**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**FORM
      10-Q**




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




For
      the
      quarterly period ended September 30, 2006




OR




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




For
      the
      transition period from  to




Commission
      file number 0-23016




**MEDIFAST,
      INC.**


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




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


**11445
      Cronhill Drive**


**Owings
      Mills, MD 21117**


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




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




Yes  x   No  o




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




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




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




Yes  o No  x




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


**Class**
            
            **Outstanding at**
              **November
                1, 2006**Common
                stock, $.001 par value per share
            
            13,545,231 shares




1


Index






**Part
                I****Financial
                Information:**Condensed
                Consolidated Balance Sheets - September
                30, 2006 (unaudited) and December 31, 2005
                (audited)
            
            3Condensed
                Consolidated Statements of Income - Three
                and Nine Months Ended September 30, 2006 and 2005
                (unaudited)
            
            4Condensed
                Consolidated Statements of Cash Flows - Nine
                Months Ended September 30, 2006 and 2005
                (unaudited)
            
            5Notes
                to Condensed Consolidated Financial Statements
            
            7Management
                Discussion and Analysis of Financial Condition and
                Results of Operations
            
            13**Part
                II**Exhibits
            
            16EX
                31.1EX
                31.2EX
                32.1





2


**MEDIFAST,
        INC. AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED BALANCE SHEETS**
  September
                  30, 2006
              
              December
                  31, 2005(Unaudited)
              
              (Audited)**ASSETS****Current
                  assets:**Cash
              
              $
              1,114,000
              
              $
              1,484,000Accounts
                  receivable-net of allowance for doubtful accounts of
                  $100,000
              
              
              764,000
              
              
              985,000Income
                  tax refund receivable
              
              
              1,048,000
              
              
              -Inventory
              
              
              8,003,000
              
              
              5,475,000Investment
                  securities
              
              
              2,420,000
              
              
              2,700,000Deferred
                  compensation
              
              
              640,000
              
              
              525,000Prepaid
                  expenses and other current assets
              
              
              2,927,000
              
              
              3,273,000Note
                  receivable - current
              
              
              230,000
              
              
              -Deferred
                  tax asset
              
              
              90,000
              
              
              -**Total
                  Current Assets**
              
              
              **17,236,000**
              
              
              **14,442,000**Property,
                  plant and equipment - net
              
              
              11,578,000
              
              
              9,535,000Trademarks
                  and intangibles - net
              
              
              4,690,000
              
              
              6,508,000Deferred
                  tax asset, net of current portion
              
              
              282,000
              
              
              -Note
                  receivable, net of current portion
              
              
              1,305,000
              
              
              -Other
                  assets
              
              
              37,000
              
              
              60,000**TOTAL
                  ASSETS**
              
              **$**
              **35,128,000**
              
              **$**
              **30,545,000****LIABILITIES
                  AND STOCKHOLDERS' EQUITY****Current
                  liabilities:**Accounts
                  payable and accrued expenses
              
              $
              2,661,000
              
              $
              2,263,000Income
                  taxes payable
              
              
              501,000
              
              
              899,000Line
                  of credit
              
              
              612,000
              
              
              633,000Current
                  maturities of long-term debt
              
              
              502,000
              
              
              561,000Deferred
                  tax liability - current
              
              
              -
              
              
              90,000**Total
                  current liabilities**
              
              
              **4,276,000**
              
              
              **4,446,000**Long-term
                  debt, net of current portion
              
              
              3,603,000
              
              
              3,977,000Deferred
                  tax liability - non-current
              
              
              -
              
              
              101,000**Total
                  Liabilities**
              
              
              **7,879,000**
              
              
              **8,524,000****Stockholders'
                  Equity:**Common
                  stock; par value $.001 per share; 20,000,000 authorized;13,544,481
                  and 12,782,791 shares issued and outstanding, respectively
              
              
              14,000
              
              
              13,000Additional
                  paid-in capital
              
              
              26,326,000
              
              
              21,759,000Accumulated
                  other comprehensive income
              
              
              208,000
              
              
              282,000Retained
                  Earnings
              
              
              5,787,000
              
              
              1,149,000**32,335,000**
              
              
              **23,203,000**Less:
                  cost of 240,749 and 210,902 shares of common stock in
                  treasury
              
              
              (1,565,000
              )
              
              (1,075,000
              )Less:
                  unearned compensation
              
              
              (3,521,000
              )
              
              (107,000
              )**Total
                  Stockholders' Equity**
              
              
              **27,249,000**
              
              
              **22,021,000****TOTAL
                  LIABILITIES & STOCKHOLDERS' EQUITY**
              
              **$**
              **35,128,000**
              
              **$**
              **30,545,000**


See
      accompanying notes to condensed consolidated financial statements.




