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 June 30, 2010




OR




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




For the
transition period from 
to




Commission
file number 0-23016




MEDIFAST,
INC.


(Exact
name of registrant as specified in its charter)




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





11445
Cronhill Drive


Owings
Mills, MD 21117


Telephone
Number (410) 581-8042




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




YesxNo ̈




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




Large
accelerated filer    ̈         Accelerated
filer  x            Non-accelerated
filer   ̈




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




Yes   ̈    No  x




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





Class
              
              Outstanding at
      August 9, 2010Common
      stock, $.001 par value per share
              
              15,419,601
      shares





Medifast,
Inc.


Index




Part
      I - Financial Information:Item
      1 – Financial StatementsCondensed
      Consolidated Balance Sheets as of June 30, 2010 (unaudited) and December
      31, 2009 (audited)
                                          
                                          3Condensed
      Consolidated Statements of Income (unaudited) for the Three and Six months
      Ended June 30, 2010 and 2009
                                          
                                          4Condensed
      Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for
      the Six months Ended June 30,2010
                                          
                                          5Condensed
      Consolidated Statements of Cash Flows (unaudited) for the Six months Ended
      June 30, 2010 and 2009
                                          
                                          6Notes
      to Unaudited Condensed Consolidated Financial Statements
                                          
                                          7Item
      2 - Management’s Discussion and Analysis of Financial Condition And
      Results of Operations
                                          
                                          14Item
      3 – Quantitative and Qualitative Disclosures about Market
    Risk
                                          
                                          24Item
      4 – Controls and Procedures
                                          
                                          24Part
      II - Other Information:Item
      1 – Legal Proceedings
                                          
                                          25Item
      1A – Risk Factors
                                          
                                          25Item
      5 – Other Information
                                          
                                          25Item
      6 - Exhibits
                                          
                                          27


2





Part
I.  Financial Information





Item 1.
Financial Statements





MEDIFAST,
INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS





(Unaudited)
                      
                      
                      (Audited)June 30, 2010
                      
                      
                      December 31, 2009ASSETSCurrent
      assetsCash
      and cash equivalents
                      
                      $
                      24,243,000
                      
                      
                      $
                      10,604,000Accounts
      receivable-net of allowance for sales returns and doubtful
      accounts of $230,000 and $100,000 respectively
                      
                      
                      1,004,000
                      
                      
                      
                      676,000Inventory
                      
                      
                      15,122,000
                      
                      
                      
                      11,232,000Investment
      securities
                      
                      
                      6,908,000
                      
                      
                      
                      5,699,000Deferred
      compensation
                      
                      
                      -
                      
                      
                      
                      641,000Income
      taxes - prepaid
                      
                      
                      2,315,000
                      
                      
                      
                      2,211,000Prepaid
      expenses and other current assets
                      
                      
                      1,924,000
                      
                      
                      
                      3,123,000Note
      receivable - current
                      
                      
                      46,000
                      
                      
                      
                      46,000Deferred
      tax asset
                      
                      
                      133,000
                      
                      
                      
                      100,000Total
      current assets
                      
                      
                      51,695,000
                      
                      
                      
                      34,332,000Property,
      plant and equipment - net
                      
                      
                      26,138,000
                      
                      
                      
                      23,237,000Trademarks
      and intangibles - net
                      
                      
                      3,526,000
                      
                      
                      
                      4,104,000Note
      receivable, net of current assets
                      
                      
                      110,000
                      
                      
                      
                      112,000Other
      assets
                      
                      
                      245,000
                      
                      
                      
                      379,000TOTAL
      ASSETS
                      
                      $
                      81,714,000
                      
                      
                      $
                      62,164,000LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilitiesAccounts
      payable and accrued expenses
                      
                      
                      12,656,000
                      
                      
                      
                      4,967,000Income
      taxes payable
                      
                      
                      -
                      
                      
                      
                      22,000Current
      maturities of long-term debt
                      
                      
                      796,000
                      
                      
                      
                      796,000Total
      current liabilities
                      
                      
                      13,452,000
                      
                      
                      
                      5,785,000Other
      liabilitiesLong-term
      debt, net of current portion
                      
                      
                      5,046,000
                      
                      
                      
                      5,444,000Deferred
      tax liability
                      
                      
                      1,366,000
                      
                      
                      
                      1,360,000Total
      liabilities
                      
                      
                      19,864,000
                      
                      
                      
                      12,589,000Stockholders'
      Equity:Preferred
      stock, $.001 par value (1,500,000 authorized, no shares issued and
      outstanding)
                      
                      
                      -
                      
                      
                      
                      -Common
      stock; par value $.001 per share; 20,000,000 shares
      authorized;15,419,601
      issued and 15,050,693 outstanding at 6/30/10 and 15,398,941 issued and
      15,031,103 shares outstanding at 12/31/09
                      
                      
                      16,000
                      
                      
                      
                      16,000Additional
      paid-in capital
                      
                      
                      30,523,000
                      
                      
                      
                      28,456,000Accumulated
      other comprehensive income (loss)
                      
                      
                      (36,000
                      )
                      
                      
                      159,000Retained
      earnings
                      
                      
                      34,702,000
                      
                      
                      
                      24,264,000Less:
      cost of 368,908 and 367,838 shares of common stock in
    treasury
                      
                      
                      (3,355,000
                      )
                      
                      
                      (3,320,000
                      )Total
      stockholders' equity
                      
                      
                      61,850,000
                      
                      
                      
                      49,575,000TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                      
                      $
                      81,714,000
                      
                      
                      $
                      62,164,000





See notes
to condensed consolidated financial statements


3





MEDIFAST,
INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF INCOME


(Unaudited)





Three Months Ended June 30,
                
                
                Six Months Ended June 30,2010
                
                
                2009
                
                
                2010
                
                
                2009Revenue
                
                $
                66,660,000
                
                
                $
                41,721,000
                
                
                $
                127,245,000
                
                
                $
                76,326,000Cost
      of sales
                
                
                17,194,000
                
                
                
                10,908,000
                
                
                
                32,011,000
                
                
                
                19,888,000Gross
      Profit
                
                
                49,466,000
                
                
                
                30,813,000
                
                
                
                95,234,000
                
                
                
                56,438,000Selling,
      general, and administration
                
                
                40,210,000
                
                
                
                26,025,000
                
                
                
                77,777,000
                
                
                
                47,635,000Income
      from operations
                
                
                9,256,000
                
                
                
                4,788,000
                
                
                
                17,457,000
                
                
                
                8,803,000Other
      income/(expense)Interest
      income/ (expense), net
                
                
                44,000
                
                
                
                3,000
                
                
                
                71,000
                
                
                
                (1,000
                )Other
      expense
                
                
                (96,000
                )
                
                
                (32,000
                )
                
                
                (110,000
                )
                
                
                (67,000
                )(52,000
                )
                
                
                (29,000
                )
                
                
                (39,000
                )
                
                
                (68,000
                )Income
      before provision for income taxes
                
                
                9,204,000
                
                
                
                4,759,000
                
                
                
                17,418,000
                
                
                
                8,735,000Provision
      for income taxes
                
                
                (3,666,000
                )
                
                
                (1,760,000
                )
                
                
                (6,979,000
                )
                
                
                (3,251,000
                )Net
      income
                
                $
                5,538,000
                
                
                $
                2,999,000
                
                
                $
                10,439,000
                
                
                $
                5,484,000Basic
      earnings per share
                
                $
                0.40
                
                
                $
                0.22
                
                
                $
                0.75
                
                
                $
                0.41Diluted
      earnings per share
                
                $
                0.38
                
                
                $
                0.20
                
                
                $
                0.71
                
                
                $
                0.37Weighted
      average shares outstanding -Basic
                
                
                14,014,744
                
                
                
                13,417,667
                
                
                
                13,970,333
                
                
                
                13,277,293Diluted
                
                
                14,742,033
                
                
                
                15,039,547
                
                
                
                14,666,398
                
                
                
                14,899,173





See notes
to condensed consolidated financial statements.


