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 March 31, 2010




OR




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




For the
transition period from 
to




Commission
file number 0-23016




MEDIFAST,
INC.


(Exact
name of registrant as specified in its charter)




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





11445
Cronhill Drive


Owings
Mills, MD 21117


Telephone
Number (410) 581-8042




Indicate
by checkmark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.




Yes  x    No  ̈




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




Large
accelerated filer   ̈          Accelerated
filer  x            Non-accelerated
filer  ̈




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




Yes  ̈     No  x




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




Class
              
              Outstanding at May
                10, 2010Common
      stock, $.001 par value per share
              
              15,409,601
      shares





Medifast,
Inc.


Index





Part
      I - Financial Information:Item
      1 – Financial StatementsCondensed
      Consolidated Balance Sheets as of March 31, 2010 (unaudited) and December
      31, 2009 (audited)
                
                3Condensed
      Consolidated Statements of Income (unaudited) for the Three Months Ended
      March 31, 2010 and 2009
                
                4Condensed
      Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for
      the Three Months Ended  March 31,2010
                
                5Condensed
      Consolidated Statements of Cash Flows (unaudited) for the Three Months
      Ended March 31, 2010 and 2009
                
                6Notes
      to Unaudited Condensed Consolidated Financial Statements
                
                7Item
      2 - Management’s Discussion and Analysis of Financial Condition And
      Results of Operations
                
                13Item
      3 – Quantitative and Qualitative Disclosures about Market
    Risk
                
                18Item
      4 – Controls and Procedures
                
                18Part
      II - Other Information:Item
      1 – Legal Proceedings
                
                19Item
      1A – Risk Factors
                
                19Item
      5 – Other Information
                
                19Item
      6 - Exhibits
                
                21


2


Part
I.  Financial Information





Item 1.
Financial Statements





MEDIFAST,
INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS





(Unaudited)
                
                
                (Audited)March31,2010
                
                
                December31,2009ASSETSCurrent
      assetsCash
      and cash equivalents
                
                $
                20,814,000
                
                
                $
                10,604,000Accounts
      receivable-net of allowance for sales returns and doubtful accounts of
      $100,000
                
                
                1,101,000
                
                
                
                676,000Inventory
                
                
                13,586,000
                
                
                
                11,232,000Investment
      securities
                
                
                7,181,000
                
                
                
                5,699,000Deferred
      compensation
                
                
                -
                
                
                
                641,000Prepaid
      expenses and other current assets
                
                
                2,491,000
                
                
                
                5,334,000Note
      receivable - current
                
                
                46,000
                
                
                
                46,000Deferred
      tax asset
                
                
                83,000
                
                
                
                100,000Total
      current assets
                
                
                45,302,000
                
                
                
                34,332,000Property,
      plant and equipment - net
                
                
                24,716,000
                
                
                
                23,237,000Trademarks
      and intangibles - net
                
                
                3,815,000
                
                
                
                4,104,000Note
      receivable, net of current assets
                
                
                112,000
                
                
                
                112,000Other
      assets
                
                
                243,000
                
                
                
                379,000TOTAL
      ASSETS
                
                $
                74,188,000
                
                
                $
                62,164,000LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilitiesAccounts
      payable and accrued expenses
                
                
                10,621,000
                
                
                
                4,967,000Income
      taxes payable
                
                
                759,000
                
                
                
                22,000Current
      maturities of long-term debt
                
                
                796,000
                
                
                
                796,000Total
      current liabilities
                
                
                12,176,000
                
                
                
                5,785,000Other
      liabilitiesLong-term
      debt, net of current portion
                
                
                5,245,000
                
                
                
                5,444,000Deferred
      tax liability
                
                
                1,464,000
                
                
                
                1,360,000Total
      liabilities
                
                
                18,885,000
                
                
                
                12,589,000Stockholders'
      Equity:Preferred
      stock, $.001 par value (1,500,000 authorized, no shares issued and
      outstanding)
                
                
                -
                
                
                
                -Common
      stock; par value $.001 per share; 20,000,000 shares authorized; 15,403,941
      issued and 15,036,103 outstanding at 3/31/10 and 15,398,941 issued and
      15,031,103 shares outstanding at 12/31/09
                
                
                16,000
                
                
                
                16,000Additional
      paid-in capital
                
                
                29,352,000
                
                
                
                28,456,000Accumulated
      other comprehensive income
                
                
                90,000
                
                
                
                159,000Retained
      earnings
                
                
                29,165,000
                
                
                
                24,264,000Less:
      cost of 367,838 and 367,838 shares of common stock in
    treasury
                
                
                (3,320,000
                )
                
                
                (3,320,000
                )Total
      stockholders' equity
                
                
                55,303,000
                
                
                
                49,575,000TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                
                $
                74,188,000
                
                
                $
                62,164,000





See notes
to condensed consolidated financial statements


3


MEDIFAST,
INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF INCOME


(Unaudited)





Three Months Ended March 31,2010
                    
                    
                    2009Revenue
                    
                    $
                    60,585,000
                    
                    
                    $
                    34,605,000Cost
      of sales
                    
                    
                    14,817,000
                    
                    
                    
                    8,979,000Gross
      Profit
                    
                    
                    45,768,000
                    
                    
                    
                    25,626,000Selling,
      general, and administration
                    
                    
                    37,567,000
                    
                    
                    
                    21,610,000Income
      from operations
                    
                    
                    8,201,000
                    
                    
                    
                    4,016,000Other
      income/(expense)Interest
      income/ (expense), net
                    
                    
                    28,000
                    
                    
                    
                    (5,000
                    )Other
      expense
                    
                    
                    (15,000
                    )
                    
                    
                    (35,000
                    )13,000
                    
                    
                    
                    (40,000
                    )Income
      before provision for income taxes
                    
                    
                    8,214,000
                    
                    
                    
                    3,976,000Provision
      for income taxes
                    
                    
                    (3,313,000
                    )
                    
                    
                    (1,491,000
                    )Net
      income
                    
                    $
                    4,901,000
                    
                    
                    $
                    2,485,000Basic
      earnings per share
                    
                    $
                    0.35
                    
                    
                    $
                    0.19Diluted
      earnings per share
                    
                    $
                    0.33
                    
                    
                    $
                    0.17Weighted
      average shares outstanding -Basic
                    
                    
                    13,908,144
                    
                    
                    
                    13,284,431Diluted
                    
                    
                    14,671,187
                    
                    
                    
                    14,494,898





See notes
to condensed consolidated financial statements.


