**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, 2007




OR




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




For
      the
      transition period from  to




Commission
      file number 0-23016




**MEDIFAST,
      INC.**


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




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


**11445
      Cronhill Drive**


**Owings
      Mills, MD 21117**


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




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




Yes  x     No  o




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




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




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




Yeso 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 7, 2007**Common
                stock, $.001 par value per share
            
            13,709,098
                shares


1


Index






**Part
      I**


**Financial
                Information:**Condensed
                Consolidated Balance Sheets -September
                30, 2007 (unaudited) and December 31, 2006 (audited)
            3Condensed
                Consolidated Statements of Income -Three
                and Nine Months Ended September 30, 2007 and 2006 (unaudited)
            4Condensed
                Consolidated Statements of Cash Flows -Nine
                Months Ended September 30, 2007 and 2006 (unaudited)
            5Notes
                to Condensed Consolidated Financial Statements
            7Management
                Discussion and Analysis of Financial Conditionand
                Results of Operations
            14**Part
                II**Exhibits
            22EX
                31.1EX
                31.2EX
                32.1


2


**MEDIFAST,
                  INC. AND SUBSIDIARIES****CONDENSED
                  CONSOLIDATED BALANCE SHEETS**(Unaudited)
              
              (Audited)(Restated)September
                  30, 2007
              
              December
                  31, 2006**ASSETS****Current
                  assets:**Cash
                  and cash equivalents
              
              $
              2,102,000
              
              $
              1,085,000Accounts
                  receivable-net of allowance for doubtful accounts
              
              
              425,000
              
              
              448,000of
                  $100,000Inventory
              
              
              8,471,000
              
              
              8,255,000Investment
                  securities
              
              
              1,477,000
              
              
              1,540,000Deferred
                  compensation
              
              
              830,000
              
              
              673,000Prepaid
                  expenses and other current assets
              
              
              3,208,000
              
              
              2,599,000Note
                  receivable - current
              
              
              174,000
              
              
              174,000Current
                  portion of deferred tax asset
              
              
              91,000
              
              
              90,000**Total
                  current assets**
              
              
              **16,778,000**
              
              
              **14,864,000**Property,
                  plant and equipment - net
              
              
              16,005,000
              
              
              14,020,000Trademarks
                  and intangibles - net
              
              
              5,749,000
              
              
              5,874,000Deferred
                  tax asset, net of current portion
              
              
              807,000
              
              
              517,000Note
                  receivable, net of current assets
              
              
              1,250,000
              
              
              1,355,000Other
                  assets
              
              
              84,000
              
              
              47,000**TOTAL
                  ASSETS**
              
              **$**
              **40,673,000**
              
              **$**
              **36,677,000****LIABILITIES
                  AND STOCKHOLDERS' EQUITY****Current
                  liabilities:**Accounts
                  payable and accrued expenses
              
              $
              2,805,000
              
              $
              2,913,000Income
                  taxes payable
              
              
              101,000
              
              
              535,000Line
                  of credit
              
              
              -
              
              
              1,256,000Current
                  maturities of long-term debt
              
              
              1,460,000
              
              
              548,000**Total
                  current liabilities**
              
              
              **4,366,000**
              
              
              **5,252,000****Other
                  liabilities and deferred credits**Long-term
                  debt, net of current portion
              
              
              4,615,000
              
              
              3,509,000**Total
                  liabilities**
              
              
              **8,981,000**
              
              
              **8,761,000****Stockholders'
                  Equity:**Preferred
                  stock, $.001 par value (1,500,000 authorized, no shares issued
                  and
                  outstanding)
              
              
              -
              
              
              -Common
                  stock; par value $.001 per share; 20,000,000 shares
                  authorized;13,709,098
                  and 13,631,898 shares issued and outstanding
              
              
              14,000
              
              
              14,000Additional
                  paid-in capital
              
              
              26,930,000
              
              
              26,629,000Accumulated
                  other comprehensive income
              
              
              367,000
              
              
              334,000Retained
                  earnings
              
              
              9,216,000
              
              
              5,981,000**36,527,000**
              
              
              **32,958,000**Less:
                  cost of 270,534 and 249,184 shares of common stock in
                  treasury
              
              
              (1,971,000
              )
              
              (1,686,000
              )Less:
                  Unearned compensation
              
              
              (2,864,000
              )
              
              (3,356,000
              )**Total
                  stockholders' equity**
              
              
              **31,692,000**
              
              
              **27,916,000****TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY**
              
              **$**
              **40,673,000**
              
              **$**
              **36,677,000**
  See
        accompanying notes to condensed consolidated financial
        statements.


3


**MEDIFAST,
                INC. AND SUBSIDIARIES****CONDENSED
                CONSOLIDATED STATEMENTS OF INCOME****(Unaudited)****Three
                Months Ended September 30,**
            
            **Nine
                Months Ended September 30,****2007**
            
            **2006**
            
            **2007**
            
            **2006**(Restated)
            
            
            
            (Restated)Revenue
            
            $
            21,846,000
            
            $
            19,642,000
            
            $
            63,975,000
            
            $
            58,779,000Cost
                of sales
            
            
            5,523,000
            
            
            4,705,000
            
            
            15,944,000
            
            
            14,334,000**Gross
                Profit**
            
            
            **16,323,000**
            
            
            **14,937,000**
            
            
            **48,031,000**
            
            
            **44,445,000**Selling,
                general, and administration
            
            
            14,766,000
            
            
            13,166,000
            
            
            43,116,000
            
            
            37,362,000**Income
                from operations**
            
            
            1,557,000
            
            
            1,771,000
            
            
            4,915,000
            
            
            7,083,000Other
                income/(expense)Interest
                expense, net
            
