**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**FORM
      10-Q**




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




For
      the
      quarterly period ended March 31, 2007




OR




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




For
      the
      transition period from  to




Commission
      file number 0-23016




**MEDIFAST,
      INC.**


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




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




**11445
      Cronhill Drive**


**Owings
      Mills, MD 21117**


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




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


Yes  x    No  o




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




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




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




Yes  o No  x




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


**Class**
            
            **Outstanding at
                May 8, 2007**Common
                stock, $.001 par value per share
            
            13,668,998
                shares







Index






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






2


**MEDIFAST,
        INC. AND SUBSIDIARIES**


**CONDENSED
        CONSOLIDATED BALANCE SHEETS**


March
                  31, 2007
              
              December
                  31, 2006(Unaudited)
              
              (Audited)**ASSETS****Current
                  assets:**Cash
              
              $
              1,857,000
              
              $
              1,085,000Accounts
                  receivable-net of allowance for doubtful accounts of
                  $100,000
              
              
              525,000
              
              
              448,000Inventory
              
              
              8,707,000
              
              
              8,255,000Investment
                  securities
              
              
              1,414,000
              
              
              1,540,000Deferred
                  compensation
              
              
              798,000
              
              
              673,000Prepaid
                  expenses and other current assets
              
              
              3,483,000
              
              
              2,599,000Note
                  receivable - current
              
              
              174,000
              
              
              174,000Deferred
                  tax asset
              
              
              92,000
              
              
              90,000**Total
                  Current Assets**
              
              
              **17,050,000**
              
              
              **14,864,000**Property,
                  plant and equipment - net
              
              
              14,575,000
              
              
              14,020,000Trademarks
                  and intangibles - net
              
              
              6,301,000
              
              
              6,274,000Deferred
                  tax asset, net of current portion
              
              
              418,000
              
              
              367,000Note
                  receivable, net of current portion
              
              
              1,314,000
              
              
              1,355,000Other
                  assets
              
              
              53,000
              
              
              47,000**TOTAL
                  ASSETS**
              
              **$**
              **39,711,000**
              
              **$**
              **36,927,000****LIABILITIES
                  AND STOCKHOLDERS' EQUITY****Current
                  liabilities:**Accounts
                  payable and accrued expenses
              
              $
              3,615,000
              
              $
              2,913,000Income
                  taxes payable
              
              
              689,000
              
              
              535,000Line
                  of credit
              
              
              1,906,000
              
              
              1,256,000Current
                  maturities of long-term debt
              
              
              528,000
              
              
              548,000**Total
                  current liabilities**
              
              
              **6,738,000**
              
              
              **5,252,000**Long-term
                  debt, net of current portion
              
              
              3,392,000
              
              
              3,509,000**Total
                  Liabilities**
              
              
              **10,130,000**
              
              
              **8,761,000****Stockholders'
                  Equity:**Common
                  stock; par value $.001 per share; 20,000,000
                  authorized;13,668,998
                  and 13,631,898 shares issued and outstanding, respectively
              
              
              14,000
              
              
              14,000Additional
                  paid-in capital
              
              
              26,752,000
              
              
              26,629,000Accumulated
                  other comprehensive income
              
              
              348,000
              
              
              334,000Retained
                  Earnings
              
              
              7,653,000
              
              
              6,231,000**34,767,000**
              
              
              **33,208,000**Less:
                  cost of 274,184 and 210,902 shares of common stock in
                  treasury
              
              
              (1,994,000
              )
              
              (1,686,000
              )Less:
                  unearned compensation
              
              
              (3,192,000
              )
              
              (3,356,000
              )**Total
                  Stockholders' Equity**
              
              
              **29,581,000**
              
              
              **28,166,000****TOTAL
                  LIABILITIES & STOCKHOLDERS' EQUITY**
              
              **$**
              **39,711,000**
              
              **$**
              **36,927,000**


See
      accompanying notes to condensed consolidated financial statement.