4


MEDIFAST,
INC. AND SUBSIDIARIES


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


Three
Months Ended March 31, 2010


(Unaudited)





Par Value
                          
                          
                          Additional
                          
                          
                          
                          
                          
                          AccumulatedNumber
                          
                          
                          $0.001
                          
                          
                          Paid-In
                          
                          
                          Retained
                          
                          
                          other comp
                          
                          
                          TreasuryofShares
                          
                          
                          Amount
                          
                          
                          Capital
                          
                          
                          Earnings
                          
                          
                          income/(loss)
                          
                          
                          Stock
                          
                          
                          TotalBalance,
      December 31, 2009
                          
                          
                          15,398,941
                          
                          
                          $
                          16,000
                          
                          
                          $
                          28,456,000
                          
                          
                          $
                          24,264,000
                          
                          
                          $
                          159,000
                          
                          
                          $
                          (3,320,000
                          )
                          
                          $
                          49,575,000Vesting
      of share-based compensation to executives and directors
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          610,000
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          610,000Shares
      issued
                          
                          
                          5,000
                          
                          
                          
                          100
                          
                          
                          
                          0
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          100Fair
      value adjustment for stock compensation tax benefit
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          286,000
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          286,000Net
      change in  unrealized gain on investments, net of
      taxes
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (69,000
                          )
                          
                          
                          
                          
                          
                          
                          (69,000
                          )Net
      income
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          4,901,000
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          4,901,000Balance,
      March 31, 2010
                          
                          
                          15,403,941
                          
                          
                          $
                          16,100
                          
                          
                          $
                          29,352,000
                          
                          
                          $
                          29,165,000
                          
                          
                          $
                          90,000
                          
                          
                          $
                          (3,320,000
                          )
                          
                          $
                          55,303,100





See notes
to condensed consolidated financial statements


5


MEDIFAST,
INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS





(Unaudited)





Three Months Ended March 31,2010
                
                
                2009Cash
      flows from operating activities:Net
      income
                
                $
                4,901,000
                
                
                $
                2,485,000Adjustments
      to reconcile net income to net cash provided by operating activities from
      continuing operations:Depreciation
      and amortization
                
                $
                1,398,000
                
                
                $
                1,229,000Realized
      loss (gain) on investment securities
                
                
                14,000
                
                
                
                (21,000
                )Common
      stock issued for services
                
                
                -
                
                
                
                52,000Vesting
      of share-based compensation
                
                
                610,000
                
                
                
                429,000Deferred
      income taxes
                
                
                105,000
                
                
                
                (110,000
                )Changes
      in assets and liabilities which provided (used) cash:Accounts
      receivable
                
                
                (425,000
                )
                
                
                (126,000
                )Inventory
                
                
                (2,354,000
                )
                
                
                1,493,000Prepaid
      expenses & other current assets
                
                
                632,000
                
                
                
                110,000Deferred
      compensation
                
                
                509,000
                
                
                
                80,000Other
      assets
                
                
                136,000
                
                
                
                (2,000
                )Income
      taxes
                
                
                2,947,000
                
                
                
                40,000Accounts
      payable and accrued expenses
                
                
                5,656,000
                
                
                
                (297,000
                )Net
      cash provided by operating activities
                
                
                14,129,000
                
                
                
                5,362,000Cash
      Flow from Investing Activities:Purchase
      Sale of investment securities, net
                
                
                (1,417,000
                )
                
                
                (51,000
                )Purchase
      of property and equipment
                
                
                (2,589,000
                )
                
                
                (722,000
                )Net
      cash (used in) investing activities
                
                
                (4,006,000
                )
                
                
                (773,000
                )Cash
      Flow from Financing Activities:Repayment
      of long-term debt, net
                
                
                (199,000
                )
                
                
                (64,000
                )Increase
      in line of credit
                
                
                -
                
                
                
                15,000Decrease
      in note receivable
                
                
                -
                
                
                
                34,000Excess
      tax benefits from share-based payment arrangements
                
                
                286,000
                
                
                
                -Purchase
      of treasury stock
                
                
                -
                
                
                
                (102,000
                )Net
      cash provided by (used in) financing activities
                
                
                87,000
                
                
                
                (117,000
                )NET
      INCREASE IN CASH AND CASH EQUIVALENTS
                
                
                10,210,000
                
                
                
                4,472,000Cash
      and cash equivalents - beginning of the period
                
                
                10,604,000
                
                
                
                973,000Cash
      and cash equivalents - end of period
                
                $
                20,814,000
                
                
                $
                5,445,000Supplemental
      disclosure of cash flow information:Interest
      paid
                
                $
                27,000
                
                
                $
                37,000Income
      taxes
                
                $
                -
                
                
                $
                985,000





See notes
to condensed consolidated financial statements


6


Medifast,
Inc.


Notes
to Unaudited Condensed Consolidated Financial Statements


For
the Three Month Period Ended March 31, 2010 and 2009





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.





The results for the three months ended
March 31, 2010 are not necessarily indicative of the results to be expected for
the year ending December 31, 2010 or any other portions
thereof.  Certain information in footnote disclosures normally
included in annual financial statements has been condensed or omitted for the
interim periods presented in accordance with the rules and regulations of the
Securities and Exchange Commission (the “SEC”) for interim consolidated
financial statements.





These financial statements do not
contain all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.  However, in
the opinion of management, all adjustments consisting of normal, recurring
adjustments considered necessary for a fair presentation of the financial
position and results of operations have been included.





The consolidated balance sheet as of
December 31, 2009 is derived from the audited financial statements included in
the Company’s Annual Report in Form 10-K filed with the SEC for the year ended
December 31, 2009 (the “2009 form 10-K), which should be read in conjunction
with these consolidated financial statements.