            
            (159,000
            )
            
            (42,000
            )
            
            (284,000
            )
            
            (134,000
            )Other
                income
            
            
            2,000
            
            
            24,000
            
            
            90,000
            
            
            184,000(157,000
            )
            
            (18,000
            )
            
            (194,000
            )
            
            50,000**Income
                before provision for income taxes**
            
            
            **1,400,000**
            
            
            **1,753,000**
            
            
            **4,721,000**
            
            
            **7,133,000**Provision
                for income tax (expense)
            
            
            (446,000
            )
            
            (298,000
            )
            
            (1,486,000
            )
            
            (2,219,000
            )**Net
                income**
            
            **$**
            **954,000**
            
            **$**
            **1,455,000**
            
            **$**
            **3,235,000**
            
            **$**
            **4,914,000**Basic
                earnings per share
            
            $
            0.07
            
            $
            0.11
            
            $
            0.25
            
            $
            0.39Diluted
                earnings per share
            
            $
            0.07
            
            $
            0.11
            
            $
            0.24
            
            $
            0.36Weighted
                average shares outstanding -Basic
            
            
            12,982,730
            
            
            12,767,629
            
            
            12,939,562
            
            
            12,657,842Diluted
            
            
            13,683,809
            
            
            13,603,208
            
            
            13,640,641
            
            
            13,493,421






See
      accompanying notes to condensed consolidated financial statements.


4


**MEDIFAST,
                    INC. AND SUBSIDIARIES****CONDENSED
                    CONSOLIDATED STATEMENTS OF CASH FLOWS****(Unaudited)**Nine
                    Months Ended September 30,2007
                
                2006(Restated)Cash
                    flows from operating activities:Net
                    income
                
                $
                3,235,000
                
                $
                4,914,000Adjustments
                    to reconcile net income to net cashprovided
                    by operating activities fromcontinuing
                    operations:Depreciation
                    and amortization
                
                
                2,536,000
                
                
                1,633,000Realized
                    (gain) loss on investment securities
                
                
                43,000
                
                
                (62,000
                )Loss
                    on sale of Consumer Choice Systems
                
                
                -
                
                
                323,000Common
                    stock issued for services
                
                
                21,000
                
                
                64,000Stock
                    options vested during period
                
                
                77,000
                
                
                18,000Excess
                    tax benefits from share-based payment arrangements
                
                
                (30,000
                )
                
                6,000Vesting
                    of unearned compensation
                
                
                492,000
                
                
                346,000Net
                    change in other comprehensive income (loss)
                
                
                33,000
                
                
                (74,000
                )Deferred
                    income taxes
                
                
                (291,000
                )
                
                (563,000
                )Changes
                    in assets and liabilities:Decrease
                    in accounts receivable
                
                
                23,000
                
                
                56,000(Increase)
                    in inventory
                
                
                (216,000
                )
                
                (1,048,000
                )(Increase)
                    in prepaid expenses & other current assets
                
                
                (609,000
                )
                
                (2,886,000
                )(Increase)
                    in deferred compensation
                
                
                (157,000
                )
                
                346,000(
                    Increase) in prepaid taxes
                
                
                -
                
                
                (115,000
                )(Increase)
                    decrease in other assets
                
                
                (37,000
                )
                
                23,000(Decrease)
                    Increase in accounts payable and accrued expenses
                
                
                (108,000
                )
                
                398,000(Decrease)
                    in income taxes payable
                
                
                (434,000
                )
                
                (516,000
                )Net
                    cash provided by operating activities
                
                
                4,578,000
                
                
                2,863,000Cash
                    Flow from Investing Activities:Sales
                    of investment securities
                
                
                30,000
                
                
                341,000(Purchase)
                    of property and equipment
                
                
                (3,551,000
                )
                
                (2,745,000
                )(Purchase)
                    of intangible assets
                
                
                (844,000
                )
                
                (607,000
                )Net
                    cash (used in) investing activities
                
                
                (4,365,000
                )
                
                (3,011,000
                )Cash
                    Flow from Financing Activities:Issuance
                    of common stock, options and warrants
                
                
                216,000
                
                
                658,000Increase
                    (repayment) of long-term debt, net
                
                
                (138,000
                )
                
                (433,000
                )Increase
                    (Decrease) in line of credit, net
                
                
                900,000
                
                
                (21,000
                )Decrease
                    in note receivable
                
                
                105,000
                
                
                -Excess
                    tax benefits from share-based payment arrangements
                
                
                30,000
                
                
                (6,000
                )(Purchase)
                    of treasury stock
                
                
                (309,000
                )
                
                (420,000
                )Net
                    cash provided by (used in) financing activities
                
                
                804,000
                
                
                (222,000
                )**NET
                    INCREASE (DECREASE) IN CASH AND****CASH
                    EQUIVALENTS**
                
                
                1,017,000
                
                
                (370,000
                )Cash
                    and cash equivalents - beginning of the period
                
                
                1,085,000
                
                
                1,484,000Cash
                    and cash equivalents - end of period
                
                $
                2,102,000
                
                $
                1,114,000Supplemental
                    disclosure of cash flow information:Interest
                    paid
                
                $
                313,000
                
                $
                271,000Income
                    taxes
                
                $
                1,435,000
                
                $
                3,403,000Supplemental
                    disclosure of non cash activity:Common
                    stock issued to executives over 6-year vesting period
                
