9





13.
            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.





The
      Medifast Board of Directors on July 24, 2008 approved restricted common stock
      grants to key executives and Board members with a 5 year vesting period,
      beginning on the grant date. Key executives were granted 425,000 shares of
      restricted common stock to retain their services over the next five years,
      reward their efforts in the participation of the successful succession and
      transition of the company operations to the new senior management team, and
      incentivize continued sales and profit growth in accordance with targets set
      by
      the Board of Directors. Tenured Board members that successfully implemented
      the
      Senior Management Succession Plan over the last four years through advice,
      counsel, and mentorship were awarded 55,000 shares of restricted common
      stock.





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 $587,000 and $570,000 at September 30, 2008 and September
      30,
      2007, respectively. Expense related to vesting of options under FASB 123R was
      $0
      and $77,000 at September 30, 2008 and September 30, 2007,
      respectively.





The
      following summarizes the stock option activity for the Nine Months ended
      September 30, 2008:




Shares
            
            Weighted
              Average
              Exercise Price
            
            Weighted
              Average
              Contractual
              Term (Years)Outstanding,
                December 31, 2007
            
            
            291,300
            
            
            4.19Options
                grantedOptions
                reinstatedOptions
                exercised
            
            
            (28,334
            )
            
            0.50Options
                forfeited or expired
            
            
            (119,632
            )
            
            6.39Outstanding
                September 30, 2008
            
            
            143,334
            
            
            3.02
            
            
            1.84Options
                exercisable, September 30, 2008
            
            
            143,334
            
            
            3.02
            
            
            1.84Options
                available for grant at September 30, 2008
            
            
            1,079,166




14. Reclassifications





Certain
      amounts for the quarter ended September 30, 2007 have been reclassified to
      conform to the presentation of the September 30, 2008 amounts. The
      reclassifications have no effect on net income for the quarters ended September
      30, 2008 and 2007.


10





15.    
      Business Segments





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




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




The
      following tables present segment information for the nine months ended September
      30, 2008 and 2007:


11





**Three Months Ended September 30, 2008****Medifast**
            
            **All Other**
            
            **Eliminations**
            
            **Consolidated**Revenues,
                net
            
            $
            24,945,000
            
            $
            2,336,000
            
            
            
            
            $
            27,281,000Cost
                of Sales
            
            
            6,031,000
            
            
            491,000
            
            
            
            
            
            6,522,000Other
                Selling, General and Adminstrative Expenses
            
            
            15,090,000
            
            
            2,097,000
            
            
            
            
            
            17,187,000Depreciation
                and Amortization
            
            
            927,000
            
            
            249,000
            
            
            
            
            
            1,176,000Interest
                (net)
            
            
            9,000
            
            
            36,000
            
            
            
            
            
            45,000Provision
                for income taxes
            
            
            802,000
            
            
            -
            
            
            
            
            
            802,000Net
                income (loss)
            
            $
            2,086,000
            
            $
            (537,000
            )
            
            
            
            $
            1,549,000Segment
                Assets
            
            $
            33,498,000
            
            $
            15,879,000
            
            
            
            
            $
            49,377,000





**Three Months Ended September 30, 2007****Medifast**
            
            **All Other**
            
            **Eliminations**
            
            **Consolidated**Revenues,
                net
            
            $
            20,580,000
            
            $
            1,266,000
            
            
            
            
            $
            21,846,000Cost
                of Sales
            
            
            5,300,000
            
            
            223,000
            
            
            
            
            
            5,523,000Other
                Selling, General and Adminstrative Expenses
            
            
            12,712,000
            
            
            1,173,000
            
            
            
            
            
            13,885,000Depreciation
                and Amortization
            
            
            579,000
            
            
            302,000
            
            
            
            
            
            881,000Interest
                (net)
            
            
            30,000
            
            
            127,000
            
            
            
            
            
            157,000Provision
                for income taxes
            
            
            446,000
            
            
            -
            
            
            
            
            
            446,000Net
                income (loss)
            
            $
            1,513,000
            
            $
            (559,000
            )
            
            
            
            $
            954,000Segment
                Assets
            
            $
            21,917,000
            
            $
            18,756,000
            
            
            