4





MEDIFAST,
INC. AND SUBSIDIARIES


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


(Unaudited)





Par Value
                    
                    
                    Additional
                    
                    
                    
                    
                    
                    AccumulatedNumber
                    
                    
                    $0.001
                    
                    
                    Paid-In
                    
                    
                    Retained
                    
                    
                    other comp
                    
                    
                    Treasuryof Shares
                    
                    
                    Amount
                    
                    
                    Capital
                    
                    
                    Earnings
                    
                    
                    income/(loss)
                    
                    
                    Stock
                    
                    
                    TotalBalance,
      December 31, 2009
                    
                    
                    15,398,941
                    
                    
                    $
                    16,000
                    
                    
                    $
                    28,456,000
                    
                    
                    $
                    24,263,000
                    
                    
                    $
                    159,000
                    
                    
                    $
                    (3,320,000
                    )
                    
                    $
                    49,574,000Share-based
      compensation to executives and directors
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1,219,000
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1,219,000Shares
      issued
                    
                    
                    10,660
                    
                    
                    
                    200
                    
                    
                    
                    50,000
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    50,200Exercise
      of stock options
                    
                    
                    10,000
                    
                    
                    
                    100
                    
                    
                    
                    34,000
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    34,100Purchase
      of treasury stock
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (35,000
                    )
                    
                    
                    (35,000
                    )Adjustment
      for stock compensation tax benefit
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    764,000
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    764,000Net
      change in  unrealized gain on investments, net of
      taxes
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (195,000
                    )
                    
                    
                    
                    
                    
                    
                    (195,000
                    )Net
      income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    10,439,000
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    10,439,000Balance,
      June 30, 2010
                    
                    
                    15,419,601
                    
                    
                    $
                    16,300
                    
                    
                    $
                    30,523,000
                    
                    
                    $
                    34,702,000
                    
                    
                    $
                    (36,000
                    )
                    
                    $
                    (3,355,000
                    )
                    
                    $
                    61,850,300





See notes
to condensed consolidated financial statements


5





MEDIFAST,
INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)





Six Months Ended June 30,2010
                    
                    
                    2009Cash
      flows from operating activities:Net
      income
                    
                    $
                    10,439,000
                    
                    
                    $
                    5,484,000Adjustments
      to reconcile net income to net cash provided by operating
      activitiesDepreciation
      and amortization
                    
                    $
                    2,817,000
                    
                    
                    $
                    2,536,000Realized
      loss (gain) on investment securities
                    
                    
                    15,000
                    
                    
                    
                    67,000Common
      stock issued for services
                    
                    
                    50,000
                    
                    
                    
                    122,000Vesting
      of share-based compensation
                    
                    
                    1,219,000
                    
                    
                    
                    1,119,000Deferred
      income taxes
                    
                    
                    (5,000
                    )
                    
                    
                    (220,000
                    )Changes
      in assets and liabilities which provided (used) cash:Accounts
      receivable
                    
                    
                    (328,000
                    )
                    
                    
                    (134,000
                    )Inventory
                    
                    
                    (3,890,000
                    )
                    
                    
                    2,668,000Prepaid
      expenses & other current assets
                    
                    
                    1,200,000
                    
                    
                    
                    312,000Deferred
      compensation
                    
                    
                    577,000
                    
                    
                    
                    (4,000
                    )Other
      assets
                    
                    
                    134,000
                    
                    
                    
                    (2,000
                    )Income
      taxes
                    
                    
                    (127,000
                    )
                    
                    
                    (646,000
                    )Accounts
      payable and accrued expenses
                    
                    
                    7,688,000
                    
                    
                    
                    582,000Net
      cash provided by operating activities
                    
                    
                    19,789,000
                    
                    
                    
                    11,884,000Cash
      Flow from Investing Activities:Purchase
      of investment securities
                    
                    
                    (1,378,000
                    )
                    
                    
                    (127,000
                    )Purchase
      of property and equipment
                    
                    
                    (5,139,000
                    )
                    
                    
                    (1,857,000
                    )Net
      cash (used in) investing activities
                    
                    
                    (6,517,000
                    )
                    
                    
                    (1,984,000
                    )Cash
      Flow from Financing Activities:Repayment
      of long-term debt, net
                    
                    
                    (398,000
                    )
                    
                    
                    (128,000
                    )Increase
      in line of credit
                    
                    
                    -
                    
                    
                    
                    (471,000
                    )Decrease
      in note receivable
                    
                    
                    2,000
                    
                    
                    
                    68,000Excess
      tax benefits from share-based payment arrangements
                    
                    
                    764,000
                    
                    
                    
                    -Proceeds
      from issuance of common stock
                    
                    
                    34,000
                    
                    
                    
                    -Purchase
      of treasury stock
                    
                    
                    (35,000
                    )
                    
                    
                    (102,000
                    )Net
      cash provided by (used in) financing activities
                    
                    
                    367,000
                    
                    
                    
                    (633,000
                    )NET
      INCREASE IN CASH AND CASH EQUIVALENTS
                    
                    
                    13,639,000
                    
                    
                    
                    9,267,000Cash
      and cash equivalents - beginning of the period
                    
                    
                    10,604,000
                    
                    
                    
                    973,000Cash
      and cash equivalents - end of period
                    
                    $
                    24,243,000
                    
                    
                    $
                    10,240,000Supplemental
      disclosure of cash flow information:Interest
      paid
                    
                    $
                    55,000
                    
                    
                    $
                    37,000Income
      taxes
                    
                    $
                    5,304,000
                    
                    
                    $
                    4,132,000





See notes
to condensed consolidated financial statements


6


Medifast,
Inc.


Notes
to Unaudited 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.





The results for the three and six
months ended June 30, 2010 are not necessarily indicative of the results to be
expected for the year ending December 31, 2010 or any other portions
thereof.  Certain information in footnote disclosures normally
included in annual financial statements has been condensed or omitted for the
interim periods presented in accordance with the rules and regulations of the
Securities and Exchange Commission (the “SEC”) for interim consolidated
financial statements.





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





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





2.
            Presentation
      of Financial Statements





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





3.
            Recent
      Accounting Pronouncements





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





4.
            Revenue
      Recognition





Revenue
is recognized net of discounts, rebates, promotional adjustments, price
adjustments, and estimated returns and upon transfer of title and risk to the
customer which occurs at shipping (F.O.B. terms).Upon shipment, the Company has
no further performance obligations and collection is reasonably assured as the
majority of sales are paid for prior to shipping.





Revenue
from product sales includes amounts billed for shipping and handling. Revenue
from shipping and handling charges was $3.5 million and $1.0 million for the
three months ended June 30, 2010 and 2009 respectively.  Revenue from
shipping and handling charges was $5.7 million and $1.9 million for the six
months ended June 30, 2010 and 2009 respectively. Shipping-related costs are
included in cost of goods sold in the accompanying consolidated statements of
operations.


7





5.
            Inventories





Inventories consist principally of
finished packaged foods, packaging and raw materials held in either the
Company’s manufacturing facility or distribution warehouse.  Inventory
is stated at the lower of cost or market, utilizing the first-in, first-out
method.





Inventory
consist of the following at June 30, 2010 and December 31, 2009
 
 2010
                    
                    
                    2009Raw
      Materials
                    
                    $
                    5,775,000
                    
                    
                    $
                    3,900,000Packaging
                    
                    
                    3,243,000
                    
                    
                    
                    2,628,000Finished
      Goods
                    
                    
                    6,104,000
                    
                    
                    
                    4,704,000$
                    15,122,000
                    
                    
                    $
                    11,232,000





6.
            Intangible
      Assets





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





As of June 30, 2010
                  
                  
                  As of December 31, 2009Gross Carrying
                  
                  
                  Accumulated
                  
                  
                  Gross Carrying
                  
                  
                  AccumulatedAmount
                  
                  
                  Amortization
                  
                  
                  Amount
                  
                  
                  AmortizationCustomer
      lists
                  
                  $
                  8,567,000
                  
                  
                  $
                  6,544,000
                  
                  
                  $
                  8,567,000
                  
                  
                  $
                  6,086,000Non-compete
      agreements
                  
                  $
                  840,000
                  
                  
                  $
                  840,000
                  
                  
                  $
                  840,000
                  
                  
                  $
                  840,000Trademarks,
      patents, and copyrights finite life
                  
                  
                  1,622,000
                  
                  
                  
                  1,046,000
                  
                  
                  
                  1,622,000
                  
                  
                  
                  926,000infinite
      life
                  
                  
                  927,000
                  
                  
                  
                  -
                  
                  
                  
                  927,000
                  
                  
                  
                  -Total
                  
                  $
                  11,956,000
                  
                  
                  $
                  8,430,000
                  
                  
                  $
                  11,956,000
                  
                  
                  $
                  7,852,000





Amortization
expense for the three and six months ended June 30, 2010 and 2009 was as
follows:





Three months ended June 30,
                  
                  
                  Six months ended June 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Customer
      lists
                  
                  $
                  229,000
                  
                  
                  $
                  365,000
                  
                  
                  $
                  458,000
                  
                  
                  $
                  730,000Trademarks
      and patents
                  
                  
                  60,000
                  
                  
                  
                  60,000
                  
                  
                  
                  120,000
                  
                  
                  