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





In
January 2010, the FASB issued new guidance that expands and clarifies
existing disclosures about fair value measurements. The guidance requires the
gross presentation of activity within the Level 3 fair value measurement roll
forward and details of transfers in and out of Level 1 and 2 fair value
measurements. In addition, companies will be required to disclose quantitative
information about the inputs used in determining fair values. These standards
were adopted in the first quarter of 2010. The adoption had no impact on the
Company’s consolidated financial position or results




4.           Revenue
Recognition




Revenue
from product sales 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.





Revenue
from product sales includes amounts billed for shipping and handling. Revenue
from shipping and handling charges was $2.1 million and $925,000 for the three
months ended March 31, 2010 and 2009, respectively. Shipping-related costs are
included in cost of goods sold in the accompanying consolidated statements of
operations.




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.


7





Inventory
consist of the following at March 31, 2010 an d December 31, 200 9





2010
                        
                        
                        2009Raw
      Materials
                        
                        $
                        3,467,000
                        
                        
                        $
                        3,900,000Packaging
                        
                        
                        2,816,000
                        
                        
                        
                        2,628,000Finish
      ed Goods
                        
                        
                        7,303,000
                        
                        
                        
                        4,704,000$
                        13,586,000
                        
                        
                        $
                        11,232,000





6.           Intangible
Assets





The
Company has acquired other intangible assets, which include: customer lists,
trademarks, patents, and copyrights.  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 with finite lives 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.  Infinite life
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 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.





AsofMarch31,2010
                    
                    
                    AsofDecember31,2009Gross Carrying
                    
                    
                    Accumulated
                    
                    
                    Gross Carrying
                    
                    
                    AccumulatedAmount
                    
                    
                    Amortization
                    
                    
                    Amount
                    
                    
                    AmortizationCustomer
      lists
                    
                    $
                    8,567,000
                    
                    
                    $
                    6,315,000
                    
                    
                    $
                    8,567,000
                    
                    
                    $
                    6,086,000Non-compete
      agreements
                    
                    $
                    840,000
                    
                    
                    $
                    840,000
                    
                    
                    $
                    840,000
                    
                    
                    $
                    840,000Trademarks,
      patents, and copyrightsfinite
      life
                    
                    
                    1,622,000
                    
                    
                    
                    986,000
                    
                    
                    
                    1,622,000
                    
                    
                    
                    926,000infinite
      life
                    
                    
                    927,000
                    
                    
                    
                    -
                    
                    
                    
                    927,000
                    
                    
                    
                    -Total
                    
                    $
                    11,956,000
                    
                    
                    $
                    8,141,000
                    
                    
                    $
                    11,956,000
                    
                    
                    $
                    7,852,000





Amortization
expense for the three months ended March 31, 2010 and 2009 was as
follows:





2010
                
                
                2009Customer
      lists
                
                $
                229,000
                
                
                $
                365,000Trademarks
      and patents
                
                
                60,000
                
                
                
                60,000Total
      Trademarks and Intangibles
                
                $
                289,000
                
                
                $
                425,000





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


8


7.                        Earnings
per Share




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





The
following table sets forth the computation of basic and diluted EPS for the
three months ended March 31:





2010
                    
                    
                    2009Numerator:Net
      income
                    
                    $
                    4,901,000
                    
                    
                    $
                    2,485,000Denominator:Weighted
      average shares of common stock outstanding
                    
                    
                    13,908,144
                    
                    
                    
                    13,284,431Effect
      of dilutive common stock equivalents
                    
                    
                    763,043
                    
                    
                    
                    1,210,467Weighted
      average diluted common shares outstanding
                    
                    
                    14,671,187
                    
                    
                    
                    14,494,898EPSBasic
                    
                    $
                    0.35
                    
                    
                    $
                    0.19Diluted
                    
                    $
                    0.33
                    
                    
                    $
                    0.17





8.
            Estimates





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





9.
            Deferred
      Compensation Plan





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.





The
participating executive 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.


9


10.
            Fair
      Value Measurements





As of
January 1, 2009, we adopted ASC 820-10 for all non-financial assets and
liabilities that are recognized or disclosed at fair value in the financial
statements. We had previously adopted ASC 820-10 for all financial assets and
liabilities.  ASC 820-10 defines fair value as the price that would be
received from selling an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. When
determining the fair value measurements for assets and liabilities, which are
required to be recorded at fair value, we consider the principal or most
advantageous market in which we would transact and the market-based risk
measurements or assumptions that market participants would use in pricing the
asset or liability, such as inherent risk, transfer restrictions, and credit
risk.




ASC
820-10 establishes a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value.  The hierarchy gives the
highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities (level 1 measurements) and the lowest priority to
unobservable inputs (level 3 measurements).  The levels of the fair value
hierarchy under ASC 820-10 are described below:





Level
      1
            Valuation
      is based upon quoted prices for identical instruments traded in active
      markets.





Level
      2
            Valuation
      is based upon quoted prices for similar instruments in active markets,
      quoted prices for identical or similar instruments that are not active,
      and model-based valuation techniques for which all significant assumptions
      are observable in the market.





Level
      3
            Valuation
      is generated from model-based techniques that use significant assumptions
      not observable in the market.  These unobservable assumptions
      reflect our own estimates of assumptions that market participants would
      use in pricing the asset or liability.  Valuation techniques
      include use of option pricing models, discounted cash flow models and
      similar techniques.





The
Company’s financial instruments include cash and cash equivalents, trade
receivables, available-for-sale securities and debt.  The carrying amounts
of cash and cash equivalents and trade receivables approximate fair value due to
their short maturities.  The fair value of available for-sale securities
are based on quoted market rates.  The carrying amount of debt approximates
fair value due to the variable rate associated with the debt.