                
                
                
                $
                3,373,000Common
                    shares issued for options and warrants
                
                
                
                
                $
                454,000Options
                    vested during period
                
                $
                77,000
                
                $
                18,000Common
                    stock issued for services
                
                $
                21,000
                
                $
                64,000Line
                    of credit converted to long-term debt
                
                $
                2,156,000


See
        accompanying notes to condensed consolidated financial statements.  5


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


6




**Notes
      to Condensed Consolidated Financial Statements**


**General**





1.
            Basis
                of Presentation





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





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








2.
            Presentation
                of Financial Statements




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








3.
            Inventories




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





4.
              Goodwill and Other Intangible Assets****


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





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


**As
                  of September 30, 2007**
              
              **As
                  of December 31, 2006**(Restated)
              
              (Restated)**Gross
                  Carrying**
              
              **Accumulated**
              
              **Gross
                  Carrying**
              
              **Accumulated****Amount**
              
              **Amortization**
              
              **Amount**
              
              **Amortization**Customer
                  lists
              
              $
              6,369,000
              
              $
              2,761,000
              
              $
              5,587,000
              
              $
              1,969,000Non-compete
                  agreements
              
              
              840,000
              
              
              840,000
              
              
              840,000
              
              
              840,000Trademarks,
                  patents, and copyrightsfinite
                  life
              
              
              1,619,000
              
              
              387,000
              
              
              1,557,000
              
              
              210,000infinite
                  life
              
              
              909,000
              
              
              -
              
              
              909,000
              
              
              -Total
              
              $
              9,737,000
              
              $
              3,988,000
              
              $
              8,893,000
              
              $
              3,019,000**Amortization
                  expense for the nine months ended September 30, 2007 and 2006 was
                  as
                  follows:**(Restated)2007
              
              
              2006Customer
                  lists
              
              
              
              
              
              
              
              $
              791,000
              
              
              580,000Non-compete
                  agreements
              
              
              
              
              
              
              
              
              -
              
              
              251,000Trademarks
                  and patents
              
              
              
              
              
              
              
              
              178,000
              
              
              102,000Total
                  Trademarks and Intangibles
              
              
              
              
              
              
              
              $
              969,000
              
              $
              933,000
  Amortization
        expense is included in selling, general and administrative
        expenses.


5.
              Fixed
                Assets





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





6.
              Note
                Receivable




Medifast
      realized a $1,503,000 note receivable as a result of the sale of Consumer Choice
      Systems on January 17, 2006 to a former board member. The note has a 10-year
      term with imputed interest of 4% collateralized by 50,000 shares of Medifast
      stock and all the assets of Consumer Choice Systems. The amount of principal
      to
      be collected over each of the next 5 years is $174,000 per year with the
      remaining amount collectible thereafter of $495,000.





7.
              Income
                Per Common Share





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


8


8.
              Estimates




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





9.
              Deferred
                Compensation Plans





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





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





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





10.
              Share
                  Based Payments


Stock-Based
      Compensation





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





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





Unearned
      compensation represents shares issued to executives that will be vested over
      a
      5-6 year period. These shares will be amortized over the vesting period in
      accordance with FASB 123(R). The expense related to the vesting of unearned
      compensation was $570,000 and $346,000 at September 30, 2007 and September
      30,
      2006, respectively.


9





The
      following summarizes the stock option activity for the Nine Months ended
      September 30, 2007:


September
                  30, 2007Shares
              
              WeightedAverageExercise
                  Price
              
              WeightedAverage
                  ContractualTerm (Years)Outstanding,
                  December 31, 2006
              
              
              321,579
              
              
              3.76Options
                  grantedOptions
                  reinstatedOptions
                  exercised
              
              
              (27,500
              )
              
              0.89Options
                  forfeited or expiredOutstanding,
                  September 30, 2007
              
              
              294,079
              
              
              4.16
              
              
              2.47Options
                  exercisable, September 30, 2007
              
              
              204,077
              
              
              3.36
              
              
              2.11Options
                  available for grant at end of year
              
              
              928,421





10.
              Recent
                    Accounting Pronouncements


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




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




In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No.
      157, Fair Value Measurements, and (“FAS 157”). This Standard defines fair value,
      establishes a framework for measuring fair value in generally accepted
      accounting principles and expands disclosures about fair value measurements.
      FAS
      157 is effective for financial statements issued for fiscal years beginning
      after November 15, 2007 and interim periods within those fiscal years. The
      adoption of FAS 157 is not expected to have a material impact on the Company’s
      consolidated financial position, results of operations or cash flows.  10


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





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





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





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


11.
              Revenue
                    Recognition


Revenue
      is recognized net of discounts, rebates, promotional adjustments, price
      adjustments, returns and other potential adjustments upon shipment and passing
      of risk to the customer and when estimates of are reasonably determinable,
      collection is reasonably assured and the Company has no further performance
      obligations.





12.
              Restatements


The
      September 30, 2006 financial statements have been restated to increase
      amortization expense on customer lists by $35,000. Net income for the
      quarter-ended September 30, 2006 decreased by $35,000 from $1,490,000 to
      $1,455,000 and retained earnings decreased from $5,764,000 to $5,729,000. The
      restatement decreased basic earnings per share by $.01 from $.12 to $.11.
      Diluted earnings per share remained unchanged at $.11.





13. Reclassifications




Certain
      amounts for the quarter ended September 30, 2006 have been reclassified to
      conform to the presentation of the September 30, 2007 amounts. The
      reclassifications have no effect on net income for the quarters ended September
      30, 2007 and 2006.