                  120,000Total
      Trademarks and Intangibles
                  
                  $
                  289,000
                  
                  
                  $
                  425,000
                  
                  
                  $
                  578,000
                  
                  
                  $
                  850,000





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


8





7.
            Earnings
      per Share




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





The
following table sets forth the computation of basic and diluted EPS for the six
months ended June 30:





Three Months Ended
                  
                  
                  Six Months EndedJune 30,
                  
                  
                  June 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Numerator:Net
      income
                  
                  $
                  5,538,000
                  
                  
                  $
                  2,999,000
                  
                  
                  $
                  10,439,000
                  
                  
                  $
                  5,484,000Denominator:Weighted
      average shares of common stock outstanding
                  
                  
                  14,014,744
                  
                  
                  
                  13,417,667
                  
                  
                  
                  13,970,333
                  
                  
                  
                  13,277,293Effect
      of dilutive common stock equivalents
                  
                  
                  727,289
                  
                  
                  
                  1,621,880
                  
                  
                  
                  696,065
                  
                  
                  
                  1,621,880Weighted
      average diluted common shares outstanding
                  
                  
                  14,742,033
                  
                  
                  
                  15,039,547
                  
                  
                  
                  14,666,398
                  
                  
                  
                  14,899,173EPSBasic
                  
                  $
                  0.40
                  
                  
                  $
                  0.22
                  
                  
                  $
                  0.75
                  
                  
                  $
                  0.41Diluted
                  
                  $
                  0.38
                  
                  
                  $
                  0.20
                  
                  
                  $
                  0.71
                  
                  
                  $
                  0.37





8.
            Estimates





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





9.
            Deferred
      Compensation Plan





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





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





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


9





10.
            Fair
      Value Measurements





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





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





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





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





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





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




The
following table represents the fair value hierarchy for those financial assets
and liabilities measured at fair value on a recurring
basis as of June 30, 2010:





Level I
                    
                    
                    Level II
                    
                    
                    Level III
                    
                    
                    TotalInvestment
      securities
                    
                    $
                    6,908,000
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    $
                    6,908,000Cash
      equivalents
                    
                    
                    24,243,000
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    24,243,000Total
      Assets
                    
                    $
                    31,151,000
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    31,151,000Liabilities
                    
                    
                    
                    
                    
                    
                    5,842,000
                    
                    
                    
                    -
                    
                    
                    
                    5,842,000Total
      Liabilities
                    
                    $
                    -
                    
                    
                    
                    5,842,000
                    
                    
                    $
                    -
                    
                    
                    $
                    5,842,000




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





11.
            Share
      Based Compensation





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


10





Stock
Options





The
following summarizes the stock option activity for the six months ended June 30,
2010:





Shares
                    
                    
                    Weighted
                      Average
                      Exercise
                      PriceOutstanding
      at beginning of year
                    
                    
                    10,000
                    
                    
                    $
                    3.83Options
      exercised
                    
                    
                    (10,000
                    )
                    
                    
                    3.83Options
      forfeited or expired
                    
                    
                    -
                    
                    
                    
                    -Outstanding
      at June 30, 2010
                    
                    
                    -
                    
                    
                    $
                    -Options
      exercisable at June 30, 2010
                    
                    
                    -
                    
                    
                    $
                    -





Restricted
Stock




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





Shares
                  
                  
                  Weighed-Average
                    Grant Date Fair
                    ValueUnvested
      at January 1, 2010
                  
                  
                  1,204,378
                  
                  
                  $
                  5.57Granted
                  
                  
                  5,000
                  
                  
                  
                  21.14Vested
                  
                  
                  (215,541
                  )
                  
                  
                  5.66Forfeited
                  
                  
                  -
                  
                  
                  
                  -Unvested
      at June 30, 2010
                  
                  
                  993,837
                  
                  
                  
                  5.63




The
Company recorded stock compensation expense of $659,000 and $638,000 for the
three months ended June 30, 2010 and 2009, respectively.




The
Company recorded stock compensation expense of $1.3 million and $1.1 million for
the six months ended June 30, 2010 and 2009, respectively. As of June 30, 2010
there was $5.6 million of total unrecognized compensation expense related to
unvested share-base compensation arrangements.


11





12.
            Reclassifications





Certain
amounts for the three and six months ended June 30, 2009 have been reclassified
to conform to the presentation of the June 30, 2010 amounts.  The
reclassifications have no effect on net income for the three and six months
ended June 30, 2010 and 2009.





13.
            Business
      Segments





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




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


12




The
following tables present segment information for the three and six months ended
June 30, 2010 and 2009:





Three Months Ended June 30,
      2010Medifast
                                                            
                                                            
                                                            All Other
                                                            
                                                            
                                                            Eliminations
                                                            
                                                            
                                                            ConsolidatedRevenues,
      net
                                                            
                                                            $
                                                            60,559,000
                                                            
                                                            
                                                            $
                                                            6,101,000
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            $
                                                            66,660,000Cost
      of Sales
                                                            
                                                            
                                                            15,839,000
                                                            
                                                            
                                                            
                                                            1,355,000
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            17,194,000Selling,
      General and Adminstrative Expenses
                                                            
                                                            
                                                            34,245,000
                                                            
                                                            
                                                            
                                                            4,546,000
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            38,791,000Depreciation
      and Amortization
                                                            
                                                            
                                                            1,148,000
                                                            
                                                            
                                                            
                                                            271,000
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            1,419,000Interest
      (net) and Other
                                                            
                                                            
                                                            87,000
                                                            
                                                            
                                                            
                                                            (35,000
                                                            )
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            52,000Provision
      for income taxes
                                                            
                                                            
                                                            3,666,000
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            3,666,000Net
      income (loss)
                                                            
                                                            $
                                                            5,574,000
                                                            
                                                            
                                                            $
                                                            (36,000
                                                            )
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            $
                                                            5,538,000Segment
      Assets
                                                            
                                                            $
                                                            58,602,000
                                                            
                                                            
                                                            $
                                                            23,112,000
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            $
                                                            81,714,000Three Months Ended June 30,
      2009Medifast
                                                            
                                                            
                                                            All Other
                                                            
                                                            
                                                            Eliminations
                                                            
                                                            
                                                            ConsolidatedRevenues,
      net
                                                            
                                                            $
                                                            37,763,000
                                                            
                                                            
                                                            $
                                                            3,958,000
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            $
                                                            41,721,000Cost
      of Sales
                                                            
                                                            
                                                            10,095,000
                                                            
                                                            
                                                            
                                                            813,000
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            10,908,000Selling,
      General and Adminstrative Expenses
                                                            
                                                            
                                                            21,569,000
                                                            
                                                            
                                                            
                                                            3,148,000
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            24,717,000Depreciation
      and Amortization
                                                            
                                                            
                                                            1,052,000
                                                            
                                                            
                                                            
                                                            256,000
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            1,308,000Interest
      (net) and Other
                                                            
                                                            
                                                            (4,000
                                                            )
                                                            
                                                            
                                                            33,000
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            29,000Provision
      for income taxes
                                                            
                                                            
                                                            1,760,000
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            1,760,000Net
      income (loss)
                                                            
                                                            $
                                                            3,291,000
                                                            
                                                            
                                                            $
                                                            (292,000
                                                            )
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            $
                                                            2,999,000Segment
      Assets
                                                            
                                                            $
                                                            40,905,000
                                                            
                                                            
                                                            $
                                                            14,126,000
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            $
                                                            55,031,000Six Months Ended June 30,
    2010Medifast
                                                            
                                                            
                                                            All Other
                                                            
                                                            
                                                            Eliminations
                                                            
                                                            
                                                            ConsolidatedRevenues,
      net
                                                            
                                                            $
                                                            115,288,000
                                                            
                                                            
                                                            $
                                                            11,957,000
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            $
                                                            127,245,000Cost
      of Sales
                                                            
                                                            
                                                            29,469,000
                                                            
                                                            
                                                            
                                                            2,542,000
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            32,011,000Selling,
      General and Adminstrative Expenses
                                                            
                                                            
                                                            66,039,000
                                                            
                                                            
                                                            
                                                            8,921,000
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            74,960,000Depreciation
      and Amortization
                                                            
                                                            
                                                            2,242,000
                                                            
                                                            
                                                            
                                                            575,000
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            2,817,000Interest
      (net) and Other
                                                            
                                                            
                                                            98,000
                                                            
                                                            
                                                            
                                                            (59,000
                                                            )
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            39,000Provision
      for income taxes
                                                            
                                                            
                                                            6,979,000
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            6,979,000Net
      income (loss)
                                                            
                                                            $
                                                            10,461,000
                                                            
                                                            
                                                            $
                                                            (22,000
                                                            )
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            $
                                                            10,439,000Segment
      Assets
                                                            