The
following table represents the fair value hierarchy for those financial assets
and liabilities measured at fair value on a recurring
basis as of March 31, 2010:





Level
      I
                        
                        
                        Level II
                        
                        
                        Level III
                        
                        
                        TotalInvestment
      securities
                        
                        $
                        7,181,000
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        $
                        7,181,000Cash
      equivalents
                        
                        
                        20,814,000
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        20,814,000Total
      Assets
                        
                        $
                        27,995,000
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        27,995,000Liabilities
                        
                        
                        
                        
                        
                        
                        6,041,000
                        
                        
                        
                        -
                        
                        
                        
                        6,041,000Total
      Liabilities
                        
                        $
                        -
                        
                        
                        
                        6,041,000
                        
                        
                        $
                        -
                        
                        
                        $
                        6,041,000




The
Company implemented ASC 820-10 10 (formerly FSP 157-2, “Effective Date of
FASB Statement No. 157”), for our nonfinancial assets and liabilities that
are re-measured at fair value on a non-recurring basis. The adoption for our
nonfinancial assets and liabilities that are re-measured at fair value on a
non-recurring basis did not impact our financial position or results of
operations; however, could have an impact in future periods.




Cash
equivalents consists of demand deposits in the amount of
$20,814,000.





11.
            Share
      Based Compensation





The Company adopted a stock option plan
("Plan"), which as amended, authorizing the grant of incentive and non-incentive
options for an aggregate of 1,250,000 shares of the Company's common stock to
officers, employees, directors and consultants.  Incentive options are
to be granted at fair market value.  Options are to be exercisable as
determined by the compensation committee.


10


Stock
Options





The
following summarizes the stock option activity for the three months ended March
31, 2010:




Shares
                      
                      
                      Weighted
                        Average
                        ExercisePriceOutstanding
      at beginning of year
                      
                      
                      10,000
                      
                      
                      $
                      3.83Options
      exercised
                      
                      
                      -
                      
                      
                      
                      -Options
      forfeited or expired
                      
                      
                      -
                      
                      
                      
                      -Outstanding
      at March 31, 2010
                      
                      
                      10,000
                      
                      
                      $
                      3.83Options
      exercisable atMarch 31, 2010
                      
                      
                      10,000
                      
                      
                      $
                      3.83




Restricted
Stock




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





Shares
                    
                    
                    Weighed-Average
                      Grant Date FairValueUnvested
      at January 1, 2010
                    
                    
                    1,204,378
                    
                    
                    $
                    5.57Granted
                    
                    
                    5,000
                    
                    
                    
                    21.14Vested
                    
                    
                    (107,770
                    )
                    
                    
                    5.66Forfeited
                    
                    
                    -
                    
                    
                    
                    -Unvested
      at March 31, 2010
                    
                    
                    1,101,608
                    
                    
                    
                    5.64




The
Company recorded stock compensation expense of $610,000 and $429,000 for the
three months ended March 31, 2010 and 2009, respectively.  As of March
31, 2010 there was $6.2 million of total unrecognized compensation expense
related to unvested share-base compensation arrangements.





13.                  
   Income Taxes
 
 The
Company is subject to U.S. Federal income taxes as well as income taxes of
multiple state jurisdictions.  For Federal and state tax purposes, tax
years 2006 – 2009 remain open to examination.
 
 The
actual combined effective tax rate for the three months ended March 31, 2010 was
40.3%.  The Company anticipates a tax rate of approximately 39-40% in
2010.




14.                      Reclassifications





Certain
amounts for the three months ended March 31, 2009 have been reclassified to
conform to the presentation of the March 31, 2010 amounts.  The
reclassifications have no effect on net income for the three months ended March
31, 2010 and 2009.


11





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 Medifast Weight
Control Centers Corporate and Franchise, 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 three months March 31, 2010
and 2009:





Three Months Ended March 31,
      2010Medifast
                                          
                                          
                                          All Other
                                          
                                          
                                          Eliminations
                                          
                                          
                                          ConsolidatedRevenues,
      net
                                          
                                          $
                                          54,729,000
                                          
                                          
                                          $
                                          5,856,000
                                          
                                          
                                          
                                          
                                          
                                          
                                          $
                                          60,585,000Cost
      of Sales
                                          
                                          
                                          13,630,000
                                          
                                          
                                          
                                          1,187,000
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          14,817,000Selling,
      General and Administrative Expenses
                                          
                                          
                                          31,749,000
                                          
                                          
                                          
                                          4,420,000
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          36,169,000Depreciation
      and Amortization
                                          
                                          
                                          1,139,000
                                          
                                          
                                          
                                          259,000
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          1,398,000Interest
      (net) and Other
                                          
                                          
                                          10,000
                                          
                                          
                                          
                                          (23,000
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          (13,000
                                          )Provision
      for income taxes
                                          
                                          
                                          3,313,000
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          3,313,000Net
      income
                                          
                                          $
                                          4,888,000
                                          
                                          
                                          $
                                          13,000
                                          
                                          
                                          
                                          
                                          
                                          
                                          $
                                          4,901,000Segment
      Assets
                                          
                                          $
                                          52,627,000
                                          
                                          
                                          $
                                          21,564,000
                                          
                                          
                                          
                                          
                                          
                                          
                                          $
                                          74,191,000Three Months Ended March 31,
      2009Medifast
                                          
                                          
                                          All Other
                                          
                                          
                                          Eliminations
                                          
                                          
                                          ConsolidatedRevenues,
      net
                                          
                                          $
                                          31,659,000
                                          
                                          
                                          $
                                          2,946,000
                                          
                                          
                                          
                                          
                                          
                                          
                                          $
                                          34,605,000Cost
      of Sales
                                          
                                          
                                          8,294,000
                                          
                                          
                                          
                                          685,000
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          8,979,000Selling,
      General and Administrative Expenses
                                          
                                          
                                          17,745,000
                                          
                                          
                                          
                                          2,637,000
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          20,382,000Depreciation
      and Amortization
                                          
                                          
                                          990,000
                                          
                                          
                                          
                                          238,000
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          1,228,000Interest
      (net) and Other
                                          
                                          
                                          0
                                          
                                          
                                          
                                          40,000
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          40,000Provision
      for income taxes
                                          
                                          
                                          1,491,000
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          1,491,000Net
      income (loss)
                                          
                                          $
                                          3,139,000
                                          
                                          
                                          $
                                          (654,000
                                          )
                                          
                                          
                                          
                                          
                                          
                                          $
                                          2,485,000Segment
      Assets
                                          
                                          $
                                          35,575,000
                                          
                                          
                                          $
                                          17,922,000
                                          
                                          
                                          
                                          
                                          
                                          
                                          $
                                          53,497,000


12


Item
2. Management’s Discussion and Analysis of


Financial
Condition and Results of Operations





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.