            
            $
            40,673,000





**Nine Months Ended September 30, 2008****Medifast**
            
            **All Other**
            
            **Eliminations**
            
            **Consolidated**Revenues,
                net
            
            $
            73,928,000
            
            $
            6,059,000
            
            
            
            
            $
            79,987,000Cost
                of Sales
            
            
            18,055,000
            
            
            1,244,000
            
            
            
            
            
            19,299,000Other
                Selling, General and Adminstrative Expenses
            
            
            44,852,000
            
            
            5,551,000
            
            
            
            
            
            50,403,000Depreciation
                and Amortization
            
            
            2,684,000
            
            
            733,000
            
            
            
            
            
            3,417,000Interest
                (net)
            
            
            22,000
            
            
            138,000
            
            
            
            
            
            160,000Provision
                for income taxes
            
            
            2,222,000
            
            
            -
            
            
            
            
            
            2,222,000Net
                income (loss)
            
            $
            6,093,000
            
            $
            (1,607,000
            )
            
            
            
            $
            4,486,000Segment
                Assets
            
            $
            33,498,000
            
            $
            15,879,000
            
            
            
            
            $
            49,377,000





**Nine Months Ended September 30, 2007****Medifast**
            
            **All Other**
            
            **Eliminations**
            
            **Consolidated**Revenues,
                net
            
            $
            60,916,000
            
            $
            3,059,000
            
            
            
            
            $
            63,975,000Cost
                of Sales
            
            
            15,544,000
            
            
            400,000
            
            
            
            
            
            15,944,000Other
                Selling, General and Adminstrative Expenses
            
            
            36,832,000
            
            
            3,657,000
            
            
            
            
            
            40,489,000Depreciation
                and Amortization
            
            
            2,060,000
            
            
            476,000
            
            
            
            
            
            2,536,000Interest
                (net)
            
            
            79,000
            
            
            206,000
            
            
            
            
            
            285,000Provision
                for income taxes
            
            
            1,486,000
            
            
            -
            
            
            
            
            
            1,486,000Net
                income (loss)
            
            $
            4,915,000
            
            $
            (1,680,000
            )
            
            
            
            $
            3,235,000Segment
                Assets
            
            $
            21,917,000
            
            $
            18,756,000
            
            
            
            
            $
            40,673,000


12





16.
            Subsequent
                Events





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-1Holdings, LLC. All parties, including Medifast,
      Inc. recently reached a global settlement including dismissal of the litigation
      with prejudice and general releases. On October 17, 2008, Medifast agreed to
      pay
      legal fees in the amount of $130,000 in cash, and 14,286 shares of Medifast
      treasury stock valued at $70,000 to settle the case. Mr. Sotomayor also received
      29,647 Medifast, Inc. warrants with a strike price of $4.80 a share from Mr.
      David Scheffler. The Board of Directors approved a settlement that was
      considered significantly less costly than the future litigation costs for
      defense. Medifast vehemently denied the alleged charges in the complaint and
      had
      fortuitous defenses that it believes would have prevailed in a trial. The
      total impact of the settlement to Medifast, Inc. will be a one time charge
      to earnings of approximately $200,000 in the fourth quarter of 2008.


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**




**Nine
      Months Ended September 30, 2008 and September 30, 2007**





Revenue:
      Revenue increased to $80 million for the first nine months of 2008 compared
      to
      $64 million for the first nine months of 2007, an increase of $16 million or
      25%. The direct marketing sales channel accounted for 45% of total revenue,
      Take
      Shape for Life 44%, brick and mortar clinics 8%, and doctors 3%. As compared
      to
      the first nine months of 2007, the direct marketing sales channel, which is
      fueled primarily by consumer advertising, decreased revenues by approximately
      2%
      year-over year, however, the advertising dollars spent to achieve nearly the
      same amount of sales were 3% less than the first nine months of 2007 as the
      Company continues to focus on more effective advertising spend. Take Shape
      for
      Life sales, which are fueled by person-to-person recruiting and support
      increased by 77% compared to the first nine months of 2007. The Medifast Weight
      Control Centers increased sales by 66% due to the opening of new clinics, and
      wholesale doctor’s sales decreased by 25% due to certain doctors transitioning
      to the professional division of Take Shape for Life.