3


**MEDIFAST,
        INC. AND SUBSIDIARIES**


**CONDENSED
        CONSOLIDATED STATEMENTS OF INCOME**
  **Three
                  Months Ended March 31,****2007**
              
              **2006**(Unaudited)
              
              (Unaudited)Revenue
              
              $
              20,089,000
              
              $
              19,183,000Cost
                  of sales
              
              
              5,058,000
              
              
              4,778,000**Gross
                  Profit**
              
              
              **15,031,000**
              
              
              **14,405,000**Selling,
                  general, and administration
              
              
              12,792,000
              
              
              11,318,000**Income
                  from operations**
              
              
              2,239,000
              
              
              3,087,000Other
                  income/(expense)Interest
                  expense
              
              
              (95,000
              )
              
              (89,000
              )Loss
                  on Sale of Consumers Choice Systems
              
              
              -
              
              
              (323,000
              )Stock
                  compensation expense
              
              
              (241,000
              )
              
              (33,000
              )Interest
                  income
              
              
              33,000
              
              
              98,000Other
                  expense
              
              
              51,000
              
              
              79,000(252,000
              )
              
              (268,000
              )**Net
                  income before provision for income taxes**
              
              
              **1,987,000**
              
              
              **2,819,000**Provision
                  for income tax (expense)
              
              
              (565,000
              )
              
              (1,125,000
              )**Net
                  income**
              
              
              **1,422,000**
              
              
              **1,694,000**Basic
                  earnings per share
              
              $
              0.11
              
              $
              0.13Diluted
                  earnings per share
              
              $
              0.10
              
              $
              0.13Weighted
                  average shares outstanding -Basic
              
              
              12,899,543
              
              
              12,965,518Diluted
              
              
              13,690,788
              
              
              13,474,411




See
      accompanying notes to condensed consolidated financial statements.




4


**MEDIFAST,
        INC. AND SUBSIDIARIES**


**CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS**


Three
                  Months Ended March 31,2007
              
              2006(Unaudited)
              
              (Unaudited)Cash
                  flows from operating activities:Net
                  income
              
              $
              1,422,000
              
              $
              1,694,000Adjustments
                  to reconcile net income to net cashprovided
                  by operating activities fromcontinuing
                  operations:Depreciation
                  and amortization
              
              
              702,000
              
              
              759,000Realized
                  (gain) loss on investment securities
              
              
              32,000
              
              
              (19,000
              )Loss
                  on sale of Consumer Choice Systems
              
              
              -
              
              
              323,000Common
                  stock issued for services
              
              
              21,000
              
              
              33,000Stock
                  options vested during period
              
              
              77,000
              
              
              18,000Excess
                  tax benefits from shared-based payment
                  arrangements
              
              
              30,000
              
              
              (6,000
              )Vesting
                  of unearned compensation
              
              
              164,000
              
              
              15,000Net
                  change in other comprehensive (loss) income
              
              
              14,000
              
              
              (55,000
              )Deferred
                  income taxes
              
              
              (53,000
              )
              
              (262,000
              )Changes
                  in assets and liabilities:(Increase)
                  decrease in accounts receivable
              
              
              (76,000
              )
              
              79,000(Increase)
                  decrease in inventory
              
              
              (452,000
              )
              
              46,000(Increase)
                  decrease in prepaid expenses & other current assets
              
              
              (885,000
              )
              
              835,000(Increase)
                  in deferred compensation
              
              
              (125,000
              )
              
              (102,000
              )Decrease
                  in other assets
              
              
              (6,000
              )
              
              (1,000
              )Increase
                  in accounts payable and accrued expenses
              
              
              701,000
              
              
              652,000(Decrease)
                  in deferred tax liability
              
              
              -
              
              
              (191,000
              )Increase
                  (decrease) in income taxes payable
              
              
              154,000
              
              
              (416,000
              )Net
                  cash provided by operating activities
              
              
              1,720,000
              
              
              3,402,000Cash
                  Flow from Investing Activities:(Purchase)
                  sale of investment securities, net
              