                                                            $
                                                            58,602,000
                                                            
                                                            
                                                            $
                                                            23,112,000
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            $
                                                            81,714,000Six Months Ended June 30,
    2009Medifast
                                                            
                                                            
                                                            All Other
                                                            
                                                            
                                                            Eliminations
                                                            
                                                            
                                                            ConsolidatedRevenues,
      net
                                                            
                                                            $
                                                            69,423,000
                                                            
                                                            
                                                            $
                                                            6,903,000
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            $
                                                            76,326,000Cost
      of Sales
                                                            
                                                            
                                                            18,390,000
                                                            
                                                            
                                                            
                                                            1,498,000
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            19,888,000Selling,
      General and Adminstrative Expenses
                                                            
                                                            
                                                            39,313,000
                                                            
                                                            
                                                            
                                                            5,786,000
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            45,099,000Depreciation
      and Amortization
                                                            
                                                            
                                                            2,042,000
                                                            
                                                            
                                                            
                                                            494,000
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            2,536,000Interest
      (net) and Other
                                                            
                                                            
                                                            (4,000
                                                            )
                                                            
                                                            
                                                            72,000
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            68,000Provision
      for income taxes
                                                            
                                                            
                                                            3,251,000
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            3,251,000Net
      income (loss)
                                                            
                                                            $
                                                            6,431,000
                                                            
                                                            
                                                            $
                                                            (947,000
                                                            )
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            $
                                                            5,484,000Segment
      Assets
                                                            
                                                            $
                                                            40,905,000
                                                            
                                                            
                                                            $
                                                            14,126,000
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            $
                                                            55,031,000


13





Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations





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





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





Background:




The
Company is engaged in the production, distribution, and sale of weight
management and disease management products and other consumable health and diet
products.  Medifast, Inc.’s product lines include meal replacements and
vitamins.   Our products and services are sold to weight loss program
participates primarily via the Internet, telephone, and brick and mortar
clinics.  Our meal food items have accounted for 93% of our revenues for
the six months ended June 30, 2010 and 95% of our revenues for the six months
ended June 30, 2009.  Program sales in our Medifast Weight Control
Center channel accounted for 2% of revenues for the first six months of 2010 and
3% for the first six months of 2009. Shipping revenue and other accounted for 4%
for the first six months of 2010 and 2% for the first six months of
2009.  No other product or service has accounted for more than 1% of
consolidated revenue in any of the last three years.




Revenue
consists primarily of meal replacement food sales. For the first six months of
2010, revenue increased to $127.2 million as compared to $76.3 million for the
first six months of 2009, an increase of $50.9 million or 67%. The Take Shape
for Life sales channel accounted for 63% of total revenue, direct response
marketing 26%, Medifast Weight Control Centers 10%, and Doctors
1%.




We review
and analyze a number of key operating and financial metrics to manage our
business, including revenue to spend in the Medifast Direct channel, number of
active health coaches and average revenue per health coach per month in the Take
Shape for Life channel, and average same store sales improvement  for
the Medifast Weigh Control Center channel.




In the
first six months of 2010 we continued to see very strong growth and improvement
in: Take Shape for Life; Direct Marketing and Medifast Weight Control
Centers.  Take Shape for Life revenue increased 81% to $79.6 million
compared with $43.9 million in the first six months of
2009.   Growth in revenues for the segment was driven by
increased customer product sales as a result of an increase in active health
coaches.   The number of active health coaches during the first
six months of 2010 increased to approximately 8,000 compared with 4,650 during
the period a year ago, an increase of 72%. In addition, the average revenue per
health coach per month increased from approximately $1,725 for the first six
months of 2009 to $1,760 in the first six months of 2010. As the number of
active health coaches’ increase, the Company receives additional sales proceeds
from product referrals, approximately $1,760 in product referrals per month for
the average coach in the first six months of 2010.




The
Direct Marketing Sales division sales increased 43% to $33.7 million as compared
with $23.5 million in the first six months of 2009, an increase of $10.2
million.  Due to a more effective advertising message, more targeted
advertising through extensive analytical analysis, and improved call center
closing rates, the company experienced a 2.8 to 1 return on advertising spend in
the first six months of 2010 as compared to 2.7 to 1 in the first six months of
2009.





The
Medifast Weight Control Centers experienced revenue growth of 67% versus the
same time period last year.  Revenue increased due to the opening of
seven new centers throughout 2009, a 28% increase in the same store sales for
Centers open for greater than one year, and the launch of the franchise
opportunity.  The Company is continuing to focus on improved
advertising effectiveness, improved closing rates on walk-in sales, as well as
the hiring of more experienced clinic personnel




If all of
our sales divisions continue to grow, there will be increasing demands on our
infrastructure.  The increased demands could cause long hold times in
the call center as well as delays on our website.  In addition, there could
be delays in order processing, packaging and shipping.  We could run out of
a majority of our inventory if product sales growth exceeded our production
capacity.  In order to mitigate these risks, a key focus for the Company in
2010 and 2011 will be investing in infrastructure to ensure that the Company can
support the revenue growth of each of our sales divisions. This initiative
includes a new Distribution Center that opened in July 2010 to better service
our Midwest to West Coast customers and increase the maximum number of orders
the Company can ship daily, new machinery to increase our production capacity to
support sales growth, an improved web platform for all our sales divisions, and
expansion of an additional call center location to handle additional call
volume. There is also risk that our Independent contractor field leaders and
health coaches could leave the company for a better opportunity which could
result in decreased revenue from Take Shape for Life channel.  This
risk is offset by the increased revenue per month earned as these same leader
health coaches build their organization of health coaches because they have
proven to be passionate about helping others and combating the growing obesity
epidemic in America at present.


14





Overview
of the Company





Distribution
Channels





Take Shape for LifeTM - Take
Shape for Life is the direct selling division of Medifast.   Take
Shape for Life is lead by its co-founder, a physician with a background in
critical care who has published a book on nutrition and support counseling as
has its other co-founder.  The network consists of independent
contractor health coaches, who are trained to provide coaching and support to
clients on Medifast weight loss programs.  Health coaches are conduits
to give clients the encouragement and mentoring to assist them to successfully
reach a healthy weight.  Take Shape For Life programs provide a road
map to empower the individual to take control of their health through better
habits.  Take Shape for Life offers the exclusive proprietary
BeSlim®
philosophy, which encourages long-term weight maintenance for those who follow
it.  Take Shape for Life also moves beyond the scope of weight loss to
teach customers how to achieve optimal health through the balance of body, mind,
and finances. Take Shape for Life uses the high quality, medically validated
products of Medifast that have been proven safe and effective in clinical
studies. The products are high quality because of the ingredients used which are
specified to be a certain quality. Health coaches and their clients follow the
Habits of Health book and companion workbook written by the Take Shape for Life
co-founder as well as The Secret Is Out co-authored by the other Take Shape for
Life co-founder, which presents the scientific basis for Medifast diet results
as clinically validated, to create a lifelong health optimization
program.  In addition to the encouragement and support of a health
coach, clients of Take Shape for Life are offered a bio-network of support
including website information, scheduled program support calls and access to
registered dieticians via toll free telephone, email and web chats.





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





Take
Shape for Life health coaches earn compensation on product sales by referring
clients to their replicated Take Shape for Life website or to the Company’s
in-house call center to purchase product.  The client purchases all
Medifast product directly from the Company which is shipped directly to the
client.  Our health coaches do not handle payment and are not required
to hold inventory for resale to clients.  In addition, our health
coaches pay the same price for product as their clients.   Our
health coaches provide coaching and support to their clients throughout the
weight loss and weight maintenance process.  Most new health coaches
are recruited by an existing health coach.  The vast majority of our
new health coaches started as weight loss clients of a health coach, had success
on the Medifast product and program, and become a health coach to help others
through the weight loss process and receive a commission on any product sales
they refer to the Company.   In addition, in the Take Shape for
Life network approximately 20% of active health coaches are health care
providers.





Take
Shape for Life health coaches are independent contractors who are paid
compensation on product sales referred to the Company.  Health coaches
can earn compensation in two ways:





·
            Commissions
      – The primary way a health coach is compensated is though earning
      commissions on product sold.  Health coaches earn commissions by
      referring product sales through their own replicated website or through
      the Company’s in-house call center.  The clients of health
      coaches are responsible to order and pay for product and their order is
      shipped directly from the Company to their home or designated
      address.  Health coaches are not required to purchase or store
      product in order to receive a commission.  In addition, health
      coaches do not receive a commission on their product orders for their
      personal use.  The Company pays retail commission on a weekly
      basis.