3





**MEDIFAST,
        INC. AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF INCOME**
  **Nine
                  Months Ended September 30,**
              
              **Three
                  Months Ended September 30,****2006**
              
              **2005**
              
              **2006**
              
              **2005**(Unaudited)
              
              (Unaudited)
              
              (Unaudited)
              
              (Unaudited)Revenue
              
              $
              58,779,000
              
              $
              29,865,000
              
              $
              19,642,000
              
              $
              10,985,000Cost
                  of sales
              
              
              14,334,000
              
              
              7,370,000
              
              
              4,705,000
              
              
              2,675,000**Gross
                  Profit**
              
              
              **44,445,000**
              
              
              **22,495,000**
              
              
              **14,937,000**
              
              
              **8,310,000**Selling,
                  general, and administration
              
              
              36,880,000
              
              
              19,163,000
              
              
              12,967,000
              
              
              7,044,000**Income
                  from operations**
              
              
              **7,565,000**
              
              
              **3,332,000**
              
              
              **1,970,000**
              
              
              **1,266,000**Other
                  income/(expense)Interest
                  expense
              
              
              (271,000
              )
              
              (97,000
              )
              
              (90,000
              )
              
              (47,000
              )Loss
                  on sale of Consumer Choice Systems
              
              
              (323,000
              )
              
              -
              
              
              -
              
              
              -Stock
                  compensation expense
              
              
              (346,000
              )
              
              -
              
              
              (164,000
              )
              
              -Interest
                  income
              
              
              137,000
              
              
              -
              
              
              48,000
              
              
              -Other
                  income (expense)
              
              
              184,000
              
              
              10,000
              
              
              24,000
              
              
              7,000**Income
                  before provision for income taxes**
              
              
              **6,946,000**
              
              
              **3,245,000**
              
              
              **1,788,000**
              
              
              **1,226,000**Provision
                  for income tax (expense)
              
              
              (2,307,000
              )
              
              (1,367,000
              )
              
              (298,000
              )
              
              (609,000
              )**Net
                  income**
              
              
              4,639,000
              
              
              1,878,000
              
              
              1,490,000
              
              
              617,000Less:
                  Preferred stock dividend requirement
              
              
              -
              
              
              (291,000
              )
              
              -
              
              
              (10,000
              )**Net
                  income**
              
              **$**
              **4,639,000**
              
              **$**
              **1,587,000**
              
              **$**
              **1,490,000**
              
              **$**
              **607,000**Basic
                  earnings per share
              
              $
              0.37
              
              $
              0.13
              
              $
              0.12
              
              $
              0.05Diluted
                  earnings per share
              
              $
              0.34
              
              $
              0.13
              
              $
              0.11
              
              $
              0.05Weighted
                  average shares outstanding -Basic
              
              
              12,657,842
              
              
              12,235,475
              
              
              12,767,629
              
              
              12,595,175Diluted
              
              
              13,493,421
              
              
              12,438,531
              
              
              13,603,208
              
              
              12,989,147


See
      accompanying notes to condensed consolidated financial statements.