              
              97,000
              
              
              (44,000
              )(Purchase)
                  of property and equipment
              
              
              (1,044,000
              )
              
              (763,000
              )(Purchase)
                  of intangible assets
              
              
              (240,000
              )
              
              (150,000
              )Net
                  cash (used in) investing activities
              
              
              (1,187,000
              )
              
              (957,000
              )Cash
                  Flow from Financing Activities:Issuance
                  of common stock, options and warrants
              
              
              24,000
              
              
              13,000(Repayment)
                  of long-term debt, net
              
              
              (137,000
              )
              
              (155,000
              )Increase
                  in line of credit
              
              
              650,000
              
              
              -Decrease
                  in note receivable
              
              
              41,000
              
              
              -Excess
                  tax benefits from share-based payment arrangements
              
              
              (30,000
              )
              
              6,000(Purchase)
                  of treasury stock
              
              
              (309,000
              )
              
              -Net
                  cash provided by (used in) financing activities
              
              
              239,000
              
              
              (136,000
              )**NET
                  INCREASE IN CASH AND****CASH
                  EQUIVALENTS**
              
              
              772,000
              
              
              2,309,000Cash
                  and cash equivalents - beginning of the period
              
              
              1,085,000
              
              
              1,484,000Cash
                  and cash equivalents - end of period
              
              $
              1,857,000
              
              $
              3,793,000Supplemental
                  disclosure of cash flow information:Interest
                  paid
              
              $
              95,000
              
              $
              89,000Income
                  taxes
              
              $
              464,000
              
              $
              1,231,000Supplemental
                  disclosure of non cash activity:Common
                  stock issued to executives over 6-year vesting period
              
              $
              -
              
              $
              3,373,000Common
                  shares issued for options and warrants
              
              $
              -
              
              $
              384,000Options
                  vested during period
              
              $
              77,000
              
              $
              18,000Common
                  stock issued for services
              
              $
              21,000
              
              $
              33,000Line
                  of credit converted to long-term debt
              
              $
              -
              
              $
              369,000


See
        accompanying notes to condensed consolidated financial statements.
 5
 **MEDIFAST,
        INC. AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.)**
  Three
                  Months Ended March 31,2007
              
              2006(Unaudited)
              
              (Unaudited)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 and distribution warehouse.
      Inventories are valued with cost determined using the first-in, first-out (FIFO)
      method.






4.
            Goodwill
                and Other Intangible Assets****





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





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





7


**As
                  of March 31, 2007**
              
              **As
                  of December 31, 2006****Gross
                  Carrying**
              
              **Accumulated**
              
              **Gross
                  Carrying**
              
              **Accumulated****Amount**
              
              **Amortization**
              
              **Amount**
              
              **Amortization**Customer
                  lists
              
              $
              6,566,000
              
              $
              1,817,000
              
              $
              6,346,000
              
              $
              1,635,000Non-compete
                  agreements
              
              
              840,000
              
              
              840,000
              
              
              840,000
              
              
              840,000Trademarks
                  and patents
              
              
              1,726,000
              
              
              174,000
              
              
              1,707,000
              
              
              143,000Total
              
              $
              9,132,000
              
              $
              2,831,000
              
              $
              8,893,000
              
              $
              2,618,000
   **Amortization
          expense for the three months ended March 31, 2007 and 2006 was as
          follows:**
  2007
              
              2006Customer
                  lists
              
              $
              182,000
              
              
              419,000Non-compete
                  agreements
              
              
              -
              
              
              97,000Trademarks
                  and patents
              
              
              31,000
              
              
              20,000Total
                  Trademarks and Intangibles
              
              $
              213,000
              
              $
              536,000


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





5.
            Fixed
                Assets





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





6.
            Note
                Receivable




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





7.
            Income
                Per Common Share





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




8





8.
            Estimates





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





9.
            Share
                Based Payments





Stock-Based
      Compensation





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





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





Unearned
      compensation represents shares issued to executives that will be vested over
      a
      5-6 year period. These shares will be amortized over the vesting period in
      accordance with FASB 123(R). The expense related to the vesting of unearned
      compensation was $77,000 and $18,000 at March 31, 2007 and March 31, 2006,
      respectively.