11


14.
              Business
                    Segments


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




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


12


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


**Three
                  Months Ended September 30, 2007****Medifast**
              
              **All
                  Other**
              
              **Consolidated**Revenues,
                  net
              
              
              20,792,000
              
              
              1,054,000
              
              
              21,846,000Cost
                  of Sales
              
              
              5,374,000
              
              
              149,000
              
              
              5,523,000Other
                  Selling, General and Adminstrative Expenses
              
              
              12,712,000
              
              
              1,172,000
              
              
              13,884,000Depreciation
                  and Amortization
              
              
              579,000
              
              
              301,000
              
              
              880,000Interest
                  (net)
              
              
              30,000
              
              
              129,000
              
              
              159,000Provision
                  for income taxes
              
              
              446,000
              
              
              -
              
              
              446,000Net
                  income (loss)
              
              
              1,651,000
              
              
              (697,000
              )
              
              954,000Segment
                  Assets
              
              
              21,917,000
              
              
              18,756,000
              
              
              40,673,000**Three
                  Months Ended September 30, 2006****Medifast**
              
              
              **All
                  Other**
              
              
              **Consolidated**(restated)Revenues,
                  net
              
              
              18,812,000
              
              
              830,000
              
              
              19,642,000Cost
                  of Sales
              
              
              4,557,000
              
              
              148,000
              
              
              4,705,000Other
                  Selling, General and Adminstrative Expenses
              
              
              10,907,000
              
              
              1,476,000
              
              
              12,383,000Depreciation
                  and Amortization
              
              
              333,000
              
              
              426,000
              
              
              759,000Interest
                  (net)
              
              
              39,000
              
              
              3,000
              
              
              42,000Provision
                  for income taxes
              
              
              298,000
              
              
              -
              
              
              298,000Net
                  income (loss)
              
              
              2,678,000
              
              
              (1,223,000
              )
              
              1,455,000Segment
                  Assets
              
              
              18,869,000
              
              
              16,259,000
              
              
              35,128,000**Nine
                  Months Ended September 30, 2007****Medifast**
              
              
              **All
                  Other**
              
              
              **Consolidated**Revenues,
                  net
              
              
              60,977,000
              
              
              2,998,000
              
              
              63,975,000Cost
                  of Sales
              
              
              15,566,000
              
              
              378,000
              
              
              15,944,000Other
                  Selling, General and Adminstrative Expenses
              
              
              37,350,000
              
              
              3,141,000
              
              
              40,491,000Depreciation
                  and Amortization
              
              
              2,060,000
              
              
              475,000
              
              
              2,535,000Interest
                  (net)
              
              
              112,000
              
              
              172,000
              
              
              284,000Provision
                  for income taxes
              
              
              1,486,000
              
              
              -
              
              
              1,486,000Net
                  income (loss)
              
              
              4,403,000
              
              
              (1,168,000
              )
              
              3,235,000Segment
                  Assets
              
              
              21,917,000
              
              
              18,756,000
              
              
              40,673,000**Nine
                  Months Ended September 30, 2006****Medifast**
              
              
              **All
                  Other**
              
              
              **Consolidated**(restated)Revenues,
                  net
              
              
              56,422,000
              
              
              2,357,000
              
              
              58,779,000Cost
                  of Sales
              
              
              13,944,000
              
              
              390,000
              
              
              14,334,000Other
                  Selling, General and Adminstrative Expenses
              
              
              31,178,000
              
              
              4,210,000
              
              
              35,388,000Depreciation
                  and Amortization
              
              
              1,223,000
              
              
              567,000
              
              
              1,790,000Interest
                  (net)
              
              
              123,000
              
              
              11,000
              
              
              134,000Provision
                  for income taxes
              
              
              2,219,000
              
              
              -
              
              
              2,219,000Net
                  income (loss)
              
              
              7,735,000
              
              
              (2,821,000
              )
              
              4,914,000Segment
                  Assets
              
              
              18,869,000
              
              
              16,259,000
              
              
              35,128,000


13


**Management
      Discussion and Analysis of**


**Financial
      Condition and Results of Operations**





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





**Critical
      Accounting Policies and Estimates**





Our
      consolidated financial statements are prepared in accordance with U.S. generally
      accepted accounting principles. Our significant accounting policies are
      described in Note 2 of our audited consolidated financial statements as of
      December 31, 2006.





The
      preparation of these financial statements requires management to make estimates
      and assumptions that affect the reported amounts of assets and liabilities,
      the
      disclosure of contingent assets and liabilities at the date of the financial
      statements, and the reported amounts of revenue and expenses during the
      reporting period. Management develops, and changes periodically, these estimates
      and assumptions based on historical experience and on various other factors
      that
      are believed to be reasonable under the circumstances. Actual results may differ
      from these estimates under different assumptions or conditions. Management
      considers the following accounting estimates to be the most critical in
      preparing our consolidated financial statements. These critical accounting
      estimates have been discussed with our audit committee.





Revenue
      Recognition. Revenue is recognized net of discounts, rebates, promotional
      adjustments, price adjustments, returns and other potential adjustments upon
      shipment and passing of risk to the customer and when estimates of are
      reasonably determinable, collection is reasonably assured and the Company has
      no
      further performance obligations.