4


**MEDIFAST,
                  INC. AND SUBSIDIARIES****CONDENSED
                  CONSOLIDATED STATEMENTS OF CASH
                  FLOWS**
  Nine
                  Months Ended September 30,2006
              
              2005(Unaudited)
              
              (Unaudited)Cash
                  flows from operating activities:Net
                  income
              
              $
              4,639,000
              
              $
              1,878,000Adjustments
                  to reconcile net income to net cash provided
                  by operating activities from continuing
                  operations:Depreciation
                  and amortization
              
              
              1,790,000
              
              
              1,385,000Realized
                  (gain) loss on investment securities
              
              
              (62,000
              )
              
              15,000Loss
                  on sale of Consumer Choice Systems
              
              
              323,000
              
              
              -Common
                  stock issued for services
              
              
              64,000
              
              
              103,000Stock
                  options vested during period
              
              
              18,000
              
              
              -Excess
                  tax benefits from share-based payment arrangements
              
              
              6,000
              
              
              -Vesting
                  of unearned compensation
              
              
              346,000
              
              
              -Net
                  change in other comprehensive (loss) income
              
              
              (74,000
              )
              
              17,000Deferred
                  income taxes
              
              
              (563,000
              )
              
              (104,000
              )Provision
                  for bad debts
              
              
              -
              
              
              13,000Changes
                  in assets and liabilities:(Increase)
                  decrease in accounts receivable
              
              
              56,000
              
              
              (467,000
              )(Increase)
                  in income tax receivable
              
              
              (1,048,000
              )
              
              -(Increase)
                  in inventory
              
              
              (2,886,000
              )
              
              (607,000
              )(Increase)
                  decrease in prepaid expenses & other current assets
              
              
              346,000
              
              
              (925,000
              )(Increase)
                  in deferred compensation
              
              
              (115,000
              )
              
              (185,000
              )Decrease
                  in other assets
              
              
              23,000
              
              
              12,000Increase
                  in accounts payable and accrued expenses
              
              
              398,000
              
              
              1,085,000Increase
                  (decrease) in income taxes payable
              
              
              (398,000
              )
              
              722,000Net
                  cash provided by operating activities
              
              
              2,863,000
              
              
              2,942,000Cash
                  Flow from Investing Activities:(Purchase)
                  sale of investment securities, net
              
              
              341,000
              
              
              (151,000
              )(Purchase)
                  of property and equipment
              
              
              (2,745,000
              )
              
              (990,000
              )(Purchase)
                  of intangible assets
              
              
              (607,000
              )
              
              (62,000
              )Net
                  cash (used in) investing activities
              
              
              (3,011,000
              )
              
              (1,203,000
              )Cash
                  Flow from Financing Activities:Issuance
                  of common stock, options and warrants
              
              
              658,000
              
              
              66,000Increase
                  (decrease) in credit line, net
              
              
              (21,000
              )
              
              642,000Principal
                  repayments of long-term debt
              
              
              (433,000
              )
              
              (407,000
              )Excess
                  tax benefits from share-based payment arrangements
              
              
              (6,000
              )
              
              -(Purchase)
                  of treasury stock
              
              
              (420,000
              )
              
              -Dividends
                  paid on preferred stock
              
              
              -
              
              
              (11,000
              )Net
                  cash provided by (used in) financing activities
              
              
              (222,000
              )
              
              290,000**NET
                  INCREASE (DECREASE) IN CASH AND****CASH
                  EQUIVALENTS**
              
              
              (370,000
              )
              
              2,029,000Cash
                  and cash equivalents - beginning of the period
              
              
              1,484,000
              
              
              612,000Cash
                  and cash equivalents - end of period
              
              $
              1,114,000
              
              $
              2,641,000Supplemental
                  disclosure of cash flow information:Interest
                  paid
              
              $
              271,000
              
              $
              232,000Income
                  taxes
              
              $
              3,403,000
              
              $
              1,426,000Supplemental
                  disclosure of non cash activity:Common
                  stock issued to executives over 6-year vesting period
              
              $
              3,373,000
              
              $
              -Common
                  shares issued for options and warrants
              
              $
              454,000
              
              $
              -Options
                  vested during period
              
              $
              18,000
              
              $
              -Conversion
                  of preferred stock B and C to common stock
              
              $
              -
              
              $
              501,000Common
                  stock issued for services
              
              $
              64,000
              
              $
              103,000Preferred
                  B and C stock dividends converted to common stock
              
              $
              -
              
              $
              279,000Line
                  of credit converted to long-term debt
              
              $
              -
              
              $
              369,000Common
                  stock issued for compensation to be earned upon vesting
              