The
following discussion should be read in conjunction with the unaudited condensed
consolidated financial statements and related notes appearing elsewhere
herein





Overview
of the Company





Medifast,
Inc. (the "Company” or “Medifast”) is a Delaware corporation, incorporated in
1993. The Company’s operations are primarily conducted through five of its
wholly owned subsidiaries, Jason Pharmaceuticals, Inc. ("Jason"), Take Shape for
Life, Inc. (“TSFL”), Jason Enterprises, Inc., Jason Properties, LLC and Seven
Crondall, LLC.  The Company is engaged in the production,
distribution, and sale of weight management and disease management products and
other consumable health and diet products.  Medifast, Inc.’s product
lines include weight and disease management, meal replacement, and vitamins
primarily manufactured in its modern, FDA approved facility in Owings Mills,
Maryland.




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




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





Distribution
Channels





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





Take Shape for LifeTM - Take
Shape for Life is the direct selling division of Medifast.  Take Shape
For Life is a physician led network of independent health coaches who are
trained to provide coaching and support to clients on Medifast
programs.  Health coaches are conduits to give clients the
encouragement and mentoring to successfully reach a healthy
weight.  Take Shape For Life programs provide a road map to empower
the individual to take control of their health through better
habits.  Take Shape for Life offers the exclusive BeSlim®
philosophy, which encourages long-term weight maintenance.  Take Shape
for Life also moves beyond the scope of weight loss to show customers how to
achieve optimal health through the balance of body, mind, and finances. Take
Shape for Life uses the high quality, medically validated products of Medifast
and The Habits of Health system to create a lifelong health optimization
program.  In addition to the encouragement and support of a health
coach, clients of Take Shape for Life are offered a bio-network of support
including program support calls and access to registered dieticians via toll
free telephone, email and web chats.


13





Program
entrants are encouraged to consult with their primary care physician and a Take
Shape for Life Health Coach to determine the Medifast program that is right for
them.  Health Coaches are required to obtain qualification based upon
testing of their knowledge on Medifast products and programs. Health Coaches may
also become certified by The Health Institute, a training program developed by
Medifast professionals.





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





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





In 2008,
the Company began offering the clinic model as a franchise
opportunity.  The Company currently has franchisee centers located in
Alabama, Arizona, California and Minnesota. At March 31, 2010, eighteen
franchise locations were in operation.





Medifast Physicians–Medifast
physicians have implemented the Medifast program within their practice or clinic
since 1980.  These physicians carry an inventory of Medifast products
and resell them to patients.  They also provide appropriate medical
monitoring, testing, and support for patients on the
program.  Management estimates that more than 20,000 physicians
nationwide have recommended Medifast as a treatment for their overweight
patients since 1980, and over an estimated 1 million patients have used its’
products to lose and maintain their weight.  Many Medifast physicians
prefer not to carry inventory and resell products in their offices and take
advantage of the Medifast Direct or the Take Shape for Life program
to  support their patient base.





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


14


Overview
of the three Months Ended March 31, 2010 Compared to Three Month Ended March 31,
2009





Three
      Months Ended March 31,2010
                                  
                                  
                                  2009
                                  
                                  
                                  $
      Change
                                  
                                  
                                  %
      ChangeRevenue
                                  
                                  $
                                  60,585,000
                                  
                                  
                                  $
                                  34,605,000
                                  
                                  
                                  $
                                  25,980,000
                                  
                                  
                                  
                                  75
                                  %Cost
      of sales
                                  
                                  
                                  14,817,000
                                  
                                  
                                  
                                  8,979,000
                                  
                                  
                                  
                                  5,838,000
                                  
                                  
                                  
                                  65
                                  %Gross
      Profit
                                  
                                  
                                  45,768,000
                                  
                                  
                                  
                                  25,626,000
                                  
                                  
                                  $
                                  20,142,000
                                  
                                  
                                  
                                  79
                                  %Selling,
      general, and administration
                                  
                                  
                                  37,567,000
                                  
                                  
                                  
                                  21,610,000
                                  
                                  
                                  $
                                  15,957,000
                                  
                                  
                                  
                                  74
                                  %Income
      from operations
                                  
                                  
                                  8,201,000
                                  
                                  
                                  
                                  4,016,000
                                  
                                  
                                  
                                  4,185,000
                                  
                                  
                                  
                                  104
                                  %Other
      income/(expense)Interest
      income (expense), net
                                  
                                  
                                  28,000
                                  
                                  
                                  
                                  (5,000
                                  )
                                  
                                  $
                                  33,000
                                  
                                  
                                  
                                  660
                                  %Other
      income/(expense)
                                  
                                  
                                  (15,000
                                  )
                                  
                                  
                                  (35,000
                                  )
                                  
                                  $
                                  20,000
                                  
                                  
                                  
                                  57
                                  %13,000
                                  
                                  
                                  
                                  (40,000
                                  )
                                  
                                  
                                  53,000
                                  
                                  
                                  
                                  133
                                  %Income
      before provision for income taxes
                                  
                                  
                                  8,214,000
                                  
                                  
                                  
                                  3,976,000
                                  
                                  
                                  $
                                  4,238,000
                                  
                                  
                                  
                                  107
                                  %Provision
      for income tax (expense)
                                  
                                  
                                  (3,313,000
                                  )
                                  
                                  
                                  (1,491,000
                                  )
                                  
                                  
                                  (1,822,000
                                  )
                                  
                                  
                                  122
                                  %Net
      income
                                  
                                  $
                                  4,901,000
                                  
                                  
                                  $
                                  2,485,000
                                  
                                  
                                  $
                                  2,416,000
                                  
                                  
                                  
                                  97
                                  %% of revenueGross
      Profit
                                  
                                  
                                  75.5
                                  %
                                  
                                  
                                  74.1
                                  %Selling,
      general, and administration
                                  
                                  
                                  62.0
                                  %
                                  
                                  
                                  62.4
                                  %Income
      from Operations
                                  
                                  
                                  13.5
                                  %
                                  
                                  
                                  11.6
                                  %





Revenue.