The
      Take
      Shape for Life division grew 77% 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 growth in this segment
      correlates directly to the increase in health coaches, which began to accelerate
      following our National Convention in July 2007. The number of active health
      coaches grew 94% to 3,200 at the end of the third quarter of 2008 as compared
      to
      1,650 for the same time period in 2007, and up from 2,800 at the end of the
      second quarter of 2008. The Company recently completed our 2008 National
      Convention in Orlando, FL on July 26 th ,
      2008
      where approximately 750 health coaches participated, an increase of nearly
      88%
      from prior year. The individuals that attended the event attended workshops
      and
      heard lectures by accredited individuals in the areas of recruiting, product
      and
      nutrition knowledge, and business skills.





The
      Medifast Weight Control Centers, which represent approximately 8% of the
      Company’s overall revenues, are currently operating in twenty locations in
      Dallas, Houston, and Orlando. In the first nine months of 2008, the Company
      experienced revenue growth of 66% versus the same time period last year. The
      average monthly revenue per clinic also witnessed growth of 11%, averaging
      $40,000 per clinic in the first nine month of 2008 as compared to $36,000 in
      the
      first nine months of 2007. In the expanding Dallas, TX market, the average
      monthly revenue per clinic is approximately $50,000. In the estimated $40
      billion weight loss and health living industry, the brick and mortar clinic
      model has always made up a significant portion of overall sales. The recent
      growth in the Medifast Weight Control Centers has proven that the model is
      in
      high demand from a select portion of the weight loss consumers. Throughout
      2007,
      the Company invested in the infrastructure of its 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,
      and finalizing the franchise opportunity documentation. During the first nine
      months of 2008, the Company opened eight additional corporately owned clinics
      in
      the Houston, TX market and two additional centers in the Dallas, TX market.
      The
      Company plans on opening two additional corporately owned clinics in the Houston
      market by the end of 2008.





On
      February 18, 2008, the Company announced that it has sold its first franchise
      of
      Medifast Weight Control Centers. The Company sold the rights to open four
      clinics in the Greater Baltimore Metropolitan Area. The franchisee also has
      the
      rights to open four additional Medifast Weight Control Centers in the Baltimore
      area over the next two years, bringing the total to eight locations. On June
      3,
      2008 the Company announced that it sold the rights to open four Medifast Weight
      Control Centers in Southern California and three Medifast Weight Control Centers
      in Central California to two different local business operators. On October
      8,
      2008, the Company announced the opening of its first franchise clinic in the
      Baltimore, MD area as well as plans for four additional franchisees to be open
      by the end of the year.





Overall,
      selling, general and administrative expenses increased by $10.7 million as
      compared to the first nine months of 2007. Take Shape for Life commission
      expense, which is completely variable based upon revenue, increased by
      approximately $7.3 million as the Company showed sales growth of 77% as compared
      to the first nine months of 2007. Salaries and benefits increased by
      approximately $1.4 million in the first nine months of 2008. The increase
      includes the hiring of additional expertise in critical areas such as Take
      Shape
      for Life and the Medifast Weight Control Centers in the second half of 2007
      which have greatly impacted the revenue growth in the first nine months of
      2008.
      Additional personnel were hired in the call center during the first and second
      quarters of 2008 as the Company brought the outsourced Take Shape for Life
      call
      center in-house early in the second quarter of 2008. Advertising expense for
      the
      first nine months of 2008 was approximately $14.7 million compared to
      approximately $15.1 million for the same period last year, a decrease of
      $400,000. Going forward, savings will be realized on communication expense
      as a
      result of bringing the call center in-house. The opening of eight new
      corporately owned clinics in the Houston, TX market and two in the Dallas,
      TX
      market also required the hiring of additional center managers and support staff.
      Communication expense decreased by $200,000 as a result of the Take Shape for
      Life call center moving in-house during the second quarter of 2008. Other
      expenses increased by $1.8 million which included items such as depreciation,
      amortization, credit card processing fees, charitable contributions, and
      property taxes. Operating expenses increased by $650,000 which primarily
      resulted from additional printing expense for our direct to consumer postcard
      mailings as well as maintenance, repairs, and supplies for our manufacturing
      and
      distribution facilities. Stock compensation expense increased by $129,000 as
      additional restricted shares were issued to key executives and Board members
      in
      the 3 rd quarter
      of 2008 that will be vesting over a five year term.