              $
              -
              
              $
              122,000
  See
        accompanying notes to condensed consolidated
        financial statements.
  5


**MEDIFAST,
                  INC. AND SUBSIDIARIES****CONDENSED
                  CONSOLIDATED STATEMENTS OF CASH FLOWS
                  (CONT.)**
  Nine
                  Months Ended September 30,2006
              
              2005(Unaudited)
              
              (Unaudited)Supplemental
                  disclosure of non cash activity:Sale
                  of Consumer Choice SystemsInventory
              
              $
              358,000
              
              $
              -Accounts
                  Receivable
              
              
              131,000
              
              
              -Intangible
                  assets, net
              
              
              1,337,000
              
              
              -Note
                  receivable
              
              
              (1,503,000
              )
              
              -Loss
                  on sale of Consumer Choice Systems
              
              
              (323,000
              )
              
              -$
              -
 See
          accompanying notes to condensed consolidated
          financial statements.
  6




**Notes
      to Condensed Consolidated Financial Statements**


**General**





1.
            Basis
                of Presentation





The
      condensed unaudited interim consolidated financial statements included herein
      have been prepared, without audit, pursuant to the rules and regulations of
      the
      Securities and Exchange Commission. The condensed consolidated financial
      statements and notes are presented as permitted on Form 10-Q and do not
      contain information included in the Company’s annual statements and notes.
      Certain information and footnote disclosures normally included in financial
      statements prepared in accordance with accounting principles generally accepted
      in the United States of America have been condensed or omitted pursuant to
      such
      rules and regulations, although the Company believes that the disclosures are
      adequate to make the information presented not misleading. It is suggested
      that
      these condensed consolidated financial statements be read in conjunction with
      the December 31, 2005 audited consolidated financial statements and the
      accompanying notes thereto. While management believes the procedures followed
      in
      preparing these condensed consolidated financial statements are reasonable,
      the
      accuracy of the amounts are in some respects dependent upon the facts that
      will
      exist, and procedures that will be accomplished by the Company later in the
      year.





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





2.
            Presentation
                of Financial Statements


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




3.
            Inventories


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




4.
            Goodwill
                and Other Intangible Assets****





In
      June
      2001, the Financial Accounting Standards Board (“FASB”) issued Statement No. 142
“Goodwill and Other Intangible Assets”. This statement addresses financial
      accounting and reporting for acquired goodwill and other intangible assets
      and
      supersedes APB Opinion No. 17, “Intangible Assets”. It addresses how intangible
      assets that are acquired individually or with a group of other assets (but
      not
      those acquired in a business combination) should be accounted for in financial
      statements upon their acquisition. This Statement also addresses how goodwill
      and other intangible assets should be accounted for after they have been
      initially recognized in the financial statements. On January 17, 2006, the
      Company sold its goodwill balance of $893,500 when the Consumer Choice Systems
      division was sold.





The
      Company has intangible assets, which include: customer lists, non-compete
      agreements, trademarks and patents. The non-compete agreements are being
      amortized over the legal life of the agreements ranging between 3 to 7 years.
      The customer lists are being amortized over a period ranging between 5 to 10
      years based on management’s best estimate of the expected benefits to be
      consumed or otherwise used up. Trademarks and patents are regularly reviewed
      to
      determine whether the facts and circumstances exist to indicate that the useful
      life is shorter than originally estimated or the carrying amount of the assets
      may not be recoverable. The Company assesses the recoverability of its
      trademarks and patents by comparing the projected discounted net cash flows
      associated with the related asset, over their remaining lives, in comparison
      to
      their respective carrying amounts. Impairment, if any, is based on the excess
      of
      the carrying amount over the fair value of those assets.