·
            Bonuses
      – health coaches are offered several bonus opportunities, including growth
      bonus, generation bonus, elite leadership bonus, rolling consistency
      bonus, client acquisition bonus, and customer assist bonus.  The
      Company pays bonuses on a monthly
basis.





It should be noted that our health
coaches earn no commission when they recruit a new health coach into the Take
Shape for Life network.  Fees paid by new health coaches for start-up
materials to the Company are sold at cost and no commissions are paid on the
start-up materials.





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


15





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





Medifast Weight Control Centers
– The Medifast Weight Control Center is the brick and mortar clinic
channel of Medifast located in Texas, Florida and Maryland.   In
2009, the Company opened seven new Medifast Weight Control Centers and had a
total of twenty – seven locations in operation at year-end.  At June
30, 2010 twenty nine corporately owned Centers were in operation. The centers
offer a high-touch model including comprehensive Medifast programs for weight
loss and maintenance, customized patient counseling, and Inbody TM
composition analysis. Medifast Weight Control Centers conduct local advertising
including radio, print, television and web initiatives.  The centers
also benefit from the nationally advertised brand which encourages walk-ins and
referrals from other Medifast business channels.





In 2008,
the Company began offering the clinic model as a franchise
opportunity.  The Company currently has franchisee centers located in
Alabama, Arizona, California and Minnesota. At June 30, 2010, twenty franchise
locations were in operation.





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





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





Critical
Accounting Policies and Estimates





Our
consolidated financial statements are prepared in accordance with U.S. generally
accepted accounting principles. Our significant accounting policies are
described in Note 2 of the consolidated financial statements filed on Form
10-K.





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, and
estimated returns and upon transfer of title and risk to the customer which
occurs at shipping (F.O.B. terms).Upon shipment, the Company has no further
performance obligations and collection is reasonably assured as the majority of
sales are paid for prior to shipping.





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.


16




Income Taxes. The benefit of
a tax position is recognized in the financial statements in the period during
which, based on all available evidence, management believes it is
more-likely-than-not that the position will be sustained upon examination,
including the resolution of appeals or litigation processes, if any. Tax
positions taken are not offset or aggregated with other positions. Tax positions
that meet the more-likely-than-not recognition threshold are measured as the
largest amount of tax benefit that is more than 50 percent likely of being
realized upon settlement with the applicable taxing authority. The portion of
the benefits associated with tax positions taken that exceeds the amount
measured as described above is reflected as a liability for unrecognized tax
benefits in the accompanying balance sheet along with any associated interest
and penalties that would be payable to the taxing authorities upon
examination.




We
evaluated our material tax positions and determined that we did not have any
uncertain tax positions requiring recognition of a liability. Our policy is to
recognize interest and penalties accrued on uncertain tax positions as part of
income tax expense. For the six months ended June 30, 2010 and 2009, no
estimated interest or penalties were recognized for the uncertainty of certain
tax positions. We file income tax returns in the United States and various
states jurisdictions. With few exceptions, we are no longer subject to U.S.
federal, state and local income tax examinations by tax authorities for the
years before 2007.


17





Overview
of the Three Months Ended June 30, 2010 Compared to Three Months Ended June 30,
2009





Three Months Ended June 30,2010
                              
                              
                              2009
                              
                              
                              $ Change
                              
                              
                              % ChangeRevenue
                              
                              $
                              66,660,000
                              
                              
                              $
                              41,721,000
                              
                              
                              $
                              24,939,000
                              
                              
                              
                              60
                              %Cost
      of sales
                              
                              
                              17,194,000
                              
                              
                              
                              10,908,000
                              
                              
                              
                              6,286,000
                              
                              
                              
                              58
                              %Gross
      Profit
                              
                              
                              49,466,000
                              
                              
                              
                              30,813,000
                              
                              
                              $
                              18,653,000
                              
                              
                              
                              61
                              %Selling,
      general, and administration
                              
                              
                              40,210,000
                              
                              
                              
                              26,025,000
                              
                              
                              $
                              14,185,000
                              
                              
                              
                              55
                              %Income
      from operations
                              
                              
                              9,256,000
                              
                              
                              
                              4,788,000
                              
                              
                              
                              4,468,000
                              
                              
                              
                              93
                              %Other
      income/(expense)Interest
      income (expense), net
                              
                              
                              44,000
                              
                              
                              
                              3,000
                              
                              
                              $
                              41,000
                              
                              
                              
                              1367
                              %Other
      income/(expense)
                              
                              
                              (96,000
                              )
                              
                              
                              (32,000
                              )
                              
                              $
                              (64,000
                              )
                              
                              
                              200
                              %(52,000
                              )
                              
                              
                              (29,000
                              )
                              
                              
                              (23,000
                              )
                              
                              
                              79
                              %Income
      before provision for income taxes
                              
                              
                              9,204,000
                              
                              
                              
                              4,759,000
                              
                              
                              $
                              4,445,000
                              
                              
                              
                              93
                              %Provision
      for income tax (expense)
                              
                              
                              (3,666,000
                              )
                              
                              
                              (1,760,000
                              )
                              
                              
                              (1,906,000
                              )
                              
                              
                              108
                              %Net
      income
                              
                              $
                              5,538,000
                              
                              
                              $
                              2,999,000
                              
                              
                              $
                              2,539,000
                              
                              
                              
                              85
                              %% of revenueGross
      Profit
                              
                              
                              74.2
                              %
                              
                              
                              73.9
                              %Selling,
      general, and administration
                              
                              
                              60.3
                              %
                              
                              
                              62.4
                              %Income
      from Operations
                              
                              
                              13.9
                              %
                              
                              
                              11.5
                              %





Three
Months Ended June 30, 2010 and June 30, 2009





Revenue:  Revenue
increased to $66.7 million in the second quarter of 2010 compared to $41.7
million in the second quarter of 2009, an increase of $25.0 million or 60%. The
Take Shape for Life sales channel accounted for 63% of total revenue; direct
marketing channel accounted for 26%, brick and mortar clinics 10%, and doctors
1%.  Take Shape for Life sales, which are fueled byincreased customer product
sales as a result of an increase in active health coaches increased by 71%
compared to the second quarter of 2009. As compared to the second quarter of
2009, the Medifast direct marketing sales channel, which is fueled primarily by
consumer advertising, increased revenues by approximately 43% year-over year.
The Medifast Weight Control Centers increased sales by 60% due to the opening of
new corporate and franchise locations and improvement in same store
sales.





Take
Shape for Life revenue increased 71% to $42.0 million compared with $24.6
million in the comparable quarter of 2009.   Growth in revenues
for the distribution channel was driven by increased customer product sales as a
result of an increase in active health coaches.   The number of
active health coaches during the second quarter increased to approximately 8,000
compared with 4,650 during the period a year ago, an increase of 72% and up from
7,100 at the close of the first quarter of 2010.  In today’s
environment where trust and personal recommendations are becoming a more
important component in consumer purchasing decisions, the Take Shape for Life
model of one-on-one communication continues to excel. Take Shape for Life
customers who have utilized the Medifast products and programs and successfully
have addressed their body weight and health issues are increasingly choosing to
become active health coaches.   Becoming a health coach is a
business opportunity that has a low cost of start-up and requires no holding of
inventory as all orders are shipped to the end consumer.  In the
current economic environment, many people are looking for supplemental income to
assist in paying bills such as the car payment, rent, or mortgage, and becoming
a health coach allows for supplemental income in the form of a commission
compensation on product sales and supporting the customer needs by providing
education on the program and support to customers ordering through Take Shape
for Life and most importantly the ability to help others regain their health
through the use of clinically proven Medifast products.


18





The
Medifast Direct Response Sales division sales increased 43% to 17.3 million as
compared with $12.1 million in the second quarter of 2009, an increase of $5.2
million.  Due to a more effective advertising message, more targeted
advertising through extensive analytical analysis, and improved call center
closing rates the company experienced a 2.8 to 1 return on advertising spend
during the second quarter of 2010 as compared to  a 2.7 to
1  return in the second quarter of 2009.  The Company spent
approximately $6.2 million on direct response advertising in the second quarter
of 2010, an increase of 38% from the second quarter of 2009.





The
Medifast Weight Control Centers, which represent approximately 10% of the
Company’s overall revenues, are currently operating in twenty nine corporate
locations in Austin, Dallas, Houston, Orlando and Baltimore, and twenty
franchise centers. In the second quarter of 2010, the Company experienced
revenue growth of 60% versus the same time period last year.   In
the second quarter of 2010, same store sales increased by 25% for corporate
Centers open greater than one year.  In the second quarter of 2010,
the Company opened two additional corporately owned centers in the Baltimore,
MD. market.  In the third and fourth quarter of 2010, the Company
plans on opening eleven to thirteen additional corporately owned clinics in
existing markets.