15





Costs
      and
      Expenses: Cost of revenue increased $3.3 million to $19.3 million in the first
      nine months of 2008 from $16 million for the first nine months of 2007. As
      a
      percentage of sales, gross margin increased to 75.9% from 75.1% for the first
      nine months of 2008. The margin improved due to efficiencies gained from new
      machinery purchases in prior year, new shipping rules that resulted in
      additional shipping revenue from customers netting against shipping expense,
      as
      well as a price increase on July 1, 2008.





Income
      taxes **:** For
      the
      first nine months of 2008 the Company recorded $2.2 million in income tax
      expense, which represents an annual effective rate of 33.1%. For the first
      nine
      months of 2007, we recorded income tax expense of $1.5 million which reflected
      an estimated annual effective tax rate of 31.5%. The Company anticipates a
      tax
      rate of approximately 32-34% in 2008.





Net
      income: Net income was $4.5 million for the first nine months of 2008 as
      compared to $3.2 million for the first nine months of 2007, an increase of
      41%.
      The improved profitability during the first nine months of 2008 is due to sales
      growth in the Take Shape for Life division and Medifast Weight Control Centers
      as well as improved advertising effectiveness in the Medifast Direct Marketing
      sales channel, and gross margin improvement.





**Three
      Months Ended September 30, 2008 and September 30, 2007**





Revenue:
      Revenue increased to $27.3 million in the third quarter of 2008 compared to
      $21.8 million in the second quarter of 2007, an increase of $5.5 million or
      25%.
      The Take Shape for Life sales channel accounted for 50% of total revenue, direct
      marketing channel accounted for 39%, brick and mortar clinics 8%, and doctors
      3%. Take Shape for Life sales, which are fueled by person-to-person recruiting
      and support increased by 99% compared to the third quarter of 2007. As compared
      to the third quarter of 2007, the direct marketing sales channel, which is
      fueled primarily by consumer advertising, decreased revenues by approximately
      15% year-over year, however, the advertising dollars spent were 16% less than
      the third quarter of 2007 as the Company continues to focus on more effective
      advertising spend. The Medifast Weight Control Centers increased sales by 77%
      due to the opening of new clinics, and doctor’s sales decreased by 25% due to
      certain doctors transitioning to the professional division of Take Shape for
      Life.


.


The
      Take
      Shape for Life division grew 99% 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 growth in this segment
      correlates directly to the increase in health coaches, which began to accelerate
      following our National Convention in July 2007. The number of active health
      coaches grew 94% to 3,200 at the end of the third quarter of 2008 as compared
      to
      1,650 for the same time period in 2007, and up from 2,800 at the end of the
      second quarter of 2008. The Company recently completed our 2008 National
      Convention in Orlando, FL on July 26 th ,
      2008
      where approximately 750 health coaches participated, an increase of nearly
      88%
      from prior year. The individuals that attended the event attended workshops
      and
      heard lectures by accredited individuals in the areas of recruiting, product
      and
      nutrition knowledge, and business skills.





The
      Medifast Weight Control Centers, which represent approximately 8% of the
      Company’s overall revenues, are currently operating in twenty locations in
      Dallas, Houston, and Orlando. In the third quarter of 2008, the Company
      experienced revenue growth of 77% versus the same time period last year. In
      the
      expanding Dallas, TX market, the average monthly revenue per clinic is
      approximately $51,000. During the third quarter of 2008, the Company opened
      three additional corporately owned clinics in the Houston, TX market. The
      Company plans on opening two additional corporately owned clinics in the Houston
      market by the end of 2008.