7


**As
                  of September 30, 2006**
              
              **As
                  of December 31, 2005****Gross
                  Carrying**
              
              **Accumulated**
              
              **Gross
                  Carrying**
              
              **Accumulated****Amount**
              
              **Amortization**
              
              **Amount**
              
              **Amortization**Customer
                  lists
              
              $
              4,739,000
              
              $
              1,447,000
              
              $
              4,514,000
              
              $
              874,000Non-compete
                  agreements
              
              
              840,000
              
              
              817,000
              
              
              840,000
              
              
              566,000Trademarks
                  and patents
              
              
              1,495,000
              
              
              120,000
              
              
              1,821,000
              
              
              121,000Goodwill
              
              
              -
              
              
              -
              
              
              894,000
              
              
              -Total
              
              $
              7,074,000
              
              $
              2,384,000
              
              $
              8,069,000
              
              $
              1,561,000
  **Amortization
                  expense for the nine months ended September 30, 2006 and 2005 was
                  as
                  follows:**
  2006
              
              2005Customer
                  lists
              
              $
              776,000
              
              
              373,000Non-compete
                  agreements
              
              
              251,000
              
              
              270,000Trademarks
                  and patents
              
              
              61,000
              
              
              38,000Total
                  Trademarks and Intangibles
              
              $
              1,088,000
              
              $
              681,000
  On
                  January 17, 2006 the Consumers Choice Systems division of the Company
                  was
                  sold which included the sale of$1,601,000
                  in gross intangible assets and $265,000 in accumulated
                  amortization.Amortization
                  expense is included in selling, general and administrative
                  expenses.


5.
            Fixed
                Assets




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





6.
            Note
                Receivable




Medifast
      realized a $1,503,000 note receivable as a result of the sale of Consumer Choice
      Systems on January 17, 2006 to a former board member. The note has a 10-year
      term with imputted interest of 4% collateralized by 50,000 shares of Medifast
      stock and all the assets of Consumer Choice Systems. The amount of principal
      to
      be collected over each of the next 5 years is $183,000 per year with the
      remaining amount collectible thereafter of $588,000.




8




7.
            Income
                Per Common Share





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





8.
            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.
            Share
                Based Payments





Stock-Based
      Compensation





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





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





Unearned
      compensation represents shares issued to executives that will be vested over
      a
      5-6 year period. These shares will be amortized over the vesting period in
      accordance with FASB 123(R). The expense related to the vesting of unearned
      compensation was $345,000 and $0 at September 30, 2006 and September 30, 2005,
      respectively.





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




9


Nine
                  Months Ended
              
              Three
                  Months Ended09/30/06
              
              09/30/05
              
              09/30/06
              
              09/30/05Net
                  income, as reported
              
              $
              4,639,000
              
              $
              1,587,000
              
              $
              1,490,000
              
              $
              607,000Add:
                  Stock-based employee compensation expenseincluded
                  in reported net income, net of related tax effects
              
              
              11,000
              
              
              -
              
              
              -
              
              
              -Deduct:
                  Total stock-based employee compensation
              
              
              (11,000
              )
              
              (287,000
              )
              
              -
              
              
              -expense
                  determined under fair value based methodfor
                  all awards, net of related tax effectsNet
                  income, pro forma
              
              $
              4,639,000
              
              $
              1,300,000
              
              $
              1,490,000
              
              $
              607,000Earning
                  per share:Basic,
                  as reported
              
              
              0.37
              
              
              0.13
              
              
              0.12
              
              
              0.05Basic,
                  pro forma
              
              
              0.37
              
              
              0.13
              
              
              0.12
              
              
              0.05Diluted,
                  as reported
              
              
              0.34
              
              
              0.11
              
              
              0.11
              
              
              0.05Diluted,
                  pro forma
              
              
              0.34
              
              
              0.10
              
              
              0.11
              
              
              0.05





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





Nine
                Months EndedSeptember
                30, 2006
            
            September
                30, 2005Dividend
                yield
            
            
            0.0
            %
            
            0.0
            %Expected
                volatility
            
            
            0.70
            
            
            0.70Risk-free
                interest rate
            
            
            4.50
            %
            
            4.5
            %Expected
                life in years
            
            
            1-5
            
            
            1-5





The
      following summarizes the stock option activity for the Nine Months ended
      September 30, 2006:


September
                  30, 2006Shares
              
              Weighted
                  Average Exercise Price
              
              Weighted
                  Average Contractual Term (Years)Outstanding,
                  December 31, 2005
              