Overall,
selling, general and administrative expenses increased by $14.2 million as
compared to the second quarter of 2009.  As a percentage of sales,
selling, general and administrative expenses decreased to 60.3% versus 62.4% in
the second quarter of 2009, which lead to a 90% increase in diluted earnings per
share in the second quarter of 2010 versus prior year.   Take
Shape for Life commission expense, which is completely variable based upon
product sales, increased by approximately $7.8 million as the Company showed
sales growth of 71% as compared to the second quarter of 2009. Take Shape for
Life health coaches are independent contractors that are paid commissions on
product sales referred to the Company.    Health coaches
earn commissions by referring product sales through their own replicated website
or through the Company’s in-house call center.  The clients of health
coaches are responsible for order and payment of product and their order is
shipped directly to their home or designated address.  Health coaches
are not required to purchase product in order to receive a
commission.  In addition, health coaches do not receive a commission
on their personal product orders Salaries and benefits increased by
approximately $3.0 million in the second quarter of 2010 as compared to last
year.  The increase includes the hiring of additional expertise in
critical areas such as Take Shape for Life and the Medifast Weight Control
Centers in the second half of 2009 which have greatly impacted revenue growth in
2010.   Areas that also experienced additional staffing due to
the 60% sales growth in the second quarter of 2010 include manufacturing,
distribution, call center, and IT.  Sales and marketing expense
increased by $1.5 million in the second quarter of 2010 as compared to prior
year.  Communication expense remained flat and other expenses
increased by $500,000 which included items such as depreciation, amortization,
credit card processing fees, charitable contributions, and property
taxes.  Operating expenses increased by $400,000 which primarily
resulted from additional printing expense for our direct to consumer postcard
mailings, printed materials included in each product shipment, as well as
maintenance, repairs, and supplies for our manufacturing and distribution
facilities.  Office expense increased by $900,000 and stock
compensation expense increased by $20,000 as additional restricted shares were
issued to key executives and Board members.





Income
taxes:In the second quarter of
2010, the Company recorded $3.7 million in income tax expense, which represents
an annual effective rate of 40.0%.  For the second quarter of 2009, we
recorded income tax expense of $1.8 million which reflected an estimated annual
effective tax rate of 37.0%.





Net
income: Net income was approximately $5.5 million for the second quarter of 2010
as compared to approximately $3.0 million for the second quarter of 2009, an
increase of 83.3%.  Pre-tax profit as a percent of sales increased to
13.9% in the second quarter of 2010 as compared to 11.5% in 2009. The improved
profitability in the second quarter of 2010 is due to sales growth in the Take
Shape for Life division, Medifast Weight Control Centers, and Direct Response
sales channels as well as improved advertising effectiveness in the Medifast
Direct Marketing sales channel, gross margin improvement as well as leveraging
the fixed costs associated with our vertically-integrated support
structure.


19





Overview
of the Six Months Ended June 30, 2010 Compared to Six Months Ended June 30,
2009





Six Months Ended June 30,2010
                            
                            
                            2009
                            
                            
                            $ Change
                            
                            
                            % ChangeRevenue
                            
                            $
                            127,245,000
                            
                            
                            $
                            76,326,000
                            
                            
                            $
                            50,919,000
                            
                            
                            
                            67
                            %Cost
      of sales
                            
                            
                            32,011,000
                            
                            
                            
                            19,888,000
                            
                            
                            
                            12,123,000
                            
                            
                            
                            61
                            %Gross
      Profit
                            
                            
                            95,234,000
                            
                            
                            
                            56,438,000
                            
                            
                            $
                            38,796,000
                            
                            
                            
                            69
                            %Selling,
      general, and administration
                            
                            
                            77,777,000
                            
                            
                            
                            47,635,000
                            
                            
                            $
                            30,142,000
                            
                            
                            
                            63
                            %Income
      from operations
                            
                            
                            17,457,000
                            
                            
                            
                            8,803,000
                            
                            
                            
                            8,654,000
                            
                            
                            
                            98
                            %Other
      income/(expense)Interest
      income (expense), net
                            
                            
                            71,000
                            
                            
                            
                            (1,000
                            )
                            
                            $
                            72,000
                            
                            
                            
                            -7200
                            %Other
      income/(expense)
                            
                            
                            (110,000
                            )
                            
                            
                            (67,000
                            )
                            
                            $
                            (43,000
                            )
                            
                            
                            64
                            %(39,000
                            )
                            
                            
                            (68,000
                            )
                            
                            
                            29,000
                            
                            
                            
                            -43
                            %Income
      before provision for income taxes
                            
                            
                            17,418,000
                            
                            
                            
                            8,735,000
                            
                            
                            $
                            8,683,000
                            
                            
                            
                            99
                            %Provision
      for income tax (expense)
                            
                            
                            (6,979,000
                            )
                            
                            
                            (3,251,000
                            )
                            
                            
                            (3,728,000
                            )
                            
                            
                            115
                            %Net
      income
                            
                            $
                            10,439,000
                            
                            
                            $
                            5,484,000
                            
                            
                            $
                            4,955,000
                            
                            
                            
                            90
                            %% of revenueGross
      Profit
                            
                            
                            74.8
                            %
                            
                            
                            73.9
                            %Selling,
      general, and administration
                            
                            
                            61.1
                            %
                            
                            
                            62.4
                            %Income
      from Operations
                            
                            
                            13.7
                            %
                            
                            
                            11.5
                            %





Revenue.


Revenue:  Revenue increased
to $127.2 million for the first six months of 2010 compared to $76.3 million for
the first six months of 2009, an increase of $50.9 million or 67%. The Take
Shape for Life sales channel accounted for 63% of total revenue, direct
marketing channel accounted for 26%, brick and mortar clinics 10%, and doctors
1%.  Take Shape for Life sales, which are fueled byincreased customer product
sales as a result of an increase in active health coaches increased by 81%
compared to the first six months of 2009. As compared to the first six months of
2009, the Medifast direct marketing sales channel, which is fueled primarily by
consumer advertising, increased revenues by approximately 43% year-over
year.  The Medifast Weight Control Centers increased sales by 67% due
to the opening of new corporate and franchise locations and improvement in same
store sales.




Take
Shape for Life revenue increased 81% to $79.6 million compared with $43.9
million in the first six months of 2009.   Growth in revenues for
the distribution channel was driven by increased customer product sales as a
result of an increase in active health coaches.   The number of
active health coaches during the second quarter increased to approximately 8,000
compared with 4,650 during the period a year ago, an increase of 72% and up from
7,100 at the close of the first quarter of 2010.  In addition, the
average revenue per health coach per month increased from approximately $1,725
for the first six months of 2009 to $1,760 in the first six months of 2010. As
the number of active health coaches increase, the Company receives additional
sales proceeds from product referrals, approximately $1,760 in product referrals
per month for the average coach in the first six months of 2010.





The
Medifast Direct Marketing Sales division sales increased 43% to $33.7 million as
compared with $23.5 million in the first six months of 2009, an increase of
$10.2 million.  Due to a more effective advertising message, more
targeted advertising through extensive analytical analysis, and improved call
center closing rates, the company experienced a 2.8 to 1 return on advertising
spend in the first six months of 2010 as compared to 2.7 to 1 in the first six
months of 2009.  The Company spent approximately $12 million on direct
response advertising in the first six months of 2010, an increase of 36% from
prior year.


20





The
Medifast Weight Control Centers, which represent approximately 10% of the
Company’s overall revenues, are currently operating in twenty nine corporate
locations in Austin, Dallas, Houston, Orlando, and Baltimore, and twenty
franchise locations.  In the first six months of 2010, the Company
experienced revenue growth of 67% versus the same time period last
year.  In the first six months of 2010, same store sales increased by
28% for corporate Centers open greater than one year.  The Company
opened three additional corporately owned centers in the first six months of
2010.  Two additional corporately owned centers in the Baltimore, MD.
market and one in the Texas market.  In the third and fourth quarter
of 2010, the Company plans on opening eleven to thirteen additional corporately
owned clinics in existing markets.