Overall,
      selling, general and administrative expenses increased by $3.6 million as
      compared to the third quarter of 2007. Take Shape for Life commission expense,
      which is completely variable based upon revenue, increased by approximately
      $2,800,000 as the Company showed sales growth of 99% as compared to the third
      quarter of 2007.. Salaries and benefits increased by approximately $500,000
      in
      the third quarter of 2008 as compared to last year. The increase includes the
      hiring of additional expertise in critical areas such as Take Shape for Life
      and
      the Medifast Weight Control Centers in the second half of 2007 which have
      greatly impacted the revenue growth in the first nine months of 2008. Additional
      personnel were hired in the call center during the first and second quarter
      of
      2008 as the Company brought the outsourced Take Shape for Life call center
      in-house early in the second quarter of 2008. The opening of eight new
      corporately owned clinics in the Houston, TX market and two in the Dallas,
      TX
      market also required the hiring of additional center managers and support staff.
      Advertising expense for the third quarter of 2008 was approximately $4.3 million
      compared to approximately $5.1 million for the same period last year, a decrease
      of $800,000 or 16%. Communication expense, decreased by $50,000 as the
      outsourced Take Shape for Life call center was brought in-house early in the
      second quarter of 2008. Other expenses increased by $650,000 which included
      items such as depreciation, amortization, credit card processing fees,
      charitable contributions, and property taxes. Operating expenses increased
      by
      $250,000 which primarily resulted from additional printing expense for our
      direct to consumer postcard mailings as well as maintenance, repairs, and
      supplies for our manufacturing and distribution facilities. Stock compensation
      expense increased by $129,000 as additional restricted shares were issued to
      key
      executives and Board members in the 3 rd quarter
      of 2008 that will be vesting over a five year term.


16


Costs
      and
      Expenses: Cost of revenue increased $1 million to $6.5 million in the third
      quarter of 2008 from $5.5 million in the third quarter of 2007. As a percentage
      of sales, gross margin increased to 76.1% from 74.7% in the third quarter of
      2007. The margin improved due to efficiencies gained from new machinery
      purchases in prior year, new shipping rules that resulted in additional shipping
      revenue from customers netting against shipping expense, as well as a price
      increase on July 1, 2008.





Income
      taxes **:** In
      the
      third quarter of 2008, the Company recorded $802,000 in income tax expense,
      which represents an annual effective rate of 34.1%. In the third quarter of
      2007, we recorded income tax expense of $446,000 which reflected an estimated
      annual effective tax rate of 32%. The Company anticipates a tax rate of
      approximately 32-34% in 2008.





Net
      income: Net income was $1.5 million in the third quarter of 2008 as compared
      to
      $954,000 in the third quarter of 2007, an increase of 62%. The improved
      profitability in the third quarter of 2008 is due to sales growth in the Take
      Shape for Life division and Medifast Weight Control Centers as well as improved
      advertising effectiveness in the Medifast Direct Marketing sales channel, and
      gross margin improvement.




**SEGMENT
      RESULTS OF OPERATIONS**





**Net
      Sales by Segment for the Three Months Ended Sept. 30,**





**2008**
            
            **2007****Segments**
            
            Sales
            
            % of Total
            
            Sales
            
            % of TotalMedifast
            
            $
            24,945,000
            
            
            91
            %
            $
            20,580,000
            
            
            94
            %All
                Other
            
            
            2,336,000
            
            
            9
            %
            
            1,266,000
            
            
            6
            %Total
                Sales
            
            $
            27,281,000
            
            
            100
            %
            $
            21,846,000
            
            
            100
            %





**Net
      Sales by Segment for the Nine Months Ended Sept. 30,**





**2008**
            
            **2007****Segments**
            
            Sales
            
            % of Total
            
            Sales
            
            % of TotalMedifast
            
            $
            73,928,000
            
            
            92
            %
            $
            60,916,000
            
            
            95
            %All
                Other
            
            
            6,059,000
            
            
            8
            %
            
            3,059,000
            
            
            5
            %Total
                Sales
            
            $
            79,987,000
            
            
            100
            %
            $
            63,975,000
            
            
            100
            %








**Three
      Months Ended September 30, 2008 and September 30, 2007**





Medifast
      Segment: The Medifast reporting segment consists of the sales of Medifast
      Direct, Take Shape for Life, and Doctors. As this represents the majority of
      our
      business this is referenced to the “Condensed Consolidated Results of
      Operations” management discussion for the three months ended September 30, 2008
      and 2007 above.