              
              359,727
              
              
              2.71Options
                  granted
              
              
              100,000
              
              
              6.25Options
                  reinstated
              
              
              16,666
              
              
              1.57Options
                  exercised
              
              
              (81,480
              )
              
              (1.63
              )Options
                  forfeited or expired
              
              
              (26,667
              )
              
              (8.36
              )Outstanding
                  September 30, 2006
              
              
              368,246
              
              
              3.76
              
              
              3.33Options
                  exercisable, September 30, 2006
              
              
              198,245
              
              
              3.33
              
              
              3.27Options
                  available for grant at end of year
              
              
              881,754
 
 10





10.
            Recent
                Accounting Pronouncements




In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards (“SFAS”) No. 151, “Inventory
      Costs.” SFAS No. 151 requires abnormal amounts of inventory costs related
      to idle facility, freight handling and wasted material expenses to be recognized
      as current period charges. Additionally, SFAS No. 151 requires that
      allocation of fixed production overheads to the costs of conversion be based
      on
      the normal capacity of the production facilities. The standard is effective
      for
      fiscal years beginning after June 15, 2005. The adoption of SFAS
      No. 151 did not have a material impact on the Company’s financial position
      or results of operations.




In
      May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error
      Corrections.” SFAS No. 154 replaces Accounting Principles Board (“APB”)
      Opinion No. 20, “Accounting Changes” and SFAS No. 3, “Reporting
      Accounting Changes in Interim Financial Statements.” SFAS No. 154 requires
      retrospective application to prior periods’ financial statements of a voluntary
      change in accounting principle unless it is impracticable. APB No. 20
      previously required that most voluntary changes in accounting principle be
      recognized by including the cumulative effect of changing to the new accounting
      principle in net income in the period of the change. SFAS No. 154 is
      effective for accounting changes and corrections of errors made in fiscal years
      beginning after December 15, 2005. The adoption of SFAS No. 154 did
      not have a material impact on the Company’s financial position or results of
      operations.




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




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




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





The
      FASB
      also issued in September 2006 Statement of Financial Accounting Standards No.
      158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement
      Plans — an amendment of FASB Statement No. 87, 88, 106 and 132(R), (“FAS 158”) .
      This Standard requires recognition of the funded status of a benefit plan in
      the
      statement of financial position. The Standard also requires recognition in
      other
      comprehensive income certain gains and losses that arise during the period
      but
      are deferred under pension


accounting
      rules, as well as modifies the timing of reporting and adds certain disclosures.
      FAS 158 provides recognition and disclosure elements to be effective as of
      the
      end of the fiscal year after December 15, 2006 and measurement elements to
      be
      effective for fiscal years ending after December 15, 2008. The Company has
      not
      yet analyzed the impact FAS 158 will have on its financial condition, results
      of
      operations, cash flows or disclosures.




11




11.
            Revenue
                Recognition





Revenue
      is recognized for product sales upon shipment and passing of risk to the
      customer and when estimates of discounts, rebates, promotional adjustments,
      price adjustments, returns, and other potential adjustments are reasonably
      determinable, collection is reasonably assured and the Company has no further
      performance obligations. These estimates are presented in the financial
      statements as reductions to net revenues and accounts receivable. Estimated
      sales returns, allowances and discounts are provided for.





Outbound
      shipping charges to customers and outbound shipping-related costs are netted
      and
      included in “cost of sales.”





Returns
      -
      Consistent with industry practice, the Company maintains a return policy that
      allows its customers to return product within a specified period (30 days).
      Because the period of payment generally approximates the period revenue was
      originally recognized, refunds are recorded as a reduction of revenue when
      paid.
      The Company’s estimate for returns is based upon its historical experience with
      actual returns. While such experience has allowed for reasonable estimation
      in
      the past, history may not always be an accurate indicator of future returns.
      The
      Company continually monitors its estimates for returns and makes adjustments
      when it believes that actual product returns may differ from the established
      accruals.