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




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




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


14


**General**




**Nine
      Months Ended September 30, 2007 and September 30, 2006**





Revenue:
      Revenue increased to $64 million for the first nine months of 2007 as compared
      to $58.8 million for the first nine months of 2006, an increase of $5.2 million
      or 9%. The direct marketing sales channel accounted for 58% of total revenue,
      Take Shape for Life 31%, doctors 5%, and clinics 6%. As compared to the first
      nine months of 2006, the direct response sales channel revenue increased by
      2%.
      Direct response is fueled primarily by consumer advertising via print, TV,
      web,
      and radio, however, in the first quarter of 2006 it was also fueled largely
      by a
      substantial editorial placement in a major consumer publication at no cost
      to
      the Company. Take Shape for Life sales, which are fueled by person-to-person
      recruiting and support increased by 17% year-over-year. The Company’s doctor’s
      sales increased by 13% compared to the first nine months of 2006. The Company’s
      clinic division which began operating under the Medifast Weight Control Center
      name in late 2006, increased sales by 34% as compared to the first nine months
      of 2006.





The
      Take
      Shape for Life division grew 17% year-over-year. This growth can largely be
      attributed to the tools and training that led to an increase in the ability
      of
      the division to both promote growth in recruiting of health coaches, as well
      as
      better supporting this growth as it occurs. This continued investment proved
      to
      be a large part of the current growth trends in Take Shape for Life sales,
      as
      well as the number of active health coaches. The number of active health coaches
      grew to 1,650 at the end of the third quarter 2007 compared to 1,200 at the
      same
      time period in 2006, an increase of 38%. This recent growth in health coaches
      was recently observed in July of 2007, with over 80% attendance growth at the
      2007 National Convention compared to the attendance at the 2006 Convention.
      The
      company believes that the growth in health coach activity is a positive trend
      that should continue, and will lead to significant revenue growth in the near
      future





The
      Medifast Weight Control Centers, which represent approximately 6% of the
      Company’s overall revenues, are currently operating in 9 locations in Dallas and
      Orlando. In the first nine months of 2007, the Company experienced revenue
      growth of 34% versus the same time period last year. The average monthly revenue
      per clinic also witnessed significant growth of 57%, averaging $36,000 per
      clinic in 2007 as compared to $23,000 in the first nine months of 2006. In
      the
      expanding Dallas, TX market, the average monthly revenue per clinic is
      approximately $50,000. In the estimated $40 billion weight loss and health
      living industry, the brick and mortar clinic model has always made up a
      significant portion of overall sales. Medifast has incorporated this model
      with
      the creation of the Medifast Weight Control Centers. The recent growth in this
      division has proven that the model is in high demand from a select portion
      of
      the weight loss consumers. The Company believes that with the recent industry
      launches of over-the-counter and anticipated launches of prescription appetite
      suppressant medications that this model will continue to grow. Therefore,
      throughout the 2 nd and 3rd
      quarter, the Company invested in the infrastructure of its medical clinic model.
      The major aspects of the investment in this division included an expanded
      executive team, the creation of a point of sale system, a robust customer data
      tracking system, finalizing the franchise opportunity documentation, and the
      beginning stages of expansion into several new locations. The Company believes
      this business will be a major driver of revenues and profits for the Medifast
      business as it continues to expand. The Company plans to continue the expansion
      of the Medifast Weight Control Centers with both additional corporate locations
      as well as offering the model through a franchise opportunity. The Company
      plans
      to open an additional 6 corporately owned locations in a major market by the
      end
      of the first quarter of 2008.








Overall,
      selling, general and administrative expenses increased by $5.8 million as
      compared to the first nine months of 2006. The majority of the increase was
      due
      to investments in the Company’s future advertising campaigns, along with the
      necessary infrastructure support tools to allow the future campaigns to improve
      in effectiveness. Advertising expense for the first nine months of 2007 was
      approximately $15.1 million compared to approximately $12.2 million for the
      same
      period last year, an increase of $2.9 million. In the prior year, the Company
      benefited from a substantial editorial placement in a major consumer publication
      at no cost to the Company. During 2007, the Company has invested in multiple
      celebrity endorsement contracts as well as increased public relations expense
      to
      focus on increasing brand awareness that will benefit our future advertising
      campaigns. Salaries and benefits increased by approximately $1,300,000 for
      the
      nine months ended September 30, 2007 as the Company hired additional expertise
      in critical areas in order to assist in future growth and meet regulatory needs.
      This primarily includes IT, nutrition and product development, marketing,
      Medifast Weight Control Centers, and Take Shape for Life. Take Shape for Life
      commission expense, which is completely variable based upon revenue, increased
      by approximately $1,200,000. Communication expense which includes outsourced
      call centers increased by $270,000 due to two outsourced call centers handling
      calls relating to TV, print, and Take Shape for Life sales. The Company has
      spent a significant amount of time and materials in the first nine months of
      2007 building the future call center infrastructure with related technology
      and
      personnel. This investment will allow the call center to increase the percentage
      of advertising calls to be handled in-house. It is believed that this initiative
      will amount to significant savings and improved closing rates in the future.
      In
      the third quarter of 2007 additional call volume was moved in-house resulting
      in
      an $80,000 decrease in communication expense. The reduction of the outsourced
      call center expenses will occur in stages throughout the remainder of 2007
      and
      into 2008. Other expenses increased by $400,000, which included items such
      as
      depreciation, amortization, credit card processing fees, charitable
      contributions, and property taxes. Stock compensation expense increased by
      $208,000 as compared to the first nine months of 2006 as stock awards vest
      over
      5 and 6 year terms for executives. These increases were offset by an
      approximately $175,000 decrease in office expense and the absence of a $323,000
      loss resulting from the sale of the Consumer Choice Systems division in the
      first quarter of 2006.