All
      Other
      Segment: The All Other reporting segment consists of the sales of Hi-Energy
      and
      Medifast Weight Control Centers. Sales increased by $1,070,000 year-over year
      for the three month period ended September 30 th .
      Sales
      increased in the Hi-Energy and Medifast Weight Control Centers sales due to
      the
      opening of ten new centers in the first nine months of 2008, including three
      centers opened in Houston, TX during the third quarter. In addition, the Dallas
      market continues to mature with the average clinic generating $51,000 per month
      in sales. The Company is continuing to focus on improved advertising
      effectiveness, improved closing rates on walk-in sales, as well as the hiring
      of
      more experienced clinic operators to manage the clinics, and improved
      efficiencies in operation of the clinics with a new point of sale software
      system. The Company now has twenty corporately owned clinics, compared to ten
      clinics in operation at the end of the third quarter of 2007.




17


**Nine
      Months Ended September 30, 2008 and September 30, 2007**





Medifast
      Segment: The Medifast reporting segment consists of the sales of Medifast
      Direct, Take Shape for Life, and Doctors. As this represents the majority of
      our
      business this is referenced to the “Condensed Consolidated Results of
      Operations” management discussion for the nine months ended September 30, 2008
      and 2007 above.





All
      Other
      Segment: The All Other reporting segment consists of the sales of Hi-Energy
      and
      Medifast Weight Control Centers. Sales increased by $3,000,000 year-over year
      for the nine-month period ended September 30, 2008. Sales increased in the
      Hi-Energy and Medifast Weight Control Centers sales due to the opening of ten
      new centers in the first nine months of 2008, including eight centers in
      Houston, TX and two centers in Dallas, TX. The Dallas, TX market continues
      to
      mature with the average clinic generating $51,000 per month in sales. The
      Company is continuing to focus on improved advertising effectiveness, improved
      closing rates on walk-in sales, as well as the hiring of more experienced clinic
      operators to manage the clinics, and improved efficiencies in operation of
      the
      clinics with a new point of sale software system. The Company now has twenty
      corporately owned clinics, compared to ten clinics in operation at the end
      of
      the third quarter of 2007.




**Net
      Profit by Segment for the Three Months Ended Sept. 30,**




**2008**
            
            **2007****Segments**
            
            Profit
            
            % of Total
            
            Profit
            
            % of TotalMedifast
            
            $
            2,086,000
            
            
            135
            %
            $
            1,513,000
            
            
            159
            %All
                Other
            
            
            (537,000
            )
            
            -35
            %
            
            (559,000
            )
            
            -59
            %Total
                Net Profit
            
            $
            1,549,000
            
            
            100
            %
            $
            954,000
            
            
            100
            %







**Net
      Profit by Segment for the Nine Months Ended Sept. 30,**





**2008**
            
            **2007****Segments**
            
            Profit
            
            % of Total
            
            Profit
            
            % of
                TotalMedifast
            
            $
            6,093,000
            
            
            136
            %
            $
            4,915,000
            
            
            152
            %All
                Other
            
            
            (1,607,000
            )
            
            -36
            %
            
            (1,680,000
            )
            
            -52
            %Total
                Net Profit
            
            $
            4,486,000
            
            
            100
            %
            $
            3,235,000
            
            
            100
            %





**Three
      Months Ended September 30, 2008 and September 30, 2007**





Medifast
      Segment: The Medifast reporting segment consists of the profits of Medifast
      Direct, Take Shape for Life, and Doctors. As this represents the majority of
      our
      business this is referenced to the “Condensed Consolidated Results of
      Operations” management discussion for the three months ended September 30, 2008
      and 2007 above. See footnote 15, “Business Segments” for a detailed breakout of
      expenses.





All
      Other
      Segment: The All Other reporting segment consists of the profit or loss 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
      decreased by $22,000. The Hi-Energy and Medifast Weight Control Centers showed
      an increase in net profitability year-over-year of $237,000. The increase in
      profitability was due to opening of ten new centers in the first nine months
      of
      2008, including three centers in the Houston, TX market during the third quarter
      of 2008. The increase in the total number of clinics to twenty led to additional
      sales and profitability. Medifast Corporate expenses increased by $215,000
      year-over-year. Corporate expenses include items such as auditors’ fees,
      attorney’s fees, Board of Director expenses, investor relations, corporate
      consulting, and corporate outings. See footnote 15, “Business Segments” for a
      detailed breakout of expenses.