Overall,
selling, general and administrative expenses increased by $30.1 million as
compared to the first six months of 2009.  As a percentage of sales,
selling, general and administrative expenses decreased to 61.1% versus 62.4% in
the first six months of 2009, which lead to a 92% increase in diluted earnings
per share in the first six months of 2010 versus prior
year.   Take Shape for Life commission expense, which is
completely variable based upon product revenue, increased by approximately $16.2
million as the Company showed sales growth of 72% as compared to the first six
months of 2009. Take Shape for Life health coaches are independent contractors
that are paid commissions on product sales referred to the
Company.    Health coaches earn commissions by referring
product sales through their own replicated website or through the Company’s
in-house call center.  The clients of health coaches are responsible
for order and payment of product and their order is shipped directly to their
home or designated address.  Health coaches are not required to
purchase product in order to receive a commission.  In addition,
health coaches do not receive a commission on their personal product orders
Salaries and benefits increased by approximately $5.9 million in the first six
months of 2010 as compared to last year.  The increase includes the
hiring of additional expertise in critical areas such as Take Shape for Life and
the Medifast Weight Control Centers in the second half of 2009 which have
greatly impacted revenue growth in 2010.   Areas that also
experienced additional staffing due to the 67% sales growth include
manufacturing, distribution, call center, and IT.  Sales and marketing
expenses increased by $3.7 million as compared to prior year, primarily due to
the $3.2 million increase in direct response
advertising.  Communication expense increased by $100,000 and other
expenses increased by $1.1 million which included items such as depreciation,
amortization, credit card processing fees, charitable contributions, and
property taxes.  Operating expenses increased by $800,000 which
primarily resulted from additional printing expense for our direct to consumer
postcard mailings, printed materials included in each product shipment, as well
as maintenance, repairs, and supplies for our manufacturing and distribution
facilities.  Office expense increased by $1,550,000 and stock
compensation expense increased by $199,000 as additional restricted shares were
issued to key executives and Board members in the third andfourth
quarters of 2009, as well as the second quarter of 2010 that will be vesting
over a five year term.





Costs and
Expenses:  Cost of revenue increased $12.1 million to $32.0 million
for the first six months of 2010 from $19.9 million for the first six months of
2009.  As a percentage of sales, gross margin increased to 74.9% from
74.1% in the six months of 2009.  We do not consider the change in our
cost of sales as a percentage of net sales for the six month period ended
June 30, 2010 to be a particularly meaningful change and attribute it to our
fixed cost of manufacturing being spread over a greater number of units sold.
The result is a fairly constant cost of sales and overall cost per unit produced
and sold from one six month period to the next.





Income
taxes:In the first six months
of 2010, the Company recorded $7.0 million in income tax expense, which
represents an annual effective rate of 40.0%.  For the first six
months of 2009, we recorded income tax expense of $3.2 million which reflected
an estimated annual effective tax rate of 37.2%.





Net
income: Net income was approximately $10.4 million for the first six months of
2010 as compared to approximately $5.5 million for the first six months of 2009,
an increase of 90.3%.  Pre-tax profit as a percent of sales increased
to 13.7% in the first six months of 2010 as compared to 11.4% in 2009. The
improved profitability in the first six months of 2010 is due to sales growth in
the Take Shape for Life division, Medifast Weight Control Centers, and Direct
Response sales channels as well as improved advertising effectiveness in the
Medifast Direct Marketing sales channel, gross margin improvement as well as
leveraging the fixed costs associated with our vertically-integrated support
structure.


21





SEGMENT
RESULTS OF OPERATIONS





Net
      Sales by Segment for the Three Months Ended June 30,2010
                            
                            
                            2009Segments
                            
                            Sales
                            
                            
                            % of Total
                            
                            
                            Sales
                            
                            
                            % of TotalMedifast
                            
                            $
                            60,559,000
                            
                            
                            
                            91
                            %
                            
                            $
                            37,776,000
                            
                            
                            
                            91
                            %All
      Other
                            
                            
                            6,101,000
                            
                            
                            
                            9
                            %
                            
                            
                            3,945,000
                            
                            
                            
                            9
                            %Total
      Sales
                            
                            $
                            66,660,000
                            
                            
                            
                            100
                            %
                            
                            $
                            41,721,000
                            
                            
                            
                            100
                            %Net
      Sales by Segment for the Six Months Ended June 30,2010
                            
                            
                            2009Segments
                            
                            Sales
                            
                            
                            % of Total
                            
                            
                            Sales
                            
                            
                            % of TotalMedifast
                            
                            $
                            115,288,000
                            
                            
                            
                            91
                            %
                            
                            $
                            69,422,000
                            
                            
                            
                            91
                            %All
      Other
                            
                            
                            11,957,000
                            
                            
                            
                            9
                            %
                            
                            
                            6,904,000
                            
                            
                            
                            9
                            %Total
      Sales
                            
                            $
                            127,245,000
                            
                            
                            
                            100
                            %
                            
                            $
                            76,326,000
                            
                            
                            
                            100
                            %





Three
Months Ended June 30, 2010 and June 30, 2009





Medifast
Segment:  The Medifast reporting segment consists of the sales of
Medifast Direct, Take Shape for Life, and Doctors.  As this represents
the majority of our business this is referenced to the “Overview of the Three
Months Ended June 30, 2010 compared to the Three Months Ended June 30, 2010”
above.





All Other
Segment:  The All Other reporting segment consists of the sales of
Medifast Weight Control Centers and Medifast Weight Control Franchise
Centers.  Sales increased by $2,156,000 year-over year for the three
month period ended June 30, 2010. Sales increased in the Medifast Weight Control
Centers and Franchise Centers due to the opening of five new corporate centers
and nine new franchise centers. The Company is continuing to focus on improved
advertising effectiveness, improved closing rates on walk-in sales, as well as
the hiring of more experienced clinic operators to manage the clinics, and
improved efficiencies in operation of the clinics. In the second quarter of
2010, the Company opened two additional corporately owned centers in the
Baltimore, MD market.  In the third and fourth quarter of 2010, the
Company plans on opening eleven to thirteen additional corporately clinics in
existing markets.  The Company now has twenty nine corporately owned
clinics, compared to twenty four clinics in operation at the end of the second
quarter of 2009.  The Company also has twenty franchisee centers in
operation.





Six
Months Ended June 30, 2010 and June 30, 2009





Medifast
Segment:  The Medifast reporting segment consists of the sales of
Medifast Direct, Take Shape for Life, and Doctors.  As this represents
the majority of our business this is referenced to the “Overview of the Six
Months Ended June 30, 2010 compared to the Three Months Ended June 30, 2010”
above.





All Other
Segment:  The All Other reporting segment consists of the sales of
Medifast Weight Control Centers and Medifast Weight Control Franchise
Centers.  Sales increased by $5,054,000 year-over year for the six
month period ended June 30, 2010. Sales increased in the Medifast Weight Control
Centers and Franchise Centers due to the opening of five new corporate centers
and nine new franchise centers. The Company is continuing to focus on improved
advertising effectiveness, improved closing rates on walk-in sales, as well as
the hiring of more experienced clinic operators to manage the clinics, and
improved efficiencies in operation of the clinics. In the second quarter of
2010, the Company opened two additional corporately owned centers in the
Baltimore, MD market.  In the third and fourth quarter of 2010, the
Company plans on opening eleven to thirteen additional corporately clinics in
existing markets.  The Company now has twenty nine corporately owned
clinics, compared to twenty four clinics in operation at the end of the second
quarter of 2009.  The Company also has twenty franchisee centers in
operation, compared to eleven at June 30, 2009.


22





Net
      Profit by Segment for the Three Months Ended June 30,2010
                            
                            
                            2009Segments
                            
                            Profit
                            
                            
                            % of Total
                            
                            
                            Profit
                            
                            
                            % of TotalMedifast
                            
                            $
                            5,574,000
                            
                            
                            
                            101
                            %
                            
                            $
                            3,305,000
                            
                            
                            
                            110
                            %All
      Other
                            
                            
                            (36,000
                            )
                            
                            
                            -1
                            %
                            
                            
                            (306,000
                            )
                            
                            
                            -10
                            %Total
      Net Profit
                            
                            $
                            5,538,000
                            
                            
                            
                            100
                            %
                            
                            $
                            2,999,000
                            
                            
                            
                            100
                            %Net
      Profit by Segment for the Six Months Ended June 30,2010
                            
                            
                            2009Segments
                            
                            Profit
                            
                            
                            % of Total
                            
                            
                            Profit
                            
                            
                            % of TotalMedifast
                            
                            $
                            10,462,000
                            
                            
                            
                            100
                            %
                            
                            $
                            6,431,000
                            
                            
                            
                            117
                            %All
      Other
                            
                            
                            (23,000
                            )
                            
                            
                            0
                            %
                            
                            
                            (947,000
                            )
                            
                            
                            -17
                            %Total
      Net Profit
                            
                            $
                            10,439,000
                            
                            
                            
                            100
                            %
                            
                            $
                            5,484,000
                            
                            
                            
                            100
                            %





Three
Months Ended June 30, 2010 and June 30, 2009





Medifast
Segment:  The Medifast reporting segment consists of the profits of
Medifast Direct, Take Shape for Life, and Doctors.  As this represents
the majority of our business this is referenced to the “Overview of the Three
Months Ended June 30, 2010 compared to the Three Months Ended June 30, 2010”
above.  See footnote 16, “Business Segments” for a detailed breakout
of expenses.