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


Three
                  Months Ended03/31/07
              
              03/31/06Net
                  income, as reported
              
              $
              1,422,000
              
              $
              1,694,000Add:  
                  Stock-based employee compensation expenseincluded
                  in reported net income, net of related tax effects
              
              
              77,000
              
              
              11,000Deduct: 
                  Total stock-based employee compensation
                expense
                    determined under fair value based method
                  for
                      all awards, net of related tax effects
              
              
              (77,000
              )
              
              (11,000
              )Net
                  income, pro forma
              
              $
              1,422,000
              
              $
              1,694,000Earning
                  per share:Basic,
                  as reported
              
              $
              0.11
              
              $
              0.13Basic,
                  pro forma
              
              $
              0.11
              
              $
              0.13Diluted,
                  as reported
              
              $
              0.10
              
              $
              0.13Diluted,
                  pro forma
              
              $
              0.10
              
              $
              0.13




9














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





Three
                Months EndedMarch
                31, 2007
            
            March
                31, 2006Dividend
                yield
            0.0%
            
            0.0%Expected
                volatility
            0.70
            
            0.70Risk-free
                interest rate
            4.70%
            
            4.5%Expected
                life in years
            1-5
            
            1-5




The
      following summarizes the stock option activity for the Three Months ended March
      31, 2007:





March
                  31, 2007Shares
              
              Weighted
                  Average Exercise Price
              
              Weighted
                  Average Contractual Term (Years)Outstanding,
                  December 31, 2006
              
              
              321,579
              
              
              3.76Options
                  grantedOptions
                  reinstatedOptions
                  exercised
              
              
              (27,500
              )
              
              0.89Options
                  forfeited or expiredOutstanding
                  March 31, 2007
              
              
              294,079
              
              
              4.16
              
              
              3.01Options
                  exercisable, March 31, 2007
              
              
              204,077
              
              
              2.75
              
              
              2.63Options
                  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.





10


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





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





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





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







11.
            Revenue
                Recognition





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





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





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





11





**Management
      Discussion and Analysis of**


**Financial
      Condition and Results of Operations**








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





**General**


**Three
      Months Ended March 31, 2007 and March 31, 2006**





Revenue:
      Revenue increased to $20.1 million for the first three months of 2007 as
      compared to $19.2 million for the first three months of 2006, an increase of
      $900,000 or 5%. The direct marketing sales channel accounted for 60% of total
      revenue, Take Shape for Life 30%, doctors 5%, and clinics 5%. As compared to
      the
      first three months of 2006, the direct response sales channel revenue increased
      by 4%. Direct response is normally fueled primarily by consumer advertising,
      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 6% year-over-year. The Company’s clinic
      division which began operating under the Medifast Weight Control Center name
      in
      late 2006, increased sales by 21% as compared to the first quarter of
      2006.





Throughout
      the fourth quarter of 2006, the Company expanded the direct response marketing
      department to evaluate and analyze the past year’s media effectiveness and to
      more effectively spend the Company’s increased advertising budget in 2007. In
      the fourth quarter of 2006, the Company analyzed the past years overall campaign
      metrics such as response rates, closing rates and media costs in order to
      improve on these metrics moving forward. The first quarter of 2007 was largely
      spent applying knowledge gained from this analysis to utilize the most effective
      aspects of the 2006 advertising campaigns. This was done to both show the
      improvements in the campaigns execution, while also utilizing the first quarter
      to create new advertising campaigns that were launched at the end of the first
      quarter and will continue to roll out with larger spend throughout the remainder
      of 2007. This strategy, led to improved month-to-month return on advertising
      dollars throughout the first quarter of 2007.  As
      compared to our 2006 advertising campaign, the 2007 campaign includes new 60
      second TV commercials, long-form television infomercials, an expanded
      presence on the web, and new creative for our print and radio advertisements.
      The Company anticipates the quarterly advertising budget to increase throughout
      the second and third quarter of 2007. In the first quarter of 2007, the Company
      spent $4.3 million on direct response marketing.