18





**Nine
      Months Ended September 30, 2008 and September 30, 2007**





Medifast
      Segment: The Medifast reporting segment consists of the profits of Medifast
      Direct, Take Shape for Life, and Doctors. As this represents the majority of
      our
      business this is referenced to the “Condensed Consolidated Results of
      Operations” management discussion for the three months ended September 30, 2008
      and 2007 above. See footnote 15, “Business Segments” for a detailed breakout of
      expenses.





All
      Other
      Segment: The All Other reporting segment consists of the profit or loss 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
      decreased by $73,000. The Hi-Energy and Medifast Weight Control Centers showed
      an increase in net profitability year-over-year of $434,000. The increase in
      profitability was due to opening of ten new centers in the first nine months
      of
      2008, including three centers in the Houston, TX market during the third quarter
      of 2008. The increase in the total number of clinics to twenty led to additional
      sales and profitability. Medifast Corporate expenses increased by $361,000
      year-over-year. Corporate expenses include items such as auditors’ fees,
      attorney’s fees, Board of Director expenses, investor relations, corporate
      consulting, and corporate outings. See footnote 15, “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 2008, 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**





Inflation
      generally affects us by increasing the costs of labor, overhead, and raw
      material and packaging costs. The impact of inflation on our financial position
      and results of operations was minimal during the third quarter of 2007, however
      in 2008 the Company is continuing to be negatively impacted by increasing raw
      material costs.





**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-1Holdings, LLC. All parties, including Medifast,
      Inc. recently reached a global settlement including dismissal of the litigation
      with prejudice and general releases. On October 17, 2008, Medifast agreed to
      pay
      legal fees in the amount of $130,000 in cash, and 14,286 shares of Medifast
      treasury stock valued at $70,000 to settle the case. Mr. Sotomayor also received
      29,647 Medifast, Inc. warrants with a strike price of $4.80 a share from Mr.
      David Scheffler. The Board of Directors approved a settlement that was
      considered significantly less costly than the future litigation costs for
      defense. Medifast vehemently denied the alleged charges in the complaint and
      had
      fortuitous defenses that it believes would have prevailed in a trial. The
      total impact of the settlement to Medifast, Inc. will be a one time charge
      to earnings of approximately $200,000 in the fourth quarter of 2008.




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
      August of 2006, the Company updated its 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




Evaluation
      of Disclosure Controls and Procedures:




The
      Securities and Exchange Commission defines the term “disclosure controls and
      procedures” to mean a company’s controls and other procedures that are designed
      to ensure that information required to be disclosed in the reports that it
      files
      or submits under the Securities Exchange Act of 1934 is recorded, processed,
      summarized and reported within the time periods specified in the Securities
      and
      Exchange Commission’s rules and forms. Based on the evaluation of the
      effectiveness of our disclosure controls and procedures by our management,
      with
      the participation of our Chief Executive Officer and our Chief Financial
      Officer, as of the end of the period covered by this report, our Chief Executive
      Officer and our Chief Financial Officer have concluded that our disclosure
      controls and procedures at the end of the period covered by this report were
      effective to ensure that information required to be disclosed in the reports
      that we file or submit under the Securities Exchange Act of 1934 is
      (i) recorded, processed, summarized and reported, within the time periods
      specified in the Commission’s rules and forms, and (ii) accumulated and
      communicated to our management, including our Chief Executive Officer and Chief
      Financial Officer, as appropriate to allow timely decisions regarding
      disclosure.





Changes
      in Internal Control over Financial Reporting:




No
      change
      in our internal control over financial reporting (as defined in Rules 13a-15(f)
      and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended
      September 30, 2008 that has materially affected, or is reasonably likely to
      materially affect, our 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
            
            November
                10, 2008Michael
                S. McDevittChief
                Executive Officer and Chief Financial Officer(principal
                executive officer and principal financial officer)


20





Index
      to
      Exhibits





Exhibit
                Number
            Description
                of Exhibit31.1
            Certification
                of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation
                S-K,
                as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.31.2
            Certification
                of Chief Financial Officer pursuant to Item 601(b)(31) of Regulation
                S-K,
                as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.32.1
            Certification
                of Chief Executive Officer and Chief Financial Officer pursuant to
                Section
                906 of the Sarbanes-Oxley Act of
                2002


21