Revenue increased to $60.6 million for
the first three months of 2010 compared to $34.6 million for the first three
months of 2009, an increase of $25.9 million or 75%.  The Take Shape
for Life sales channel accounted for 62% of total revenue; direct marketing
channel accounted for 27%, and the Medifast Weight Control Centers and physician
clinics 11%.  Take Shape for Life sales, which are fueled by
person-to-person direct selling and successful health coaches building their
independent businesses and supporting clients increased sales to $37.6 million
or 94% compared to the first quarter of 2010.   The Company’s
Medifast Weight Control Center clinic division, increased sales to $6.6 million
or 75% compared to the first quarter of 2009.  Same store sales
increased by 30% for corporate Centers open greater than one
year.   The Company now has twenty seven corporately owned
clinics, compared to twenty one clinics in operation at the end of the first
quarter of 2009.  The Company’s Medifast Weight Control Center
Franchise model has been expanding as well and now has 18 franchisee centers in
operations as compared to 10 in the first quarter of 2009.  The direct
marketing sales channel, which is fueled primarily by consumer advertising,
increased revenues to $16.4 million or 43% year-over year on a 34% increase in
advertising spend.    Due to the growth of the business,
shipping revenue has increased and is now recognized in the revenue line item on
the consolidated statement of operations in accordance with generally accepted
accounting principles.  Previously, shipping revenue was netted
against shipping expense in the cost of sales line item on the consolidated
statement of operations.  In the first quarter of 2010, the Company
collected $2.1 million in shipping revenue from customers as compared to
$925,000 in the first quarter of 2009.


15


Take
Shape for Life revenue increased 94% to $37.6 million compared with $19.4
million in 2009.   Growth in revenues for the distribution
channel was driven by increased customer product sales as a result of an
increase in active health coaches.   The number of active health
coaches during the first quarter of 2010 increased to approximately 7,100
compared with 4,000 during the period a year ago, an increase of 78%. We
continue to see the benefits of a physician-lead network of coaches that are
able to support their clients in their weight-loss efforts.   In
today’s environment where trust and personal recommendations are becoming a more
important component in consumer purchasing decisions, the Take Shape for Life
model of health coaches helping others to lose weight as a result of one-on-one
communication and support continues its rapid growth. Take Shape for Life
customers who have utilized the Medifast products and programs and successfully
have addressed their body weight and health issues are increasingly choosing to
become active health coaches.   Becoming a health coach is a
business opportunity that has a low start up cost, and does not require the
holding of inventory as all orders are shipped from the company to the end
consumer.   In the current economic environment, many people are
looking for supplemental income to assist in paying the car payment or mortgage,
and becoming a health coach allows for supplemental income in the form of
commission compensation on product sales. In addition, the health coach supports
customer needs by providing education on the program and assisting customers in
selecting the right choices of the clinically proven Medifast products and
protocols. Take Shape for Life has assisted thousands of overweight and obese
customers regain their health and wellbeing while creating a national bionetwork
of active health coaches who are combating the epidemic of Obesity in
America.





The
Medifast Weight Control Centers and physician clinics, which represent
approximately 11% of the Company’s overall revenues, are currently operating in
twenty seven corporate locations in Florida, Maryland, and Texas, and eighteen
franchise locations.  In the first quarter of 2009, the Company was
operating twenty one corporate locations and supporting ten franchise
locations.  In the first quarter of 2010, the Company experienced
revenue growth of 75% versus the same time period last
year.  Throughout 2010, the Company anticipates opening an additional
13-15 corporately owned Medifast Weight Control Centers.





The
Direct Marketing Sales division sales increased 43% to 16.4 million as compared
with $11.4 million in the first quarter of 2009, an increase of $5.0
million.  Due to a more effective advertising message, more targeted
advertising through extensive analytical analysis, and improved call center
closing rates the company experienced a 2.8 to 1 return on advertising spend
during the first quarter of 2010 as compared to  a 2.6 to
1  return in the first quarter of 2009.  The Company spent
approximately $5.75 million on direct response advertising in the first quarter
of 2010.





Cost of Goods
Sold


Cost of revenue increased $5.8 million
to $14.8 million in the first quarter of 2010 from $9 million in the first
quarter of 2009.  As a percentage of sales, gross margin improved by
140 basis points to 75.5% from 74.1% in the first quarter of
2009.  The improvement in gross margin is due to improved pricing on
raw materials and packaging, manufacturing efficiencies realized from machinery
in terms of labor and scrap reduction, and decreased manufacturing overhead as a
result of the increased number of units produced to support the sales
growth.





Previously, shipping revenue was netted
against shipping expense in the cost of sales line item on the consolidated
statement of operations.  However, due to the growth of the business,
shipping revenue has increased and is now recognized in the revenue line item on
the consolidated statement of operations  in accordance with generally
accepted accounting principles.





Operating
Expenses


Selling, general and administrative
expenses increased by $15.9 million to $37.6 million in the first quarter of
2010 as compared to $21.6 million in the first quarter of 2009.  As a
percentage of sales, selling, general and administrative expense decreased to
62% in 2010 from 62.4% in the first quarter of 2009, an improvement of 40 basis
points.   Take Shape for Life commission expense, which is
completely variable based upon revenue, increased by $8.4 million as the Company
showed sales growth of 94% as compared to 2009. Salaries and benefits increased
by approximately $3.3 million in the first quarter of 2010. The increase
includes the hiring of additional expertise in critical areas such as Take Shape
for Life, Medifast Weight Control Centers, and IT to support the strong growth
in 2010 and beyond.    Areas that also experienced
additional staffing due to the 75% sales growth in the first quarter of 2010
include manufacturing, distribution, call center, human resources, accounting,
and marketing. Personnel expense also increased due to accrued 2010 bonuses for
the corporate bonus pool based on strong first quarter 2010
results.  In addition, personnel expense included vesting of an
executive deferred compensation plan to meet the payout obligation of the plan.
Sales and marketing expense in the first quarter of 2010 increased by $2.2
million as compared to the first quarter of 2009.  This was as a
result of a 34% increase in direct response advertising spend, increased
advertising spend for corporately owned Medifast Weight Control Centers, and
accrued Take Shape for Life annual convention expense to be held in July 2010.
Communication expense increased by $100,000.  Office expenses
increased by $650,000 and stock compensation expense increased by
$181,000.  Operating expenses increased by $400,000 which primarily
resulted from additional printing expense for our direct to consumer postcard
mailings, printed materials included in each product shipment, as well as
maintenance, repairs, and supplies for our manufacturing and distribution
facilities.  Other operating expenses increased by $600,000 which
included items such as depreciation, amortization, credit card processing fees,
charitable contributions, and property taxes.