All Other
Segment:  The All Other reporting segment consists of the profit or
loss of Medifast Weight Control Centers, Medifast Weight Control Franchise
Centers, and corporate expenses related to the parent company
operations.  For the three months ended June 30, 2010, the loss in the
All Other segment increased improved to a loss of $36,000, from a loss of
$306,000 in the second quarter of 2009. The Medifast Weight Control Centers and
Franchise Centers showed an increase in net profitability year-over-year of
$690,000.   The increase in profitability was due to opening of
six new corporately owned centers in 2009, and opening eight new franchise
centers in 2009. The increase in the total number of corporate clinics to twenty
nine, twenty operating franchise centers, and improvements in same store sales
year-over-year led to additional sales and profitability.  Medifast
Corporate expenses increased by $420,000 year-over-year.  Corporate
expenses include items such as auditors’ fees, attorney’s fees, stock
compensation expense and corporate governance related to NYSE, Sarbanes Oxley,
and SEC regulations.  See footnote 13, “Business Segments” for a
detailed breakout of expenses.





Six
Months Ended June 30, 2010 and June 30, 2009





Medifast
Segment:  The Medifast reporting segment consists of the profits of
Medifast Direct, Take Shape for Life, and Doctors.  As this represents
the majority of our business this is referenced to the “Overview of the Six
Months Ended June 30, 2010 compared to the Three Months Ended June 30, 2010”
above.  See footnote 14, “Business Segments” for a detailed breakout
of expenses.





All Other
Segment:  The All Other reporting segment consists of the profit or
loss of Medifast Weight Control Centers, Medifast Weight Control Franchise
Centers, and corporate expenses related to the parent company
operations.  For the first six months of 2010, the loss in the All
Other segment increased improved to a loss of $23,000, from a loss of $947,000
in the first six months of 2009. The Medifast Weight Control Centers and
Franchise Centers showed an increase in net profitability year-over-year of
$1,812,000.   The increase in profitability was due to opening of
six new corporately owned centers in 2009, and opening eight new franchise
centers in 2009. The increase in the total number of corporate clinics to twenty
nine, twenty operating franchise centers, and improvements in same store sales
year-over-year led to additional sales and profitability.  Medifast
Corporate expenses increased by $888,000 year-over-year.  Corporate
expenses include items such as auditors’ fees, attorney’s fees, stock
compensation expense and corporate governance related to NYSE, Sarbanes Oxley,
and SEC regulations.  See footnote 13, “Business Segments” for a
detailed breakout of expenses.


23





Seasonality


The
Company's weight management products and programs have historically been subject
to seasonality.  Traditionally the holiday season in November/December
of each year is considered poor for diet control products and
services.  January and February generally show increases in sales, as
these months are considered the commencement of the “diet season.”  In
2010, seasonality has not been a significant factor.  This is largely
due to the increase in the consumer’s awareness of the overall health and
nutritional benefits accompanied with the use of the Company’s product
line.  As consumers continue to increase their association of
nutritional weight loss programs with overall health, seasonality will continue
to decrease.





Item
3.     Quantitative and Qualitative Disclosures about
Market Risk.




Market
risk is the potential loss arising from adverse changes in market rates and
prices, such as interest rates and a decline in the stock market. The Company
does not enter into derivatives, foreign exchange transactions or other
financial instruments for trading or speculative purposes. The Company has
limited exposure to market risks related to changes in interest rates. The
principal risks of loss arising from adverse changes in market rates and prices
to which the Company and its subsidiaries are exposed relate to interest rates
on debt.  Since nearly all of our debt is variable rate based, any
changes in market interest rates will cause an equal change in our net interest
expense.  At June 30, 2010, there was $6.0 million of variable
interest loans outstanding which is subject to interest rate
risk.  Interest rates on our variable rate loans ranged from 1.54% to
2.74% for the period ended June 30, 2010.  Each 100 basis point
increase in the bank’s LIBOR rates relative to these borrowings would impact
interest expense by $60,000 over a 12-month period.





We are
exposed to market risk related to changes in interest rates and market pricing
impacting our investment portfolio. Our current investment policy is to maintain
an investment portfolio consisting mainly of U.S. money market and high-grade
corporate securities, directly or through managed funds. Our cash is deposited
in and invested through highly rated financial institutions in North America.
Our marketable securities are subject to interest rate risk and market pricing
risk and will fall in value if market interest rates increase or if market
pricing decreases. If market interest rates were to increase and market pricing
were to decrease immediately and uniformly by 10% from levels at June 30, 2010,
we estimate that the fair value of our investment portfolio would decline by an
immaterial amount and therefore we would not expect our operating results or
cash flows to be affected to any significant degree by the effect of a change in
market conditions on our investments.





Item
4.     Controls and Procedures




Evaluation
of Disclosure Controls and Procedures:




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




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




As a
consequence of that determination, we have implemented a procedure designed to
detect or prevent this error from occurring in the future. In February 2010, the
Company hired a CPA in-house with extensive experience in financial reporting
and ASC 740, “Accounting for Income Taxes.”  In addition, on a
quarterly basis the company will have an outside tax advisor review management’s
tax provision calculations. Management believes that such enhanced procedure
will prospectively mitigate this material weakness.  The second
quarter of 2010 was the first full quarter in which all remedial measures were
in place to detect or prevent a material weakness in the preparation and review
process for the calculation of the tax provision.  Management
anticipates in the third quarter of 2010 the remedial measures will be effective
in order to conclude that our disclosure controls and procedures will be
effective as of September 30, 2010.




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


24





Changes in Internal Control
over Financial Reporting:


There
were changes in the Company’s internal controls over financial reporting (as
such term is defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act)
during the last fiscal quarter to which this report relates that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting. We identified a material weakness in our
internal control over financial reporting and have described the changes to our
internal controls over financial reporting designed to remediate this material
weakness.  Additionally, as a consequence of that determination, we have
implemented a procedure designed to detect or prevent this error from occurring
in the future. In February 2010, the Company hired a CPA in-house with extensive
experience in financial reporting and ASC 740, “Accounting for Income
Taxes.”  In addition, on a quarterly basis the company will have an outside
tax advisor review management’s tax provision calculations. Management believes
that such enhanced procedure will prospectively mitigate this material
weakness.





Part II  Other
Information





Item
1.  Legal Proceedings





As previously reported, Medifast, Inc.
continues to prosecute its civil claim pending in the US District Court (SD Cal)
against Fraud Discovery Institute, Inc., its subsidiary iBusiness Reporting, its
editor William Lobdell, Tracy Coenen, her Sequence, Inc., “Zee Yourself”, Robert
L. Fitzpatrick and Barry Minkow for defamation, violations of California
Corporate Code Sections 25400 et seq, and 17200 et seq.  Civil
conspiracy claim was added in First Amended Complaint filed April 12,
2010.  Medifast, Inc. also continues to closely cooperate with all
governmental regulatory and criminal investigative agencies with whom it has
filed complaints or inquiries.





Item
1A. Risk Factors




Information
about risk factors for the six months ended June 30, 2010, does not differ
materially from those in set forth in Part I, Item 1A, of our Annual Report on
Form 10-K for the year ended December 31, 2009.




Item 5. Other
Information





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





We are
not obligated to purchase any shares.  Subject to applicable
securities laws repurchases may be made at such times and in such amounts, as
our management deems appropriate.  The share repurchase program may be
discontinued or terminated at any time and we have not established a date for
completion of the share repurchase program.  The repurchases will be
funded from our available cash.   As of June 30, 2010, we had
purchased 135,000 shares as treasury stock through the repurchase program noted
above.





The
following is a summary of our common stock purchases during the quarter ended
June 30, 2010:





Period
                  
                  Total Number of Shares
                    Purchased
                  
                  
                  Average Price Paid
                    per Share
                  
                  
                  Total Number of Shares
                    Purchased as Part of Publicly
                    Announced Plans or Programs
                  
                  
                  Maximum Number of Shares
                    that May Yet Be Purchased
                    Under the Plans or ProgramsApril
      1 - April 30,2010
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  365,000May
      1 - May 31, 2010
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  365,000June
      1 - June 31, 2010
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  365,000


25





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
                    August
      9, 2010Michael
      S. McDevittChief
      Executive Officer(principal
      executive officer and principal financial officer)





BY:
            
            /S/
      BRENDAN N. CONNORS
            August
      9, 2010Brendan
      N. ConnorsChief
      Financial Officer(principal
      executive officer and principal financial officer)


26





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


27