12




**Management
      Discussion and Analysis of**


**Financial
      Condition and Results of Operations**








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





**General**




**Nine
      Months Ended September 30, 2006 and September 30, 2005**





Revenue:
      Revenue increased to $58.8 million for the first nine months of 2006 as compared
      to $29.9 million for the first nine months of 2005, an increase of $28.9 million
      or 97%. The direct marketing sales channel accounted for 63% of total revenue,
      Take Shape for Life 27%, doctors 5%, and clinics 5%. As compared to the first
      nine months of 2005, the direct marketing sales channel, which is fueled
      primarily by consumer advertising, increased revenues by approximately 174%.
      Take Shape for Life sales, which are fueled by person-to-person recruiting
      and
      support increased by 51% year-over-year





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





Due
      to
      the significant growth in the first half of 2006, Medifast, Inc. began exploring
      third party over-sourcing capabilities in the call center. The Company began
      using an outsourced call center for overflow call volume in late April. The
      company has also invested in increasing production capacity with the purchase
      of
      additional manufacturing lines. The lines will significantly improve the
      company's production capability, while also improving its overall efficiencies.
      The Company believes that these capabilities will provide the Company with
      the
      scalability necessary to seamlessly handle increased demands as the business
      continues to grow.





Costs
      and
      Expenses: Cost of revenue increased $6.9 million to $14.3 million in the first
      nine months of 2006 from $7.4 million in 2005. As a percentage of sales, gross
      margin increased to 76% for the first nine months of 2006 as compared to 75%
      for
      the first nine months of 2005. The slight increase in gross margin is primarily
      due to decreased raw material costs as a result of increased volume
      discounts.





Advertising
      expense for the first nine months of 2006 was approximately $11.7 million as
      compared to approximately $3 million in the first nine months of 2005, an
      increase of $8.7 million. The increased marketing was spent primarily for TV
      advertising and print media. The Company continues to test and analyze which
      TV
      clusters and print media provide the lowest cost to acquire a customer. This
      testing will allow the company to spend our advertising dollars most effectively
      as we plan on increasing our advertising budget for the year of
      2007.





Other
      Income/Expense: Stock compensation expense for the first nine months of 2006
      was
      $346,000 as compared to $0 in 2005. This expense represents the vesting of
      share-based compensation to key executives over five and six year terms. The
      Company has reviewed unvested options and concluded that the effects of FASB
      123R are immaterial.





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





Income
      taxes: In the third quarter of 2006, the company had a $1 million federal tax
      refund receivable. A portion of this refund was factored into the Company’s
      income tax provision which lowered the estimated tax rate for the first 9 month
      of 2006 **.** **** **** For
      the
      first nine months of 2006, we recorded $2.3 million in income tax expense,
      which
      represents an annual effective rate of 33%. For the first nine months of 2005,
      we recorded income tax expense of $1.4 million which reflected an estimated
      annual effective tax rate of 42%. The company anticipates a tax rate of
      approximately 37-39% in 2007.





Net
      income: Net income increased to $4.6 million in the first nine months of 2006
      as
      compared to $1.9 million in the first nine months of 2005, which reflected
      an
      increase of $2.7 million or 147%. The increase in net income is due to an
      increase in sales offset by increased selling, general, and administrative
      expenses, that primarily consist of increased advertising and commissions paid
      to Take Shape for Life health advisors.




13




**Three
      Months Ended September 30, 2006 and September 30, 2005**




Revenue:
      Revenue increased to $19.6 million in the third quarter of 2006 as compared
      to
      $11 million in the third quarter of 2005, an increase of $8.6 million or 79%.
      The direct marketing sales channel accounted for 68% of total revenue, Take
      Shape for Life 25%, doctors 4%, and clinics 4%. In the comparable period in
      2005, the direct marketing sales channel, which is fueled primarily by consumer
      advertising increased revenues by approximately 156%. Take Shape for Life sales,
      which are fueled by person-to-person recruiting and support increased by
      approximately 25% year-over-year





The
      growth in revenue is primarily the result of an increased advertising campaign
      in 2006. The Company has expanded into additional print media and national
      cable
      and network TV spots. During the third quarter the Company continued to expand
      the advertising to new markets and demographics in preparation for an increased
      advertising budget in 2007.