15


Costs
      and
      Expenses: Cost of revenue increased $1.6 million to $16 million in the first
      nine months of 2007 from $14.3 million in 2006. As a percentage of sales, gross
      margin remained at approximately 75% for the first nine months of 2007 and
      2006.





Income
      taxes **:** **** **** For
      the
      first nine months of 2007, we recorded $1,486,000 in income tax expense, which
      represents an annual effective rate of 31.5%. For the first nine months of
      2006,
      we recorded income tax expense of $2,219,000 which reflected an estimated annual
      effective tax rate of 31.1%. The Company anticipates a tax rate of approximately
      32-34% in 2007.





Net
      income: Net income was $3.2 million in the first nine months of 2007 as compared
      to $4.9 million in the first nine months of 2006, which reflected a decrease
      of
      $1.7 million or 35%. The decrease was directly related to the initiatives of
      the
      Company to create its new advertising campaign and improve future capabilities
      to increase advertising effectiveness. Additionally, the Company did not have
      the benefit of the no cost editorial publication that occurred in the first
      quarter of 2006 that led to significant profits.








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





Revenue:
      Revenue increased to $21.8 million for the three months ended September 30,
      2007
      as compared to $19.6 million for the same period in 2006, an increase of $2.2
      million or 11%. The direct marketing sales channel accounted for 58% of total
      revenue, Take Shape for Life 31%, doctors 5%, and clinics 6%. As compared to
      the
      three months ended September 30, 2006, the direct response sales channel revenue
      increased by 2%. Take Shape for Life sales, which are fueled by person-to-person
      recruiting and support increased by 30% year-over-year. Doctor’s sales increased
      10% as compared to prior year and the Company’s clinic division, which began
      operating under the Medifast Weight Control Center name in late 2006, increased
      sales by 34% as compared to the quarter-ended September 30, 2006.





The
      Take
      Shape for Life division grew 30% year-over-year. This growth can largely be
      attributed to the 2007 National Convention that had over 80% attendance growth
      as compared to 2006. Health coaches were trained on tools and training materials
      that promoted growth in the recruitment of health coaches as well as enhanced
      customer support. As compared to prior year, health coach recruitment increased
      by 75% in the third quarter of 2007. The company believes that the growth in
      health coach activity is a positive trend that should continue, and will lead
      to
      significant revenue growth in the near future





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





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





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





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





In
      the
      third quarter of 2007 selling, general, and administrative expenses increased
      by
      $1.6 million as compared to Q3 of 2006. As compared to prior year, advertising
      expense increasing by approximately $400,000. Advertising expense for Q3 of
      2007
      was approximately $5.1 million compared to $4.7 million for the same period
      last
      year. The primary reason for the increase in advertising expense was due to
      increased spending on future campaigns that include celebrity endorsement
      contracts and the public relations and promotions associated with them, that
      the
      Company feels would increase sales and exposure of the Medifast brand. The
      Company has invested in multiple celebrity endorsement contracts that increased
      advertising expense in the current year. In the third quarter of 2007, in order
      to prepare for the first quarter of 2008 the Company invested in testing a
      celebrity endorsed campaign, while only minimal weight loss had been experienced
      by both celebrities. This test was done to prove the believed increased
      effectiveness of a celebrity endorsed campaign. Due to the proven success of
      the
      celebrity endorsed campaign in the third quarter, and with the celebrities
      now
      having experienced substantially more weight loss, the Company invested in
      the
      creation of an advertising campaign to be launched in the first quarter of
      2008.
      Salaries and benefits increased by approximately $500,000 as compared to the
      third quarter of 2006 as the Company hired additional expertise and incurred
      additional recruiting fees in critical areas in order to assist in future
      growth. This primarily includes IT, nutrition and product development,
      marketing, Medifast Weight Control Centers, and Take Shape for Life. The
      salaries are attributed to the investing of internal abilities to improve
      capabilities of the Company moving forward. These internal teams were associated
      with the building of several areas to include the additional capabilities of
      the
      Company’s website and call center. One of these major initiatives was the mid
      June launch of the Company’s auto-ship program that has proven successful as
      approximately 35% of all new customers choose the auto-ship option. The Company
      believes that this, along with the many other innovative updates completed,
      will
      significantly improve its customer retention strategies, while positively
      impacting the lifetime value of consumers and providing clearer future revenue
      expectations from reoccurring customers. Take Shape for Life commission expense,
      which is directly related to sales, increased by approximately $700,000.
      Communication expense which includes outsourced call centers decreased by
      $80,000 as the Company continues to bring more call volume into its in-house
      call center. Other expenses increased by $200,000, which included items such
      as
      depreciation, amortization, credit card processing fees, charitable
      contributions, and property taxes. These increases were offset by an
      approximately $75,000 decrease in office expense.


16


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





Costs
      and
      Expenses: Cost of revenue increased $800,000 to $5.5 million in Q3 of 2007
      from
      $4.7 million in 2006. As a percentage of sales, gross margin remained at
      approximately 75% for the third quarter of 2007 and 2006.





Income
      taxes **:** **** **** In
      the
      third quarter of 2007, we recorded $446,000 in income tax expense, which
      represents an annual effective rate of 31.9%. In the third quarter of 2006,
      we
      recorded income tax expense of $298,000 which reflected an estimated annual
      effective tax rate of 17%. The Company anticipates a tax rate of approximately
      32-34% in 2007.