Other
Income/Expense


Other
income/expense improved from a $40,000 expense in the first quarter of 2009 to
$13,000 in other income in the first quarter of 2010. The main driver was a
reduction in interest expense of $33,000 as a result of lower interest
rates.





Income
taxes


In the first quarter of 2010, the
Company recorded $3.3 million in income tax expense, which represents an annual
effective rate of 40.3%.   For the first three months of 2009, we
recorded income tax expense of $1.5 million which reflected an estimated annual
effective tax rate of 37.5%.  The Company anticipates a tax rate of
approximately 39-40% in 2010.


16


Net
income:





Net income was approximately $4.9
million in the first quarter of 2010 as compared to approximately $2.5 million
in the first quarter of 2009, an increase of 97%.  Income from
operations as a percent of sales increased to 13.5% in the first quarter of 2010
as compared to 11.6% in the first quarter of 2009. The improved profitability in
the first quarter of 2010 is due to sales growth in Take Shape for Life,
Medifast Weight Control Centers, and Medifast Direct Marketing, as well as
improved advertising effectiveness in the Medifast Direct Marketing sales
channel, gross margin improvement as well as leveraging the fixed costs
associated with our vertically-integrated support structure.





SEGMENT
RESULTS OF OPERATIONS





Net Sales by Segment for the Three Months Ended March 31,2010
                    
                    
                    2009Segments
                    
                    Sales
                    
                    
                    % of Total
                    
                    
                    Sales
                    
                    
                    % of TotalMedifast
                    
                    $
                    54,729,000
                    
                    
                    
                    90
                    %
                    
                    $
                    31,659,000
                    
                    
                    
                    91
                    %All
      Other
                    
                    
                    5,856,000
                    
                    
                    
                    10
                    %
                    
                    
                    2,946,000
                    
                    
                    
                    9
                    %Total
      Sales
                    
                    $
                    60,585,000
                    
                    
                    
                    100
                    %
                    
                    $
                    34,605,000
                    
                    
                    
                    100
                    %





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 March
31, 2010 and 2009 above.





All Other
Segment:  The All Other reporting segment consists of the sales of
Medifast Weight Control Centers and Medifast Weight Control Franchise
Centers.  Sales increased by $2,910,000 year-over year for the three
month period ended March 31, 2010. Sales increased in the Medifast Weight
Control Centers and Franchise Centers due to the opening of six new corporate
centers in 2009 and 8 new franchise centers in 2009,  The Company is
continuing to focus on improved advertising effectiveness, improved closing
rates on walk-in sales, as well as the hiring of more experienced clinic
operators to manage the clinics, and improved efficiencies in operation of the
clinics. The Company now has twenty seven corporately owned clinics, compared to
twenty one clinics in operation at the end of the first quarter of
2009.  The Company also has eighteen franchisee centers in
operation.





Net
      Profit by Segment for the Three Months Ended March 31,2010
                              
                              
                              2009Segments
                              
                              Profit
                              
                              
                              % of Total
                              
                              
                              Profit
                              
                              
                              % of TotalMedifast
                              
                              $
                              4,888,000
                              
                              
                              
                              100
                              %
                              
                              $
                              3,139,000
                              
                              
                              
                              126
                              %All
      Other
                              
                              
                              13,000
                              
                              
                              
                              0
                              %
                              
                              
                              (654,000
                              )
                              
                              
                              -26
                              %Total
      Net Profit
                              
                              $
                              4,901,000
                              
                              
                              
                              100
                              %
                              
                              $
                              2,485,000
                              
                              
                              
                              100
                              %





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 March
31, 2010 and 2009 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 Medifast Weight Control Centers, Medifast Weight Control Franchise
Centers, and corporate expenses related to the parent company
operations.  Year-over-year, profit in the All Other segment increased
to $13,000, from a loss of $654,000.  The Medifast Weight Control
Centers and Franchise Centers showed an increase in net profitability
year-over-year of $1,032,000.   The increase in profitability was
due to opening of six new corporately owned centers in 2009, and opening eight
new franchise centers in 2009. The increase in the total number of corporate
clinics to twenty seven, eighteen operating franchise centers, and improvements
in same store sales year-over-year led to additional sales and
profitability.  Medifast Corporate expenses increased by $365,000
year-over-year.  Corporate expenses include items such as auditors’
fees, attorney’s fees, stock compensation expense and corporate governance
related to NYSE, Sarbanes Oxley, and SEC regulations.  See footnote
14, “Business Segments” for a detailed breakout of expenses.


17


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
2010, 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





Item
3.     Quantitative and Qualitative Disclosures about
Market Risk.




Market
risk is the potential loss arising from adverse changes in market rates and
prices, such as interest rates and a decline in the stock market. The Company
does not enter into derivatives, foreign exchange transactions or other
financial instruments for trading or speculative purposes. The Company has
limited exposure to market risks related to changes in interest rates. The
principal risks of loss arising from adverse changes in market rates and prices
to which the Company and its subsidiaries are exposed relate to interest rates
on debt.  Since nearly all of our debt is variable rate based, any
changes in market interest rates will cause an equal change in our net interest
expense.  At March 31, 2010, there was $6.0 million of variable
interest loans outstanding which is subject to interest rate
risk.  Interest rates on our variable rate loans ranged from 1.54% to
2.74% for the period ended March 31, 2010.  Each 100 basis point
increase in the bank’s LIBOR rates relative to these borrowings would impact
interest expense by $60,000 over a 12-month period.