The
      Take
      Shape for Life network grew 6% year-over-year as the Company continues focusing
      on providing tools to help the network recruit additional health coaches. The
      Company made substantial investment in 2006 to provide the health coaches with
      a
      comprehensive business tool that will drive recruiting within the Organization
      as well as lead to a higher lifetime value of customers and health coaches.
      In
      Q1 of 2007, the Take Shape for Life Network was in the beginning stages of
      recruiting growth and this will remain a focus throughout the remainder of
      2007.





Medifast
      Weight Control Centers are currently operating in 10 locations in Texas and
      Florida. In Q1 of 2007, the Clinics realized sales growth of 21% compared to
      Q1
      of 2006. Additional clinics will be opened in Florida and Texas throughout
      Q2
      and Q3. This model will be available for franchise opportunities toward the
      end
      of the second quarter.





Throughout
      the fourth quarter of 2006 and the first quarter of 2007, the Company has
      continued to invest in the executive expertise necessary to drive the Medifast
      direct response and Take Shape for Life models, which represent 90% of the
      total
      business revenue, along with the Information Technology infrastructure expertise
      to support both of these hi-tech business models. The hiring of Richard Zeeb,
      VP
      of Direct Response Marketing, Rodman Heckman, EVP Take Shape for Life, and
      John
      Hamilton, Chief Information Officer, who each have extensive years of specific
      industry experience has provided the Company the expertise needed in each of
      these critical areas. The timing of these hires did not allow them to have
      their
      full potential impact on the business in the first quarter of 2007, however,
      we
      expect based on current Company trends and these individuals industry histories,
      that the Company will recognize significant improvements in their division’s
      effectiveness in both the short and long term.





Costs
      and
      Expenses: Cost of revenue increased $280,000 to $5.1 million in the first three
      months of 2007 from $4.8 million in 2006. As a percentage of sales, gross margin
      remained at approximately 75% for the first quarter of 2007 and 2006.





Other
      Income/Expense: Stock compensation expense for the first three months of 2006
      was $241,000 as compared to $33,000 in 2006. This expense represents the vesting
      of share-based compensation to key executives over five and six year terms.
      The
      Company has reviewed unvested options and concluded that the effects of FASB
      123R are immaterial.





12


Income
      taxes **:** **** **** For
      the
      first three months of 2007, we recorded $565,000 in income tax expense, which
      represents an annual effective rate of 28%. For the first three months of 2006,
      we recorded income tax expense of $1.1 million which reflected an estimated
      annual effective tax rate of 39%. The Company anticipates a tax rate of
      approximately 36-38% in 2007.





Net
      income: Net income was $1.4 million in the first three months of 2007 as
      compared to $1.7 million in the first three months of 2006, which reflected
      a
      decrease of $300,000 or 18%.





**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 **:**





There
      was
      no material pending or threatened litigation as of 3/31/07.





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





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





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





Internal
      Control Policy : As
      of
      March 31, 2007, the Company’s management, with the participation of the Chief
      Executive Officer and Chief Financial Officer, performed an evaluation of the
      effectiveness of the design and operation of the Company’s disclosure controls
      and procedures pursuant to Exchange Act Rule 13a-15. Based on that evaluation,
      the Chief Executive Officer and Chief Financial Officer have concluded that
      the
      design and operation of these disclosure controls and procedures were effective
      as of the end of the period covered by this report. In connection with this
      evaluation, no change in the Company’s internal control over financial reporting
      was identified that occurred during the period covered by this report that
      has
      materially affected, or is reasonably likely to affect the Company’s internal
      control over financial reporting.





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


13




Index
      to
      Exhibits





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
















14