Net
      income: Net income was $954,000 in the third quarter of 2007 as compared to
      $1,455,000 in the third quarter of 2006, which reflected a decrease of $501,000
      or 34%. The decrease was directly related to the initiatives of the Company
      to
      create its new advertising campaign and improve future capabilities to increase
      advertising effectiveness through technology and personnel.








**SEGMENT
      RESULTS OF OPERATIONS**




**Net
        Sales by Segment for the Three Months Ended September
        30,**
 **2007**
              
              **2006****Segments**
              
              Sales
              
              %
                  of Total
              
              Sales
              
              %
                  of TotalMedifast
              
              
              20,792,000
              
              
              95
              %
              
              18,812,000
              
              
              96
              %All
                  Other
              
              
              1,054,000
              
              
              5
              %
              
              830,000
              
              
              4
              %Eliminations
              
              
              -
              
              
              0
              %
              
              -
              
              
              0
              %Total
                  Sales
              
              
              21,846,000
              
              
              100
              %
              
              19,642,000
              
              
              100
              %
 **Net
          Sales by Segment for the Nine Months Ended September
          30,**
 **2007**
              
              
              **2006****Segments**
              
              
              Sales
              
              
              %
                  of Total
              
              
              Sales
              
              
              %
                  of TotalMedifast
              
              
              60,977,000
              
              
              95
              %
              
              56,422,000
              
              
              96
              %All
                  Other
              
              
              2,998,000
              
              
              5
              %
              
              2,357,000
              
              
              4
              %Eliminations
              
              
              -
              
              
              0
              %
              
              -
              
              
              0
              %Total
                  Sales
              
              
              63,975,000
              
              
              100
              %
              
              58,779,000
              
              
              100
              %




17


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





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





All
      Other
      Segment: The All Other reporting segment consists of the sales of Medifast
      Weight Control Centers. Sales increased by $224,000 year-over year as a result
      of an increase in Medifast Weight Control Centers sales to $1,054,000. The
      increase in the Medifast Weight Control Center’s sales was due to the opening of
      more clinics in Texas, the closing of less profitable centers, spending
      efficiencies in advertising, improved closing rates on sales, as well as the
      hiring of more experienced clinic operators to manage the clinics. In addition,
      new programs were developed that extended the lifetime value of each
      customer.








**Nine
      Months Ended September 30, 2007 and September 30, 2006**





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





All
      Other
      Segment: The All Other reporting segment consists of the sales of Medifast
      Weight Control Centers. Sales increased by $641,000 year-over year as a result
      of an increase in Medifast Weight Control Centers sales to $2,998,000. The
      increase in the Medifast Weight Control Center’s sales was due to the opening of
      more clinics in Texas, the closing of less profitable centers, spending
      efficiencies in advertising, improved closing rates on sales, as well as the
      hiring of more experienced clinic operators to manage the clinics. In addition,
      new programs were developed that extended the lifetime value of each customer.
      The “umbrella” effect of Medifast direct advertising has also had an impact on
      sales by increasing brand recognition as well as walk-in customers.




**Net
        Profit by Segment for the Three Months Ended September 30,**
 **2007**
              
              **2006****Segments**
              
              Profit
              
              %
                  of Total
              
              Profit
              
              %
                  of TotalMedifast
              
              
              1,651,000
              
              
              173
              %
              
              2,678,000
              
              
              184
              %All
                  Other
              
              
              (697,000
              )
              
              -73
              %
              
              (1,223,000
              )
              
              -84
              %Eliminations
              
              
              -
              
              
              0
              %
              
              -
              
              
              0
              %Total
                  Sales
              
              
              954,000
              
              
              100
              %
              
              1,455,000
              
              
              100
              %
 **Net
          Profit by Segment for the Nine Months Ended September 30,**
 **2007**
              
              
              **2006****Segments**
              
              
              Profit
              
              
              %
                  of Total
              
              
              Profit
              
              
              %
                  of TotalMedifast
              
              
              4,403,000
              
              
              136
              %
              
              7,735,000
              
              
              157
              %All
                  Other
              
              
              (1,168,000
              )
              
              -36
              %
              
              (2,821,000
              )
              
              -57
              %Eliminations
              
              
              -
              
              
              0
              %
              
              -
              
              
              0
              %Total
                  Sales
              
              
              3,235,000
              
              
              100
              %
              
              4,914,000
              
              
              100
              %








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





Medifast
      Segment: The Medifast reporting segment consists of the profits of Medifast
      Direct, Take Shape for Life, and Doctors and Clinics. As this represents the
      majority of our business this is referenced to the “Condensed Consolidated
      Results of Operations” management discussion for the three months ended
      September 30, 2007 and 2006 above. See footnote 14, “Business Segments” for a
      detailed breakout of expenses


18


All
      Other
      Segment: The All Other reporting segment consists of the losses of Medifast
      Weight Control Centers, and corporate expenses related to the parent company
      operations. Year-over-year, the loss in the All Other segment improved by
      $526,000. The decreased expenses were due to a restructuring of the Hi-Energy
      and Medifast Weight Control Centers management team, improved advertising spend,
      and reduction in salary expense. The Hi-Energy and Medifast Weight Control
      Centers showed an improvement year-over-year of $231,000. Corporate expenses
      increased in the third quarter of 2007 as compared to the prior year, which
      includes auditor’s fees, refinancing fees, attorney’s fees, board of director
      expenses, investor relations, corporate consulting, education and training,
      and
      corporate outings. See footnote 14, “Business Segments” for a detailed breakout
      of expenses.