We are
exposed to market risk related to changes in interest rates and market pricing
impacting our investment portfolio. Our current investment policy is to maintain
an investment portfolio consisting mainly of U.S. money market and high-grade
corporate securities, directly or through managed funds. Our cash is deposited
in and invested through highly rated financial institutions in North America.
Our marketable securities are subject to interest rate risk and market pricing
risk and will fall in value if market interest rates increase or if market
pricing decreases. If market interest rates were to increase and market pricing
were to decrease immediately and uniformly by 10% from levels at March 31,
2010, we estimate that the fair value of our investment portfolio would decline
by an immaterial amount and therefore we would not expect our operating results
or cash flows to be affected to any significant degree by the effect of a change
in market conditions on our investments.





Item
4.     Controls and Procedures





Evaluation of Disclosure
Controls and Procedures:


Management,
including our Chief Executive Officer and Chief Financial Officer, conducted an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended, as of March 31, 2010. Our
disclosure controls and procedures are designed to ensure that information
required to be disclosed by us in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported accurately and on a
timely basis.




Based
upon that evaluation, our Chief Executive Officer and Chief Financial Officer
have concluded that our disclosure controls and procedures were not effective as
of March 31, 2010, because of the material weaknesses in internal control
over financial reporting discussed in the fiscal 2009 Form 10-K.  The
material weakness related to the preparation and review process for the
calculation of the tax provision, which led to errors in the computation of
deferred tax assets, deferred tax liabilities, and related income tax
provision.





As a
consequence of that determination, we have implemented a procedure designed to
detect or prevent this error from occurring in the future. In February 2010, the
Company hired a CPA in-house with extensive experience in financial reporting
and ASC 740, “Accounting for Income Taxes.”  In addition, on a
quarterly basis the company will have an outside tax advisor review management’s
tax provision calculations. Management believes that such enhanced procedure
will prospectively mitigate this material weakness.





Because
of the material weaknesses in internal control over financial reporting
described in the fiscal 2009 Form 10-K, we performed additional analyses and
other post-closing procedures to ensure that our consolidated financial
statements were prepared in accordance with generally accepted accounting
principles. Accordingly, management, including our Chief Executive Officer and
Chief Financial Officer, believes the consolidated financial statements included
in this report fairly present, in all material respects, our financial
condition, results of operations and cash flows for the periods
presented.





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
March 31, 2010 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting, except for the
changes in our internal controls discussed above in order to remediate tax
material weakness.


18


Part II  Other
Information





Item
1.  Legal Proceedings





As previously reported, Medifast,
Inc.filed a civil complaint on February 17, 2010 in the U.S. District Court (SD,
Cal) against Barry Minkow, his Fraud Discovery Institute, Inc., its subsidiary
iBusiness Reporting, its editor William Lobdell, Tracy Coenen, her Sequence,
Inc., “Zee Yourself”, and Robert L. Fitzpatrick for defamation, violations of
California Corporation Code Sections 25400 et seq, and 17200 et seq alleging a
scheme of market manipulation of Medifast, Inc. stock by damaging the business
reputation of Medifast, Inc. (MED-NYSE) and its meal replacement weight loss
products and organization for Defendants monetary gain. Bradley T. MacDonald,
Executive Chairman, Medifast, Inc. who is also a large shareholder joined the
lawsuit individually. Medifast, Inc. filed on April 12, 2010  a First
Amended Complaint in this case  to reflect  occurrences
since the initial filing including but not limited to Minkow/FDI restarting
their website attack on the Company which had been voluntarily shut down by them
February 15, 2010 prior to their Press Release posted February 16,
2010  which belatedly announced the voluntary  termination
of their investigation of the Company with no disclosed findings or conclusions.
The suit seeks at least $270 Million in compensatory damages, punitive damages,
and ancillary relief. Medifast, Inc. also continues to pursue its pending
complaints filed in March, 2009 with the SEC, Maryland Securities Commissioner,
and the U.S. Attorney against most of these same named
Defendants.





Item
1A. Risk Factors




Information
about risk factors for the three months ended March 31, 2010, does not differ
materially from those in set forth in Part I, Item 1A, of our Annual Report on
Form 10-K for the year ended December 31, 2009.





Item 5. Other
Information





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





We are
not obligated to purchase any shares.  Subject to applicable
securities laws repurchases may be made at such times and in such amounts, as
our management deems appropriate.  The share repurchase program may be
discontinued or terminated at any time and we have not established a date for
completion of the share repurchase program.  The repurchases will be
funded from our available cash.   As of March 31, 2010, we had
purchased 135,000 shares as treasury stock through the repurchase program noted
above.





The
following is a summary of our common stock purchases during the quarter ended
March 31, 2010:





Period
                  
                  Total Number of Shares
                    Purchased
                  
                  
                  Average Price Paid
                    per Share
                  
                  
                  Total Number of Shares
                    Purchased as Part of Publicly
                    Announced Plans or Programs
                  
                  
                  Maximum Number of Shares
                    that May Yet Be Purchased
                    Under the Plans or ProgramsJanuary
      1 - January 31, 2010
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  365,000February
      1 - February 28, 2010
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  365,000March
      1 - March 31, 2010
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  365,000





Planned Executive Stock Sales
- The Compensation Committee of Medifast, Inc. has utilized vested stock grants
as a major source of compensation for its senior executive team so that their
interests are aligned with Shareholders by building value in the Medifast Brand
and increasing shareholder value. The Senior Executive Team continues to earn
stock grants over the next five years and must pay an increasingly higher tax
rate on their illiquid restricted stock grants.  Therefore, in 2010, the
CEO, President and the VP of Finance plan on selling shares of Medifast
Common Stock up to approximately 200,000 shares for tax and estate purposes in
accordance with the Medifast, Inc. Insider Trading Policy as outlined below in
“Item 5 – Other Information.”  In addition, in 2010 Shirley Mac Donald, the
wife of the Chairman of the Board, may sell up to approximately 133,000 shares
of Medifast, Inc. common stock for estate planning and retirement
purposes.  The Chairman of the Board, Bradley T. Mac Donald will be
donating 30,000 shares of Medifast stock to a major University as part of his
estate planning.  After the sale and donation of Medifast common
stock, the MacDonald Family will still hold approximately 850,000 shares of
Medifast common stock.


19


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
                  
                  May
      10, 2010Michael
      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