Costs
      and
      Expenses: Cost of revenue increased $2.0 million to $4.7 million in the third
      quarter of 2006 from $2.7 million in the third quarter of 2005. As a percentage
      of sales, gross margin maintained at 24% in the third quarter of 2006 as
      compared to 24% in the third quarter of 2005. The slight increase in gross
      margin is primarily due to decreased raw material costs as a result of increased
      volume discounts.





Advertising
      expense in the third quarter of 2006 was approximately $4.7 million as compared
      to approximately $1.1 million in the third quarter of 2005. The increased
      marketing was spent primarily for TV advertising and print media. The increased
      advertising spent was very effective and informative in providing metrics to
      best prove to the company the proper spending structure for the expected
      increase in advertising spending in 2007.





Other
      Income/Expense: Stock compensation expense for third quarter of 2006 was
      $164,000 as compared to $0 in 2005. This amount will be consistent for the
      remainder of 2006. This expense represents the vesting of share-based
      compensation to key executives over five and six year terms. The Company has
      reviewed unvested options and concluded that the effects of FASB 123R are
      immaterial.





Income
      taxes: In the third quarter of 2006 we recorded $298,000 in income tax expense,
      which represents an annual effective rate of 17%. The Company had a $1 million
      federal income tax receivable at the end of the third quarter which resulted
      in
      a decrease in the income tax provision during the quarter. The tax refund was
      as
      a result of a cost segregation study that the Company had performed on its
      fixed
      assets that resulted in a large federal tax refund. In the third quarter of
      2005, we recorded income tax expense of $609,000 which reflected an estimated
      annual effective tax rate of 50%.





Net
      income: Net income increased to $1.5 million in the third quarter of 2006 as
      compared to $607,000 in the third quarter of 2005, which reflected an increase
      of $873,000 or 141%. The increase in net income is due to an increase in sales
      offset by increased selling, general, and administrative expenses, that
      primarily consist of increased advertising and commissions paid to Take Shape
      for Life health advisors.





**Liquidity
      and Capital Resources**





The
      Company had stockholders’ equity of $27,249,000 and working capital of
      $12,960,000 on September 30, 2006 compared with $22,021,000 and $9,996,000
      at
      September 30, 2005, respectively. The $5,228,000 net increase in stockholder’s
      equity and the $2,964,000 net increase in working capital reflect the increased
      profitability and liquidity of the Company. The Company’s cash position
      decreased from $1.5 million at December 31, 2005 to $1.1 million at September
      30, 2006. The decrease is due to increased cash outlays for infrastructure
      and
      inventory build-up for the first quarter of 2007 as well as timing as it relates
      to accounts payable. On September 30, 2006 the Company’s current ratio was 4 to
      1.




**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 2006 seasonality has not been a
      significant factor. This is largely due to the increase in the consumer’s
      awareness of the overall health and nutritional benefits accompanied with the
      use of the Company’s product line. As consumers continue to increase their
      association of nutritional weight loss programs with overall health, seasonality
      will continue to decrease.





**Inflation**





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




14




**Item
      5. Other Information**


Litigation **:**





There
      was
      no material pending or threatened litigation as of 9/30/06.





Long-Term
      Employment Contracts


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




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





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





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





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





Internal
      Control Policy : As
      of
      September 30, 2006, the Company’s management, with the participation of the
      Chief Executive Officer and the President, performed an evaluation of the
      effectiveness of the design and operation of the Company’s disclosure controls
      and procedures pursuant to Exchange Act Rule 13a-15. Based on that evaluation,
      the Chief Executive Officer and the President have concluded that the design
      and
      operation of these disclosure controls and procedures were effective as of
      the
      end of the period covered by this report. In connection with this evaluation,
      no
      change in the Company’s internal control over financial reporting was identified
      that occurred during the period covered by this report that has materially
      affected, or is reasonably likely to affect the Company’s internal control over
      financial reporting.




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




15





Index
      to
      Exhibits





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





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





32.1
            Certification
                of Chief Executive Officer and Chief Financial Officer pursuant to
                Section
                906 of the Sarbanes-Oxley Act of 2002  32.2
            Audit
              Committee Charter  32.3
            Compensation
              Committee Charter  32.4
            Nomination
              Committee Charter




16