**Nine
      Months Ended September 30, 2007 and September 30, 2006**





Medifast
      Segment: The Medifast reporting segment consists of the profits of Medifast
      Direct, Take Shape for Life, and Doctors and Clinics. As this represents the
      majority of our business this is referenced to the “Condensed Consolidated
      Results of Operations” management discussion for the nine months ended September
      30, 2007 and 2006 above. See footnote 14, “Business Segments” for a detailed
      breakout of expenses





All
      Other
      Segment: The All Other reporting segment consists of the losses of Medifast
      Weight Control Centers, and corporate expenses related to the parent company
      operations. Year-over-year, the loss in the All Other segment decreased by
      $1,653,000. These segments include the selling, general, and administrative
      expenses of the corporate operation, which includes auditor fees, refinancing
      fees, attorney’s fees, board of director expenses, investor relations, corporate
      consulting, education and training, and corporate outings, and the Hi-Energy
      and
      Medifast Weight Control Centers. The Medifast Weight Control Centers showed
      an
      improvement year-over-year of $440,000 associated with expanding the clinic
      model, and increased sales within that model. See footnote 14, “Business
      Segments” for a detailed breakout of expenses





**Seasonality**





The
      Company's weight management products and programs have historically been subject
      to seasonality. Traditionally the holiday season in November/December of each
      year is considered poor for diet control products and services. January and
      February generally show increases in sales, as these months are considered
      the
      commencement of the “diet season.” In 2007, seasonality has not been a
      significant factor. This is largely due to the increase in the consumer’s
      awareness of the overall health and nutritional benefits accompanied with the
      use of the Company’s product line. As consumers continue to increase their
      association of nutritional weight loss programs with overall health, seasonality
      will continue to decrease.





**Inflation**





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





**Item
      5. Other Information**




Litigation **:**





Leonard
      Z. Sotomeyer on December 30, 2003 filed an action in the Supreme Court of the
      State of New York, County of New York, against his former business partner,
      David Scheffler, and T-1 Holdings, LLC, and included Medifast, Inc., formerly
      Heathrite, Inc., as a Defendant, Case 604076-03, seeking monetary damages for
      failure of his former business partner to compensate him under several
      consulting agreements with Medifast, Inc. made with H-T Capital, Inc. and
      derivatively on behalf of T-1 Holdings, LLC. The Court dismissed on Defendants’
motions Sotomeyer’s complaint in its entirety by Order of September 30, 2004.
      Following an appeal, the Appellate Division, First Department, reinstated the
      first and second causes of action while affirming the dismissal of Plaintiff’s
      remaining derivative claims by its decision April 13, 2006. During the third
      quarter of 2007, the Court ruled favorably to Medifast preliminarily dismissing
      all counts against Medifast, except one. Medifast believes it continues to
      have
      a meritorious defense to the sole remaining count and that any decision rendered
      would not materially impact the ongoing operations of Medifast,
      Inc.





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





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





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




19


Controls
      and Procedures :




The
      Corporation maintains disclosure controls and procedures designed to ensure
      that
      information required to be disclosed in reports filed under the Securities
      Exchange Act of 1934, as amended, is recorded, processed, summarized, and
      reported within the specified time periods.




Medifast’s
      management, with the participation of its chief executive officer and its chief
      financial officer, evaluated the effectiveness of Medifast’s disclosure controls
      and procedures (as defined in the Securities Exchange Act of 1934
      Rules 13a-15(e) or 15d-15(e)) as of September 30, 2007. Based on that
      evaluation, Medifast’s chief executive officer and chief financial officer
      concluded that, as of that date, Medifast’s disclosure controls and procedures
      required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15,
      were effective at the reasonable assurance level.




As
      discussed in Medifast’s Annual Report on Form 10-K/A for the year ended
      December 31, 2006, management’s assessment identified the following
      material weakness and significant deficiency:




(A) As
      previously disclosed in our Form 10-K/A for the year ended December 31, 2006
      the
      Company identified a material weakness related to its internal control over
      the
      accounting for its customer lists under Statement of Financial Accounting
      Standards No. 142, “Goodwill and Other Intangible Assets.” The material
      weakness resulted in the restatement of the Company’s consolidated financial
      statements as of December 31, 2006 and 2005, and the interim financial
      information for each of the quarters in 2006, commencing with the quarter ended
      March 31, 2006.




In
      the third quarter of 2007, management implemented enhanced internal controls
      over its accounting for all intangible assets under Statement of Financial
      Accounting Standards No. 142, “Goodwill and Other Intangible Assets.” All key
      management involved in the financial reporting process was trained on the
      accounting for intangible assets under FASB 142. In addition, any new intangible
      assets are reviewed by three financial management personnel before being
      recorded on the financial statements to ensure proper accounting and disclosure.
      As a result of the additional controls, management has assessed the operating
      effectiveness of these enhanced internal controls and believes the material
      weakness has been remediated.




Other
      than indicated above, there were no changes in the Corporation’s internal
      control over financial reporting that occurred during the quarter ended
      September 30, 2007, that have materially affected, or are reasonably likely
      to materially affect, the Corporation’s internal control over financial
      reporting.




20


**SIGNATURES**





Pursuant
      to the requirements of the Securities Exchange Act of 1934, the Registrant
      has
      duly caused this Report to be signed on its behalf by the undersigned, thereunto
      duly authorized.





**Medifast,
      Inc.**


BY:
              
              /S/
                  MICHAEL S. MCDEVITT
              
              November
                  8, 2007Michael
                  S. McDevittChief
                  Executive Officer and Chief Financial Officer(principal
                  executive officer and principal financial officer)






21


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


22